<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, 2000
Commission File Number 0-21917
--------------------
VDI MULTIMEDIA
(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.)
7083 Hollywood Boulevard, Suite 200 90028
Hollywood, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (323) 957-7990
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 10, 2000, there were 9,192,595 shares of Common Stock
outstanding.
<PAGE>
VDI MULTIMEDIA
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1999 2000
----------------- -----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,030,000 $ 1,453,000
Accounts receivable, net of allowances for doubtful
accounts of $971,000 and $1,095,000, respectively 19,736,000 17,673,000
Inventories 1,122,000 1,041,000
Prepaid expenses and other current assets 1,413,000 3,431,000
Deferred income taxes 1,096,000 1,072,000
----------------- -----------------
Total current assets 26,397,000 24,670,000
Property and equipment, net 21,860,000 26,886,000
Other assets, net 297,000 303,000
Goodwill and other intangibles, net 26,510,000 26,310,000
----------------- ----------------
Total assets $ 75,064,000 $ 78,169,000
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,998,000 $ 7,451,000
Accrued expenses 2,581,000 2,933,000
Income taxes payable 418,000 -
Borrowings under revolving credit agreement 5,888,000 -
Current portion of notes payable 8,309,000 -
Current portion of capital lease obligations 217,000 102,000
----------------- -----------------
Total current liabilities 24,411,000 10,486,000
----------------- -----------------
Deferred income taxes 1,408,000 2,046,000
Notes payable, less current portion 16,433,000 30,024,000
Capital lease obligations, less current portion 68,000 26,000
Shareholders' equity:
Preferred stock; no par value; 5,000,000 authorized;
none outstanding - -
Common stock; no par value; 50,000,000 authorized; 9,210,697
and 9,201,995 shares, respectively, issued and outstanding 17,935,000 17,859,000
Retained earnings 14,809,000 17,728,000
----------------- -----------------
Total shareholders' equity 32,744,000 35,587,000
----------------- -----------------
Total liabilities and shareholders' equity $ 75,064,000 $ 78,169,000
================= =================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
1999 2000 1999 2000
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 20,366,000 $ 18,004,000 $ 58,808,000 $ 55,616,000
Cost of goods sold 12,551,000 10,982,000 34,967,000 32,614,000
----------------- ------------------ ----------------- -----------------
Gross profit 7,815,000 7,022,000 23,841,000 23,002,000
Selling, general and administrative expense 4,116,000 4,679,000 13,271,000 14,195,000
Expenses related to terminated merger - - - 1,214,000
----------------- ------------------ ----------------- -----------------
Operating income 3,699,000 2,343,000 10,570,000 7,593,000
Interest expense, net 560,000 1,117,000 1,623,000 2,505,000
----------------- ------------------ ----------------- -----------------
Income before income taxes
3,139,000 1,226,000 8,947,000 5,088,000
Provision for income taxes 1,287,000 455,000 3,668,000 2,114,000
----------------- ------------------ ----------------- -----------------
Net income $ 1,852,000 $ 771,000 $ 5,279,000 $ 2,974,000
================= ================== ================= =================
Earnings per share:
Basic:
Net income per share $ 0.20 $ 0.08 $ 0.56 $ 0.32
Weighted average number of shares 9,205,785 9,211,157 9,360,384 9,221,565
Diluted:
Net income per share $ 0.19 $ 0.08 $ 0.55 $ 0.31
Weighted average number of shares including
the dilutive effect of stock options 9,540,863 9,327,983 9,543,127 9,549,921
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1999 2000
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,279,000 $ 2,974,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,672,000 4,383,000
Change in deferred taxes 1,028,000 662,000
Provision for doubtful accounts 600,000 124,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,613,000) 1,939,000
(Increase) decrease in inventories (177,000) 81,000
Increase in prepaid expenses and other current assets (1,499,000) (2,018,000)
Increase in other assets (24,000) (6,000)
Increase in accounts payable 620,000 453,000
Increase in accrued expenses 869,000 352,000
Decrease in income taxes payable (548,000) (418,000)
---------------- -----------------
Net cash provided by operating activities 8,207,000 8,526,000
---------------- -----------------
Cash used in investing activities:
Capital expenditures (5,772,000) (8,186,000)
Proceeds from sale of assets - 12,000
Net cash paid for acquisitions (1,801,000) (1,035,000)
---------------- -----------------
Net cash used in investing activities (7,573,000) (9,209,000)
---------------- -----------------
Cash flows from financing activities:
Distributions to shareholders - (55,000)
Change in revolving credit agreement 5,655,000 -
Repurchase of common stock (3,064,000) (332,000)
Proceeds from exercise of stock options 35,000 256,000
Proceeds from notes payable - 31,174,000
Repayment of notes payable (4,369,000) (25,892,000)
Repayment of capital lease obligations (431,000) (157,000)
Repayment of revolving credit agreement - (5,888,000)
---------------- -----------------
Net cash used in financing activities (2,174,000) (894,000)
---------------- -----------------
Net decrease in cash (1,540,000) (1,577,000)
Cash at beginning of period 2,048,000 3,030,000
---------------- -----------------
Cash at end of period $ 508,000 $ 1,453,000
================ =================
Supplemental disclosure of cash flow information: Cash paid for:
Interest $ 1,626,000 $ 2,505,000
================ =================
Income tax $ 4,074,000 $ 2,415,000
================ =================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
VDI MULTIMEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
NOTE 1 - THE COMPANY
VDI MultiMedia ("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, digitize, 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, editing
and digital media 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 eight
acquisitions of companies providing similar services. The latest of these
acquisitions occurred in November 2000, as described in Note 6. 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 and advertising industries, 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 nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. 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, 1999, 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 November 10, 2000,
the Company has repurchased 638,500 shares of the Company's common stock in
connection with this program.
In September 2000, the board of directors authorized the Company to
allocate an additional $5,000,000 to purchase its common stock at market prices
ranging from $4.00 to $6.00 per share.
<PAGE>
NOTE 3 - EMPLOYEE LOAN
At September 30, 2000, the Company had a $600,000 loan outstanding to its
Chief Executive Officer. The loan is unsecured and bears interest at a rate of
4.62%.
NOTE 4 - CREDIT FACILITY
The Company signed a $45.0 million credit facility in September 2000,
with Union Bank of California, N.A., as agent. The new facility is structured
as a revolving line of credit and was funded on September 28, 2000. The new
facility was first used to extinguish all amounts outstanding under the
Company's prior credit facilities. The remaining availability under the line
will provide the Company with funding for capital expenditures, working
capital needs and support for its acquisition strategy. The amount available
under the facility reduces to $40.0 million on December 31, 2002, to $35.0
million on December 31, 2003 and to $30.0 million on December 31, 2004. The
facility expires on December 31, 2005.
NOTE 5 - ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which provides additional guidance in applying
generally accepted accounting principles to revenue recognition in the
financial statements. Subsequent to the issuance of SAB 101, the SEC issued
Staff Accounting Bulletin 101A ("SAB 101A"), which delays the implementation
date of SAB 101 for registrants with fiscal years that begin between December
16, 1999 and March 15, 2000. Subsequent to the issuance of SAB 101A, the SEC
issued Staff Accounting Bulletin 101B ("SAB 101B"), which delays the
implementation date of SAB 101 until no later than the fourth fiscal quarter
of fiscal year beginning after December 15, 1999. VDI Multimedia is in the
process of determining the impact this pronouncement will have on its
consolidated financial statements.
NOTE 6 - SUBSEQUENT EVENT
On November 3, 2000, VDI acquired all of the assets and certain
liabilities of Creative Digital, Inc. Creative Digital provides creative and
editorial services for national commercials, promos, film trailers,
television shows, music videos and feature films. As consideration, the
Company paid Creative Digital $500,000 in cash and assumed certain
liabilities in November, 2000. Additionally, the Company will issue Creative
Digital $350,000 in stock, contingent upon Creative Digital meeting certain
earnings goals through December 31, 2000. Creative Digital may also earn up
to $3,000,000 in earn-out payments, subject to certain earn-out provisions
which are predicated upon Creative Digital attaining certain earnings goals,
as set forth in the purchase agreement, in each year through December 31,
2005.
<PAGE>
VDI MULTIMEDIA
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, 1999, 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, 1999, 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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999.
REVENUES. Revenues decreased by $2.4 million or 11.6% to $18.0 million
for the three-month period ended September 30, 2000 compared to $20.4 million
for the three-month period ended September 30, 1999. Revenue for the third
quarter of 1999 included approximately $1.5 million for the completion of a
special project not related to the Company's core operations in the
entertainment and advertising industries. Additionally, revenues decreased
due to a decrease in the use of the Company's services by certain customers
resulting from service failures that occurred during the integration of its
two largest facilities and the loss of certain key sales personnel.
Advertising revenues were also negatively impacted by an on-going actor's
strike.
GROSS PROFIT. Gross profit decreased $0.8 million or 10.1% to $7.0 million
for the three-month period ended September 30, 2000 compared to $7.8 million for
the three-month period ended September 30, 1999. As a percent of revenues, gross
profit increased from 38.4% to 39.0%. The increase in gross profit as a
percentage of revenues was due to lower outsourcing costs which were partially
offset by higher wages and depreciation related to the build out of the digital
television services department.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.6 million, or 13.7%, to $4.7 million for the
three-month period ended September 30, 2000 compared to $4.1 million for the
three-month period ended September 30, 1999. As a percentage of revenues,
selling, general and administrative expense increased to 26.0% for the
three-month period ended September 30, 2000 compared to 20.2% for the
three-month period ended September 30, 1999. This increase was due to higher
administrative wages in the digital television and information systems
departments; increased legal, consulting and public relations fees; and
increased depreciation.
OPERATING INCOME. Operating income decreased $1.4 million or 36.6% to $2.3
million for the three month period ended September 30, 2000 compared to $3.7
million for the three month period ended September 30, 1999 due to the lower
gross profit and increased selling, general and administrative expenses.
<PAGE>
VDI MULTIMEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
INTEREST EXPENSE. Interest expense increased $0.5 million, or 99.5%, to
$1.1 million for the three-month period ended September 30, 2000 compared to
$0.6 million for the three-month period ended September 30, 1999. This increase
was due to the write-off of $0.4 million of deferred financing charges related
to the Company's prior credit facility and increased borrowings under the
Company's debt agreements.
INCOME TAXES. The Company's effective tax rate was 37.1% for the second
quarter of 2000 and 41.0% for the second quarter of 1999.
NET INCOME. Net income for the three-month period ended September 30, 2000
decreased $1.1 million or 58.4% to $0.8 million compared to $1.9 million for the
three-month period ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1999.
REVENUES. Revenues decreased by $3.2 million or 5.4% to $55.6 million for
the nine-month period ended September 30, 2000 compared to $58.8 million for the
nine-month period ended September 30, 1999. Revenue decreased due to a decrease
in the use of the Company's services by certain customers resulting from the
integration of its two largest facilities and the loss of certain key sales
personnel. Additionally, revenue for the third quarter of 1999 included
approximately $1.5 million for the completion of a special project not related
to the Company's core operations in the entertainment and advertising
industries. Advertising revenues were also negatively impacted by an on-going
actor's strike.
GROSS PROFIT. Gross profit decreased by $0.8 million or 3.5% to $23.0 for
the nine-month period ended September 30, 2000 compared to $23.8 million for the
nine-month period ended September 30, 1999. As a percent of revenues, gross
profit increased from 40.5% to 41.4%. The increase in gross profit as a
percentage of revenues was due primarily to lower outsourcing costs and the
lower cost of direct materials resulting from volume purchasing discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.9 million, or 7.0%, to $14.2 million for
the nine-month period ended September 30, 2000 compared to $13.3 million for
the nine-month period ended September 30, 1999. As a percentage of revenues,
selling, general and administrative expense increased to 25.5% for the
nine-month period ended September 30, 2000 compared to 22.6% for the
nine-month period ended September 30, 1999. This increase was due to an
increase in administrative salaries related to the digital television
services and information systems departments; accrued severance costs of $0.4
million in the second quarter of 2000; increased legal, consulting and public
relations fees; and increased depreciation.
EXPENSES RELATED TO TERMINATED MERGER. In the quarter ended March 31, 2000,
the Company accrued $1.2 million in expenses related to the termination of their
proposed merger with an affiliate of Bain Capital.
OPERATING INCOME. Operating income decreased $3.0 million or 28.1% to $7.6
million for the nine month period ended September 30, 2000 compared to $10.6
million for the nine month period ended September 30, 1999 due to the lower
gross profit and increased selling, general and administrative expenses and
expenses related to the terminated merger.
INTEREST EXPENSE. Interest expense increased $0.9 million, or 54.0%, to
$2.5 million for the nine-month period ended September 30, 2000 compared to $1.6
million for the nine-month
<PAGE>
VDI MULTIMEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
period ended September 30, 1999. This increase was due to increased borrowings
under the Company's debt agreements and the write-off of $0.4 million of
deferred financing charges related to the Company's prior credit facility.
INCOME TAXES. The Company's effective tax rate was 41.5% for the first nine
months of 2000 and 41.0% for the first nine months of 1999.
NET INCOME. Net income for the nine-month period ended September 30, 2000
decreased $2.3 million or 43.7% to $3.0 million compared to $5.3 million for the
nine-month period ended September 30, 1999.
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, 1999.
At September 30, 2000 the Company's cash and cash equivalents aggregated
$1.5 million. The Company's operating activities provided cash of $8.5 million
for the nine months ended September 30, 2000.
The Company's investing activities used cash of $9.2 million for the nine
months ended September 30, 2000. The Company spent approximately $8.2 million
for the addition and replacement of capital equipment and for investments in
digital television services equipment and 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 $3.5 million on capital expenditures during the last three
months of 2000 to upgrade and replace equipment, upgrade the Company's
management information systems and invest in high definition and other digital
equipment.
The Company's financing activities used cash of $0.9 million in the nine
months ended September 30, 2000. Cash flows from financing activities included
the repayment of $31.8 million related to the Company's prior credit facilities
and the draw down of $31.2 million under a new credit facility, as described
below.
In September, the Company signed a $45.0 million revolving credit facility
agented by Union Bank of California. The new facility provides the Company with
funding for capital expenditures, working capital needs and support for its
acquisition strategies. The amount available under the facility reduces to $40.0
million on December 31, 2002, to $35 million on December 31, 2003 and to $30.0
million on December 31, 2004. The facility expires on December 31, 2005. As of
September 30, 2000, there was $30.0 million outstanding under the facility.
Management believes that cash generated from its ongoing operations and its
credit facility 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 MULTIMEDIA
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 August 15, 2000. 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 PriceWaterhouseCoopers LLP as the Company's independent public
accountants for the fiscal year ending December 31, 2000.
1. Election of Directors
The following individuals were elected as directors at the Annual Meeting of
Shareholders:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
<S> <C> <C>
R. Luke Stefanko 5,999,371 11,400
Haig S. Bagerdijan 5,999,371 11,400
Robert A. Baker 5,999,371 11,400
Greggory J. Hutchins 5,999,371 11,400
Robert M. Loeffler 5,999,371 11,400
</TABLE>
2. The appointment by the Board of Directors of the Company of
PriceWaterhouseCoopers LLP as the Company's independent auditors
for the fiscal year ending December 31, 2000 was ratified with
6,009,571 for the proposal, 1,200 against the proposal, 0 votes
abstaining and 0 broker nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT NO. DESCRIPTION
10 Amended and Restated Credit Agreement
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on or about July 26,
2000 relating to changes in the Company's management and board of
directors.
<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 MULTIMEDIA
DATE: November 14, 2000 BY: /s/ CLARKE W. BREWER
------------------------ -----------------------------------------
Clarke W. Brewer
Chief Financial Officer and Treasurer
(duly authorized officer and
principal financial officer)
