UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT COMMISSION FILE NUMBER
FEBRUARY 2, 1998 0-21943
(Date of earliest event reported)
- - - - - - - - - - - - - - - - - - -
FOUR MEDIA COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4599440
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2813 WEST ALAMEDA AVENUE
BURBANK, CALIFORNIA 91505
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: 818-840-7000
Not applicable
(Former name and former address, if changed since last report)
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
The following documents are included as part of this report:
PAGE NO.
--------
(a) Financial Statements of Business Acquired:
Visualize (d/b/a Pacific Ocean Post) and Affiliate
Financial Statements for the ten months ended October 31, 1997
and the year ended December 31, 1996
Report of Independent Accountants................................ A-1
Combined Balance Sheets at October 31, 1997 and
December 31, 1996.............................................. A-2
Combined Statements of Operations for the
ten months ended October 31, 1997 and
the year ended December 31, 1996............................... A-3
Combined Statements of Equity for the
ten months ended October 31, 1997 and
the year ended December 31, 1996............................... A-4
Combined Statements of Cash Flows for the
ten months ended October 31, 1997 and
the year ended December 31, 1996............................... A-5
Notes to Combined Financial Statements........................... A-6
(b) Pro Forma Financial Information
Pro Forma Information............................................ B-1
Pro Forma Condensed Combined Balance Sheet
as of August 3, 1997........................................... B-2
Pro Forma Condensed Combined Statement of Operations
For the year ended August 3, 1997............................ B-3
Pro Forma Condensed Combined Statement of Operations
for the three months ended November 2, 1997.................... B-4
Notes to Pro Forma Condensed Combined Financial
Statements..................................................... B-5
REPORT OF INDEPENDENT ACCOUNTANTS
__________
To the Shareholders of
Visualize (d/b/a Pacific Ocean Post)
We have audited the accompanying combined balance sheets of Visualize
(d/b/a Pacific Ocean Post) and Affiliate (the "Company"), as identified in Note
1 of the Notes to Combined Financial Statements, as of October 31, 1997 and
December 31, 1996, and the related combined statements of operations,
shareholders' equity and cash flows for the ten months ended October 31, 1997
and the year ended December 31, 1996. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Visualize (d/b/a
Pacific Ocean Post) and Affiliate as of October 31, 1997 and December 31, 1996,
and the combined results of their operations and their combined cash flows for
the ten months ended October 31, 1997 and the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
January 15, 1998
A-1
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COMBINED BALANCE SHEETS
(in thousands, except share data)
OCTOBER 31, DECEMBER 31,
1997 1996
------------------ -------------------
ASSETS
Current assets:
Cash................................................................... $ 193 $ 65
Accounts receivable, less allowance for doubtful accounts of $359 and
$329 as of October 31, 1997 and December 31, 1996, respectively....... 5,682 5,096
Prepaid expenses and other current assets.............................. 466 412
Deferred income taxes.................................................. 298 248
------- -------
Total current assets................................................. 6,639 5,821
Property and equipment, net............................................. 19,273 17,077
Deposits................................................................ 243 365
Deferred income taxes................................................... 218 56
Investment in DVD Center................................................ 146 -
Other assets............................................................ 49 -
------- -------
Total assets......................................................... $26,568 $23,319
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations..... $ 9,777 $ 9,480
Subordinated debenture, due to related party........................... 100 -
Accounts payable and accrued expenses.................................. 2,149 1,531
Income taxes payable................................................... 1,769 610
Deferred income........................................................ 47 298
------- -------
Total current liabilities............................................ 13,842 11,919
Long-term debt and capital lease obligations............................ 7,185 6,958
Subordinated debenture, due to related party............................ - 100
Deferred lease costs.................................................... 360 352
------- -------
Total liabilities.................................................... 21,387 19,329
Commitments (Note 6)
Shareholders' equity:
Common stock, no par value; 5,000 share authorized; issued and
outstanding 389 shares (1997) and 397 shares (1996)................... 41 672
Retained earnings...................................................... 5,140 3,318
------- -------
Total shareholders' equity........................................... 5,181 3,990
------- -------
Total liabilities and shareholders' equity........................... $26,568 $23,319
======= =======
The accompanying notes are an integral part of these combined financial
statements.
A-2
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COMBINED STATEMENT OF OPERATIONS
(in thousands)
TEN MONTHS ENDED YEAR ENDED
OCTOBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
Revenues........................................................ $34,794 $32,542
Cost of services................................................ 18,052 16,926
------ ------
Gross Profit................................................ 16,742 15,616
Selling, general and administrative expense..................... 6,746 7,069
Depreciation and amortization expense........................... 5,619 5,761
Restructuring charge............................................ - 952
------ ------
Operating income............................................. 4,377 1,832
Other income (expense):
Interest expense............................................... (1,447) (1,532)
Equity in losses of DVD Center................................. (4) -
Other, net..................................................... 157 85
------ ------
(1,294) (1,447)
------ ------
Income before income taxes and minority interest............. 3,083 385
Provision for income taxes...................................... 1,286 364
------ ------
Income before minority interest.............................. 1,797 21
Minority interest in losses of consolidated subsidiary.......... 25 -
------ --------
Net income................................................... $1,822 $ 21
====== ========
The accompanying notes are an integral part of these combined financial
statements.
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COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
COMMON STOCK
---------------------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------------- --------------- ---------------- --------------
Balance at December 31, 1995...... 397 $ 672 $3,297 $3,969
Net income....................... - - 21 21
--- ----- ------ ------
Balance at December 31, 1996...... 397 672 3,318 3,990
Repurchase and retirement of
common stock.................... (8) (631) - (631)
Net income....................... - - 1,822 1,822
--- ----- ------ ------
Balance at October 31, 1997....... 389 $ 41 $5,140 $5,181
=== ===== ====== ======
The accompanying notes are an integral part of these combined financial
statements.
A-4
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COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
TEN MONTHS ENDED YEAR ENDED
OCTOBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
Operating activities:
Net income.................................................... $1,822 $ 21
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 5,618 5,783
Gain on sale of fixed assets................................. (129) (3)
Deferred income taxes........................................ (212) (636)
Provision for doubtful accounts.............................. 30 (73)
Undistributed loss of affiliate.............................. 4 -
Changes in assets and liabilities:
Accounts receivable......................................... (616) (479)
Prepaid expenses and other current assets................... (54) (102)
Deposits.................................................... 122 (79)
Other assets................................................ (63) -
Accounts payable and accrued expenses....................... 617 369
Deferred income............................................. (251) 62
Income taxes payable........................................ 1,160 472
Deferred lease costs........................................ 9 14
------- -------
Net cash provided by operating activities................ 8,057 5,349
Investment activities:
Purchase of property and equipment............................ (1,896) (1,601)
Proceeds from disposal of fixed assets........................ 128 63
Investment in affiliate....................................... (150) -
------- -------
Net cash used in investing activities.................... (1,918) (1,538)
Financing activities:
Net borrowings on line of credit.............................. (167) 890
Long-term debt borrowings..................................... - 1,000
Long-term debt repayments..................................... (798) (1,220)
Net payments of capital lease obligations..................... (4,888) (4,432)
Common stock repurchased...................................... (158) -
------- -------
Net cash used in financing activities.................... (6,011) (3,762)
Net increase in cash..................................... 128 49
Cash at beginning of year....................................... 65 16
------- -------
Cash at end of year............................................ $ 193 $ 65
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................... $ 1,441 $ 1,527
======= =======
Taxes...................................................... $ 339 $ 530
======= =======
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations and debt of $5,905 and $4,567 were incurred in
connection with the purchases of new equipment during the ten months ended
October 31,1997 and year ended December 31, 1996, respectively.
In March 1997, the Company repurchased 7.94 shares of its common stock by
paying 25% in cash and issuing a note for $473.
The accompanying notes are an integral part of these combined financial
statements.
A-5
VISUALIZE (D/B/A PACIFIC OCEAN POST) AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Significant Accounting Policies. The
accompanying combined financial statements consist of Visualize (d/b/a Pacific
Ocean Post), a California corporation, and an affiliated partnership, Ten Moons
at POP ("Ten Moons"). These entities are collectively referred to as Visualize
(d/b/a Pacific Ocean Post) and Affiliate (the "Company").
The Company is engaged primarily in performing production and post-
production services for companies in the entertainment industry located
predominantly within Southern California. The Company's services are principally
performed for commercials, television programming, feature films, and corporate
and music video. In January 1996, the Company decided to exit its production
operations.
The accompanying combined financial statements have been presented on a
combined basis due to common ownership. The combination was accounted for in a
manner similar to a pooling of interests. All significant intercompany
transactions and balances have been eliminated.
On December 30, 1996, the Company entered into a joint venture agreement
with Cinram U.S. Holdings, Inc. to form Cinram-POP DVD Center, LLC (the "DVD
Center"). The DVD Center was formed to provide complete digital versatile disc
("DVD") authoring services to the theatrical and non-theatrical marketplace,
including audio and video encoding, authoring and multiplexing, project
management, mastering, replication, packaging and fulfillment, either directly
or through purchasing such services from its members. The Company has a 49%
interest in the DVD Center and accounts for the joint venture using the equity
method of accounting. In January 1997, the Company contributed $150,000 to the
DVD Center as required by the joint venture agreement.
In February 1997, the Company formed POP Animation, Inc. ("POP
Animation") for the purpose of expanding its computer graphics imaging
department. POP Animation purchased all of the assets and assumed the equipment
leases and $125,000 in accounts payable of Buzz F/X, a Santa Monica-based
computer graphics imaging company. The Company owns 83% of the outstanding stock
of POP Animation with the remaining 17% being held by Buzz Image Group, Inc. and
certain former employees of Buzz F/X. The results of POP Animation are included
in the accompanying financial statements of the Company as of October 31, 1997.
A-6
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NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
1. Organization and Summary of Significant Accounting Policies, continued
Concentration of Credit Risk. Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of
temporary cash investments and trade receivables. The Company places its
temporary cash investments with high credit, quality financial institutions. The
Company has not incurred any losses relating to these investments.
The Company's trade receivables, which are generally due within 30 days,
are from various companies within the entertainment industry. The Company
performs periodic credit evaluations of its customers' financial condition and
generally does not require collateral. Credit losses relating to its customers
have consistently been within management's expectations.
For the ten months ended October 31, 1997 and the year ended December 31,
1996, no single customer accounted for more than 10% of the Company's sales.
Financial Instruments. Statement of Financial Accounting Standards
---------------------
("SFAS") No. 107, "Disclosure about Fair Value of Financial Instruments",
requires disclosure of fair value information about most financial instruments
both on and off the balance sheet, if it is practicable to estimate. SFAS No.
107 excludes certain financial instruments such as certain insurance contracts
and all non-financial instruments from its disclosure requirements. A financial
instrument is defined as a contractual obligation that ultimately ends with the
delivery of cash or an ownership interest in an entity. Disclosures regarding
the fair value of financial instruments are derived using external market
sources, estimates using present value or other valuation techniques. Cash,
accounts receivable, accounts payable, accrued and other liabilities and short-
term revolving credit agreements and variable rate long-term debt instruments
approximate their fair value.
Revenue Recognition. Post-production revenues are recognized as services
are performed in accordance with the underlying agreements. Post-production
revenues from fixed-price contracts are recognized on the percentage-of-
completion (cost-to-cost) method, whereby revenues and gross profits are
recognized ratably throughout the performance period of the contract based on
percentage of actual incurred costs to total estimated final costs. This method
is used because management considers actual costs incurred to be the best
available measure of progress on these contracts. The Company performs a monthly
review of uncompleted contracts and adjusts for changes in estimates in the
period of the change. Cash collected in advance of services being performed is
recorded as deferred income.
A-7
VISUALIZE (D/B/A PACIFIC OCEAN POST) AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Inventories. Inventories are stated at the lower of cost (first-in,
first-out) or market, and are comprised of raw materials and supplies.
Depreciation and Amortization. Depreciation and amortization of property
and equipment is computed using the straight-line method over the estimated
useful lives of the related assets, which range from three to seven years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease terms or the useful lives of the improvements. Expenditures
for repairs and maintenance are charged to expenses as incurred.
Impairment losses to long-lived assets are recognized when the carrying
amount of the asset exceeds the estimated fair value of the asset in accordance
with the provisions of Statement of Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of".
Use Of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
OCTOBER 31, DECEMBER 31,
1997 1996
--------------------- --------------------
Trade receivables......................................................... $5,993 $5,412
Advances to shareholders and employees.................................... 48 13
------ ------
6,041 5,425
Less: Allowance for doubtful accounts..................................... 359 329
------ ------
$5,682 $5,096
====== ======
The Company provided services to two companies owned by shareholders of
the Company in amounts totaling $64,000 and $130,000 for the ten months ended
October 31, 1997 and the year ended December 31, 1996, respectively. During
1996, the Company wrote off $67,000 of receivables from these companies.
Receivables outstanding from these companies total $13,000 as of October 31,
1997. There were no outstanding receivables from these companies as of December
31, 1996.
A-8
VISUALIZE (D/B/A PACIFIC OCEAN POST) AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, and related accumulated depreciation and
amortization is as follows (in thousands):
October 31, December 31,
1997 1996
--------------------- ----------------------
Equipment............................................................ $38,454 $31,599
Leasehold improvements............................................... 4,912 4,505
Furniture, fixtures and other equipment.............................. 483 395
------- -------
43,849 36,499
Less: Accumulated depreciation and amortization...................... 24,576 19,422
------- -------
$19,273 $17,077
======= =======
Certain technical equipment aggregating $32,452,449 and $26,461,417 at
October 31, 1997 and December 31, 1996, respectively, was recorded under capital
lease and financing agreements. Accumulated amortization on this equipment was
approximately $18,383,000 and $14,233,000 at October 31, 1997 and December 31,
1996, respectively. Amortization of capital lease property has been included in
depreciation and amortization expense.
During the ten months ended October 31, 1997 and the year ended December
31, 1996, the Company expensed maintenance, repairs and spare parts in amounts
of $136,211 and $124,777, respectively.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
OCTOBER 31, DECEMBER 31,
1997 1996
------------------ --------------------
Line of Credit............................................................... $ 3,780 $ 3,947
Notes payable to financing companies, bearing interest at 8% to 9.85%,
collateralized by equipment, payable in monthly installments of principal
and interest through December 1998.......................................... 520 1,190
Capital lease obligations.................................................... 12,318 11,301
Note payable to ex-shareholder for repurchase of Company stock, payable in
monthly installments of principal and interest through March 1999........... 344 -
Subordinated debenture, due to related party................................. 100 100
------- ------
17,062 16,538
Less: Current maturities 9,877 9,480
------- -------
$ 7,185 $ 7,058
======= =======
A-9
VISUALIZE (D/B/A PACIFIC OCEAN POST) AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
4. LONG-TERM DEBT, continued
The Company has a line of credit of $5,000,000. The line of credit
agreement originally expired on May 1, 1997, but was subsequently renewed
through March 1, 1998. At October 31, 1997 and December 31, 1996, the line of
credit bore interest of prime plus 1% and prime, respectively. Borrowings under
the line are collateralized by substantially all of the receivables of the
Company and are guaranteed by the principal shareholders of the Company. Under
the terms of this agreement, the Company is subject to certain financial
covenants, including a minimum net worth and a maximum liability-to-equity
ratio.
The Company has entered into various capital leases for equipment. These
leases are through 2002 and are at interest rates of 6% to 12%. The majority of
these leases require that the Company perform all necessary repairs and
maintenance.
The subordinated debenture to a related party is due March 1, 1998 and
bears interest at the rate of 7% per annum. The holder has the right as of the
due date to convert the debenture into nonvoting shares of the Company's common
stock at the rate of .0000259 shares for each $1 principal amount of debentures,
subject to adjustment for dilution.
Aggregate capital lease obligations and loan maturities subsequent to
October 31, 1997 are as follows (in thousands):
TWELVE MONTHS ENDING FUTURE LEASE PRINCIPAL
OCTOBER 31, PAYMENTS PAYMENTS TOTAL
- ---------------------- --------------------- ---------------------- --------------------
1998 $ 6,338 $4,479 $10,817
1999 4,819 266 5,085
2000 1,985 - 1,985
2001 580 - 580
2002 188 - 188
------- ------- -------
13,910 $4,745 $18,655
======= =======
Less: Amounts representing interest 1,592
-------
$12,318
=======
5. INCOME TAXES
Deferred income taxes are determined in accordance with SFAS No.109,
"Accounting for Income Taxes". Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized.
A-10
VISUALIZE (D/B/A PACIFIC OCEAN POST) AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
5. INCOME TAXES, continued
The provision (benefit) consists of the following (in thousands):
OCTOBER 31, DECEMBER 31,
1997 1996
-------------------- -------------------
Current:
Federal............................................................. $1,187 $ 399
State............................................................... 312 116
------ -----
1,499 515
Deferred:
Federal............................................................. (182) (106)
State............................................................... (31) (45)
------ -----
(213) (151)
------ -----
$1,286 $ 364
====== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
OCTOBER 31, DECEMBER 31,
1997 1996
-------------------- --------------------
Deferred tax assets:
Accounts receivable.................................................. $ 155 $ 171
Accrued liabilities.................................................. 139 124
Property and equipment............................................... 236 60
Other................................................................ 106 27
----- -----
Total deferred tax assets........................................ 636 382
Deferred tax liabilities:
Prepaid expenses.................................................... (88) (58)
Other............................................................... (32) (20)
----- -----
Total deferred tax liabilities................................... (120) (78)
----- -----
Net deferred tax asset........................................... $ 516 $ 304
===== =====
A-11
VISUALIZE (D/B/A PACIFIC OCEAN POST) AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
5. INCOME TAXES, continued
A reconciliation of income tax computed at the statutory federal income tax
rate to the effective tax rate for the Company is as follows (in thousands):
OCTOBER 31, DECEMBER 31,
1997 1996
--------------------- ----------------------
Income taxes computed at federal statutory rate...................... $1,059 $ 131
Permanent differences................................................ 112 194
State tax provisions, net of federal benefits........................ 185 47
Income taxes paid by Ten Moons at POP partnership.................... (67) (31)
Other................................................................ (3) 23
------ -----
$1,286 $ 364
====== =====
The Company has recently filed an amended tax return for the year ended
1993 and is intending to file amended tax returns for the years ended 1994
through 1996 to include certain reportable transactions. The estimated taxes,
penalties, and interest have been reflected by increasing income taxes payable
and decreasing 1995 beginning retained earnings.
6. COMMITMENTS
The Company is obligated under operating leases for certain premises.
These leases require that the Company provide insurance and pay taxes assessed
against the leased property. The terms of the leases are for ten years, with
renewal options. The operating lease for the post-production facility, which
was renegotiated effective March 1, 1995, provides for rent increases based on
the Consumer Price Index. In addition, the lease provided for reduced rental
payments for the first nine months of the lease as inducement to enter into the
lease. The audio facility operating lease, which was entered into with a
related party, provides for a 5% annual rent increase through 2003. The
accompanying statements of income for the ten months ended October 31, 1997 and
the year ended December 31, 1996, respectively, reflect rent expense on a
straight-line basis over the terms of both the production and audio leases. An
obligation of $360,160 and $352,243 representing future payments in excess of
expense is reflected in the accompanying balance sheet at October 31, 1997 and
December 31, 1996, respectively. The deferred lease costs are amortized over
the life of the leases.
A-12
VISUALIZE (D/B/A PACIFIC OCEAN POST) AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
6. COMMITMENTS, continued
Minimum future obligations under non-cancelable operating leases with third
parties at October 31, 1997 are as follows (in thousands):
TWELVE MONTHS ENDING
OCTOBER 31,
------------------------
1998 $1,973
1999 1,306
2000 998
2001 1,026
2002 1,042
Thereafter 270
------
Total $6,615
======
The future minimum rental payments due to a related party under a lease for
the audio facility for the next five years and thereafter from October 31, 1997
are $480,323, $504,339, $529,556, $556,034 and $709,341, respectively.
Rent expense under the operating leases for the ten months ended October
31, 1997 was $1,811,214 and included $381,077 paid to related parties under a
lease for the audio facility.
At October 31, 1997, the Company has guaranteed $225,000, or 50%, of the
outstanding balance of a line of credit of the DVD Center.
7. SHAREHOLDERS' EQUITY
In March 1997, the Company repurchased 7.94 shares of its common stock by
paying 25% in cash and issuing a note for $472,644 at 10%, which requires
monthly payments of principal and interest totaling $21,810 through March 11,
1999.
8. RESTRUCTURING CHARGE
In January 1996, the Company decided to exit its production operations. The
Company incurred costs of approximately $952,220 during 1996 related to exiting
its production activities. Such costs included rent and facility costs,
payroll, fixed assets, and additional costs incurred on productions which
carried over from 1995.
A-13
VISUALIZE (D/B/A PACIFIC OCEAN POST) AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (continued)
FOR THE TEN MONTHS ENDED OCTOBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
9. MINORITY INTEREST
Minority interest represents the minority shareholder's proportionate share
of the equity of POP Animation. For the ten months ended October 31, 1997,
operations of POP Animation resulted in losses applicable to minority interest
exceeding the minority interest in the equity capital of POP Animation. Such
excess of $5,557 is charged against operating expenses of the Company, as there
is no obligation of the minority interest to make good on such losses. Any
future losses of POP Animation will continue to be charged against the
operations of the Company, while the Company's majority interest will be
credited for any future earnings to the extent of such losses previously
absorbed.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan covering all full-time
employees. Employees are eligible to participate in the plan after 90 days of
service. Currently, approximately 125 employees participate in the plan.
Employees can contribute up to 20% of pretax annual compensation (subject to IRS
limitations). The Company contributes an amount equal to 25% of the first 4% of
base compensation that a participant contributes to the plan. The Company's
expense for the plan totaled $63,800 and $71,317 for the ten months ended
October 31, 1997 and the year ended December 31, 1996, respectively.
11. SUBSEQUENT EVENTS
In December 1997, the Company entered into an agreement with Four Media
Company ("4MC") whereby 4MC will purchase 100% of the stock of the Company. In
addition, 4MC will acquire assets and assume liabilities of Ten Moons. The
acquisition will be accounted for under the purchase method of accounting and is
expected to be completed during the first quarter of 1998.
A-14
FOUR MEDIA COMPANY
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
On February 2, 1998, Four Media Company ("4MC") acquired all the
outstanding shares of capital stock of Visualize, a California corporation d/b/a
Pacific Ocean Post ("POP"). The purchase price of the shares was $27,140,000, of
which $24,000,000 was paid in cash, and $3,140,000 is represented by promissory
notes. Additional adjustment contingent on and related to the amounts of tax
refunds or payments may become due upon realization. Substantially all of the
cash was provided by 4MC's new $200,000,000 credit facility. This facility will
also be used to pay an estimated $3,000,000 in loan fees (on the entire credit
facility) and other costs associated with this acquisition.
The acquisition is accounted for using the purchase accounting method and,
accordingly, the purchase price will be allocated to the assets acquired and
liabilities assumed based on the fair market value of such assets and
liabilities at the date of acquisition. The unaudited condensed pro forma
balance sheet and results of operations are based on available information and
certain assumptions regarding the allocation of purchase price, which could
change significantly based on the realizable value of certain assets, the
potential to incur additional transaction related costs, and other analyses.
The accompanying condensed pro forma combined financial statements
illustrate the effect of the acquisition on 4MC's financial position at August
3, 1997 and the results of operations for the year then ended and 4MC's
financial position at November 2, 1997 and the results of operations for the
three months then ended as if the acquisition had taken place on the balance
sheet dates, August 3, 1997 and November 2, 1997 with respect to the respective
balance sheets and August 5, 1996 with respect to the year ended August 3, 1997
and three months ended November 2, 1997 results of operations.
Pro Forma condensed combined results of operations may not be indicative of
actual results which would have been obtained if the acquisition had occurred on
August 5, 1996 or August 3, 1997.
B-1
FOUR MEDIA COMPANY
Unaudited Pro Forma Combined Balance Sheets
As of August 3, 1997
(in thousands)
4MC POP PRO FORMA 4MC
ASSETS (HISTORICAL) (HISTORICAL) ADJUSTMENTS (PRO FORMA)
-------------- -------------- ----------------- --------------
Current assets:
Cash................................................. $ 6,089 $ 16 $ - $ 6,105
Restricted cash...................................... 680 - - 680
Trade accounts receivable............................ 18,755 6,419 - 25,174
Inventory............................................ 952 - - 952
Prepaid expenses..................................... 3,219 545 - 3,764
Deferred taxes....................................... - 248 - 248
-------- ------- ---------- --------
Total current assets................................ 29,695 7,228 - 36,923
Property, plant & equipment, net...................... 93,672 19,824 (6,000)(1) 107,496
Deferred taxes........................................ 2,000 55 - 2,055
Long term receivables................................. 4,067 - - 4,067
Other assets.......................................... 2,803 440 32,279 (1) 35,522
-------- ------- ---------- --------
Total assets........................................ $132,237 $27,547 $26,279 $186,063
======== ======= ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt and capital $ 10,559 $10,605 $ (21,164)(1) $ -
lease obligations...................................
Subordinated debenture............................... - 100 1,040 (1) 1,140
Accounts payable..................................... 11,080 1,324 - 12,404
Accrued and other liabilities........................ 6,227 470 2,000 (1) 8,697
Income taxes payable................................. - 1,356 - 1,356
Deferred income...................................... - 316 - 316
-------- ------- ---------- --------
Total current liabilities........................... 27,866 14,171 (18,124) 23,913
Long term debt and capital lease obligations.......... 54,633 8,231 49,164 (1) 112,028
Deferred lease cost................................... - 357 - 357
Minority interest..................................... - 27 - 27
Commitments and contingencies
Stockholders' equity:
Preferred stock...................................... - - - -
Common stock......................................... 96 41 (41)(1) 96
Additional paid-in capital........................... 41,650 - - 41,650
Foreign currency translation adjustment.............. (269) - - (269)
Retained earnings.................................... 8,261 4,720 (4,720)(1) 8,261
-------- ------- ---------- --------
Total stockholders' equity.......................... 49,738 4,761 (4,761) 49,738
-------- ------- ---------- --------
Total liabilities and stockholders' equity.......... $132,237 $27,547 $ 26,279 $186,063
======== ======= ========== ========
The accompanying notes are an integral part of these combined financial
statements.
B-2
FOUR MEDIA COMPANY
Unaudited Pro Forma Combined Balance Sheets
As of November 2, 1997
(in thousands)
ASSETS 4MC POP PRO FORMA 4MC
(HISTORICAL) (HISTORICAL) ADJUSTMENTS (PRO FORMA)
-------------- -------------- ----------------- ---------------
Current assets:
Cash................................................ $ 879 $ 193 $ - $ 1,072
Restricted cash..................................... 637 - - 637
Trade accounts receivable........................... 24,367 5,682 - 30,049
Inventory........................................... 1,029 - - 1,029
Prepaid expenses.................................... 4,048 466 - 4,514
Deferred taxes...................................... - 298 - 298
-------- ------- ---------- --------
Total current assets............................... 29,695 6,639 - 37,599
Property, plant & equipment, net..................... 102,825 19,273 (5,449)(1) 116,649
Deferred taxes....................................... 2,000 218 - 2,218
Long term receivables................................ 3,560 - - 3,560
Other assets......................................... 3,056 438 31,308 (1) 34,802
-------- ------- ---------- --------
Total assets....................................... $142,401 $26,568 $ 25,859 $194,828
======== ======= ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt and capital
lease obligations.................................. $ 13,176 $ 9,777 $ (22,953)(1) $ -
Subordinated debenture.............................. - 100 1,040 (1) 1,140
Accounts payable.................................... 9,649 1,775 - 11,424
Accrued and other liabilities....................... 7,171 374 2,000 (1) 9,545
Income taxes payable................................ - 1,769 - 1,769
Deferred income..................................... - 47 - 47
-------- ------- ---------- --------
Total current liabilities.......................... 29,996 13,842 (19,913) 23,925
Long term debt and capital lease obligations......... 62,928 7,185 50,953 121,066
Deferred lease costs................................. - 360 - 360
Commitments and contingencies
Stockholders' equity:
Preferred stock..................................... - - - -
Common stock........................................ 96 41 (41)(1) 96
Additional paid-in capital.......................... 41,650 - - 41,650
Foreign currency translation adjustment............. (755) - - (755)
Retained earnings................................... 8,486 5,140 (5,140)(1) 8,486
-------- ------- ---------- --------
Total stockholders' equity......................... 49,477 5,181 (5,181) 49,477
-------- ------- ---------- --------
Total liabilities and stockholders' equity......... $142,401 $26,568 $ 25,859 $194,828
======== ======= ========== ========
The accompanying notes are an integral part of these combined financial
statements.
B-3
FOUR MEDIA COMPANY
Unaudited Condensed Statement of Operations
For the fiscal year ended August 3, 1997
(In thousands, except per share amounts)
4MC POP PRO FORMA 4MC
(HISTORICAL) (HISTORICAL) ADJUSTMENTS (PRO FORMA)
--------------- -------------- ---------------- ---------------
Revenues.............................................. $84,527 $38,032 $ - $122,559
Cost of services...................................... 53,184 19,315 - 72,499
------- ------- --------- --------
Gross profit........................................ 31,343 18,717 - 50,060
------- ------- --------- --------
Operating expenses:
Sales general and administrative..................... 12,899 7,514 - 20,413
Depreciation and amortization........................ 13,175 6,493 (3,774)(2) 15,894
------- ------- --------- --------
Total operating expenses............................ 26,074 14,007 (3,774) 36,307
------- ------- --------- --------
Income from operations........................... 5,269 4,710 3,774 13,753
Interest expense, net................................. 3,887 1,612 4,114 (3) 9,613
------- ------- --------- --------
Income before income taxes and minority interest..... 1,382 3,098 (340) 4,140
Income taxes......................................... - 1,654 (1,489)(4) 165
Minority interest.................................... - (4) - (4)
------- ------- --------- --------
Net income.......................................... $ 1,382 $ 1,440 $ 1,149 $ 3,971
======= ======= ========= ========
Net income per share.................................. $0.16 $0.46
======= ========
Weighted average number of shares outstanding......... 8,563 8,563
======= ========
The accompanying notes are an integral part of these combined financial
statements.
B-4
FOUR MEDIA COMPANY
Unaudited Condensed Statement Of Operations
For the three months ended November 2, 1997
(In thousands, except per share amounts)
4MC POP PRO FORMA 4MC
(HISTORICAL) (HISTORICAL) ADJUSTMENTS (PRO FORMA)
-------------- ------------- ----------------- ----------------
Revenues............................................... $27,267 $10,798 $ - $38,065
Cost of services....................................... 17,741 5,922 - 23,663
------- ------- ------- -------
Gross profit......................................... 9,526 4,876 - 14,402
------- ------- ------- -------
Operating expenses:
Sales general and administrative...................... 3,937 1,954 - 5,891
Depreciation and amortization......................... 4,016 1,769 (943)(2) 4,842
------- ------- ------- -------
Total operating expenses............................. 7,953 3,723 (943) 10,733
------- ------- ------- -------
Income from operations............................ 1,573 1,153 943 3,669
Interest expense, net.................................. 1,348 480 1,028(3) 2,856
------- ------- ------- -------
Income before income taxes and minority interest...... 225 673 (85) 813
Income taxes.......................................... - 281 (253)(4) 28
Minority interest..................................... - 27 - 27
------- ------- ------- -------
Net income........................................... $ 225 $ 419 $ 168 $ 812
======= ======= ======= =======
Net income per share................................... $0.02 $0.08
======= =======
Weighted average number of shares outstanding.......... 10,169 10,169
======= =======
The accompanying notes are an integral part of these combined financial
statements.
B-5
FOUR MEDIA COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET AND STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
1. The total purchase price of the POP acquisition reflected in the pro forma
balance sheets consists of:
August 3, 1997 November 2, 1997
---------------------- -----------------------
Amount paid to shareholders.................................... $27,140 $27,140
Assumption of liabilities...................................... 22,786 21,387
Estimated transaction costs.................................... 2,000 2,000
------- -------
Total...................................................... $51,926 $50,527
======= =======
The amount paid to shareholders includes sellers' notes of $1,140 which is
subordinate to the bank financing. All of the debt is classified as non-
current in accordance with the terms of the new acquisition financing
obtained. The adjustment reflects all of the above assumptions as well as an
adjustment of property, plant and equipment to an estimated fair market
value of $13,824. Also included in other assets is $3,000 of estimated
deferred financing costs.
2. Adjustments to reflect revised depreciation using fair market value of POP
assets and seven year useful life, and goodwill acquired amortized over
forty years.
3. Adjustments to reflect new debt at average interest rate of 8.10%, plus
amortization of $3,000 financing costs over 6 1/2 years.
4. Estimated elimination of 90% of income taxes because of 4MC's net operating
loss carryforwards.
B-6
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: March 16, 1998 By: /s/ Alan S. Unger
-----------------
Alan S. Unger
Vice President and
Chief Financial Officer