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 EXCHANGE ACT OF 1934
DATE OF REPORT COMMISSION FILE NUMBER
MAY 4, 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)
818-840-7000
Registrant's telephone number including area code:
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:
(a) Financial Statements of Business Acquired: PAGE NO.
--------
Video Symphony, Inc. and Affiliate Financial Statements for the
years ended December 31, 1995, 1996 and 1997
Report of Independent Accountants............................................ A-1
Combined Balance Sheets at December 31, 1995, 1996 and 1997................. A-2
Combined Statements of Operations for the years ended
December 31, 1995, 1996 and 1997............................................ A-3
Combined Statements of Equity for the years ended
December 31, 1995, 1996 and 1997............................................ A-4
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997............................................ A-5
Notes to Combined Financial Statements....................................... A-6
(b) Pro Forma Financial Information
Unaudited Pro Forma Condensed Consolidated Financial Information............. B-1
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of May 3, 1998........................................................... B-2
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended August 3, 1997........................................... B-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the nine months ended May 3, 1998....................................... B-4
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements..... B-5
REPORT OF INDEPENDENT ACCOUNTANTS
-----------------------
To the Shareholders of
Video Symphony, Inc, and Affiliate
We have audited the accompanying combined balance sheets of Video Symphony,
Inc, and Affiliate (referred to as the "Company"), as identified in Note 1 to
the Notes to Combined Financial Statements as of December 31, 1995, 1996 and
1997, and the related combined statements of operations, equity, and cash flows
for each of the years in the three-year period ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Video
Symphony, Inc. and Affiliate as of December 31, 1995, 1996 and 1997, and the
results of their combined operations and their combined cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
April 8, 1998
A-1
VIDEO SYMPHONY, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
(in thousands)
DECEMBER 31,
----------------------------------
1995 1996 1997
---- ---- ----
ASSETS
Current Assets:
Cash..................................................... $ 79 $ 101 $ 43
Trade accounts receivable................................ 394 626 513
Due from related party................................... - - 9
------ ------ ------
Total current assets.................................... 473 727 565
Property and equipment, net............................... 1,349 3,094 3,090
Other assets.............................................. - 37 11
------ ------ ------
Total assets............................................ $1,822 $3,858 $3,666
====== ====== ======
LIABILITIES AND EQUITY
Current Liabilities:
Current maturities of long-term debt and capital lease
obligations............................................. $ 263 $ 880 $1,358
Accounts payable......................................... 264 144 170
Due to related party..................................... 15 - -
Accrued expenses......................................... - 117 38
------ ------ ------
Total current liabilities............................... 542 1,141 1,566
Long-term debt and capital lease obligations.............. 366 1,430 819
------ ------ ------
Total Liabilities....................................... 908 2,571 2,385
Commitments (Note 6)
Equity.................................................... 914 1,287 1,281
------ ------ ------
Total liabilities and equity............................ $1,822 $3,858 $3,666
====== ====== ======
The accompanying notes are an integral part of these combined financial
statements.
A-2
VIDEO SYMPHONY, INC. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---- ---- ----
Revenues:
Equipment rental...................................................... $1,356 $3,281 $3,438
Other................................................................. -- -- 224
------ ------ ------
Total revenues....................................................... 1,356 3,281 3,662
Expenses:
Direct operating...................................................... 313 742 570
Depreciation and amortization of rental equipment..................... 175 528 873
Selling, general and administrative................................... 289 193 966
Interest expense, net................................................. 53 130 260
------ ------ ------
Total expenses....................................................... 830 1,593 2,669
------ ------ ------
Income before income taxes........................................... 526 1,688 993
Provision for income taxes............................................. -- (2) (15)
------ ------ ------
Net income........................................................... $ 526 $1,686 $ 978
====== ====== ======
The accompanying notes are an integral part of these combined financial
statements.
A-3
VIDEO SYMPHONY, INC. AND AFFILIATE
COMBINED STATEMENTS OF EQUITY
(in thousands)
COMMON DUE FROM RETAINED PARTNERS'
STOCK SHAREHOLDERS EARNINGS CAPITAL TOTAL
------- ------------- --------- ---------- -------
Balance, December 31, 1994............................ - - - $ 227 $ 227
Net income........................................... - - - 526 526
Partner contributions................................ - - - 206 206
Partner distributions................................ - - - (45) (45)
------- -------- ----- ------- ------
Balance, December 31, 1995............................ - - - 914 914
Net income........................................... - - $ 140 1,546 1,686
Partner distributions................................ - - - (563) (563)
Repurchase of partnership interest................... - - - (55) (55)
Adjustment to incorporate partnerships and issue
common stock........................................ $1,842 - - (1,842) -
Shareholder distributions............................ - - (94) - (94)
Net advances to shareholders......................... ($601) - - (601)
------- -------- ----- ------- ------
Balance, December 31, 1996............................ 1,842 (601) 46 - 1,287
Net income........................................... - - 978 - 978
Shareholder distributions............................ - - (332) - (332)
Net advances to shareholders......................... - (727) - - (727)
Common stock issued to minority shareholder.......... 75 - - - 75
------- -------- ----- ------- ------
Balance, December 31, 1997............................ $1,917 $( 1,328) $ 692 $ - $1,281
======= ======== ===== ======= ======
The accompanying notes are an integral part of these combined financial
statements.
A-4
VIDEO SYMPHONY, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
1995 1996 1997
--------- ---------- ----------
Cash flows from operating activities:
Net income...................................................................... $ 526 $ 1,686 $ 978
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of rental equipment.............................. 175 528 873
Depreciation of leasehold improvements and furniture and fixtures.............. - 4 15
Gain on sale of equipment...................................................... - (186) (23)
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables...................................... (394) (232) 113
(Increase) decrease in intercompany receivables............................... - - (9)
(Increase) decrease in other assets........................................... - (37) 26
Increase (decrease) in accounts payable....................................... 142 (120) 26
Increase (decrease) in intercompany payables.................................. 15 (15) -
Increase (decrease) in accrued expenses....................................... (38) 117 (79)
----- ------- -------
Net cash provided by operating activities................................... 426 1,745 1,920
----- ------- -------
Cash flows from investing activities:
Proceeds from sale of equipment................................................. - 197 68
Purchases of property, plant and equipment...................................... (398) (122) (225)
----- ------- -------
Net (used in) cash provided by investing activities......................... (398) 75 (157)
----- ------- -------
Cash flows from financing activities:
Proceeds from bank lines of credit.............................................. - - 275
Repayment of equipment capital lease obligations................................ (115) (485) (975)
Repayment of note payable....................................................... - - (137)
Partner contributions........................................................... 206 - -
Partner distributions........................................................... (45) (563) -
Repurchase of partnership interest.............................................. - (55) -
Common stock issued to minority shareholder..................................... - - 75
Shareholder distributions....................................................... - (94) (332)
Due from shareholders........................................................... - (601) (727)
----- ------- -------
Net cash provided by (used in) investing activities......................... 46 (1,798) (1,821)
----- ------- -------
Net increase (decrease) in cash............................................. 74 22 (58)
Cash at beginning of year........................................................ 5 79 101
----- ------- -------
Cash at end of year.............................................................. $ 79 $ 101 $ 43
===== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.......................................... $ 53 $ 130 $ 260
Cash paid during the year for income taxes...................................... $ - $ - $ 4
Non-cash investing and financing activities:
Capital lease obligations incurred............................................. $ 670 $ 1,786 $ 704
Note payable incurred to buyout partner........................................ $ - $ 380 $ -
Incorporation reclassification of partnership earnings and capital............. $ - $ 1,842 $ -
The accompanying notes are an integral part of these combined financial
statements.
A-5
VIDEO SYMPHONY, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements consist of Video Symphony,
Inc., a California S-Corporation, and Digital Doctors, Inc., a California S-
Corporation. These entities are collectively referred to as Video Symphony,
Inc. and Affiliate (the "Company").
The accompanying combined financial statements have been presented on a
combined basis due to common ownership and business. The combination was
accounted for in a manner similar to a pooling of interest. All significant
intercompany transactions and balances have been eliminated. The combination
excludes a certain entity under common ownership or control of the shareholders,
since it engages in unrelated business lines and will not be subject to
acquisition noted herein.
The Company was formed in 1995 as one partnership between Mike Flanagan,
Greg Howard and Eugene Huang. The Company is in the business of renting and
selling computer video editing equipment, primarily to the television and motion
picture industry. On July 1, 1996, the Company repurchased the partnership
interest from Eugene Huang for $435,000. Effective December 1, 1996, both
companies combined herein were incorporated under the laws of the State of
California. All shareholders of the Company have equal percentages of ownership
in both entities combined herein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. Revenue is earned through rental and sales of
-------------------
equipment. Equipment rentals are accounted for as short-term operating leases
and revenues are recorded as earned under the terms of the rental or leasing
contract. Revenues from equipment sales are recognized when a product is
shipped.
Property and Equipment. Property, equipment and leasehold improvements are
----------------------
recorded at cost. Expenditures for improvements are capitalized while
maintenance and repairs are charged to operations as incurred.
Depreciation and Amortization. Depreciation of property and equipment is
-----------------------------
computed by use of the straight-line method based on the estimated useful life
of 5 years of the respective assets, except for leasehold improvements, which
are amortized using the straight-line method over the life of the improvement or
the length of the lease, whichever is shorter. When properties are retired or
otherwise disposed of, the cost and related accumulated depreciation are removed
from the accounts, and the resulting gain or loss is credited or charged to
operations.
A-6
VIDEO SYMPHONY, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Income Taxes. Effective December 1, 1996, the Company converted to an S-
-------------
Corporation for income tax purposes. As a result of S-Corporation status, the
Company is not subject to federal income tax at the corporate level, and
California state franchise taxes are assessed at a rate of 1.5%, and are
included in the provision for income taxes in the Company's statements of
operations.
Use of Estimates. The preparation of financial statements in conformity
-----------------
with generally accepted accounting principles requires management to make
estimates and assumptions for the reporting period and as of the financial
statement date. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Fair Value. In accordance with the reporting requirements of Statement of
-----------
Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value
of Financial Instruments," the Company calculates the fair value of financial
instruments and includes this additional information in the notes to the
combined financial statements when the fair value is different than the carrying
value of those financial instruments. When the fair value reasonably
approximates the carrying value, no additional disclosure is made.
Advertising. The Company reports the costs of all advertising as expenses
-----------
in the periods in which those costs are incurred. Advertising expense was $0,
$2,440 and $31,143 for the years ended December 31, 1995, 1996 and 1997,
respectively.
3. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company places its cash with high-credit, quality institutions
which are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000. At December 31, 1995, 1996 and 1997, the Company had no accounts with
any lending institution in excess of the amount insured by the FDIC.
A-7
VIDEO SYMPHONY, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. CONCENTRATION OF CREDIT RISK, CONTINUED
The Company grants credit to its customers, substantially all of whom are
in the entertainment industry. Credit risk with respect to trade accounts
receivable is generally diversified due to the large number of entities
comprising the Company's customer base. The Company controls credit risk
through credit approvals, credit limits and monitoring procedures. Credit is
extended based on an evaluation of each customer's financial condition, and
generally collateral is not required. The Company did not have any customers or
group of customers which accounted for a significant amount of revenues for the
years ended December 31, 1995, 1996 and 1997.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31 (in
thousands):
1995 1996 1997
---- ---- ----
Rental equipment................................................. $ 659 $1,096 $1,267
Rental equipment under capital leases............................ 863 2,630 3,230
------ ------ ------
Total......................................................... 1,522 3,726 4,497
Less: Accumulated depreciation................................... 175 669 1,492
------ ------ ------
Rental equipment, net......................................... 1,347 3,057 3,005
Furniture and fixtures........................................... 2 15 41
Leasehold improvements........................................... -- 27 63
------ ------ ------
Total......................................................... 2 42 104
Less Accumulated depreciation.................................... - 5 19
------ ------ ------
Leasehold improvements and furniture and fixtures, net........ 2 37 85
------ ------ ------
Total property and equipment, net............................. $1,349 $3,094 $3,090
====== ====== ======
During the fiscal years ended December 31, 1995, 1996 and 1997, the Company
incurred repairs, maintenance and spare parts expenses of $114,203, $167,020 and
$85,453, respectively.
5. LONG-TERM DEBT
The following is a summary of long-term debt (in thousands):
1995 1996 1997
---- ---- ----
Capital lease obligations........................... $629 $1,930 $1,659
Bank lines of credit................................ -- -- 275
Note payable........................................ -- 380 243
---- ------ ------
629 2,310 2,177
Less: Current maturities............................ 263 880 1,358
---- ------ ------
$366 $1,430 $ 819
==== ====== ======
A-8
VIDEO SYMPHONY, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. LONG TERM DEBT, CONTINUED
All loans and capital lease obligations as of December 31, 1997 expire
in the year 2000. Aggregate loan and capital lease obligation maturities for
the next three fiscal years are as follows (in thousands):
FUTURE
PRINCIPAL LEASE
YEARS ENDING IN PAYMENTS PAYMENTS TOTAL
--------------- --------- -------- -----
1998............................................. $354 $1,128 $1,483
1999............................................. 89 577 667
2000............................................. 75 116 190
---- ------ ------
518 1,821 2,340
Less: Interest included in capital lease obligation.. -- 163 163
---- ------ ------
$518 $1,658 $2,177
==== ====== ======
The Company has entered into various capital lease obligations related to
the purchase of equipment. These notes are due through the year 2000 and are at
interest rates of 8.19% to 37.08%.
In February 1997, the Company entered into three $100,000 line-of-credit
agreements with Preferred Bank, expiring in March of 1998, bearing interest at
prime plus 2.5%. The bank's prime rate was 8.5% at December 31, 1997. The
lines of credit are collateralized by substantially all of the assets of the
Company and personally guaranteed by the shareholders of the Company. Two of
the lines of credit were renewed through June of 1998 and the remaining line of
credit was fully repaid upon expiration in March of 1998.
In July 1996, the Company purchased the interest of one of its partners
with a $380,000 unsecured 12% note payable due through the year 2000.
6. COMMITMENTS
The Company leases an office facility under a three-year noncancellable
operating lease with the initial term commencing February 1997 and ending June
2000. The lease contains a base rent of $2,500 per month and additional
payments for maintenance costs. Rent expense for the year ended December 31,
1997 totaled $28,287.
At December 31, 1997, the annual commitment under the operating lease is as
follows (in thousands):
YEARS ENDING IN
---------------
1998.......................... $30
1999.......................... 30
2000.......................... 15
---
$75
===
A-9
VIDEO SYMPHONY, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS, CONTINUED
During 1995 and 1996, the Company shared an office facility with Video
Symphony Entertraining, Inc. ("VSE"), a non-combined affiliate commonly owned by
the shareholders of the Company. Rent expense for the year ended December 31,
1995 and 1996 for the Company totaled $25,493 and $38,820, respectively, based
on the square footage occupied.
7. EQUITY
A summary of the common stock at December 31 of the Combined Companies is
as follows (in thousands):
1996 1997
----------- ------------
Video Symphony, Inc. 10,000,000 shares authorized, 1,000,000 and 1,020,000 shares
issued and outstanding at 1996 and 1997, respectively; no par or stated value........ $1,841 $1,878
Digital Doctors, Inc. 10,000,000 shares authorized, 1,000,000 and 1,020,000 shares
issued and outstanding at 1996 and 1997, respectively; no par or stated value........ 1 39
------ ------
$1,842 $1,917
====== ======
8. EMPLOYEE BENEFIT PLAN
The Company instituted a profit-sharing plan (the "Plan") for eligible
employees in 1996. The annual Company contribution to the Plan is to be
determined by the Board of the Plan, with a maximum amount equal to the amount
allowed under Internal Revenue Service regulations, Section 415(c) of the
Internal Revenue Code. The Company contributed $77,347 and $0 to the Plan for
the years ended December 31, 1996 and 1997, respectively.
9. RELATED PARTIES
In July 1996, the Company purchased the partnership interest of Eugene
Huang for a total purchase price of $435,000. The Company paid $55,000 in cash
and entered into an unsecured note payable for the remaining $380,000, bearing
interest at 12% and due in the year 2000.
A-10
VIDEO SYMPHONY, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTIES, CONTINUED
The Company entered into an operating lease for facilities and certain
capital leases for equipment on behalf of VSE. The facility and the equipment
under the capital leases are used solely by VSE and the Company does not
recognize any sublease income from VSE. Rent expense for facilities and the
capital lease assets and obligations and associated amortization and interest
expense are not included in the combined financial statements of the Company.
In addition, the Company funded certain operational expenses and repayments of
capital lease obligations of VSE. As a result, at December 31, 1995, 1996 and
1997, the Company has receivables form VSE totaling $0, $601,269 and $1,327,957,
respectively. The shareholders of the Company have personally guaranteed the
receivables from VSE. The receivable amounts from VSE in each of the years are
shown in the statement of equity as receivables from the shareholders of the
Company, as it is uncertain whether VSE will have the ability to repay such
receivables.
10. SUBSEQUENT EVENT
In December 1997, the Company entered into an agreement with Four Media
Company ("4MC") whereby 4MC will acquire the business operations, certain assets
and assume certain liabilities of the Company. The acquisition will be
accounted for under the purchase method of accounting and is expected to be
completed during the second quarter of 1998.
A-11
FOUR MEDIA COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On May 4, 1998, Four Media Company ("4MC") through its wholly owned
subsidiary VSDD Acquisition Corp., acquired all of the outstanding ownership
interests in Symphonic Video LLC and Digital Doctors LLC from their parent
companies Video Symphony, Inc. and Digital Doctors, Inc. (collectively "VSI").
In this transaction, 4MC effectively acquired all of the operations of VSI. The
purchase price totaled approximately $3.1 million paid in 4MC common stock.
On February 2, 1998, 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 $26.4 million of which $23.3 million was
paid in cash, and $3.1 million 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 million credit facility.
The unaudited pro forma condensed consolidated balance sheet at May 3, 1998
gives effect to the VSI acquisition as if it had occurred on May 3, 1998. The
4MC historical balance sheet at May 3, 1998 includes the balance sheet of POP.
The unaudited pro forma condensed consolidated statements of operations for
the year ended August 3, 1997 and for the nine months ended May 3, 1998 give
effect to the VSI and POP acquisitions as if they had occurred on August 5,
1996. The 4MC historical statement of operations for the nine months ended May
3, 1998 includes the results of POP from the February 2, 1998 acquisition date.
The acquisitions were accounted for using the purchase accounting method
and, accordingly, the purchase price of each transaction 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 unaudited pro forma condensed consolidated financial statements may not
be indicative of actual results which would have been obtained if the
acquisitions had been completed and in effect for the periods indicated, nor of
the results that may be obtained in the future.
B-1
FOUR MEDIA COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MAY 3, 1998
(in thousands)
ASSETS 4MC VSI PRO FORMA 4MC
(HISTORICAL) (HISTORICAL) ADJUSTMENTS (PRO FORMA)
Current assets:
Cash......................................... $ 2,088 $ - $ - $ 2,088
Trade accounts receivable.................... 33,201 254 - 33,455
Inventory.................................... 1,262 - - 1,262
Prepaid expenses............................. 6,138 - - 6,138
-------- ------- --------- --------
Total current assets........................ 42,689 254 - 42,943
Property, plant & equipment, net.............. 121,364 3,012 (1,012)/4/ 123,364
Deferred taxes................................ 2,516 - - 2,516
Long term receivables......................... 2,703 - - 2,703
Goodwill...................................... 32,825 - 3,436 /4/ 36,261
Other assets.................................. 3,152 10 - 3,162
-------- ------- --------- --------
Total assets................................ $205,249 3,276 2,424 $210,949
======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt and
capital lease obligations................... $ 5,991 1,467 $(1,467)/4/ $ 5,991
Accounts payable............................. 8,940 189 - 9,129
Accrued and other liabilities................ 7,938 283 200 /4/ 8,421
-------- ------- --------- --------
Total current liabilities................... 22,869 1,939 (1,267) 23,541
Long term debt and capital lease obligations.. 118,602 461 1,467 /4/ 120,530
Commitments and contingencies
Stockholders' equity:
Preferred stock.............................. 14,835 - - 14,835
Common stock................................. 96 1,917 (1,914)/4/ 99
Additional paid-in capital................... 41,650 - 3,097 /4/ 44,747
Foreign currency translation adjustment...... (660) - (660)
Retained earnings (deficit).................. 7,857 (1,041) 1,041 /4/ 7,857
-------- ------- --------- --------
Total stockholders' equity.................. 63,778 876 2,224 66,878
-------- ------- --------- --------
Total liabilities and stockholders' equity.. $205,249 $ 3,276 $ 2,424 $210,949
======== ======= ========= ========
The accompanying notes are an integral part of the unaudited pro forma condensed
consolidated financial statements.
B-2
FOUR MEDIA COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 3, 1997
(In thousands, except per share amounts)
PRO FORMA ADJUSTMENTS
--------------------------------
4MC POP VSI ACQUISITION ACQUISITION 4MC
(HISTORICAL) (HISTORICAL) (HISTORICAL) OF POP OF VSI (PRO FORMA)
---------- ---------- ---------- ----------- ----------- ---------
Revenues............................. $84,527 $38,032 $3,725 $ - $126,284
Cost of services..................... 53,184 19,315 1,606 - (730)/5/ 73,375
------- ------- ------ ---------- ------- --------
Gross profit....................... 31,343 18,717 2,119 - 730 52,909
------- ------- ------ ---------- ------- --------
Operating expenses:
Sales general and administrative.... 12,899 7,514 418 - - 20,831
Depreciation and amortization....... 13,175 6,493 9 (3,774)/1/ 372 /5/ 16,275
------- ------- ------ ---------- ------- --------
Total operating expenses........... 26,074 14,007 427 (3,774) 372 37,106
------- ------- ------ ---------- ------- --------
Income from operations.......... 5,269 4,710 1,692 3,774 358 15,803
Interest expense, net................ 3,887 1,612 212 4,114 /2/ (23)/6/ 9,802
------- ------- ------ ---------- ------- --------
Income before income taxes and
minority interest.................. 1,382 3,098 1,480 (340) 381 6,001
Income taxes........................ - 1,654 10 (1,489)/3/ (9)/3/ 166
Minority interest................... - (4) - - - (4)
------- ------- ------ ---------- ------- --------
Net income......................... $ 1,382 $ 1,440 $1,470 $ 1,149 $ 390 $ 5,831
======= ======= ====== ========== ======= ========
Net income per share-basic........... $ 0.17 $ 0.70
======= ========
Net income per share -diluted........ $ 0.16 $ 0.66
======= ========
Weighted average number of shares
outstanding-basic................... 7,963 8,287
Weighted average number of shares ======= ========
outstanding-diluted................. 8,553 8,877
======= ========
The accompanying notes are an integral part of the unaudited pro forma condensed
consolidated financial statements.
B-3
FOUR MEDIA COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 3, 1998
(In thousands, except per share amounts)
PRO FORMA ADJUSTMENTS
4MC POP VSI ACQUISITION ACQUISITION 4MC
(HISTORICAL) (HISTORICAL) (HISTORICAL) OF POP OF VSI (PRO FORMA)
---------- ---------- ---------- ----------- ----------- ---------
Revenues................................ $95,017 $18,617 $3,101 $ - $ $116,735
Cost of services........................ 60,282 10,927 1,238 - (667)/5/ 71,780
------- ------- ------ --------- ------- --------
Gross profit.......................... 34,735 7,690 1,863 - 667 44,955
------- ------- ------ --------- ------- --------
Operating expenses:
Sales general and administrative....... 13,719 4,894 479 - - 19,092
Depreciation and amortization.......... 13,541 3,607 9 (2,829)/1/ 278 /5/ 14,606
------- ------- ------ --------- ------- --------
Total operating expenses.............. 27,260 8,501 488 (2,829) 278 33,698
------- ------- ------ --------- ------- --------
Income from operations............... 7,475 (811) 1,375 2,829 389 11,257
Interest expense, net................... 5,430 912 239 3,084 /2/ (65) 9,600
------- ------- ------ --------- ------- --------
Income before income taxes and
minority interest.................... 2,045 (1,723) 1,136 (255) 454 1,657
Income taxes........................... - (709) 6 709 /7/ (6)/7/ -
Minority interest...................... - 23 - - - 23
------- ------- ------ --------- ------- --------
Net income before extraordinary item.. $ 2,045 $ (991) 1,130 $ (964) 460 $ 1,680
======= ======= ====== ========= ======= ========
Net income per share before extraordinary
item-basic............................... $0.22 $0.17
======= ========
Net income per share before extraordinary
item-diluted............................. $0.19 $0.15
======= ========
Weighted average number of shares
outstanding-basic........................ 9,553 9,877
======= ========
Weighted average number of shares
outstanding-diluted...................... 10,526 10,850
======= ========
The accompanying notes are an integral part of the unaudited pro forma condensed
consolidated financial statements.
B-4
FOUR MEDIA COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Adjustments to reflect revised depreciation using fair market value of POP
assets and seven-year useful life, and goodwill acquired amortized over
forty years.
2. Adjustments to reflect new debt at average interest rate of 8.10%, plus
amortization of $3,000 financing costs over 6 1/2 years.
3. Estimated elimination of 90% of income taxes because of 4MC's net operating
loss carryforwards.
4. The purchase price of VSI totaled approximately $3,100 paid in 4MC common
stock. In addition, the Company recorded $200 in estimated transaction
costs.
All of the VSI debt was subsequently repaid with borrowings from the
Company's debt facility. Property, plant and equipment is adjusted to an
estimated fair market value of $2,000.
5. Adjustments to reflect revised depreciation using fair market value of VSI
assets and seven year useful life, and goodwill acquired amortized over
thirty years. In addition, depreciation expense reported by VSI in cost of
services has been reclassified to operating expenses to conform to the 4MC
presentation.
6. Adjustments to related payoff of VSI debt with borrowings for the Company's
debt facility at average interest rate of 8.10%.
7. Elimination of 100% of net income tax benefit based on taxable income being
reported on a consolidated basis. No income tax is shown on a consolidated
basis because of 4MC's net operating loss carryforwards.
B-5
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: July 16, 1998 By: /s/ Alan S. Unger
-------------------------
Alan S. Unger
Vice President and
Chief Financial Officer