<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, 1999 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 (323) 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 May 12, 1999, there were 9,203,394 shares of Common Stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VDI MEDIA
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,048,000 $ 1,984,000
Accounts receivable, net of allowances for doubtful
accounts of $878,000 and $188,000, respectively 17,329,000 18,232,000
Inventories 734,000 826,000
Prepaid expenses and other current assets 976,000 1,232,000
Deferred income taxes 917,000 522,000
----------- -----------
Total current assets 22,004,000 22,796,000
Property and equipment, net 17,655,000 19,241,000
Other assets, net 406,000 408,000
Goodwill and other intangibles, net 24,784,000 24,877,000
----------- -----------
Total Assets $64,849,000 $67,322,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,480,000 $ 3,757,000
Accrued expenses 1,528,000 2,045,000
Income taxes payable 548,000 43,000
Borrowings under revolving credit agreement 233,000 5,738,000
Current portion of notes payable 5,827,000 5,809,000
Current portion of capital lease obligations 525,000 408,000
----------- -----------
Total current liabilities 13,141,000 17,800,000
----------- -----------
Deferred income taxes 350,000 359,000
Notes payable, less current portion 22,234,000 20,783,000
Capital lease obligations, less current portion 214,000 168,000
Shareholders' equity:
Preferred stock; no par value; 5,000,000 authorized;
none outstanding - -
Common stock; no par value; 50,000,000 authorized;
9,776,094 and 9,344,394 shares, respectively,
issued and outstanding 20,948,000 18,655,000
Retained earnings 7,962,000 9,557,000
----------- -----------
Total shareholders' equity 28,910,000 28,212,000
----------- -----------
$64,849,000 $67,322,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
VDI MEDIA
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1999
------------- ------------
<S> <C> <C>
Revenues $11,643,000 $19,784,000
Cost of goods sold 7,138,000 11,605,000
---------- ----------
Gross profit 4,505,000 8,179,000
Selling, general and administrative expense 2,523,000 4,975,000
---------- ----------
Operating income 1,982,000 3,204,000
Interest expense 101,000 504,000
Interest income 14,000 3,000
---------- ----------
Income before income taxes 1,895,000 2,703,000
Provision for income taxes 777,000 1,108,000
---------- ----------
Net income $1,118,000 $1,595,000
---------- ----------
---------- ----------
Earnings per share:
Basic:
Net income per share $ 0.12 $ 0.17
Weighted average number of shares 9,635,199 9,664,531
Diluted:
Net income per share $ 0.11 $ 0.16
Weighted average number of shares including the dilutive
effect of stock options (99,506 for 1998 and 65,442 for
1999) 9,734,705 9,729,973
</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,
----------------------------
1998 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,118,000 $ 1,595,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,144,000 1,202,000
Deferred taxes (450,000) 404,000
Provision for doubtful accounts (55,000) 324,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 998,000 (1,227,000)
Increase in inventories (220,000) (92,000)
Increase in prepaid expenses and other current assets (105,000) (256,000)
Increase in other assets (152,000) (2,000)
Increase (decrease) in accounts payable 496,000 (723,000)
Decrease (increase) in accrued expenses (1,164,000) 517,000
Decrease in income taxes payable - (505,000)
----------- ----------
Net cash provided by operating activities 1,610,000 1,237,000
----------- ----------
Cash used in investing activities:
Capital expenditures (1,707,000) (2,402,000)
Net cash paid for acquisitions (540,000) (479,000)
----------- ----------
Net cash used in investing activities (2,247,000) (2,881,000)
Cash flows from financing activities:
Change in revolving credit agreement 1,086,000 5,505,000
Proceeds from sale of common stock 1,060,000 -
Repurchase of common stock - (2,293,000)
Repayment of notes payable (874,000) (1,469,000)
Repayment of capital lease obligations (307,000) (163,000)
---------- ----------
Net cash provided by financing activities 965,000 1,580,000
Net increase in cash 328,000 (64,000)
Cash at beginning of period 2,921,000 2,048,000
---------- ----------
Cash at end of period $3,249,000 $1,984,000
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 101,000 $ 504,000
---------- ----------
---------- ----------
Income tax $1,227,000 $1,210,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VDI MEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
NOTE 1 -- THE COMPANY
VDI Media ("VDI" or the "Company") is a leading provider of video and
film asset management services to owners, producers and distributors of
entertainment and advertising content. The Company provides the services
necessary to edit, master, reformat, archive and ultimately distribute its
clients' video content.
The Company provides physical and electronic delivery of commercials,
movie trailers, electronic press kits, infomercials and syndicated
programming to thousands of broadcast outlets worldwide. The Company provides
worldwide electronic distribution, using fiber optics and satellites, through
its Broadcast One-Registered Trademark- network. Additionally, the Company
provides 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 seeks to capitalize on growth in demand for the services
related to the distribution of entertainment content, without assuming the
production or ownership risk of any specific television program, feature film
or other form of content. The primary users of the Company's services are
entertainment studios and advertising agencies that generally choose to
outsource such services due to the sporadic demand of any single customer for
such services and the fixed costs of maintaining a high-volume physical plant.
Since January 1, 1997, the Company has successfully completed seven
acquisitions of companies providing similar services. The latest of these
acquisitions occurred in November 1998 when the Company acquired the assets
of Dubs, Inc. ("Dubs"), one of the Company's largest direct competitors in
Hollywood. The Company will continue to evaluate acquisition opportunities to
enhance its operations and profitability. As a result of these acquisitions,
VDI believes it is one of the largest and most diversified providers of
technical and distribution services to the entertainment industry, and is
therefore able to offer its customers a single source for such services at
prices that reflect the Company's scale economies.
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, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. 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, 1998, as amended.
NOTE 2 -- STOCK REPURCHASE
In February 1999, the Company commenced a stock repurchase program. The
board of directors authorized the Company to allocate up to $4,000,000 to
purchase its common stock at suitable market prices. As of May 12, 1999, the
Company has repurchased 573,000 shares of the Company's common stock in
connection with this program.
5
<PAGE>
VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 1998, 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, 1998, as amended,
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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998.
REVENUES. Revenues increased by $8.1 million or 69.9% to $19.8 million
for the three month period ended March 31, 1999 compared to $11.6 million for
the three month period ended March 31, 1998. This increase in revenue was
due to increased volume resulting from (i) the acquisitions of All Post, Inc.
("All Post"), Dubs, and The Dub House ("Dub House") and (ii) substantially
increased marketing of the Company's media services.
GROSS PROFIT. Gross profit increased $3.7 million or 81.6% to $8.2
million for the three month period ended March 31, 1999 compared to $4.5
million for the three month period ended March 31, 1998. As a percent of
revenues, gross profit increased from 38.7% to 41.4%. The increase in gross
profit as a percentage of revenues was due primarily to the lower cost of
direct materials resulting from scale purchasing discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $2.5 million, or 97.2%, to $5.0 million for
the three month period ended March 31, 1999 compared to $2.5 million for the
three month period ended March 31, 1998. As a percentage of revenues,
selling, general and administrative expense increased to 25.1% for the three
month period ended March 31, 1999 compared to 21.7% for the three month
period ended March 31, 1998. This increase was due to higher administrative
wages at All Post and Dubs as well as increased rent and amortization costs
associated with acquisitions.
OPERATING INCOME. Operating income increased $1.2 million or 61.7% to
$3.2 million for the three month period ended March 31, 1999 compared to $2.0
million for the three month period ended March 31, 1998.
INTEREST EXPENSE. Interest expense increased $0.4 million, or 399%, to
$0.5 million for the three month period ended March 31, 1999 compared to $0.1
million for the three month period ended March 31, 1998. This increase was
due to increased borrowings under the Company's debt agreements related to
the acquisitions of the Dub House, All Post and Dubs.
INCOME TAXES. The Company's effective tax rate was 41% for the first
quarter of 1999 and 1998.
6
<PAGE>
NET INCOME. Net Income for the three month period ended March 31, 1999
increased $0.5 million or 42.7% to $1.6 million compared to $1.1 million for
the three month period ended March 31, 1998.
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, as amended, for the year ended December 31, 1998.
At March 31, 1999 the Company's cash and cash equivalents aggregated
$2.0 million. The Company's operating activities provided cash of $1.2
million for the three months ended March 31, 1999.
The Company's investing activities used cash of $2.9 million for the
three months ended March 31, 1999. The Company spent approximately $2.4
million for the addition and replacement of capital equipment necessary to
consolidate newly acquired companies, 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 $4.5 million on capital
expenditures during the last three quarters of 1999 to complete the
consolidation of newly acquired facilities, upgrade and replace equipment and
upgrade the Company's management information systems.
The Company's financing activities provided cash of $1.6 million in the
three months ended March 31, 1999. Cash flows from financing activities
include a $5.5 million increase in the Company's revolving credit agreement
with Union Bank of California (the "Bank"), used primarily to fund capital
expenditures related to the integration and consolidation of acquired
companies and to repurchase the Company's common stock in accordance with the
Company's stock repurchase program.
The Company has a $6.0 million revolving credit agreement with the Bank,
which expires on November 1, 1999. There was $5.7 million outstanding under
the Union Bank Credit Agreement at March 31, 1999. The Company also has
$26.6 million outstanding on a term loan with the Bank at March 31, 1999.
Management is currently in the process of negotiating an increase in its
revolving credit agreement to fund capital expenditures necessary to complete
the integration and consolidation of acquired companies.
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.
YEAR 2000 COMPLIANCE ISSUE
The Company is currently working to resolve the potential impact of the
Year 2000 problem on its computer systems and computerized equipment. The
Year 2000 problem is a result of computer programs having been written using
two rather than four digits to identify an applicable year. Any information
technology systems that have time-sensitive software may recognize a date
using "00" as the year 1900
7
<PAGE>
rather than the year 2000. The problem also extends to non-information
technology systems that rely on embedded chip systems.
The Company has divided the Year 2000 readiness task by the following
functional areas: IT infrastructure, business systems, operational systems,
facilities, and business partners. IT infrastructure includes the Company's
wide area networks, local area networks, servers, desktop computers, and
telephone systems. Business systems include mainframe and midrange computer
hardware and applications. Operational systems include equipment used for the
Company's day-to-day operations in the post-production business and editing
and graphics equipment. Facilities include fire, life, and safety equipment,
elevators and alarm systems. Business partners include suppliers and vendors,
financial institutions, benefit providers, payroll services, and customers.
The Company has appointed a task force chaired by its chief financial officer
and coordinated by its information systems director.
The Company has developed a four-phase approach to resolving the Year
2000 issues that are reasonably within its control. The four phases of the
program include inventory, assessment, remediation and testing, and
implementation. The inventory phase consists of a company wide inventory of
computer hardware, software, business applications, and operational and
facilities equipment. The inventory is then used to generate a master
assessment list and identify equipment vendors. The assessment phase consists
of identifying at-risk systems and products and ranking the products by
criticality to the business. Each product is then assigned to a task force
member to determine whether the product is in compliance and, if not, whether
the system should be upgraded or replaced. The remediation and testing phase
consists of developing a project plan, defining and implementing steps
required to bring the systems or products into compliance, defining a test
plan to verify compliance, and documenting the test results. The final phase
is implementing remediation on systems and products company wide.
The Company has been in the process of analyzing and upgrading its
information technology ("IT") systems (i.e., its IT infrastructure and
business systems) since early 1998, including upgrading all of its PC
hardware, operating systems, and office automation software. With respect to
the remaining IT systems, the Company has completed its inventory phase and
anticipates completion of its assessment and testing phases by May 30, 1999.
With respect to non-IT systems, including operational systems and facilities
systems, the Company has completed its inventory phase and anticipates
completion of the assessment phase by June 30, 1999.
The Company anticipates completion of all phases of its compliance
program in both IT and non-IT systems by the end of the third quarter of
1999.
THIRD PARTIES. Like every other business, the Company is at risk from
potential Year 2000 failures on the part of its major business counterparts,
including suppliers, vendors, financial institutions, benefit providers,
payroll services, and clients, as well as potential failures in public and
private infrastructure services, including electricity, water,
transportation, and communications. The Company has initiated communications
with significant third party businesses to assess their efforts in addressing
Year 2000 issues and is in the process of determining the Company's
vulnerability if these third parties fail to remediate their Year 2000
problems. There can be no guarantee that the systems of third parties will be
timely remediated, or that such parties' failure to remediate Year 2000
issues would not have a material adverse effect on the Company.
COSTS. Costs incurred to date in addressing the Year 2000 issue have not
been material and are being funded through operating cash flows. The Company
anticipates that it may incur significant costs associated with replacing
non- compliant systems and equipment. In addition, the Company anticipates
that it will incur additional costs in the form of redeployment of internal
resources from other activities. The Company does not expect these
redeployments to have a material adverse effect on other ongoing business
operations of the Company. Based upon the information currently available to
the Company, costs associated with addressing the Year 2000 issue are
expected to be between $350,000 and $500,000.
8
<PAGE>
RISKS. System failures resulting from the Year 2000 problem could
potentially affect operations and financial results in all aspects of the
Company's business. For example, failures could affect all aspects of the
Company's videotape duplication and distribution, post production and
ancillary operations, as well as inventory records, payroll operations,
security, billing, and collections. At this time the Company believes that
its most likely worst case scenario involves potential disruption in areas in
which the Company's operations must rely on third parties whose systems may
not work properly after January 1, 2000. As a result of Year 2000 related
failures of the Company's or third parties' systems, the Company could suffer
a reduction in its operations. Such a reduction may result in a fluctuation
in the price of the Company's common stock.
CONTINGENCY PLAN. The Company does not currently have a comprehensive
contingency plan with respect to the Year 2000 problem. However, the Company
has created a task force comprised of financial and technical employees that
is prepared to address any Year 2000 issues as they arise. The Company will
continue to develop its contingency plan during 1999 as part of its ongoing
Year 2000 compliance effort.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
A report on Form 8-K/A was filed with the Commission on February 2nd and
February 5th, 1999, each relating to the purchase by the Company of certain
assets of Dubs, Inc.
10
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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 14, 1999 BY: /s/ Clarke W. Brewer
-------------------------- ------------------------------
Clarke W. Brewer
Chief Financial Officer
and Treasurer
(duly authorized officer and
principal financial officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,984,000
<SECURITIES> 0
<RECEIVABLES> 18,420,000
<ALLOWANCES> (188,000)
<INVENTORY> 826,000
<CURRENT-ASSETS> 22,796,000
<PP&E> 33,955,761
<DEPRECIATION> (14,715,109)
<TOTAL-ASSETS> 67,322,000
<CURRENT-LIABILITIES> 17,800,000
<BONDS> 0
0
0
<COMMON> 18,655,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 67,322,000
<SALES> 19,784,000
<TOTAL-REVENUES> 19,784,000
<CGS> 11,605,000
<TOTAL-COSTS> 11,605,000
<OTHER-EXPENSES> 4,975,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 504,000
<INCOME-PRETAX> 2,703,000
<INCOME-TAX> 1,108,000
<INCOME-CONTINUING> 1,595,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,595,000
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.16
</TABLE>
