<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, 2000
Commission File Number 0-21917
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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 August 11, 2000, there were 9,201,995 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, June 30,
1999 2000
----------------- -----------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,030,000 $ 233,000
Accounts receivable, net of allowances for doubtful
accounts of $971,000 and $1,140,000, respectively 19,736,000 17,749,000
Inventories 1,122,000 1,022,000
Prepaid expenses and other current assets 1,413,000 2,591,000
Deferred income taxes 1,096,000 941,000
----------------- -----------------
Total current assets 26,397,000 22,536,000
Property and equipment, net 21,860,000 25,709,000
Other assets, net 297,000 376,000
Goodwill and other intangibles, net 26,510,000 26,150,000
----------------- -----------------
$ 75,064,000 $ 74,771,000
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,998,000 $ 7,375,000
Accrued expenses 2,581,000 2,896,000
Income taxes payable 418,000 -
Borrowings under revolving credit agreement 5,888,000 8,388,000
Current portion of notes payable 8,309,000 5,800,000
Current portion of capital lease obligations 217,000 143,000
----------------- -----------------
Total current liabilities 24,411,000 24,602,000
----------------- -----------------
Deferred income taxes 1,408,000 1,459,000
Notes payable, less current portion 16,433,000 13,533,000
Capital lease obligations, less current portion 68,000 34,000
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 9,245,062 shares, respectively, issued and outstanding 17,935,000 18,130,000
Retained earnings 14,809,000 17,013,000
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Total shareholders' equity 32,744,000 35,143,000
----------------- -----------------
$ 75,064,000 $ 74,771,000
================= =================
</TABLE>
See accompanying notes to consolidated financial statements
2
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VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1999 2000 1999 2000
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $18,657,000 18,431,000 $ 38,442,000 $ 37,612,000
Cost of goods sold 10,810,000 10,800,000 22,415,000 21,632,000
-------------- -------------- --------------- ---------------
Gross profit 7,847,000 7,631,000 16,027,000 15,980,000
Selling, general and administrative expense 4,180,000 4,998,000 9,156,000 9,515,000
Expenses related to terminated merger - - - 1,214,000
-------------- -------------- --------------- ---------------
Operating income 3,667,000 2,633,000 6,871,000 5,251,000
Interest expense 562,000 704,000 1,066,000 1,388,000
Interest income - - 3,000 -
-------------- -------------- --------------- ---------------
Income before income taxes 3,105,000 1,929,000 5,808,000 3,863,000
Provision for income taxes 1,273,000 866,000 2,381,000 1,659,000
============== ============== =============== ===============
Net income $ 1,832,000 $ 1,063,000 $ 3,427,000 $ 2,204,000
============== ============== =============== ===============
Earnings per share:
Basic:
Net income per share $ 0.20 $ 0.12 $ 0.36 $ 0.24
Weighted average number of shares 9,215,878 9,238,843 9,438,965 9,226,825
Diluted:
Net income per share $ 0.20 $ 0.11 $ 0.36 $ 0.23
Weighted average number of shares including
the dilutive effect of stock options (65,442
for 1999 and 234,056 for 2000) 9,363,586 9,472,899 9,545,540 9,660,947
</TABLE>
3
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VDI MEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------------
1999 2000
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,427,000 $ 2,204,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,409,000 2,827,000
Deferred taxes 315,000 206,000
Provision for doubtful accounts 152,000 169,000
Changes in assets and liabilities:
Decrease in accounts receivable 875,000 1,818,000
(Increase) decrease in inventories (344,000) 100,000
Increase in prepaid expenses and other current assets (1,188,000) (1,178,000)
Increase in other assets (18,000) (79,000)
(Decrease) increase in accounts payable (92,000) 377,000
Increase in accrued expenses 350,000 315,000
Decrease in income taxes payable (548,000) (418,000)
---------------- -----------------
Net cash provided by operating activities 5,338,000 6,341,000
---------------- -----------------
Cash used in investing activities:
Capital expenditures (4,122,000) (5,847,000)
Proceeds from sale of assets - 12,000
Net cash paid for acquisitions (968,000) (481,000)
---------------- -----------------
Net cash used in investing activities (5,090,000) (6,316,000)
Cash flows from financing activities:
Change in revolving credit agreement 5,655,000 2,500,000
Repurchase of common stock (3,064,000) -
Proceeds from exercise of stock options - 195,000
Proceeds from notes payable 1,000,000 -
Repayment of notes payable (2,919,000) (5,409,000)
Repayment of capital lease obligations (335,000) (108,000)
---------------- -----------------
Net cash provided by (used in) financing activities 337,000 (2,822,000)
Net increase (decrease) in cash 585,000 (2,797,000)
Cash at beginning of period 2,048,000 3,030,000
---------------- -----------------
Cash at end of period $ 2,633,000 $ 233,000
================ =================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,066,000 $ 1,388,000
================ =================
Income tax $ 3,854,000 $ 2,337,000
================ =================
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VDI MULTIMEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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, 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(R) 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 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 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 six months ended June 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 August 11, 2000,
the Company has repurchased 629,000 shares, totaling $3.4 million, of the
Company's common stock in connection with this program.
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VDI MULTIMEDIA
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, 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 JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
REVENUES. Revenues decreased by $0.3 million or 1.2% to $18.4 million for
the three month period ended June 30, 2000 compared to $18.7 million for the
three month period ended June 30, 1999. This decrease in revenue was due to a
decrease in the use of the Company's services by certain customers resulting
from the integration of its two largest facilities.
GROSS PROFIT. Gross profit decreased $0.2 million or 2.7% to $7.6 million
for the three month period ended June 30, 2000 compared to $7.8 million for the
three month period ended June 30, 1999. As a percent of revenues, gross profit
decreased from 42.1% to 41.4%. The decrease in gross profit as a percentage of
revenues was due primarily to costs related to building the digital television
services department, which generated an insignificant amount of revenues in the
quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.8 million, or 19.6%, to $5.0 million for the
three month period ended June 30, 2000 compared to $4.2 million for the three
month period ended June 30, 1999. As a percentage of revenues, selling, general
and administrative expense increased to 27.1% for the three month period ended
June 30, 2000 compared to 22.4% for the three month period ended June 30, 1999.
This increase was due to accrued severance costs related to the recent departure
of certain executives, administrative salaries related to the build-out of the
digital television services department and increased legal fees.
OPERATING INCOME. Operating income decreased $1.1 million or 28.2% to $2.6
million for the three month period ended June 30, 2000 compared to $3.7 million
for the three month period ended June 30, 1999 due to the lower gross profit
and higher selling, general and administrative expense.
INTEREST EXPENSE. Interest expense increased $0.1 million, or 25.3%, to
$0.7 million for the three month period ended June 30, 2000 compared to $0.6
million for the three month period ended June 30, 1999. This increase was due to
increased borrowings under the Company's debt agreements and an increase in the
cost of funds due to higher interest rates.
INCOME TAXES. The Company's effective tax rate was 43% for the second
quarter of 2000 and 41% for the second quarter of 1999.
<PAGE>
VDI MULTIMEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
NET INCOME. Net Income for the three month period ended June 30, 2000
decreased $0.7 million or 42.0% to $1.1 million compared to $1.8 million for the
three month period ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
REVENUES. Revenues decreased by $0.8 million or 2.2% to $37.6 million for
the six month period ended June 30, 2000 compared to $38.4 million for the six
month period ended June 30, 1999. This decrease in revenue was due to a decrease
in the use of the Company's services by certain customers resulting from the
integration of its two largest facilities.
GROSS PROFIT. Gross profit remained flat at $16.0 million for the six month
period ended June 30, 2000 compared to the six month period ended June 30, 1999.
As a percent of revenues, gross profit increased from 41.7% to 42.5%. The
increase in gross profit as a percentage of revenues was due primarily to the
lower cost of direct materials resulting from volume purchasing discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.3 million, or 3.9%, to $9.5 million for the
six month period ended June 30, 2000 compared to $9.2 million for the six month
period ended June 30, 1999. As a percentage of revenues, selling, general and
administrative expense increased to 25.3% for the six month period ended June
30, 2000 compared to 23.8% for the six month period ended June 30, 1999. This
increase was due to accrued severance costs related to the recent departure of
certain executives, administrative salaries related to the build-out of the
digital television services department and increased legal fees; these
additional costs were offset by lower administrative wages in other areas of the
Company.
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 $1.7 million or 23.6% to $5.2
million for the six month period ended June 30, 2000 compared to $6.9 million
for the six month period ended June 30, 1999 due to the higher selling,
general and administrative expense and expenses related to the terminated
merger.
INTEREST EXPENSE. Interest expense increased $0.3 million, or 30.2%, to
$1.4 million for the six month period ended June 30, 2000 compared to $1.1
million for the six month period ended June 30, 1999. This increase was due to
increased borrowings under the Company's debt agreements and an increase in the
cost of funds due to higher interest rates.
INCOME TAXES. The Company's effective tax rate was 43% for the first six
months of 2000 and 41% for the first six months of 1999.
NET INCOME. Net income for the six month period ended June 30, 2000
decreased $1.2 million or 35.7% to $2.2 million compared to $3.4 million for the
six month period ended June 30, 1999.
<PAGE>
VDI MULTIMEDIA
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, as amended, for the year ended December 31, 1999.
At June 30, 2000 the Company's cash and cash equivalents aggregated $0.2
million. The Company's operating activities provided cash of $6.3 million for
the six months ended June 30, 2000.
The Company's investing activities used cash of $6.3 million for the six
months ended June 30, 2000. The Company spent approximately $5.8 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 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 $5.5 million on
capital expenditures during the last six months of 2000 to upgrade and replace
equipment, upgrade the Company's management information system and invest in
high definition and other digital equipment.
The Company's financing activities provided cash of $2.8 million in the six
months ended June 30, 2000. Cash flows from financing activities include $5.5
million in debt repayments, offset by an increase in the Company's revolving
credit facility of $2.5 million.
The Company has a $10.0 million revolving credit agreement with the Bank,
which expires on November 1, 2000. There was $8.4 million outstanding under the
credit agreement at June 30, 2000. The Company also had $19.3 million
outstanding on a term loan with the Bank at June 30, 2000. The Company is
currently in the process of negotiating a larger credit facility, which it
expects to complete by the end of the third quarter of 2000.
Management believes that cash generated from its ongoing operations and a
larger credit facility, which the Company expects to complete by the end of the
third quarter of 2000, 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 MULTIMEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
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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: AUGUST 14, 2000 BY: /s/ CLARKE W. BREWER
-------------------- ------------------------------
Clarke W. Brewer
Chief Financial Officer
and Treasurer
(duly authorized officer and
principal financial officer)
