<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 MARCH 31, 1998 Commission File Number 0-21917
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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.
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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 May 12, 1998, there were 9,769,780 shares of Common Stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VDI MEDIA
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
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(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,921,000 $ 3,249,000
Accounts receivable, net of allowances for doubtful
accounts of $607,000 and $552,000, respectively 11,532,000 10,709,000
Inventories 285,000 505,000
Prepaid expenses and other current assets 382,000 367,000
Deferred income taxes 330,000 619,000
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Total current assets 15,450,000 15,449,000
Property and equipment, net 7,808,000 8,519,000
Deferred income taxes 119,000 -
Other assets, net 124,000 276,000
Goodwill and other intangibles, net 9,406,000 9,798,000
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Total Assets $32,907,000 $34,042,000
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<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,964,000 $ 4,460,000
Accrued expenses 3,147,000 1,717,000
Income taxes payable 791,000 487,000
Borrowings under revolving credit agreement 1,086,000 2,172,000
Current portion of notes payable 350,000 28,000
Current portion of capital lease obligations 758,000 682,000
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Total current liabilities 10,096,000 9,546,000
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Deferred income taxes - 24,000
Notes payable, less current portion 552,000 -
Capital lease obligations, less current portion 727,000 496,000
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 9,762,186 shares, respectively,
issued and outstanding 18,880,000 20,206,000
Retained earnings 2,652,000 3,770,000
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Total shareholders' equity 21,532,000 23,976,000
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$32,907,000 $34,042,000
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</TABLE>
See accompanying notes to consolidated financial statements
2
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VDI MEDIA
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1997 1998
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<S> <C> <C>
Revenues $ 8,487,000 $11,643,000
Cost of goods sold 5,072,000 7,138,000
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Gross profit 3,415,000 4,505,000
Selling, general and administrative expense 2,151,000 2,523,000
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Operating income 1,264,000 1,982,000
Interest expense 119,000 101,000
Interest income 51,000 14,000
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Income before income taxes 1,196,000 1,895,000
Provision for income taxes 190,000 777,000
Establishment of deferred tax liability (Note 1) 185,000 -
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Net income $ 821,000 $ 1,118,000
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Earnings per share:
Basic:
Net income per share $ 0.11 $ 0.12
Weighted average number of shares 7,522,667 9,635,199
Diluted:
Net income per share $ 0.11 $ 0.11
Weighted average number of shares including
the dilutive effect of stock options
(1,133 for 1997 and 99,506 for 1998) 7,523,800 9,734,705
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
VDI MEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
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1997 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 821,000 $ 1,118,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 798,000 1,144,000
Change in deferred taxes 185,000 (450,000)
Provision for doubtful accounts 20,000 (55,000)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (431,000) 998,000
Increase in inventories (69,000) (220,000)
Decrease (increase) in prepaid expenses
and other current assets 231,000 (105,000)
Increase in other assets - (152,000)
Decrease in deferred offering costs 875,000 -
(Decrease) increase in accounts payable (120,000) 496,000
Increase (decrease) in accrued expenses 97,000 (1,164,000)
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Net cash provided by operating activities 2,407,000 1,610,000
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Cash used in investing activities:
Capital expenditures (232,000) (1,707,000)
Net cash paid for acquisitions (4,091,000) (540,000)
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Net cash used in investing activities (4,323,000) (2,247,000)
Cash flows from financing activities:
S Corporation distributions to shareholders (4,233,000) -
Change in revolving credit agreement - 1,086,000
Proceeds from sale of common stock 18,041,000 1,060,000
Repayment of notes payable (1,795,000) (874,000)
Repayment of amounts receivable from officer 1,225,000 -
Repayment of capital lease obligations (260,000) (307,000)
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Net cash provided by financing activities 12,978,000 965,000
Net increase in cash 11,062,000 328,000
Cash at beginning of period 564,000 2,921,000
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Cash at end of period $11,626,000 $ 3,249,000
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Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 119,000 $ 101,000
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Income tax $ 53,000 $ 1,227,000
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</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VDI MEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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, California; Tulsa, Oklahoma; Chicago, Illinois;
New York, New York and San Francisco, California.
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 three months ended March 31, 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.
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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
statement 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 prospectus as filed with the Securities
and Exchange Commission on February 19, 1997.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues increased by $3.1 million, or 37.2%, to $11.6
million for the three month period ended March 31, 1998 compared to $8.5
million for the three month period ended March 31, 1997. This increase in
revenue was due to increased volume resulting from (i) the integration of new
clients and availability of new services resulting from the acquisitions of
Woodholly Productions, Multi-Media Services and Fast Forward and (ii) to a
lesser extent the increased use of the companies services by existing
clients.
GROSS PROFIT. Gross profit increased $1.1 million, or 32.0%, to $4.5
million for the three month period ended March 31, 1998 compared to $3.4
million for the three month period ended March 31, 1997. As a percentage of
revenues, gross profit decreased from 40.2% to 38.7%. The decrease in gross
profit as a percentage of revenues was attributable to an increase in direct
labor costs, depreciation charges and outsourcing costs resulting from the
consolidation of acquired facilities in New York, San Francisco and West Los
Angeles.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.4 million, or 17.3%, to $2.5 million for
the three month period ended March 31, 1998 compared to $2.1 million for the
three month period ended March 31, 1997. As a percentage of revenues,
selling, general and administrative expense decreased to 21.7% for the three
month period ended March 31, 1998 compared to 25.3% for the three month
period ended March 31, 1997. This decrease in selling, general and
administrative expense as a percentage of revenues was primarily due to the
ability of the Company to leverage these expenses as companies were acquired,
and the spreading of fixed overhead expenses over a higher revenue base in
the three month period ended March 31, 1998 compared to the same period in
1997.
OPERATING INCOME. Operating income increased $0.7 million, or 56.8%, to
$2.0 million for the three month period ended March 31, 1998 compared to $1.3
million for the three month period ended March 31, 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 quarter of 1998.
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VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
NET INCOME. Net income for the three month period ended March 31, 1998
increased $0.3 million, or 36.2%, to $1.1 million compared to $0.8 million for
the three month period ended March 31, 1997.
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 March 31, 1998, the Company's cash and cash equivalents aggregated
$3.2 million. The Company's operating activities provided cash of $1.3
million for the three months ended March 31, 1998 and $2.4 million for the
three months ended March 31, 1997.
The Company's investing activities used cash of $2.2 million for the
three months ended March 31, 1998. The Company spent approximately $1.7
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 videotape duplication
equipment in order to increase capacity or replace existing equipment. The
Company expects to spend approximately $1.0 million on capital expenditures
during the last three quarters of 1998 to upgrade and replace equipment and
management information systems.
The Company's financing activities provided cash of $1.2 million in the
three months ended March 31, 1998. Cash flows from financing activities
include $1.0 million in proceeds from the exercise of stock options.
The Company has a $10 million revolving credit agreement with Union Bank
which expires on June 30, 1998. There was $2.2 million outstanding under the
Union Bank Credit agreement at March 31, 1998.
Management believes that cash generated from its revolving credit
agreement 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.
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VDI MEDIA
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. DESCRIPTION
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27 Financial Data Schedule
(b) Reports on Form 8-K
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No reports on Form 8-K have been filed during the quarter for which
this report is filed.
<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: May 15, 1998 BY: /s/ Donald R. Stine
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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-END> MAR-31-1998
<CASH> 3,249,000
<SECURITIES> 0
<RECEIVABLES> 11,261,000
<ALLOWANCES> (552,000)
<INVENTORY> 505,000
<CURRENT-ASSETS> 15,449,000
<PP&E> 19,482,000
<DEPRECIATION> (10,963,000)
<TOTAL-ASSETS> 34,042,000
<CURRENT-LIABILITIES> 9,546,000
<BONDS> 0
0
0
<COMMON> 20,206,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,042,000
<SALES> 11,643,000
<TOTAL-REVENUES> 11,643,000
<CGS> 7,138,000
<TOTAL-COSTS> 7,138,000
<OTHER-EXPENSES> 2,523,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,000
<INCOME-PRETAX> 1,895,000
<INCOME-TAX> 777,000
<INCOME-CONTINUING> 1,118,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,118,000
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
</TABLE>
