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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
COMMISSION FILE NUMBER 0-21917
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VDI MULTIMEDIA
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-4272619
(State of or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7083 HOLLYWOOD BOULEVARD, SUITE 200 90028
HOLLYWOOD, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
</TABLE>
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 May 12, 2000 there were 9,238,650 shares of Common Stock outstanding.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VDI MULTIMEDIA
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,030,000 $ 403,000
Accounts receivable, net of allowances for doubtful
accounts of $971,000 and $1,101,000, respectively....... 19,736,000 20,458,000
Inventories............................................... 1,122,000 1,027,000
Prepaid expenses and other current assets................. 1,413,000 2,089,000
Deferred income taxes..................................... 1,096,000 857,000
----------- -----------
Total current assets.................................... 26,397,000 24,834,000
Property and equipment, net............................... 21,860,000 23,166,000
Other assets, net......................................... 297,000 283,000
Goodwill and other intangibles, net....................... 26,510,000 26,385,000
----------- -----------
Total Assets............................................ $75,064,000 $74,668,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,998,000 $ 6,116,000
Accrued expenses.......................................... 2,581,000 3,521,000
Income taxes payable...................................... 418,000 132,000
Borrowings under revolving credit agreement............... 5,888,000 5,888,000
Current portion of notes payable.......................... 8,309,000 8,300,000
Current portion of capital lease obligations.............. 217,000 180,000
----------- -----------
Total current liabilities............................... 24,411,000 24,137,000
----------- -----------
Deferred income taxes..................................... 1,408,000 1,455,000
Notes payable, less current portion....................... 16,433,000 14,983,000
Capital lease obligations, less current portion........... 68,000 44,000
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 9,238,361 shares, respectively, issued and
outstanding............................................. 17,935,000 18,100,000
Retained earnings......................................... 14,809,000 15,949,000
----------- -----------
Total shareholders' equity.............................. 32,744,000 34,049,000
----------- -----------
$75,064,000 $74,668,000
=========== ===========
</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
MARCH 31,
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1999 2000
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<S> <C> <C>
Revenues.................................................... $19,784,000 $19,181,000
Cost of goods sold.......................................... 11,605,000 10,832,000
----------- -----------
Gross profit................................................ 8,179,000 8,349,000
Selling, general and administrative expense................. 4,975,000 4,518,000
Expenses related to terminated merger....................... -- 1,214,000
----------- -----------
Operating income............................................ 3,204,000 2,617,000
Interest expense............................................ 504,000 685,000
Interest income............................................. 3,000 --
----------- -----------
Income before income taxes.................................. 2,703,000 1,932,000
Provision for income taxes.................................. 1,108,000 792,000
----------- -----------
Net income.................................................. $ 1,595,000 $ 1,140,000
=========== ===========
Earnings per share:
Basic:
Net income per share...................................... $ 0.17 $ 0.12
Weighted average number of shares......................... 9,664,531 9,214,808
Diluted:
Net income per share...................................... $ 0.16 $ 0.12
Weighted average number of shares including the dilutive
effect of stock options (65,442 for 1999 and 634,188 for
2000)................................................... 9,729,973 9,848,996
</TABLE>
See accompanying notes to consolidated financial statements.
3
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VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1999 2000
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Cash flows from operating activities:
Net income................................................ $1,595,000 $1,140,000
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................... 1,202,000 1,381,000
Deferred taxes.......................................... 404,000 286,000
Provision for doubtful accounts......................... 324,000 144,000
Changes in assets and liabilities:
Increase in accounts receivable........................... (1,227,000) (866,000)
(Increase) decrease in inventories........................ (92,000) 95,000
Increase in prepaid expenses and other current assets..... (256,000) (676,000)
(Increase) decrease in other assets....................... (2,000) 14,000
Decrease in accounts payable.............................. (723,000) (882,000)
Increase in accrued expenses.............................. 517,000 940,000
Decrease in income taxes payable.......................... (505,000) (286,000)
---------- ----------
Net cash provided by operating activities................... 1,237,000 1,290,000
---------- ----------
Cash used in investing activities:
Capital expenditures...................................... (2,402,000) (2,275,000)
Proceeds from sale of assets.............................. -- 12,000
Net cash paid for acquisitions............................ (479,000) (299,000)
---------- ----------
Net cash used in investing activities....................... (2,881,000) (2,562,000)
Cash flows from financing activities:
Change in revolving credit agreement...................... 5,505,000 --
Repurchase of common stock................................ (2,293,000) --
Proceeds from exercise of stock options................... -- 165,000
Repayment of notes payable................................ (1,469,000) (1,459,000)
Repayment of capital lease obligations.................... (163,000) (61,000)
---------- ----------
Net cash provided by financing activities................... 1,580,000 (1,355,000)
Net decrease in cash........................................ (64,000) (2,627,000)
Cash at beginning of period................................. 2,048,000 3,030,000
---------- ----------
Cash at end of period....................................... $1,984,000 $ 403,000
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest.................................................. $ 504,000 $ 685,000
========== ==========
Income tax................................................ $1,210,000 $ 820,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VDI MULTIMEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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-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, 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 May 12, 2000, the
Company has repurchased 573,000 shares of the Company's common stock in
connection with this program.
5
<PAGE>
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 Form 10-K for the year ended
December 31, 1999, as amended, 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 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 MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999.
REVENUES. Revenues decreased by $0.6 million or 3.0% to $19.2 million for
the three month period ended March 31, 2000 compared to $19.8 million for the
three month period ended March 31, 1999. This decrease in revenue was due to a
decrease in demand for the Company's advertising and publicity services and a
decrease in the use of its services by certain customers resulting from the
integration of its two largest facilities. Revenues were also negatively
impacted by the discontinuation of certain business lines which were either
unprofitable or shut down to accommodate the rollout of VDI's high definition
television services.
GROSS PROFIT. Gross profit increased $0.1 million or 2.1% to $8.3 million
for the three month period ended March 31, 2000 compared to $8.2 million for the
three month period ended March 31, 1999. As a percent of revenues, gross profit
increased from 41.3% to 43.5%. 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 decreased $0.5 million, or 9.2%, to $4.5 million for the
three month period ended March 31, 2000 compared to $5.0 million for the three
month period ended March 31, 1999. As a percentage of revenues, selling, general
and administrative expense decreased to 23.6% for the three month period ended
March 31, 2000 compared to 25.1% for the three month period ended March 31,
1999. This decrease was due to lower administrative wages and a decrease in the
Company's bad debt provision.
EXPENSES RELATED TO TERMINATED MERGER. In the quarter ended March 31, 2000,
the Company accrued $1.2 million in expenses related to the recent termination
of their proposed merger with an affiliate of Bain Capital.
OPERATING INCOME. Operating income decreased $0.6 million or 18.3% to
$2.6 million for the three month period ended March 31, 2000 compared to
$3.2 million for the three month period ended March 31, 1999.
6
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VDI MULTIMEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
INTEREST EXPENSE. Interest expense increased $0.2 million, or 35.9%, to
$0.7 million for the three month period ended March 31, 2000 compared to
$0.5 million for the three month period ended March 31, 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 41% for the first
quarter of 2000 and 1999.
NET INCOME. Net income for the three month period ended March 31, 2000
decreased $0.5 million or 28.5% to $1.1 million compared to $1.6 million for the
three month period ended March 31, 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 March 31, 2000 the Company's cash and cash equivalents aggregated
$0.4 million. The Company's operating activities provided cash of $1.3 million
for the three months ended March 31, 2000.
The Company's investing activities used cash of $2.6 million for the three
months ended March 31, 2000. The Company spent approximately $2.3 million for
the addition and replacement of capital equipment necessary to accommodate
increased customer demands for the Company's services, and for investments in
digital 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 $8.5 million on capital expenditures during the last three
quarters of 2000 to upgrade and replace equipment, upgrade the Company's
management information systems and invest in high definition television and
other digital equipment.
The Company's financing activities used cash of $1.4 million in the three
months ended March 31, 2000. Cash flows from financing activities include debt
repayments of $1.5 million.
The Company has a $6.0 million revolving credit agreement with Union Bank of
California (the "Bank"), which expires on November 1, 2000. There was
$5.9 million outstanding under the credit agreement at March 31, 2000. The
Company also had $23.3 million outstanding on term loans with the Bank at
March 31, 2000. Subsequent to March 31, 2000, the Company increased the amount
of its revolving credit agreement with the Bank to $8.5 million. The Company is
also in the process of negotiating a larger credit facility, which it expects to
complete by the end of the second quarter of 2000.
Management believes that cash generated from its credit facilities, 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.
7
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VDI MULTIMEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
YEAR 2000 COMPLIANCE ISSUE
The risks posed by Year 2000 issues, which arise because computer systems
and software products may be unable to distinguish 21(st) century dates from
20(th) century dates, could harm the Company's business. Prior to the end of
1999 the Company completed a review of the Year 2000 compliance of its IT
infrastructure, business and operational systems and third-party suppliers. The
Company's review included testing to determine how their systems would function
at and beyond the Year 2000. To date, the Company has not experienced any
material Year 2000 related problems with its IT infrastructure, business systems
or operational systems. Additionally, the Company is not aware of any failure by
its third-party suppliers to be Year 2000 compliant that could impact its
business or operations. However, there is an ongoing risk that such problems or
failures could arise or become apparent in the future. Any such problems or
failures experienced by the Company or its customers could have negative
consequences for the Company, including decreasing the demand for its products
and interrupting its operations. As a result, the Company's supply chain and
revenue could be harmed.
8
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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<CAPTION>
<S> <C> <C>
(a) Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on or about January 11,
2000 relating to its proposed merger with an affiliate of Bain Capital.
</TABLE>
9
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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.
<TABLE>
<S> <C> <C>
VDI MULTIMEDIA
By: /s/ CLARKE W. BREWER
-----------------------------------------
Clarke W. Brewer
CHIEF FINANCIAL OFFICER AND TREASURER
(DULY AUTHORIZED OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
</TABLE>
Date: May 15, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 403,000
<SECURITIES> 0
<RECEIVABLES> 21,559,000
<ALLOWANCES> (1,101,000)
<INVENTORY> 1,027,000
<CURRENT-ASSETS> 24,834,000
<PP&E> 41,220,000
<DEPRECIATION> (18,054,000)
<TOTAL-ASSETS> 74,668,000
<CURRENT-LIABILITIES> 24,137,000
<BONDS> 0
0
0
<COMMON> 18,100,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 74,668,000
<SALES> 19,181,000
<TOTAL-REVENUES> 19,181,000
<CGS> 10,832,000
<TOTAL-COSTS> 10,832,000
<OTHER-EXPENSES> 5,732,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 685,000
<INCOME-PRETAX> 1,932,000
<INCOME-TAX> 792,000
<INCOME-CONTINUING> 1,140,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,140,000
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
