<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 Commission File Number 0-21917
--------------------
VDI MEDIA
(Exact name of registrant as specified in its charter)
California 95-4272619
(State of or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6920 Sunset Boulevard, 90028
Hollywood, California (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code (213) 957-5500
Securities registered pursuant to Section 12(b) of the Act
None.
Securities registered pursuant to Section 12(g) of the Act
Common Stock, no par value.
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X] No [ ]
As of November 13, 1998, there were 9,770,837 shares of Common Stock
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VDI MEDIA
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
---------------- ------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,921,000 $ 2,261,000
Accounts receivable, net of allowances for doubtful
accounts of $607,000 and $613,000, respectively 11,532,000 14,871,000
Inventories 285,000 558,000
Prepaid expenses and other current assets 382,000 429,000
Deferred income taes 330,000 508,000
---------------- ------------------
Total current assets 15,450,000 18,627,000
Property and equipment, net 7,808,000 14,211,000
Deferred income taxes 119,000 -
Other assets, net 124,000 339,000
Goodwill and other intangibles, net 9,406,000 18,480,000
---------------- ------------------
Total Assets $ 32,907,000 $ 51,657,000
---------------- ------------------
---------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,964,000 $ 3,629,000
Accrued expenses 3,147,000 1,461,000
Income taxes payable 791,000 -
Borrowings under revolving credit agreement 1,086,000 17,964,000
Current portion of notes payable 350,000 25,000
Current portion of capital lease obligations 758,000 678,000
---------------- ------------------
Total current liabilities 10,096,000 23,757,000
---------------- ------------------
Deferred income taxes - 103,000
Notes payable, less current portion 552,000 -
Capital lease obligations, less current portion 727,000 279,000
Shareholders' equity:
Preferred stock; no par value; 5,000,000 authorized;
none outstanding - -
Common stock; no par value; 50,000,000 authorized; 9,580,000
and 9,770,837 shares, respectively, issued and outstanding 18,880,000 20,608,000
Retained earnings 2,652,000 6,910,000
---------------- ------------------
Total shareholders' equity 21,532,000 27,518,000
---------------- ------------------
$ 32,907,000 $ 51,657,000
---------------- ------------------
---------------- ------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
VDI MEDIA
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
1997 1998 1997 1998
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues $ 11,248,000 $ 16,419,000 $ 28,546,000 $ 42,312,000
Cost of goods sold 7,096,000 9,886,000 17,513,000 25,578,000
----------------- ----------------- ------------------ -----------------
Gross profit 4,152,000 6,533,000 11,033,000 16,734,000
Selling, general and administrative expense 2,518,000 3,457,000 6,752,000 8,953,000
----------------- ----------------- ------------------ -----------------
Operating income 1,634,000 3,076,000 4,281,000 7,781,000
Interest expense 74,000 342,000 239,000 583,000
Interest income 57,000 3,000 205,000 19,000
----------------- ----------------- ------------------ -----------------
Income before income taxes 1,617,000 2,737,000 4,247,000 7,217,000
Provision for income taxes 665,000 1,122,000 1,421,000 2,959,000
Establishment of deferred tax liability (Note 1) - - 185,000 -
----------------- ----------------- ------------------ -----------------
Net income $ 952,000 $ 1,615,000 $ 2,641,000 $ 4,258,000
----------------- ----------------- ------------------ -----------------
----------------- ----------------- ------------------ -----------------
Earnings per share:
Basic:
Net income per share $ 0.10 $ 0.17 $ 0.29 $ 0.44
Weighted average number of shares 9,580,000 9,769,904 8,968,425 9,725,144
Diluted:
Net income per share $ 0.10 $ 0.16 $ 0.29 $ 0.43
Weighted average number of shares including
the dilutive effect of stock options 9,735,608 9,817,243 9,041,098 9,827,240
</TABLE>
<PAGE>
VDI MEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1997 1998
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,689,000 $ 4,258,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,599,000 3,553,000
Change in deferred taxes 185,000 (746,000)
Provision for doubtful accounts 65,000 6,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 65,000 (491,000)
Increase in inventories (11,000) (4,000)
(Increase) decrease in prepaid expenses and other current assets (390,000) 95,000
Increase in other assets - (215,000)
Decrease in deferred offering costs 876,000 -
Decrease in accounts payable (607,000) (1,587,000)
Decrease in accrued expenses (106,000) (1,718,000)
----------------- ----------------
Net cash provided by operating activities 3,365,000 3,151,000
----------------- ----------------
Cash used in investing activities:
Capital expenditures (329,000) (4,576,000)
Net cash paid for acquisitions (4,278,000) (16,436,000)
----------------- ----------------
Net cash used in investing activities (4,607,000) (21,012,000)
Cash flows from financing activities:
S Corporation distributions to shareholders (5,555,000) -
Change in revolving credit agreement - 16,878,000
Proceeds from sale of common stock 18,041,000 1,728,000
Repayment of notes payable (1,816,000) (877,000)
Repayment of amounts receivable from officer 1,225,000 -
Repayment of capital lease obligations (470,000) (528,000)
----------------- ----------------
Net cash provided by financing activities 11,425,000 17,201,000
Net increase (decrease) in cash 10,183,000 (660,000)
Cash at beginning of period 564,000 2,921,000
----------------- ----------------
Cash at end of period $ 10,747,000 $ 2,261,000
----------------- ----------------
----------------- ----------------
Supplemental disclosure of cash flow information: Cash paid for:
Interest $ 165,000 $ 582,000
----------------- ----------------
----------------- ----------------
Income tax $ 1,316,000 $ 3,724,000
----------------- ----------------
----------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VDI MEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
NOTE 1 -- THE COMPANY
VDI MEDIA (the "Company") provides broadcast quality video duplication,
distribution and related value-added services including distribution of national
television spot advertising, trailers and electronic press kits. The Company's
services consist of (i) the physical and electronic delivery of broadcast
quality advertising, including spots, trailers, electronic press kits and
infomercials, and syndicated television programming to television stations,
cable television and other end-users nationwide and (ii) a broad range of video
services, including the duplication of video in all formats, element storage,
standards conversions, closed captioning and transcription services, and video
encoding for air play verification purposes. The Company also provides its
customers value-added post production and editing services. The Company is
headquartered in Hollywood, California and has additional facilities in Los
Angeles, Santa Monica, Burbank and San Francisco, California; Chicago, Illinois;
New York, New York; and Dallas, Texas.
In the first quarter of 1997, the Company completed the sale of 3,120,000
common shares, no par value ("Common Stock"), in an initial public offering (the
"Offering"). Prior to the Offering, the Company had elected S Corporation status
for federal and state income tax purposes. As a result of the Offering, the S
Corporation status terminated. Thereafter, the Company has paid federal and
state income taxes as a C Corporation. The termination of the Company's S
Corporation status resulted in the establishment of a net deferred tax liability
calculated at normal federal and state income rates, causing a one-time non-cash
charge of $185,000 against earnings for additional income tax expense in the
quarter ended March 31, 1997.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and the Securities and
Exchange Commission's rules and regulations for reporting interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. These financial statements should be read in
conjunction with the financial statements and related notes contained in the
Company's Form 10-K for the year ended December 31, 1997.
NOTE 2 -- ACQUISITIONS
On June 9, 1998, the Company acquired all of the assets of The Dub House,
Inc. ("The Dub House"). The Dub House distributes broadcast media for
advertising agencies, independent producers and other broadcast media providers.
As consideration, the Company will pay the owners of The Dub House a maximum of
$1.7 million, of which $1.5 million was paid in the second quarter of 1998. The
remaining balance is subject to earn-out provisions which are predicated upon
The Dub House attaining certain sales goals, as set forth in the purchase
agreement, through June 1999.
On June 12, 1998, the Company acquired substantially all of the assets of
All Post, Inc. ("All Post"). All Post provides full service duplication,
distribution, video content storage and ancillary services to major motion
picture studios and independent production companies for both domestic and
international use. As consideration, the Company will pay All Post a
<PAGE>
maximum of $14.5 million, of which $13.0 million was paid in the second quarter
of 1998. The remaining balance is subject to earn-out provisions which are
predicated upon All Post attaining certain gross profit goals, as set forth in
the purchase agreement, through June 1999.
The Company has accounted for both of these acquisitions as purchases.
Goodwill arising from these transactions is being amortized over twenty years.
The contingent purchase price for each of these transactions, to the extent
earned, will be recorded as an increase to goodwill. The consolidated statement
of income includes both The Dub House and All Post's results of operations from
the effective date of their acquisitions.
NOTE 3 - SUBSEQUENT EVENT
The Company has signed a definitive agreement to acquire substantially all
of the assets of Dubs, Inc. for an initial purchase price of $11.0 million
plus a contingent earn-out payment of up to $3.3 million of common stock. The
agreement is subject to certain closing conditions and is expected to close
on November 17, 1998. The acquisition will be accounted for as a purchase.
Goodwill arising from this transaction will be amortized over 20 years.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In connection with the "safe-harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company, in its Annual Report on Form 10-K
for the year ended December 31, 1997, outlined cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in forward-looking statements made by, or on
behalf of, the Company. Such forward-looking statements, as made within this
Quarterly Report on Form 10-Q, should be considered in conjunction with the
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and the risk factors set forth in the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on February 19, 1997 and Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on June 29, 1998. Factors that could
cause future results to differ from the Company's expectations include, but are
not limited to, the following: competition, customer and industry concentration,
dependence on technological developments, risks related to expansion and
acquisition of new businesses, dependence on key personnel, fluctuating results
and seasonality and control by management.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES. Revenues increased by $5.2 million or 46.0% to $16.4 million for
the three month period ended September 30, 1998 compared to $11.2 million for
the three month period ended September 30, 1997 primarily due to the
acquisitions of Multimedia Services, Fast Forward and All Post and also due to
the increased use of the Company's services by existing customers and the
addition of new customers. The increased use of the Company's services and
addition of new customers was primarily due to (i) the availability of new
services and capacity resulting from the acquisition of Multimedia Services,
Fast Forward and All Post and (ii) substantially increased marketing of the
Company's services.
GROSS PROFIT. Gross profit increased $2.3 million or 57.4% to $6.5 million
for the three month period ended September 30, 1998 compared to $4.2 million for
the three month period ended September 30, 1997. As a percentage of revenues,
gross profit increased to 39.8% from 36.9%. The increase in gross profit as a
percentage of revenues was primarily attributable to (i) lower direct materials
costs from scale buying and lower direct services costs due to changes in the
mix of services provided, and (ii) lower depreciation expenses which are
allocated to cost of goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $1.0 million or 37.3% to $3.5 million for the
three month period ended September 30, 1998 compared to $2.5 million for the
three month period ended September 30, 1997. As a percentage of revenues,
selling, general and administrative expense decreased to 21.1% for the three
month period ended September 30, 1998 compared to 22.4% for the three month
period ended September 30, 1997. This decrease was due to a reduction in the
cost of administrative personnel, as a percent of sales, resulting from the
ongoing integration of the Company's subsidiaries and the subsequent
elimination of staff. The decrease in administrative wages was offset in part
by increased amortization expense related to goodwill from acquired companies.
OPERATING INCOME. Operating income increased $1.5 million or 88.3% to $3.1
million for the three month period ended September 30, 1998 compared to $1.6
million for the three month period ended September 30, 1997.
<PAGE>
INCOME TAXES. The Company provided for taxes in the third
quarter of 1998 at its expected effective tax rate of 41%.
NET INCOME. Net income for the three month period ended September 30, 1998
increased $0.6 million or 70.0% to $1.6 million compared to $1.0 million in
1997. Such increase is primarily attributable to the previously described
factors.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES. Revenues increased by $13.8 million, or 48.2%, to $42.3 million
for the nine month period ended September 30, 1998 compared to $28.5 million for
the nine month period ended September 30, 1997. This increase in revenue was
primarily due to increased demand for services resulting from (i) the
integration of new clients and availability of new services resulting from the
acquisitions of Multi-Media Services, Fast Forward and All Post, and (ii) the
increased use of the company's services by existing clients.
GROSS PROFIT. Gross profit increased $5.7 million, or 51.2%, to $16.7
million for the nine month period ended September 30, 1998 compared to $11.0
million for the nine month period ended September 30, 1997. As a percentage of
revenues, gross profit increased from 38.7% to 39.5%. The increase in gross
profit as a percentage of revenues was primarily attributable to lower direct
materials costs from scale buying and lower depreciation expenses (as a percent
of revenues) which are allocated to cost of goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $2.2 million, or 32.6%, to $9.0 million for the
nine month period ended September 30, 1998 compared to $6.8 million for the nine
month period ended September 30, 1997. As a percentage of revenues, selling,
general and administrative expense decreased to 21.2% for the nine month period
ended September 30, 1998 compared to 23.7% for the nine month period ended
September 30, 1997. This decrease in selling, general and administrative expense
as a percentage of revenues was primarily due to (i) the elimination of several
selling, general and administrative personnel as acquired companies were
integrated into the Company, and (ii) the spreading of fixed overhead
expenses over a higher revenue base in the nine month period ended September
30, 1998 compared to the same period in 1997.
OPERATING INCOME. Operating income increased $3.5 million, or 81.8%, to
$7.8 million for the nine month period ended September 30, 1998 compared to $4.3
million for the nine month period ended September 30, 1997.
INCOME TAXES. Prior to the Offering, the Company operated as an S
Corporation. As such, the Company was not responsible for federal income
taxes and provided for state income taxes at reduced rates. As a result of
the Offering, the Company's S Corporation status terminated. Accordingly, the
Company has since provided, and will continue to provide, for all income
taxes at higher statutory rates. These factors resulted in an effective tax
rate for 1997 of approximately 40%. The Company provided for taxes at a rate
of 41% in the first nine months of 1998.
NET INCOME. Net income for the nine month period ended September 30, 1998
increased $1.7 million, or 61.2%, to $4.3 million compared to $2.6 million for
the nine month period ended September 30, 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
This discussion should be read in conjunction with the notes to the
financial statements and the corresponding information more fully described in
the Company's Form 10-K for the year ended December 31, 1997.
At September 30, 1998, the Company's cash and cash equivalents aggregated
$2.3 million. The Company's operating activities provided cash of $3.1 million
for the nine months ended September 30, 1998.
The Company's investing activities used cash of $21 million for the nine
months ended September 30, 1998, including $13.6 million for the acquisition of
All Post, and $1.5 million for the acquisition of The Dub House. The Company
also spent approximately $4.6 million for the addition and replacement of
capital equipment necessary to accommodate increased customer demands for the
Company's services, and for investments in management information systems. The
Company's business is equipment intensive, requiring periodic expenditures of
cash or the incurrence of additional debt to acquire additional fixed assets in
order to increase capacity or replace existing equipment. The Company expects to
spend approximately $1.0 million on capital expenditures during the last quarter
of 1998 to upgrade and replace equipment and management information systems.
The Company's financing activities provided cash of $17.2 million in the
nine months ended September 30, 1998. Cash flows from financing activities
include a $16.9 million increase in the Company's revolving credit agreement
with Union Bank of California, N.A. (Union Bank), used primarily to fund the
purchases of All Post and The Dub House.
The Company has a $20.0 million revolving credit agreement with Union Bank
which expired on September 30, 1998. There was $18.0 million outstanding under
the Union Bank credit agreement at September 30, 1998. Management is currently
in the process of negotiating a $35.0 million credit facility to replace its
existing credit agreement which it expects to complete by November 17, 1998.
In June 1998 the Company acquired substantially all of the assets and
assumed certain liabilities of All Post (the "All Post Acquisition"). The
purchase price consisted of an initial payment of $13.0 million plus an as yet
undetermined contingent purchase price. The contingent purchase price is to be
earned and paid based on the gross profit (as defined) resulting from the
financial results of All Post as a separate division of the Company. The
contingent purchase price, in total, is limited to $1.5 million. The excess of
the initial consideration over the fair value of the assets acquired and
liabilities assumed of approximately $6.5 million has been allocated to
goodwill.
The Company also acquired substantially all of the assets and assumed
certain liabilities of The Dub House (the "Dub House Acquisition"), located in
Dallas, Texas, in June 1998. The purchase price consisted of an initial payment
of $1.5 million plus an undetermined contingent purchase price. The contingent
purchase price is to be earned and paid based on the sales growth attained by
The Dub House as a separate division of the Company. The contingent purchase
price, in total, is limited to $0.2 million. The excess of the initial
consideration over the fair value of the assets acquired and liabilities assumed
of approximately $1.0 million has been allocated to goodwill.
Goodwill arising from the All Post Acquisition and the Dub House
Acquisition (the "Acquisitions") will be amortized over 20 years. The contingent
purchase price, to the extent
<PAGE>
earned, will be treated as an increase in goodwill. The Acquisitions were
accounted for by the Company under the purchase method of accounting.
Management believes that cash available on its revolving credit agreement
(as proposed to be amended) and generated from its ongoing operations and
existing working capital will fund necessary capital expenditures and provide
adequate working capital for at least the next twelve months.
The Company, from time to time, considers the acquisition of businesses
complementary to its current operations. Consummation of any such acquisition or
other expansion of the business conducted by the Company may be subject to the
Company securing additional financing.
YEAR 2000 ISSUE
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to disruptions in
operations. The Company recently developed a three-phase program for Y2K
information systems compliance. Phase I is to identify those systems with which
the Company has exposure to Y2K issues. Phase II is the development and
implementation of action plans to be Y2K compliant in all areas by late 1998.
Phase III, to be completed by mid-1999, is the final testing of each major area
of exposure to ensure compliance. The Company has identified three major areas
determined to be critical for successful Y2K compliance: (1) financial and
informational system applications, (2) manufacturing applications and (3)
third-party relationships.
The Company, in accordance with Phase I of the program, is in the process
of conducting an internal review of all systems and contacting all software
suppliers to determine major areas of exposure to Y2K issues. In the financial
and information system area, a number of applications have been identified as
being Y2K compliant due to their recent implementation. The Company's core
financial and reporting systems are not Y2K compliant but were already scheduled
for replacement by mid-1999. In the manufacturing area, the Company is in the
process of identifying areas of exposure. The Company plans to substantially
complete its survey of third party systems by the end of 1998.
The Company believes it will cost approximately $2.0 million to replace the
core financial and reporting systems. The Company will utilize outside
consultants to undertake a portion of the work and expects approximately
one-fourth of the cost to be incurred in 1998 and the remainder in 1999. The
Company has yet to determine what costs will be incurred in connection with the
manufacturing area and the third party area.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
-----------------
The Company filed an amendment to a Current Report on Form 8-K
in August 1998 with respect to the All Post acquisition.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VDI MEDIA
DATE: November 16, 1998 BY: /s/ Donald R. Stine
---------------------- -------------------
Donald R. Stine
Chief Financial Officer
and Treasurer
(duly authorized officer and
principal financial officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,261,000
<SECURITIES> 0
<RECEIVABLES> 15,484,000
<ALLOWANCES> (613,000)
<INVENTORY> 558,000
<CURRENT-ASSETS> 18,548,000
<PP&E> 32,662,000
<DEPRECIATION> (18,451,000)
<TOTAL-ASSETS> 51,578,000
<CURRENT-LIABILITIES> 23,757,000
<BONDS> 0
0
0
<COMMON> 20,608,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 51,578,000
<SALES> 42,312,000
<TOTAL-REVENUES> 42,312,000
<CGS> 25,578,000
<TOTAL-COSTS> 25,578,000
<OTHER-EXPENSES> 8,953,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 583,000
<INCOME-PRETAX> 7,217,000
<INCOME-TAX> 2,959,000
<INCOME-CONTINUING> 4,258,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,258,000
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
</TABLE>
