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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
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Commission file number: 0-21943
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FOUR MEDIA COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 95-4599440
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2813 West Alameda Avenue, Burbank, CA 91505
(Address of principal executive offices) (Zip code)
818-840-7000
(Registrant's telephone number including area code)
------------------
Not applicable
(Former name, former address, and former fiscal year,
if changed since last report)
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
------- ------
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 9,552,502 shares of
Common Stock, $.01 par value, as of June 16, 1997.
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FOUR MEDIA COMPANY
Index
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of August 4, 1996
and May 4, 1997...................................... 4
Consolidated Statements of Operations for the Nine
Months Ended April 28, 1996 and May 4, 1997 and the
Three Months Ended April 28, 1996 and May 4, 1997.... 5
Consolidated Statements of Cash Flows for the Nine
Months Ended April 28, 1996 and May 4, 1997 and the
Three Months Ended April 28, 1996 and May 4, 1997.... 6
Notes to Consolidated Financial Statements........... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview............................................. 10
Three Months Ended May 4, 1997 Compared to
Three Months Ended April 28, 1996.................... 11
Nine Months Ended May 4, 1997 Compared to
Nine Months Ended April 28, 1996..................... 12
Liquidity and Capital Resources...................... 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................... 15
Item 2. Changes in Securities................................ 15
Item 3. Defaults Upon Senior Securities...................... 15
Item 4. Submission of Matters to a Vote of Security Holders.. 15
Item 5. Other Information.................................... 15
Item 6. Exhibits and Reports on Form 8-K..................... 15
Signatures.................................................... 16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
3
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FOUR MEDIA COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
August 4, May 4,
1996 1997
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash................................. $ 5,312 $ 7,998
Restricted cash...................... 709 695
Trade accounts receivable, net of
allowance for doubtful accounts of
$823 and $879 as of August 4, 1996
and May 4, 1997, respectively....... 8,622 19,043
Inventory............................ 867 952
Prepaid expenses and other current
assets.............................. 2,838 1,666
------- --------
Total current assets............. 18,348 30,354
Property, plant and equipment, net...... 57,665 88,898
Deferred taxes.......................... 2,000 2,000
Long-term receivable.................... 2,008 1,420
Other assets............................ 1,806 2,574
------- --------
Total assets..................... $81,827 $125,246
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations....... $ 6,153 $ 9,471
Accounts payable..................... 5,803 8,918
Accrued and other liabilities........ 4,750 5,905
------- --------
Total current liabilities........ 16,706 24,294
Long-term debt and capital lease
obligations............................ 33,978 51,393
Subordinated debt, due to stockholder... 9,000 -
------- --------
Total liabilities................ 59,684 75,687
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value;
5,000,000 authorized, no shares
issued and outstanding at May 4,
1997................................ - -
Common stock, $.01 par value; 1,000
shares authorized, issued and
outstanding at August 4, 1996....... - -
Common stock, $.01 par value;
50,000,000 shares authorized,
9,552,502 shares issued and
outstanding at May 4, 1997.......... - 96
Additional paid-in capital........... 15,010 41,714
Foreign currency translation
adjustment.......................... 254 (84)
Retained earnings.................... 6,879 7,833
------- --------
Total stockholders' equity....... 22,143 49,559
------- --------
Total liabilities and
stockholders' equity............ $81,827 $125,246
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
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FOUR MEDIA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------- ---------------------
April 28, May 4, April 28, May 4,
1996 1997 1996 1997
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Revenues:
Studio.................................. $17,594 $18,665 $ 5,840 $ 7,261
Broadcast............................... 15,642 17,305 5,065 5,730
Television.............................. 18,373 23,766 7,058 9,703
Visual effects.......................... 1,586 2,017 515 1,034
------- ------- ------- -------
Total revenues........................ 53,195 61,753 18,478 23,728
------- ------- ------- -------
Cost of services:
Personnel............................... 19,093 22,765 6,286 8,664
Material................................ 5,545 5,214 1,816 1,820
Facilities.............................. 3,449 3,925 1,144 1,313
Other................................... 4,648 6,433 1,437 2,399
------- ------- ------- -------
Total cost of services................ 32,735 38,337 10,683 14,196
------- ------- ------- -------
Gross profit........................ 20,460 23,416 7,795 9,532
------- ------- ------- -------
Operating expenses:
Sales, general and administrative....... 8,547 9,647 2,646 3,521
Depreciation and amortization........... 7,566 9,342 2,561 3,725
------- ------- ------- -------
Total operating expenses.............. 16,113 18,989 5,207 7,246
------- ------- ------- -------
Income from operations.............. 4,347 4,427 2,588 2,286
------- ------- ------- -------
Interest expense, net.................... 2,987 3,472 993 1,060
------- ------- ------- -------
Income before income tax benefits... 1,360 955 1,595 1,226
Income tax benefits...................... 771 0 317 0
------- ------- ------- -------
Net income............................ $ 2,131 $ 955 $ 1,912 $ 1,226
======= ======= ======= =======
Net income per share..................... $ 0.33 $ 0.12 $ 0.30 $ 0.12
======= ======= ======= =======
Weighted average number of common
shares outstanding...................... 6,475 8,024 6,475 9,941
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
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FOUR MEDIA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
------------------- -------------------
April 28, May 4, April 28, May 4,
1996 1997 1996 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 2,131 $ 955 $ 1,912 $ 1,226
Depreciation and amortization......... 7,481 9,342 2,518 3,725
Provision for doubtful accounts....... 304 392 108 193
Deferred taxes........................ (771) - (317) -
Changes in operating assets and
liabilities:
(Increase) decrease in restricted
cash................................ 8 15 (5) 15
Increase in trade and long-term
receivables......................... (4,347) (8,432) (1,414) (1,584)
(Increase) decrease in inventory..... (50) 1 (108) (23)
(Increase) decrease in prepaid
expenses & other assets............. (247) 404 (175) 1,235
Increase (decrease) in accounts
payable............................. (450) 3,116 (1,007) 1,156
Increase (decrease) in accrued and
other liabilities................... 1,025 1,154 (616) 137
------- -------- ------- --------
Net cash provided by operating
activities........................ 5,084 6,947 896 6,080
Cash flows from investing activities:
Purchase of business................... - (9,422) - (9,422)
Purchases of property, plant and
equipment............................. (6,161) (24,798) (80) (1,166)
------- -------- ------- --------
Net cash used in investing (6,161) (34,220) (80) (10,588)
activities........................
Cash flows from financing activities:
Proceeds from public offering.......... - 26,800 - 26,800
Proceeds from mortgage loan............ - 8,400 - -
Proceeds from term loans............... - 16,000 - -
Proceeds from (repayment of) revolving
credit facility....................... - 258 - (4,853)
Proceeds from equipment notes.......... 1,910 4,583 445 333
Repayment of long-term debt............ (3,195) (25,743) (1,535) (11,881)
------- -------- ------- --------
Net cash provided by (used in)
financing activities.............. (1,285) 30,298 (1,090) 10,399
Effect of exchange rate changes on cash. 101 (339) 148 (172)
------- -------- ------- --------
Net increase (decrease) in cash......... (2,261) 2,686 (126) 5,719
Cash at beginning of period............. 6,651 5,312 4,516 2,279
------- -------- ------- --------
Cash at end of period................... $ 4,390 $ 7,998 $ 4,390 $ 7,998
======= ======== ======= ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.............................. $ 1,741 $ 2,818 $ 470 $ 1,279
Income taxes.......................... - - - -
Non cash investing and financing
activities:
Capital lease obligations incurred.... $ 3,609 $ 8,235 $ 1,848 $ 2,531
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
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FOUR MEDIA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Organization and Basis of Presentation:
Business. Four Media Company (the "Company") is a leading provider of
outsourcing solutions for the technical and creative requirements of owners,
producers and distributors of television programming, feature films and other
entertainment content. The Company's services integrate and apply a variety of
systems and processes to enhance the creation and distribution of entertainment
content.
While the Company believes that it operates in one business segment, which
is providing outsourcing solutions and related services to the entertainment
industry, the Company has organized its activities into four divisions: studio,
broadcast, television and visual effects services. The studio services division
located in Burbank and Universal City, California, manages, formats and
distributes content worldwide. The broadcast services division, located in
Burbank, and the Republic of Singapore, assembles and distributes television
networks and programming via satellite to viewers in the United States, Canada
and Asia. The television services division, located in Burbank, Universal City
and Santa Monica, California, assembles film or video principal photography into
a form suitable for network, syndicated, cable or foreign television. The visual
effects division, located in Santa Monica, digitally creates and manipulates
images in high-resolution formats for use in feature films.
Organization. The Company was incorporated as a holding company in the
State of Delaware on September 25, 1996 and issued 100,000 shares of common
stock. On the same date the company previously known as Four Media Company,
changed its name to 4MC-Burbank, Inc. ("4MC-Burbank"). On October 17, 1996 the
Company completed a reorganization which was accounted for in a manner similar
to a pooling of interests. Under the terms of the reorganization, the Company
issued 5,900,000 shares of its common stock to Technical Services Partners, L.P.
("TSP"), the Company's and 4MC-Burbank's sole stockholder, in exchange for 1,000
shares (100% of issued and outstanding shares) of 4MC-Burbank and as a result
4MC-Burbank became a wholly owned subsidiary of the Company. In conjunction with
the Reorganization, 4MC-Burbank's interest in its wholly owned subsidiaries
Digital Magic Company ("DMC") and Four Media Company Asia PTE Ltd. ("4MC Asia")
was transferred to the Company in the form of a dividend distribution from 4MC-
Burbank. The purpose of the Reorganization was to facilitate future financing
transactions and acquisitions. On November 19, 1996, the Company distributed a
stock dividend to TSP of 475,000 shares of its common stock.
4MC-Burbank was incorporated in July 1993 as a wholly owned subsidiary of
TSP, a limited partnership formed for the purpose of acquiring certain defined
net assets of Compact Video Group, Inc., Compact Video Services, Inc., Image
Transform, Inc. and Meridian Studios, Inc. (collectively "Compact").
On August 4, 1993, TSP acquired and transferred to 4MC-Burbank,
substantially all of the assets of Compact. The acquisition was accounted for
under the purchase method of accounting. The purchase price was allocated to the
fair value of current assets in the amount of $5.2 million and property, plant,
and equipment in the amount of $16.9 million. The transaction included the
assumption of current liabilities (including acquisition costs) in the amount of
$6.5 million and a term loan in the amount of $10.6 million.
On October 26, 1994, 4MC Acquisition Corp., at the time, a wholly owned
subsidiary of 4MC-Burbank, acquired substantially all of the assets of Digital
Magic and Transfer Company ("DM&T"). The acquisition was accounted for under
the purchase method of accounting. The purchase price was allocated to the fair
value of current assets in the amount of $1.0 million and property, plant, and
equipment in the amount of $6.6 million. The transaction included the assumption
of current liabilities (including acquisition costs) in the amount of $4.0
million, and equipment notes in the amount of $3.5 million. Subsequent to this
acquisition, 4MC Acquisition Corp. changed its name to DMC.
On February 13, 1995, 4MC Asia, at the time, a wholly owned subsidiary of
4MC-Burbank registered in the Republic of Singapore, entered into an outsourcing
contract with MTV Asia LDC ("MTV Asia") to provide technical and creative
services. The agreement has a seven year term and provides for early termination
by MTV Asia after five years by paying a fee, as defined in the agreement, not
to exceed $3.5 million.
On February 7, 1997, the Company completed an initial public offering of
5,000,000 shares of Common
7
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Stock, of which 3,077,502 shares were sold by the Company and 1,922,498 shares
were sold by TSP, as the selling stockholder. The offering generated
approximately $26.8 million of proceeds to the Company, net of underwriting
commissions and related expenses.
On March 10, 1997, AV Acquisition Corp., a wholly owned subsidiary of the
Company, acquired substantially all of the assets of Anderson Film Industries
Corp and Anderson Graphics, LLC. (collectively, "Anderson"). The acquisition
was accounted for under the purchase method of accounting. The purchase price
was allocated at fair value to current assets of $1.8 million and property,
plant and equipment of $8.4 million. The total transaction cost was $10.3
million, comprised of $7.7 million in payments to secured and unsecured
creditors, $.9 in assumed capital lease obligations and $1.7 million in
transaction costs.
Basis of Presentation. The accompanying consolidated financial statements
of Four Media Company and its subsidiaries for the nine month and three month
periods ended April 28, 1996 and May 4, 1997 have been prepared in accordance
with generally accepted accounting principles and with the instructions to Form
10-Q and Article 10 of Regulation S-X. These financial statements have not been
audited by independent accountants, but include all adjustments (consisting of
normal recurring adjustments) which are, in management's opinion, necessary for
a fair presentation of the financial condition, results of operations and cash
flows for such periods. However, these results are not necessarily indicative
of results for any other interim period or for the full year. The August 4,
1996 balance sheet is derived from audited financial statements included in the
Company's Prospectus dated February 7, 1997.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
omitted pursuant to requirements of the Securities and Exchange Commission.
Management believes that the disclosures included in the accompanying interim
financial statements and footnotes are adequate to make the information not
misleading, but should be read in conjunction with the consolidated financial
statements and notes thereto included in the Prospectus dated February 7, 1997.
The accompanying financial statements as of August 4, 1996 and for the nine
months ended April 28, 1996 and May 4, 1997 are presented on a consolidated
basis and include the accounts of Four Media Company and its wholly owned
subsidiaries 4MC-Burbank, DMC, 4MC Asia and AV Acquisition Corp. All material
inter-company accounts and transactions have been eliminated in consolidation.
8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this form 10-Q and within
the Company's prospectus dated February 7, 1997. When used in the following
discussion, the words "believes", "anticipates", "intends", "expects" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected, including, but not
limited to, those set forth in "Risk Factors" as disclosed within the Company's
prospectus dated February 7, 1997. Readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the date hereof.
OVERVIEW
The Company is a leading provider of outsourcing solutions for the technical
and creative service requirements of owners, producers and distributors of
television programming, feature films and other entertainment content. The
Company's services integrate and apply a variety of systems and processes to
enhance the creation and distribution of entertainment content. The Company
seeks to capitalize on domestic and international growth in demand for original
entertainment content as well as from the exploitation of existing television
and film libraries without taking production or ownership risk with respect to
any specific television program, feature film or other content.
The Company's business is divided into studio, broadcast, television and
visual effects services. In each of its four business divisions, the Company
offers most of the systems and technical solutions that constitute the processes
that are integral to the creation, enhancement and distribution of entertainment
content. The studio services division, located in Burbank, California manages,
formats and distributes existing content libraries to end users in the United
States and internationally. The broadcast services division, located in Burbank
and the Republic of Singapore, assembles and distributes cable television
channels and programming via satellite to viewers in the United States, Canada
and Asia. The television services division, located in Burbank and Santa
Monica, California assembles film or video principal photography into a form
suitable for domestic network, syndicated, cable or foreign television. The
visual effects services division, located in santa monica, digitally creates and
manipulates images in high resolution formats for use in feature films.
Revenues have increased annually and on a comparable quarter to quarter basis
since the inception of the Company on August 4, 1993. The company attributes
this increase in revenues to several factors including: (i) an increase in
demand for the Company's services resulting from the growth in worldwide demand
for entertainment content; (ii) an expansion of capacity resulting from its
extensive investment in new digital infrastructure; (iii) successful
acquisitions and international expansion; (iv) the diversification of its
service offerings; and (v) the increasing acceptance of its bundled service
outsourcing solutions.
EBITDA has increased annually and on a comparable quarter to quarter basis
since the inception of the Company on August 4, 1993. The Company attributes
the increase in EBITDA to several factors including: (i) growth in revenues;
(ii) improvement in the Company's gross profit resulting from the efficiency of
its new Singapore operations and new domestic infrastructure; and (iii) decrease
in the ratio of overhead and fixed costs to revenues, as the Company has
generally increased capacity utilization and decreased the cost of adding new
capacity.
The Company believes that EBITDA is an important measure of its financial
performance. "EBITDA" is defined as earnings before interest, taxes,
depreciation and amortization, excluding gains and losses on asset sales and
nonrecurring charges. The Company's investments in new infrastructure, machine
capacity and technology have produced a relatively high depreciation expense and
will remain a significant non-cash charge to earnings. It is the Company's
policy to depreciate equipment and other capitalized items over a period of
three to seven years. The Company expects that the difference between EBITDA
and net earnings will be reduced over time through increased capacity
utilization.
EBITDA is calculated before depreciation and amortization charges and, in
businesses with significant non-cash expenses, provides a measure of operating
performance and cash flow available to pay interest, repay debt, make
acquisitions or invest in capital equipment and new technologies. As a result,
the company intends to report
10
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EBITDA as a measure of financial performance. However, EBITDA does not represent
cash generated from operating activities in accordance with generally accepted
accounting principles ("GAAP") and should not be considered in isolation or as
a substitute for other measures of performance prepared in accordance with GAAP.
EBITDA does not reflect that portion of the Company's capital expenditures which
may be required to maintain the Company's market share, revenues and leadership
position in its industry. Moreover, not all EBITDA will be available to pay
interest or repay debt. The Company's presentation of EBITDA may not be
comparable to similarly titled measures reported by other companies.
THREE MONTHS ENDED MAY 4, 1997 COMPARED TO THREE MONTHS ENDED APRIL 28, 1996.
Revenues. Total revenues for the three months ended May 4, 1997 increased
28.1% to $23.7 million compared to $18.5 million for the three months ended
April 28, 1996. The revenue increase was attributable primarily to the factors
set forth below.
Studio services revenues for the three months ended May 4, 1997 increased
25.9% to $7.3 million compared to $5.8 million for the three months ended April
28, 1996. The major component of this increase was the acquisition of the
business of Anderson Film Industries, Corp. and Anderson Graphics, LLC
(collectively "Anderson") ($.8 million) during the third quarter together with
increased film-to-tape transfer revenues ($.5 million) as a result of the
deployment of additional telecine capacity in response to an increase in demand
for film-to-tape transfer services.
Broadcast services revenues for the three months ended May 4, 1997
increased 11.8% to $5.7 million compared to $5.1 million for the three months
ended April 28, 1996. Revenues from the Company's Singapore operation increased
26.0% during the third quarter of fiscal 1997. This increase was attributable to
the addition of a six month contract with MGM Gold (which was extended through
May 1997), an increase in the utilization of the facility by both MTV Asia and
other clients, and the scheduled annual increase in the fees paid by MTV Asia
under its contract with the Company. The increase in revenues from Singapore was
partially offset by a reduction in revenues from the Company's domestic
broadcast operations. The reduction in revenues was the result of a negotiated
reduction of the monthly payments under a service agreement with TVN
Entertainment Corporation in the third quarter of fiscal 1996. The reductions in
domestic broadcast revenues was partially offset by a $.3 million increase in
syndication distribution revenues. The Company believes that the deployment of
digital compression technology for broadcast applications and the expansion of
cable channel capacity resulting from the anticipated introduction of digital
set-top boxes will increase demand for its broadcast services.
Television services revenues for the three months ended May 4, 1997
increased 36.6% to $9.7 million compared to $7.1 million for the three months
ended April 28, 1996. The revenue increase was the result of the acquisition of
Anderson ($2.2 million in revenues) in the third quarter together with the
completion of the Company's new digital television services facility in Burbank.
The new facility replaces existing analog infrastructure and equipment, thereby
enhancing the competitiveness of the Company's television operations.
Visual effects services revenues for the three months ended May 4, 1997
increased 100% to $1.0 million compared to $.5 million for the three months
ended April 28, 1996. This increase was the result of the commencement of
visual effects projects (including Mortal Combat II). These projects are
expected to be completed in the fourth quarter.
Gross Profit. Gross profit for the three months ended May 4, 1997
increased 21.8% to $9.5 million (40.2% of revenues) compared to $7.8 million
(42.2% of revenues) in the three months ended April 28, 1996. The reduction of
2.0% in the Company's gross profit as a percent of revenues was attributable
primarily to the addition of personnel in the television services division in
anticipation of increased demand for services in future periods. In addition,
the Company leased two transponders on the Hughes Galaxy IV satellite in
anticipation of increased demand from Warner Bros. for satellite transponder
time.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses for the three months ended May 4, 1997 increased 34.6%
to $3.5 million (14.8% of revenues) compared to $2.6 million (14.3% of revenues)
for the three months ended April 28, 1996. The increase in selling, general and
administrative expenses of $.9 million was primarily attributable to the
acquisition of Anderson ($.6 million) in the third quarter. In addition,
expenses incurred in the three months ended April 28, 1996 were offset by
$225,000 of insurance proceeds.
11
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Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the three months ended May 4, 1997 increased 42.3% to $3.7 million
(15.7% of revenues) compared to $2.6 million (13.9% of revenues) in the three
months ended April 28, 1996. The increase in depreciation and amortization
expense as a percentage of total revenues is attributable primarily to the $18.9
of capital expenditures made during fiscal 1996.
Interest Expense. Interest expense for the three months ended May 4, 1997
increased 10.3% to $1.1 million compared to $1.0 million in the three months
ended April 28, 1996. The increase was attributable to additional long-term
borrowings incurred by the Company to fund capital expenditures in fiscal 1996
and the first half of fiscal 1997. The Company expects interest expense to
decline in future periods due to the reduction of long-term debt with proceeds
from the Company's February 7, 1997 initial public offering.
Income Tax Benefits. For the three months ended May 4, 1997 the Company has
not reflected income tax benefits related to the utilization of the Company's
net operating loss carryforwards or change in its net deferred tax assets.
Income taxes for the three months ended April 28, 1996 reflect the recognition,
for financial accounting purposes, of the use of net operating loss
carryforwards and an increase in net deferred tax assets.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
for the three months ended May 4, 1997 increased 17.6% to $6.0 million compared
to $5.1 million in the three months ended April 28, 1996. The increase in EBITDA
of $.9 million was the result of increased revenues from both the Anderson
acquisition and internal growth. See "Liquidity and Capital Resources" for a
discussion of net cash provided by operating activities for the period.
NINE MONTHS ENDED MAY 4, 1997 COMPARED TO NINE MONTHS ENDED APRIL 28, 1996.
Revenues. Total revenues for the nine months ended May 4, 1997 increased
16.2% to $61.8 million compared to $53.2 million for the nine months ended April
28, 1996. The revenue increase was attributable primarily to the factors set
forth below.
Studio services revenues for the nine months ended May 4, 1997 increased
6.2% to $18.7 million compared to $17.6 million for the nine months ended April
28, 1996. The major component of this increase was the acquisition of Anderson
($.8 million) during the third quarter together with increased film to tape
transfer revenues ($.5 million) in the third quarter as a result of the
deployment of additional telecine capacity in response to an increase in demand
for film-to-tape transfer services. This studio services capacity had been
temporarily utilized to meet commitments in the television services division
until the new television facility was completed. The Company continued to
experience a reduction in revenues associated with the restoration and
preservation of television programming.
Broadcast services revenues for the nine months ended May 4, 1997 increased
10.9% to $17.3 million compared to $15.6 million for the nine months ended April
28, 1996. Revenues from the Company's Singapore operation increased 34.0% during
the first nine months of fiscal 1997. This increase was attributable to the
addition of a six month contract with MGM (which was extended through May 1997),
increased utilization of the facility by both MTV Asia and other clients, and
the scheduled annual increase in the fees paid by MTV Asia under its contract
with 4MC Asia. The increase in revenues from the Company's Singapore operations
were partially offset by a reduction in revenues from the Company's domestic
broadcast operations. This reduction in revenues was the result of the
expiration of a service agreement with the Disney Channel in the second quarter
of fiscal 1996, together with a negotiated reduction of the monthly payments
under a service agreement with TVN Entertainment Corporation during the third
quarter of fiscal 1996. These reductions in domestic broadcast revenues
applicable to Disney and TVN were partially offset by an increase in syndication
distribution revenues ($.9 million). The Company believes that the deployment of
digital compression technology for broadcast applications and the expansion of
cable channel capacity resulting from the anticipated introduction of digital
set-top boxes will increase demand for its domestic broadcast services.
Television services revenues for the nine months ended May 4, 1997
increased 29.3% to $23.8 million compared to $18.4 million for the nine months
ended April 28, 1996. The revenue increase was partially the result of the
Anderson acquisition ($2.2 million) together with the completion of a
significant portion of the Company's
12
<PAGE>
new digital television services facility in Burbank. The Company's new Burbank
facility replaces existing analog infrastructure and equipment thereby enhancing
the competitiveness of the Company's television operations.
Visual effects services revenues for the nine months ended May 4, 1997
increased 25.0% to $2.0 million compared to $1.6 million for the six months
ended April 28, 1996. This increase is the result of the commencement of various
visual effects projects (including Mortal Combat II). These projects are
expected to be completed during the fourth quarter.
Gross Profit. Gross profit for the nine months ended May 4, 1997 increased
14.1% to $23.4 million (37.9% of revenues) compared to $20.5 million (38.5% of
revenues) in the nine months ended April 28, 1996. The reduction in the
Company's gross profit as a percent of revenues was attributable primarily to
the addition of personnel in the television services division in anticipation of
increased demand for services in future periods. In addition the Company leased
two transponders on the Hughes Galaxy IV Satellite in anticipation of increased
demand from Warner Bros. for satellite transponder time.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses for the nine months ended May 4, 1997 increased 12.9% to
$9.6 million (15.6% of revenues) compared to $8.5 million (16.1% of revenues)
for the nine months ended April 28, 1996. The increase in selling, general and
administrative expense of $1.1 million was partially attributable to the
acquisition of Anderson ($.6 million) in the third quarter of 1997. In addition,
expenses incurred in the nine months ended April 28, 1996 were offset by
$675,000 of insurance proceeds.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the nine months ended May 4, 1997 increased 22.4% to $9.3 million
(15.1% of revenues) compared to $7.6 million (14.2% of revenues) in the nine
months ended April 28, 1996. The increase in depreciation and amortization
expense as a percentage of total revenues is attributable primarily to the $18.9
million of capital expenditures made during fiscal 1996. The Company expects
that depreciation expense will decline as a percentage of total revenues as the
Company derives additional revenue from currently underutilized capacity.
Interest Expense. Interest expense for the nine months ended May 4, 1997
increased 16.7% to $3.5 million compared to $3.0 in the nine months ended April
28, 1996. The increase was attributable to additional long-term borrowings
incurred by the Company to fund capital expenditures in fiscal 1996 and 1997.
The Company expects interest expense to decline in future periods due to the
reduction in long-term debt with proceeds from the Company's February 7, 1997
initial public offering.
Income Tax Benefits. For the nine months ended May 4, 1997 the Company has
not reflected any income tax benefit related to the utilization of the Company's
net operating loss carryforwards or change in its' net deferred tax assets.
Income taxes for the nine months ended April 28, 1996 reflect the recognition,
for financial accounting purposes, of the use of net operating loss
carryforwards and an increase in net deferred tax assets.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for
the nine months ended May 4, 1997 increased 16.0% to $13.8 million compared to
$11.9 million in the nine months ended April 28, 1996. See "Liquidity and
Capital Resources" for a discussion of net cash provided by operating
activities for the period.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. The Company's net cash provided
by operating activities was $6.9 million and $6.1 million for the nine and three
month periods ended May 4, 1997 compared to $5.1 million and $.9 million for the
nine and three month periods ended April 28, 1996. The increase for the nine
months ended May 4, 1997 was primarily attributable to the reduction in the net
income combined with increased non-cash charges (depreciation and amortization)
and the reduction of non-cash credits (deferred taxes). The increase for the
three months ended was primarily attributable to changes in the components of
operating assets and liabilities, primarily the seasonal increases in accounts
receivable.
Net Cash Provided (Used) by Financing Activities. The Company's net cash
provided by financing activities was $30.3 million and $10.4 million for the
nine and three month periods ended May 4, 1997 compared to funds being used by
financing activities of $1.3 million and $1.1 million for the nine and three
month periods ended April 28, 1996. In the three months ended May 4, 1997 the
Company completed an initial public offering of
13
<PAGE>
common stock. The offering generated approximately $26.8 million of proceeds,
net of underwriting commission and related expenses. As of the date hereof, the
Company used $14.1 million to repay existing debt and $9.4 million to purchase
the assets of Anderson. In addition in the nine months ended May 4, 1997, the
Company borrowed $8.4 million under a term loan to finance the purchase of a
90,000 square foot facility in Burbank, California for $11.3 million. The
purchase of the facility essentially converts a rental payment cash flow stream
to a debt amortization cash flow stream. The Company purchased this building in
advance of substantially higher rental payments at the expiration of the
Company's short term lease. Also during the nine month period ended May 4, 1997
the Company entered into a loan agreement that provides for up to $34.0 million
in financing in the form of an $16.0 million term loan, an $11.0 million
revolving line of credit and a $7.0 million capital expenditure line of credit.
As of May 4, 1997, $17.4 million had been borrowed under this agreement.
The Company believes that, absent any acquisitions, the remaining proceeds
of the offering, combined with cash flow from operations and amounts available
under certain existing financing facilities, will be sufficient to meet
anticipated working capital and capital expenditure requirements through the end
of fiscal 1998.
14
<PAGE>
PART II.
OTHER INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Legal Proceedings.......................................... No change
Previously reported in the Company's
Registration Statement on Form S-1
(File No. 333-13721.)
Item 2. Changes in Securities...................................... None
Item 3. Defaults Upon Senior Securities............................ None
Item 4. Submission of Matters to a Vote of Security Holders........ None
Item 5. Other Information.......................................... None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27. Financial Data Schedule
b. Reports on Form 8-K
1. Form 8-K filed March 23, 1997 relating to the
acquisition of Anderson.
2. Form 8-K-A filed to correct the state of
incorporation of Four Media Company.
3. Form 8-K-A filed May 23, 1997 containing
financial information relating to the
acquisition of Anderson.
4. Form 8-K-A filed May 30, 1997 to correct one
number on the Four Media Company Pro Forma
Unaudited Condensed Statement of Operations for
the year ended August 4, 1996.
</TABLE>
15
<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.
FOUR MEDIA COMPANY
Date: June 16, 1997 By: /s/ Robert T. Walston
--------------------------
Robert T. Walston,
Chief Executive Officer and
Chairman of the Board
By: /s/ John H. Sabin
----------------------
John H. Sabin,
Vice President, Chief Financial Officer and
Director
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> AUG-04-1996 AUG-04-1996
<PERIOD-START> FEB-03-1997 AUG-05-1996
<PERIOD-END> MAY-04-1997 MAY-04-1997
<CASH> 8,693 8,693
<SECURITIES> 0 0
<RECEIVABLES> 19,922 19,922
<ALLOWANCES> 879 879
<INVENTORY> 952 952
<CURRENT-ASSETS> 1,666 1,666
<PP&E> 116,957 116,957
<DEPRECIATION> 28,059 28,059
<TOTAL-ASSETS> 125,246 125,246
<CURRENT-LIABILITIES> 24,294 24,294
<BONDS> 0 0
0 0
0 0
<COMMON> 41,810 41,810
<OTHER-SE> 7,749 7,749
<TOTAL-LIABILITY-AND-EQUITY> 125,246 125,246
<SALES> 23,728 61,753
<TOTAL-REVENUES> 23,728 61,753
<CGS> 14,196 38,337
<TOTAL-COSTS> 14,196 38,337
<OTHER-EXPENSES> 7,246 18,989
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,060 3,472
<INCOME-PRETAX> 1,226 955
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,226 955
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,226 955
<EPS-PRIMARY> 0.12 0.12
<EPS-DILUTED> 0.12 0.12
</TABLE>
