<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 JUNE 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 August 12, 1998, there were 9,769,883 shares of Common Stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VDI MEDIA
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,921,000 $ 2,533,000
Accounts receivable, net of allowances for doubtful
accounts of $607,000 and $583,000, respectively 11,532,000 14,655,000
Inventories 285,000 521,000
Prepaid expenses and other current assets 382,000 1,071,000
Deferred income taxes 330,000 619,000
------------ ------------
Total current assets 15,450,000 19,399,000
Property and equipment, net 7,808,000 13,524,000
Deferred income taxes 119,000 -
Other assets, net 124,000 301,000
Goodwill and other intangibles, net 9,406,000 17,655,000
------------ ------------
Total Assets $ 32,907,000 $ 50,879,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,964,000 $ 4,002,000
Accrued expenses 3,147,000 1,889,000
Income taxes payable 791,000 -
Borrowings under revolving credit agreement 1,086,000 17,889,000
Current portion of notes payable 350,000 26,000
Current portion of capital lease obligations 758,000 697,000
------------ ------------
Total current liabilities 10,096,000 24,503,000
------------ ------------
Deferred income taxes - 24,000
Notes payable, less current portion 552,000 -
Capital lease obligations, less current portion 727,000 449,000
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 9,769,883 shares, respectively, issued and outstanding 18,880,000 20,608,000
Retained earnings 2,652,000 5,295,000
------------ ------------
Total shareholders' equity 21,532,000 25,903,000
------------ ------------
$32,907,000 $50,879,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
VDI MEDIA
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 8,811,000 $ 14,250,000 $ 17,298,000 $ 25,893,000
Cost of goods sold 5,345,000 8,555,000 10,417,000 15,693,000
------------ ------------ ------------ ------------
Gross profit 3,466,000 5,695,000 6,881,000 10,200,000
Selling, general and administrative expense 2,084,000 2,973,000 4,236,000 5,496,000
------------ ------------ ------------ ------------
Operating income 1,382,000 2,722,000 2,645,000 4,704,000
Interest expense 46,000 140,000 165,000 241,000
Interest income 99,000 3,000 151,000 16,000
------------ ------------ ------------ ------------
Income before income taxes 1,435,000 2,585,000 2,631,000 4,479,000
Provision for income taxes 566,000 1,060,000 757,000 1,836,000
Establishment of deferred tax liability (Note 1) - - 185,000 -
------------ ------------ ------------ ------------
Net income $869,000 $1,525,000 $1,689,000 $2,643,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per share:
Basic:
Net income per share $0.09 $0.16 $0.20 $0.27
Weighted average number of shares 9,580,000 9,768,848 8,551,333 9,702,024
Diluted:
Net income per share $0.09 $0.15 $0.20 $0.27
Weighted average number of shares including
the dilutive effect of stock options 9,640,071 9,872,154 8,582,538 9,823,461
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
VDI MEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,689,000 $ 2,643,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,599,000 2,227,000
Change in deferred taxes 185,000 (146,000)
Provision for doubtful accounts 65,000 (24,000)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 65,000 (246,000)
(Increase) decrease in inventories (11,000) 33,000
Increase in prepaid expenses and other current assets (390,000) (546,000)
Increase in other assets - (177,000)
Decrease in deferred offering costs 876,000 -
Decrease in accounts payable (607,000) (1,213,000)
Decrease in accrued expenses (106,000) (1,290,000)
Decrease in income taxes payable - (791,000)
------------ ------------
Net cash provided by operating activities 3,365,000 470,000
------------ ------------
Cash used in investing activities:
Capital expenditures (329,000) (2,851,000)
Net cash paid for acquisitions (4,278,000) (15,323,000)
------------ ------------
Net cash used in investing activities (4,607,000) (18,174,000)
Cash flows from financing activities:
S Corporation distributions to shareholders (5,555,000) -
Change in revolving credit agreement - 16,803,000
Proceeds from sale of common stock 18,041,000 -
Proceeds from exercise of stock options - 1,728,000
Repayment of notes payable (1,816,000) (876,000)
Repayment of amounts receivable from officer 1,225,000 -
Repayment of capital lease obligations (470,000) (339,000)
------------ ------------
Net cash provided by financing activities 11,425,000 17,316,000
Net increase in cash 10,183,000 (388,000)
Cash at beginning of period 564,000 2,921,000
------------ ------------
Cash at end of period $10,747,000 $2,533,000
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $165,000 $241,000
------------ ------------
------------ ------------
Income tax $1,316,000 $3,224,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VDI MEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six months ended June 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
<PAGE>
both domestic and international use. As consideration, the Company will pay
the owners of All Post a 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.
<PAGE>
VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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 JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased by $5.5 million or 61.7% to $14.3 million
for the three month period ended June 30, 1998 compared to $8.8 million for
the three month period ended June 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 local and national services.
GROSS PROFIT. Gross profit increased $2.2 million or 64.3% to $5.7
million for the three month period ended June 30, 1998 compared to $3.5
million for the three month period ended June 30, 1997. As a percentage of
revenues, gross profit increased to 40.0% from 39.3%. 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 labor costs due to
operating leverage, (ii) a reduction in the cost of fiber optic and satellite
costs which resulted from improved video trafficking logistics, and (iii)
lower depreciation expenses which are allocated to cost of goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.9 million or 42.6% to $3.0 million for
the three month period ended June 30, 1998 compared to $2.1 million for the
three month period ended June 30, 1997. As a percentage of revenues,
selling, general and administrative expense decreased to 20.9% for the three
month period ended June 30, 1998 compared to 23.7% for the three month period
ended June 30, 1997. This decrease was due to a reduction in the cost of
administrative personnel, as a percent of sales, resulting from the
elimination of staff as acquired companies were integrated. The decrease in
administrative wages was offset in part by increased amortization expense
related to goodwill from acquired companies.
OPERATING INCOME. Operating income increased $1.3 million or 97.0% to
$2.6 million for the three month period ended June 30, 1998 compared to $1.4
million for the three month period ended June 30, 1997.
<PAGE>
VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
INCOME TAXES. The Company provided for taxes at a rate of 41% in the
second quarter of 1998.
NET INCOME. Net income for the three month period ended June 30, 1998
increased $0.6 million or 75.6% to $1.5 million compared to $0.9 million in
1997. Such increase is primarily attributable to the previously described
factors.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased by $8.6 million, or 49.7%, to $25.9
million for the six month period ended June 30, 1998 compared to $17.3
million for the six month period ended June 30, 1997. This increase in
revenue was primarily due to increased volume 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 $3.3 million, or 48.2%, to $10.2
million for the six month period ended June 30, 1998 compared to $6.9 million
for the six month period ended June 30, 1997. As a percentage of revenues,
gross profit decreased from 39.8% to 39.4%. The decrease in gross profit as
a percentage of revenues was primarily attributable to an increase in
outsourcing costs resulting from the consolidation of acquired facilities in
New York, San Francisco and West Los Angeles. The increased outsourcing
costs were partially offset by lower direct materials costs resulting from
scale buying and lower depreciation charges which are allocated to cost of
goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $1.3 million, or 29.7%, to $5.5 million for
the six month period ended June 30, 1998 compared to $4.2 million for the six
month period ended June 30, 1997. As a percentage of revenues, selling,
general and administrative expense decreased to 21.2% for the six month
period ended June 30, 1998 compared to 24.5% for the six month period ended
June 30, 1997. This decrease in selling, general and administrative expense
as a percentage of revenues was primarily due to (i) the spreading of fixed
overhead expenses over a higher revenue base in the six month period ended
June 30, 1998 compared to the same period in 1997, and (ii) the elimination
of several selling, general and administrative personnel as acquired
companies were integrated.
OPERATING INCOME. Operating income increased $2.1 million, or 77.9%, to
$4.7 million for the six month period ended June 30, 1998 compared to $2.6
million for the six month period ended June 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 six months of 1998.
NET INCOME. Net income for the six month period ended June 30, 1998
increased $0.9 million, or 56.4%, to $2.6 million compared to $1.7 million
for the six month period ended June 30, 1997.
<PAGE>
VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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 June 30, 1998, the Company's cash and cash equivalents aggregated
$2.5 million. The Company's operating activities provided cash of $0.5
million for the six months ended June 30, 1998.
The Company's investing activities used cash of $18.2 million for the
six months ended June 30, 1998, including $13.0 million for the acquisition
of All Post, and $1.5 million for the acquisition of The Dub House. The
Company also spent approximately $2.9 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 $1.5 million
on capital expenditures during the last two quarters of 1998 to upgrade and
replace equipment and management information systems.
The Company's financing activities provided cash of $17.3 million in the
six months ended June 30, 1998. Cash flows from financing activities include
a $16.8 million increase in the Company's revolving credit agreement with
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 expires on September 30, 1998. There was $17.9 million
outstanding under the Union Bank credit agreement at June 30, 1998.
Management is currently in the process of negotiating a larger credit
facility to replace its existing credit agreement. There is no assurance that
the Company will be successful in obtaining such larger credit facility.
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 earned, will be treated as an
increase in goodwill. The Acquisitions were accounted for by the Company
under the purchase method of accounting.
<PAGE>
VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS-(CONTINUED)
Management believes that cash generated from its revolving credit
agreement (as proposed to be amended) and 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.
<PAGE>
VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on June 2, 1998.
At the meeting, shareholders voted on (i) the election of directors to hold
office until the next annual meeting of shareholders of the Company or until
their successors are duly elected and qualified and (ii) approval of the
appointment of Price Waterhouse LLP as the Company's independent public
accountants for the fiscal year ending December 31, 1998.
1. Election of Directors
<TABLE>
<CAPTION>
Name Votes For Votes Against Votes Withheld Broker Non-Votes
- ---- --------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
R. Luke Stefanko 7,479,745 0 19,100 0
Donald R. Stine 7,479,745 0 19,100 0
Thomas J. Ennis 7,479,745 0 19,100 0
Edward M. Philip 7,479,745 0 19,100 0
Steven J. Schoch 7,479,745 0 19,100 0
</TABLE>
2. The appointment by the Board of Directors of the Company of Price
Waterhouse LLP as the Company's independent auditors for the fiscal year ending
December 31, 1998 was ratified with 7,497,825 for the proposal, 1,020
against the proposal, 0 votes abstaining and 0 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. DESCRIPTION
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Securities and Exchange
Commission on June 29, 1998 relating to the purchase by the Company
of certain assets of All Post, Inc.
<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: August 14, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,533,000
<SECURITIES> 0
<RECEIVABLES> 15,239,000
<ALLOWANCES> (583,000)
<INVENTORY> 521,000
<CURRENT-ASSETS> 19,399,000
<PP&E> 30,866,000
<DEPRECIATION> (17,342,000)
<TOTAL-ASSETS> 50,879,000
<CURRENT-LIABILITIES> 24,503,000
<BONDS> 0
0
0
<COMMON> 20,608,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 50,879,000
<SALES> 25,893,000
<TOTAL-REVENUES> 25,893,000
<CGS> 15,693,000
<TOTAL-COSTS> 15,693,000
<OTHER-EXPENSES> 5,496,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 241,000
<INCOME-PRETAX> 4,479,000
<INCOME-TAX> 1,836,000
<INCOME-CONTINUING> 2,643,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,643,000
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
