================================================================================
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 2, 1999
[_] Transaction Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
---- ----
Commission File Number: 0-21943
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, CA 91505
(Address of Principal Executive Offices, Including 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
------ ------
Number of shares of common stock, par value $0.01 per share, of the
registrant outstanding as of June 7, 1999: 19,693,629 shares.
- --------------------------------------------------------------------------------
FOUR MEDIA COMPANY
FORM 10-Q
For the Quarter Ended May 2, 1999
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
Number
------
Consolidated Balance Sheets as of August 2, 1998
and May 2, 1999........................................................... 3
Consolidated Statements of Operations for the Nine Months ended May 3, 1998
and May 2, 1999 and the Three Months Ended May 3, 1998 and
May 2, 1999................................................................ 4
Consolidated Statements of Cash Flows for the Nine Months ended May 3, 1998
and May 2, 1999............................................................ 5
Notes to Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview................................................................. 9
Three Months Ended May 2, 1999 Compared to
Three Months Ended May 3, 1998........................................... 10
Nine Months Ended May 2, 1999 Compared to
Nine Months Ended May 3, 1998............................................ 11
Liquidity and Capital Resources.......................................... 12
Year 2000 Compliance Issue............................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risks...................................................... 14
Foreign Currency Risks................................................... 14
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
Signature ........................................................................... 16
2
- -------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 1. Financial Statements
- --------------------------------------------------------------------------------
FOUR MEDIA COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
August 2, May 2,
1998 1999
---------- --------
(Unaudited)
ASSETS
Current assets:
Cash.............................................................................. $ 3,301 $ 8,098
Trade accounts receivable, net of allowance for doubtful accounts of $1,258 and
$1,666 as of August 2, 1998 and May 2, 1999, respectively........................ 31,657 39,055
Inventory......................................................................... 1,263 1,972
Prepaid expenses and other current assets......................................... 5,624 5,435
-------- --------
Total current assets............................................................ 41,845 54,560
Property, plant and equipment, net................................................. 124,230 163,815
Deferred taxes..................................................................... 6,572 6,572
Long-term receivable............................................................... 3,276 5,168
Goodwill, less accumulated amortization of $529 and $1,884 as of August 2, 1998
and May 2, 1999, respectively..................................................... 37,507 82,079
Other assets....................................................................... 2,914 3,888
-------- --------
Total assets.................................................................... $216,344 $316,082
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations................ $ 6,184 $ 6,638
Accounts payable.................................................................. 10,781 9,901
Accrued and other liabilities..................................................... 5,980 8,746
Deferred income taxes............................................................. 1,615 1,615
-------- --------
Total current liabilities....................................................... 24,560 26,900
Long-term debt and capital lease obligations....................................... 124,671 161,854
-------- --------
Total liabilities............................................................... 149,231 188,754
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, 150,000 Series A
Convertible shares issued and outstanding as of August 2, 1998 and 0 as of
May 2, 1999; liquidation preference $15,000,000................................ 2 -
Common stock, $.01 par value; 50,000,000 shares authorized, 9,876,770 shares
issued and outstanding as of August 2, 1998 and 19,693,629 as of May 2, 1999... 99 197
Additional paid-in capital........................................................ 59,577 112,596
Foreign currency translation adjustment........................................... (1,567) (1,450)
Retained earnings................................................................. 9,002 15,985
-------- --------
Total stockholders' equity...................................................... 67,113 127,328
-------- --------
Total liabilities and stockholders' equity...................................... $216,344 $316,082
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
FOUR MEDIA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Nine Months Ended Three Months Ended
--------------------------------- -------------------------------
May 3, May 2, May 3, May 2,
1998 1999 1998 1999
------------ ----------- ----------- -----------
Revenues:
Mastering and distribution.............. $25,715 $ 33,033 $ 9,108 $11,009
Broadcast and syndication............... 16,902 17,142 5,817 6,073
Television.............................. 44,740 94,221 19,318 32,178
Film and animation...................... 7,660 4,542 4,858 2,248
------- -------- ------- -------
Total revenues......................... 95,017 148,938 39,101 51,508
------- -------- ------- -------
Cost of services:
Personnel............................... 37,456 55,355 15,182 18,763
Material................................ 7,542 8,165 2,963 2,591
Facilities.............................. 4,713 6,888 1,831 2,397
Other................................... 10,571 15,636 3,918 5,748
------- -------- ------- -------
Total cost of services................. 60,282 86,044 23,894 29,499
------- -------- ------- -------
Gross profit.......................... 34,735 62,894 15,207 22,009
------- -------- ------- -------
Operating expenses:
Sales, general and administrative....... 13,719 24,936 5,969 8,296
Depreciation and amortization........... 13,541 20,521 5,558 7,830
------- -------- ------- -------
Total operating expenses............... 27,260 45,457 11,527 16,126
------- -------- ------- -------
Income from operations................ 7,475 17,437 3,680 5,883
Interest expense, net.................... 5,430 10,454 2,553 3,198
------- -------- ------- -------
Income before income tax.............. 2,045 6,983 1,127 2,685
Provision for income tax................. -- -- -- --
------- -------- ------- -------
Net income before extraordinary item.. 2,045 6,983 1,127 2,685
Extraordinary loss on early
extinguishment of debt.................. (2,449) -- (2,449) --
------- -------- ------- -------
Net Income (loss)........................ $ (404) $ 6,983 $(1,322) $ 2,685
======= ======== ======= =======
Earnings per common share:
Income before extraordinary item........ $ 0.22 $ 0.63 $ 0.12 $ 0.21
Extraordinary item...................... (0.26) -- (0.26) --
------- -------- ------- -------
Net income (loss) per common share...... $ (0.04) $ 0.63 $ (0.14) $ 0.21
======= ======== ======= =======
Earnings per common share - assuming
dilution:
Income before extraordinary item........ $ 0.19 $ 0.54 $ 0.10 $ 0.19
Extraordinary item...................... (0.23) -- (0.22) --
------- -------- ------- -------
Net income (loss) per common share...... $ (0.04) $ 0.54 $ (0.12) $ 0.19
======= ======== ======= =======
Weighted average common and common
equivalent shares outstanding:
Basic................................... 9,553 11,130 9,553 12,824
======= ======== ======= =======
Diluted................................. 10,526 13,037 11,212 14,386
======= ======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
FOUR MEDIA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
--------------------------------------------
May 3, May 2,
1998 1999
------------------ ----------------
Cash flows from operating activities:
Net income (loss)......................................................... $ (404) $ 6,983
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................... 13,541 20,521
Provision for doubtful accounts......................................... 417 741
Extraordinary loss on early extinguishment of debt...................... 2,449 --
Changes in operating assets and liabilities:
Restricted cash........................................................ 625 --
Trade and long term receivables........................................ (9,543) (1,701)
Inventory.............................................................. (171) (425)
Prepaid expenses and other current assets.............................. (3,123) (916)
Accounts payable....................................................... (2,961) (4,286)
Accrued and other liabilities.......................................... (4,736) (3,223)
-------- --------
Net cash (used in) provided by operating activities................... (3,906) 17,694
Cash flows from investing activities:
Purchases of property, plant and equipment................................ (21,245) (30,539)
Acquisition of businesses, net of cash acquired........................... (23,248) (51,506)
-------- --------
Net cash used in investing activities................................. (44,493) (82,045)
Cash flows from financing activities:
Net proceeds from Warburg transaction..................................... -- 50,985
Proceeds from mortgage loan............................................... 8,100 --
Repayments of mortgage loans.............................................. -- (85)
Proceeds from term loans.................................................. 102,000 45,000
Repayments of term loans.................................................. -- (563)
Proceeds from (repayment of) revolving credit facility.................... (5,287) (4,000)
Proceeds from equipment notes............................................. 5,599 --
Proceeds from preferred stock financing................................... 14,835 --
Repayment of equipment notes and capital lease obligations................ (80,637) (22,263)
-------- --------
Net cash provided by financing activities............................. 44,610 69,074
Effect of exchange rate changes on cash.................................... (212) 74
-------- --------
Net (decrease) increase in cash............................................ (4,001) 4,797
Cash at beginning of period................................................ 6,089 3,301
-------- --------
Cash at end of period...................................................... $ 2,088 $ 8,098
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................................... $ 5,430 $ 10,454
Taxes.................................................................... 370 24
Non cash investing and financing activities:
Capital lease obligations incurred....................................... $ 9,049 $ --
Stock issued in connection with the Encore acquisition................... $ -- $ 2,131
Notes issued in connection with the POP acquisition...................... $ 3,140 $ --
The accompanying notes are an integral part of these consolidated financial
statements.
5
FOUR MEDIA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Organization and Basis of Presentation
Four Media Company (the "Company") is a provider of technical and creative
services to 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 services to the entertainment industry, the Company has organized
its activities into four divisions: mastering and distribution, broadcast and
syndication, television, and film and animation services. The mastering and
distribution division, located in Burbank, Universal City and San Francisco,
California and London, England, manages, formats and distributes content
worldwide. The broadcast and syndication division, located in Burbank and the
Republic of Singapore, assembles and distributes television programming via
satellite to viewers in the United States, Canada and Asia. The television
division, located in Burbank, Hollywood, Universal City, Santa Monica and San
Francisco, California, assembles film or video principal photography into a form
suitable for network, syndicated, cable or foreign television. The film and
animation division, located in Santa Monica, digitally creates and manipulates
images in high-resolution formats for use in feature films.
Organization. On February 2, 1998, the Company acquired all the outstanding
shares of capital stock of Visualize d/b/a Pacific Ocean Post ("POP"). The
purchase price of the transaction was $30.1 million, of which $25.4 million was
paid in cash, $1.2 million was represented by promissory notes, and $3.5 million
represented transaction costs.
On May 4, 1998, the Company, 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, the Company effectively acquired all of the operations of VSI. The
purchase price of the transaction was $3.3 million, of which $3.1 million was
paid in the Company's common stock and $0.2 million represented transaction
costs.
On September 18, 1998, the Company acquired all the outstanding shares of
capital stock of MSCL, Inc. ("Encore") and the real estate occupied by Encore.
The purchase price of the transaction was approximately $46.0 million. This
amount includes $41.9 million paid in cash to the Encore shareholders (including
$11.2 million for the purchase of real estate), $2.0 million in estimated
transaction costs, and the issuance of 486,486 shares of Company common stock
valued at $4.38 per share.
On April 29, 1999, the Company acquired all of the outstanding shares of
capital stock of TVP Group Plc ("TVP"), a London based provider of
postproduction services for approximately $10.0 million in cash, including the
repayment of debt. In addition, the Company is required to pay the former
shareholders of TVP up to an additional $0.8 million (the "Deferred
Consideration") if, within the first twelve months following the TVP
acquisition, (1) the Company acquires another U.K. company engaged in a line of
business similar to that of TVP, or (2) TVP achieves certain operating results.
On May 25, 1999, the Company acquired all of the outstanding shares of
capital stock of TVi Limited ("TVi") from Carlton Communications Plc, a London
based provider of postproduction services, for approximately $10.1 million in
cash. Upon completion of the TVi acquisition, the Company paid out
approximately $0.4 million of the Deferred Consideration.
On April 8, 1999, Warburg, Pincus Equity Partners, L.P. and certain
affiliates ("Warburg, Pincus") acquired 10.2 million shares of the Company's
common stock, comprised of both newly issued shares and existing shares, for
approximately $80.0 million. Under the terms of the Agreement, Warburg, Pincus
acquired approximately 6.6 million common shares from the Company for $52.7
million and received a warrant to purchase 1.1 million shares with an exercise
price of $15.00 per share. In addition, Warburg, Pincus acquired 3.1 million of
the outstanding shares currently held by Technical Services Partners, L.P.
("TSP"), a limited partnership controlled by Steinhardt Management Company,
Inc., for approximately $23.4 million. An additional 498,000 shares were
purchased for approximately $4.0 million from the Company's founders, who have
entered into long-term employment contracts and who continue to have a
significant equity interest in the Company. Concurrently with the closing of
the transaction, the holder of all outstanding shares of the Company's preferred
stock converted all of its preferred shares into 2,250,000 shares of common
stock.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company, POP, VSI, Encore, TVP and TVi, and the Warburg,
Pincus transaction as if such transactions had occurred at the beginning of
fiscal 1998 after giving effect to certain adjustments, including amortization
of goodwill, revised depreciation based on estimated fair market values,
utilization of net operating losses, revised interest expense based on the terms
of the acquisition debt and equity financing and elimination of certain
acquisition related costs. The pro forma summary does not necessarily reflect
the results of operations that actually would have occurred had the foregoing
transactions been consummated on the dates set forth above (in thousands):
Nine Months Ended
---------------------------
May 3, 1998 May 2, 1999
----------- -----------
Revenues.......................................... $178,611 $169,568
Net income........................................ 11,968 10,277
Earnings per common share
Basic........................................ $ 0.61 $ 0.52
Diluted...................................... 0.60 0.52
6
FOUR MEDIA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Organization and Basis of Presentation (continued)
Basis of Presentation. The accompanying consolidated financial statements of
Four Media Company and its subsidiaries as of August 2, 1998 and May 2, 1999 and
for the nine and three month periods ended May 3, 1998 and May 2, 1999 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. The balance
sheet at August 2, 1998 was derived from audited financial statements included
in the Company's Form 10-K for the fiscal year ended August 2, 1998 (the "Form
10-K"). The financial statements at May 2, 1999 and for the nine and three month
periods ended May 3, 1998 and May 2, 1999 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.
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 Company's Form 10-K.
The accompanying financial statements as of August 2, 1998 and for the nine
and three months ended May 3, 1998 and May 2, 1999 are presented on a
consolidated basis and include the accounts of Four Media Company and its wholly
owned subsidiaries 4MC-Burbank, Inc., Digital Magic Company, Four Media Company
Asia PTE Ltd, Anderson Video Company, Co3, Visualize (dba POP), POP Animation,
VSDD Acquisition Corp. MSCL, Inc. (dba Encore), and TVP. All material inter-
company accounts and transactions have been eliminated in consolidation.
2. Earnings Per Share
Effective with the period ended May 3, 1998, the Company adopted the
earnings per share calculation and disclosure requirements of SFAS No. 128,
"Earnings per Share". The table below demonstrates the earnings per share
calculations for the periods presented in thousands except per share data.
---------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended
May 3, 1998 May 2, 1999
----------------------------------------------- -------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- --------------- ------------- -------------- --------------- --------------
Net income...................... $2,045 - $6,983 -
Basic EPS....................... 2,045 9,553 $0.22 6,983 11,130 $0.63
===== =====
Effects of Dilutive Securities:
Options and convertible
preferred stock............. - 973 - 1,907
------ ------ ------ ------
Diluted EPS.................... $2,045 10,526 $0.19 $6,983 13,037 $0.54
====== ====== ===== ====== ====== =====
Options and warrants omitted... 885 7,470
====== ======
7
FOUR MEDIA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Earnings Per Share (continued)
---------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
May 3, 1998 May 2, 1999
----------------------------------------------- -------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- --------------- ------------- -------------- --------------- --------------
Net income..................... $1,127 - $2,685 -
Basic EPS...................... 1,127 9,553 $0.12 2,685 12,824 $0.21
====== ===== ====== =====
Effects of Dilutive Securities:
Options and convertible
preferred stock........... - 1,659 - 1,562
------ ------ ------ ------
Diluted EPS.................... $1,127 11,212 $0.10 $2,685 14,386 $0.19
====== ====== ===== ====== ====== =====
Options and warrants omitted... 885 7,470
====== ======
The Company incurred an extraordinary loss of $2.4 million for the three
and nine months ended May 3, 1998. This resulted in a net loss of $1.3 million
and $0.4 million for the three and nine months ended May 3, 1998, respectively.
Basis EPS and diluted EPS after the extraordinary loss was ($0.14) and ($0.12),
respectively, for the three months ended May 3, 1998 and ($0.04) and ($0.04),
respectively, for the nine months ended May 3, 1998.
Certain options were omitted in 1998 and 1999 because the exercise prices
(between $6.68 and $10.00) exceeded the average price during the periods.
3. Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income
(SFAS No. 130)." The Company adopted SFAS No. 130 beginning in the first
quarter of fiscal 1999. Comprehensive income is defined as all changes in
shareholders' equity, except those resulting from investments by or
distributions to shareholders. The Company's comprehensive income is as follows
(in thousands):
Nine Months Ended Three Months Ended
------------------------------- ---------------------------------
May 3, May 2, May 3, May 2,
1998 1999 1998 1999
---------------------------------------- ---------------------------------------
Net income.......................... $(404) $6,983 $(1,322) $2,685
Foreign currency translation
Adjustments........................ (391) 117 570 (85)
----- ------ ------- ------
Comprehensive income (loss)......... $(795) $7,100 $ (752) $2,600
===== ====== ======= ======
4. Foreign Exchange
Substantially all of the Company's foreign transactions are denominated in
foreign currencies, including the liabilities of its foreign subsidiaries, 4MC
Asia, TVP, and TVi. Although the Company's foreign transactions are not
generally subject to foreign exchange transaction gains or losses, the financial
statements of its foreign subsidiaries are translated into United States dollars
as part of the Company's consolidated financial reporting. Fluctuations in the
exchange rate therefore will affect the Company's consolidated balance sheets
and statements of operations. Until the recent Asian economic difficulties, the
Singapore dollar and British pound have been stable relative to the United
States dollar. However, during fiscal 1998, the Singapore dollar lost
approximately 20% of its value relative to the U.S. dollar.
5. Legal Proceedings
On March 16, 1999, the Company entered into a settlement agreement with the
International Alliance of Theatrical Stage Employees ("IATSE") relating to
several matters pending before the National Labor Relations Board ("NLRB").
Under the terms of the settlement agreement, the Company agreed to enter into a
collective bargaining agreement with IATSE which affects 110 employees and to
pay an aggregate of approximately $240,000 in claims for back pay from certain
current and former employees. In consideration therefor, IATSE has agreed to
cease all negative publicity against the Company and to dismiss all actions
pending before the NLRB.
8
- -------------------------------------------------------------------------------
Item 2. 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 Form 10-K for the fiscal year ended 1998. When used in the
following discussion, the words "believes", "anticipates", "intends",
"projects", "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. 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 technical and creative services
to producers and distributors of television programming, television commercials,
feature films and other entertainment content, as well as to owners of film and
television libraries. These services include the processing, enhancement,
storage and distribution of film and video from the point it leaves the camera
until it is shown, in various formats, to audiences around the world. The
Company's customers include major television and film production studios such as
Paramount Pictures, Sony Pictures Corporation, Twentieth Century Fox, Universal
Pictures, The Walt Disney Company and Warner Bros., as well as independent
producers and distributors located in the United States, Europe and Asia.
While the Company believes that it operates in one business segment,
which is providing services to the entertainment industry, the Company has
organized its activities into four divisions: mastering and distribution,
broadcast and syndication, television and film and animation services. The
mastering and distribution division, located in Burbank, Universal City and San
Francisco, California and London, England, manages, formats and distributes
entertainment content worldwide. The broadcast and syndication division, located
in Burbank and the Republic of Singapore, assembles and distributes television
programming via satellite to viewers in the United States, Canada and Asia. The
television division, located in Burbank, Hollywood, Universal City, Santa
Monica, and San Francisco, California, assembles film or video principal
photography into a form suitable for network, syndicated, cable or foreign
television. The film and animation division, located in Santa Monica, digitally
creates and manipulates images in high-resolution formats for use in feature
films.
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. EBITDA is calculated before depreciation and amortization
charges and, in businesses with significant non-cash expenses, is widely used as
a measure of 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 EBITDA as a measure of financial performance. 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.
9
Three Months Ended May 2, 1999 Compared To Three Months Ended May 3, 1998.
Revenues. Total revenues for the three months ended May 2, 1999 increased
31.7% to $51.5 million compared to $39.1 million for the three months ended May
3, 1998. The revenue increase was attributable primarily to the factors set
forth below.
Mastering and distribution revenues for the three months ended May 2, 1999
increased 20.9% to $11.0 million compared to $9.1 million for the three months
ended May 3, 1998. The major components of this increase include increased
professional duplication revenues ($2.3 million) offset be decreased laboratory
revenues ($0.4 million). Of the total increase, $1.8 million relates to the
acquisition of Encore in September 1998.
Broadcast and syndication revenues for the three months ended May 2, 1999
increased 5.2% to $6.1 million compared to $5.8 million for the three months
ended May 3, 1998. This increase is attributed to revenues recognized by the
Company's Singapore operation for broadcast services provided to Nickelodeon
beginning in November 1998.
Television revenues for the three months ended May 2, 1999 increased 66.8%
to $32.2 million compared to $19.3 million for the three months ended May 3,
1998. The major components of this increase include telecine revenues ($4.0
million), editorial revenues ($6.6 million), visual effects revenues ($1.8
million), and duplication revenues ($0.5 million). These revenue increases are
primarily attributable to the addition of the sound editorial department ($0.6
million), VSI acquired in May 1998 ($1.4 million), and Encore acquired in
September 1998 ($11.3 million).
Film and animation revenues for the three months ended May 2, 1999
decreased 55.1% to $2.2 million compared to $4.9 million for the three months
ended May 3, 1998. This decrease is the result of a decline in the number of
feature film projects currently in the marketplace due to a delay by the major
studios in approving new production on large budget action and effects feature
films.
Gross Profit. Gross profit for the three months ended May 2, 1999
increased 44.7% to $22.0 million (42.7% of revenues) compared to $15.2 million
(38.9% of revenues) for the three months ended May 3, 1998. The increase of
3.8% in the Company's gross profit as a percent of revenues was attributable to
a 2.4% reduction in personnel costs, a 2.5% reduction in material costs, offset
by a 1.1% increase in outside service costs as a percentage of revenues. These
reductions are the result of the Company's continued ability to leverage its
existing cost structure to operate its expanded operations.
Sales, General, and Administrative Expenses. Sales, general, and
administrative expenses for the three months ended May 2, 1999 increased 38.3%
to $8.3 million (16.1% of revenues) compared to $6.0 million (15.3% of revenues)
for the three months ended May 3, 1998. The increase of 0.8% as a percent of
revenues was attributable to increased overhead costs associated with the Encore
acquisition.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the three months ended May 2, 1999 increased 39.3% to $7.8 million
compared to $5.6 million for the three months ended May 3, 1998. This increase
was primarily the result of capital expenditures added during fiscal 1998, the
acquisition of the equipment of POP, VSI, and Encore in February 1998, May 1998,
and September 1998, respectively, and the amortization of goodwill recorded as a
result of the POP, VSI, and Encore acquisitions.
Interest Expense. Interest expense for the three months ended May 2, 1999
increased 23.1% to $3.2 million compared to $2.6 million for the three months
ended May 3, 1998. This increase was attributable to additional long term
borrowings incurred by the Company to fund the POP and Encore acquisitions in
February 1998 and September 1998, respectively, pay loan fees and other costs
associated with the Company's debt refinancing, which occurred in February 1998,
and to fund capital expenditures in fiscal 1998 and fiscal 1999.
Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA
for the three months ended May 2, 1999 increased 48.9% to $13.7 million compared
to $9.2 million for the three months ended May 3, 1998. The increase in EBITDA
results from an increase in revenues and gross profit offset by an increase in
selling, general, and administrative expenses. The increase in EBITDA includes
EBITDA contributed by VSI ($0.5 million), and Encore ($3.5 million).
10
Nine Months Ended May 2, 1999 Compared To Nine Months Ended May 3, 1998.
Revenues. Total revenues for the nine months ended May 2, 1999 increased
56.7% to $148.9 million compared to $95.0 million for the nine months ended May
3, 1998. The revenue increase was attributable primarily to the factors set
forth below.
Mastering and distribution revenues for the nine months ended May 2, 1999
increased 28.4% to $33.0 million compared to $25.7 million for the nine months
ended May 3, 1998. The major components of this increase include increased
professional duplication revenues ($6.9 million), and laboratory revenues ($0.4
million). Of the total increase, $4.8 million relates to the acquisition of
Encore in September 1998.
Broadcast and syndication revenues for the nine months ended May 2, 1999
increased 1.2% to 17.1 million compared to $16.9 million for the nine months
ended May 3, 1998. This increase is attributed to revenues recognized by the
Company's Singapore operation for broadcast services provided to Nickelodeon
beginning in November 1998.
Television revenues for the nine months ended May 2, 1999 increased 110.7%
to $94.2 million compared to $44.7 million for the nine months ended May 3,
1998. The major components of this increase include increased sound revenues
($5.2 million), telecine revenues ($14.1 million), editorial revenues ($16.6
million), visual effects revenues ($10.0 million), and duplication revenues
($3.6 million). These revenue increases are primarily attributable to the
addition of the sound editorial department ($1.7 million), POP acquired in
February 1998 ($8.9 million), VSI acquired in May 1998 ($4.2 million), and
Encore acquired in September 1998 ($29.6 million).
Film and animation revenues for the nine months ended May 2, 1999 decreased
41.6% to $4.5 million compared to $7.7 million for the nine months ended May 3,
1998. This decrease is the result of a decline in the number of feature film
projects currently in the marketplace due to a delay by the major studios in
approving new production on large budget action and effects feature films.
Gross Profit. Gross profit for the nine months ended May 2, 1999 increased
81.3% to $62.9 million (42.2% of revenues) compared to $34.7 million (36.6% of
revenues) for the nine months ended May 3, 1998. The increase of 5.6% in the
Company's gross profit as a percent of revenues was attributable to a 2.3%
reduction in personnel costs, a 2.4% reduction in material costs, and a .9%
reduction in outside service costs as a percentage of revenues. These reductions
are the result of the Company's continued ability to leverage its existing cost
structure to operate its expanded operations.
Sales, General, and Administrative Expenses. Sales, general, and
administrative expenses for the nine months ended May 2, 1999 increased 81.8% to
$24.9 million (16.7% of revenues) compared to $13.7 million (14.4% of revenues)
for the nine months ended May 3, 1998. The increase of 2.3% as a percent of
revenues was attributable to increased overhead costs associated with the Encore
acquisition.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the nine months ended May 2, 1999 increased 51.9% to $20.5 million
compared to $13.5 million for the nine months ended May 3, 1998. This increase
was primarily the result of capital expenditures added during fiscal 1998, the
acquisition of the equipment of POP, VSI, and Encore in February 1998, May 1998,
and September 1998, respectively, and the amortization of goodwill recorded as a
result of the POP, VSI, and Encore acquisitions.
Interest Expense. Interest expense for the nine months ended May 2, 1999
increased 94.5% to $10.5 million compared to $5.4 million for the nine months
ended May 3, 1998. This increase was attributable to additional long term
borrowings incurred by the Company to fund the POP and Encore acquisitions in
February 1998 and September 1998, respectively, pay loan fees and other costs
associated with the Company's debt refinancing, which occurred in February 1998,
and to fund capital expenditures in fiscal 1998 and fiscal 1999.
Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA
for the nine months ended May 2, 1999 increased 81.0% to $38.0 million compared
to $21.0 million for the nine months ended May 3, 1998. The increase in EBITDA
results from an increase in revenues and gross profit offset by an increase in
selling, general, and administrative expenses. The increase in EBITDA includes
EBITDA contributed by POP ($0.9 million), VSI ($1.9 million), and Encore ($9.5
million).
11
Liquidity and Capital Resources
Net Cash Provided by (Used in) Operating Activities. The Company's net
cash provided by (used in) operating activities was $17.7 million for the nine
months ended May 2, 1999 compared to $(3.9) million for the nine months ended
May 3, 1998. The increase was primarily attributable to the increase in income
before depreciation and amortization for the nine months ended May 2, 1999.
Net Cash Provided by Financing Activities. The Company's net cash provided
by financing activities was $69.1 million for the nine months ended May 2, 1999
compared to $44.6 million for the nine months ended May 3, 1998. During the
nine month period ended May 2, 1999, the Company borrowed an additional $81.7
million under its existing credit facility. These funds were used to fund the
Encore acquisition (including the repayment of most of Encore's outstanding
debt), purchase a building in Burbank and for working capital purposes. In
addition, the Company received net proceeds of $51.0 million from the Warburg,
Pincus transaction. These funds were used to repay $43.7 million owed under the
existing credit facility and to fund the TVP acquisition.
The Company believes that the cash flow from operations, combined with the
Company's borrowing capabilities, will be sufficient to meet its anticipated
working capital and capital expenditure requirements through the end of 1999.
Year 2000 Compliance Issue
State of Readiness. The Company is currently working to resolve the
potential impact of the Year 2000 problem on its computer systems and
computerized equipment. The Year 2000 problem is a result of computer programs
having been written using two rather than four digits to identify an applicable
year. Any information technology systems that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The
problem also extends to non-information technology systems that rely on embedded
chip systems.
The Company has divided the Year 2000 readiness task by the following
functional areas: information technology ("IT") infrastructure, business
systems, operational systems, facilities and business partners. IT
infrastructure includes the Company's wide area networks, local area networks,
servers, desktop computers and telephone systems. Business systems include
mainframe and midrange computer hardware and applications. Operational systems
include equipment used for the Company's day-to-day operations in the
postproduction business including telecine machines, satellite broadcasting
systems, editing and graphics equipment. Facilities include fire, life, and
safety equipment, elevators, alarm systems, and environmental monitoring
equipment. Business partners include suppliers and vendors, financial
institutions, benefit providers, payroll services, and customers. The Company
has appointed a task force chaired by its chief technology officer and
coordinated by its information systems manager. Representatives of each of the
Company's divisions are included on the task force, as well as an attorney from
its legal department.
The Company has developed a four phase approach to resolving the Year 2000
issues that are reasonably within its control. The program is being addressed
separately by each of the five functional Year 2000 areas of the Company. The
four phases of the program include inventory, assessment, remediation and
testing, and implementation. The inventory phase consists of a company wide
inventory of computer hardware, software, business applications, and operational
and facilities equipment. The inventory is then used to generate a master
assessment list and identify equipment vendors. The assessment phase consists
of identifying at-risk systems and products and ranking the products by
criticality to the business. Each product is then assigned to a task force
member to determine whether the product is in compliance and, if not, whether
the system should be upgraded or replaced. The remediation and testing phase
consists of developing a project plan, defining and implementing steps required
to bring the systems or products into compliance, defining a test plan to verify
compliance, and documenting the test results. The final phase is implementing
remediation on systems and products company wide.
The Company has been in the process of analyzing and upgrading its IT
systems (i.e., its IT infrastructure and business systems) since early 1998,
including upgrading all of its PC hardware, operating systems, and office
automation software. The Company's business applications, which include human
resources and financial software, as well as the software used for inventory,
scheduling, work orders and job management, has been fully upgraded to a Year
2000 compliant release. With respect to the remaining IT systems, as well as the
non-IT systems, the Company has completed its inventory and assessment phases
and has substantially completed its testing phase. The Company has targeted
September 30, 1999 for completion of all phases of its compliance program in
both IT and non-IT systems.
12
Third Parties. Like every other business, the Company is at risk from
potential Year 2000 failures on the part of its major business counterparts,
including suppliers, vendors, financial institutions, benefit providers, payroll
services, and clients, as well as potential failures in public and private
infrastructure services, including electricity, water, transportation, and
communications. The Company has initiated communications with significant third
party businesses to assess their efforts in addressing Year 2000 issues and is
in the process of determining the Company's vulnerability if these third parties
fail to remediate their Year 2000 problems. There can be no guarantee that the
systems of third parties will be timely remediated, or that such parties'
failure to remediate Year 2000 issues would not have a material adverse effect
on the Company.
Costs. Costs incurred to date in addressing the Year 2000 issue have not
been material and are being funded through operating cash flows. The Company
anticipates that it may incur significant costs associated with replacing non-
compliant systems and equipment. In addition, the Company anticipates that it
will incur additional costs in the form of redeployment of internal resources
from other activities. The Company does not expect these redeployments to have
a material adverse effect on other ongoing business operations of the Company.
Based upon the information currently available to the Company, costs associated
with addressing the Year 2000 issue are expected to be between $250,000 to
$500,000.
Risks. System failures resulting from the Year 2000 problem could
potentially affect operations and financial results in all aspects of the
Company's business. For example, failures could affect all aspects of the
Company's television, film and animation, manufacturing and distribution, and
broadcast and syndication operations, as well as inventory records, payroll
operations, security, billing, and collections. At this time the Company
believes that its most likely worst case scenario involves potential disruption
in areas in which the Company's operations must rely on third parties whose
systems may not work properly after January 1, 2000. As a result of Year 2000
related failures of the Company's or third parties' systems, the Company could
suffer a reduction in its operations. Such a reduction may result in a
fluctuation in the price of the Company's common stock.
Contingency Plan. The Company does not currently have a comprehensive
contingency plan with respect to the Year 2000 problem. However, the Company
has created a task force comprised of accounting, legal, and technical employees
that is prepared to address any Year 2000 issues as they arise. The Company
will continue to develop its contingency plan during 1999 as part of its ongoing
Year 2000 compliance effort.
POP Tax Audit
The Internal Revenue Service is currently auditing the 1994 and 1995 United
States federal income tax returns of one of the Company's subsidiaries, POP. The
Company believes that it has established adequate reserves on its books and
records for any additional tax liability that may result from such audit.
Further, the Company is in the process of preparing and intends to file
original United States federal and California income and franchise tax returns
for POP's 1997 taxable year and 1998 stub-period taxable year.
13
- -------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------------------
Interest Rate Risks
As of May 2, 1999, the Company had fixed interest rate debt of
approximately $16.3 million and floating interest rate debt of approximately
$152.2 million. The floating interest rates are based upon the prevailing LIBOR
rate. For floating rate debt, interest rate changes do not generally effect the
market value of debt but do impact future earnings and cash flows, assuming
other factors are held constant. Conversely, for fixed rate debt, interest rate
changes do effect the market value of debt but do not impact earnings or cash
flows. A hypothetical one percentage change in the prevailing LIBOR rate would
impact earnings of the Company by $1.5 million per year. A similar change in the
interest rate would impact the total fair value of the Company's fixed rate debt
by less than $0.2 million.
Foreign Currency Risk
Substantially all of the Company's foreign transactions are denominated in
foreign currencies, including the liabilities of its foreign subsidiaries, 4MC
Asia, TVP, and TVi. Although the Company's foreign transactions are not
generally subject to foreign exchange transaction gains or losses, the financial
statements of its foreign subsidiaries are translated into United States dollars
as part of the Company's consolidated financial reporting. Fluctuations in the
exchange rate therefore will affect the Company's consolidated balance sheets
and statements of operations. Until the recent Asian economic difficulties,
the Singapore dollar and British pound have been stable relative to the United
States dollar. However, during fiscal 1998, the Singapore dollar lost
approximately 20% of its value relative to the U.S. dollar.
The Company's total revenues denominated in a currency other than U.S.
dollars for the nine months ended May 2, 1999 were approximately 5.5% of total
revenues. The Company's net assets maintained in a functional currency other
than U.S. dollars at May 2, 1999 were approximately 7.0% of total net assets.
14
- -------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1. Legal Proceedings.
On March 16, 1999, the Company entered into a settlement
agreement with the International Alliance of Theatrical Stage
Employees ("IATSE") relating to several matters pending before the
National Labor Relations Board ("NLRB"). Each of these matters were
previously disclosed in the Company's Annual Report on Form 10-K
for the fiscal year ended August 2, 1998. Under the terms of the
settlement agreement, the Company agreed to enter into a collective
bargaining agreement with IATSE which effects 110 employees and to
pay an aggregate of approximately $240,000 in claims for back pay
from certain current and former employees. In consideration
therefor, IATSE has agreed to cease all negative publicity against
the Company and to dismiss all actions pending before the NLRB.
Item 2. Changes in Securities.
On April 8, 1999, the Company sold Warburg, Pincus 6,582,607
newly issued shares of its common stock for approximately $52.7
million and issued Warburg, Pincus a warrant to purchase an
additional 1,100,000 shares of common stock at an exercise price
of $15.00 per share. In addition, on April 8, 1999, in connection
with the Warburg, Pincus transaction, the Fleming Funds converted
150,000 shares of Series A Convertible Preferred Stock held by the
Fleming Funds into 2,250,000 shares of the Company's common stock.
Each of the foregoing were private placements to accredited
investors and therefore exempt from registration under Section 4(2)
of the Securities Act. The Company used the proceeds from the
Warburg, Pincus transaction to repay $43.7 million owed under its
revolving credit facility, and for other general corporate
purposes.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's special meeting of stockholders held on March
18, 1999, the Company's stockholders approved each of the proposals
relating to the Warburg, Pincus transaction. The voting results for
each of the proposals are as follows:
(i) Approval of the issuance to Warburg, Pincus of (A) 6,582,607
shares of common stock of the Company, (B) a warrant to purchase
1,100,000 additional shares of common stock and (C) the shares of
common stock issuable upon exercise of such warrant.
FOR: 7,360,416 AGAINST: 406,902
ABSTAIN: 23,210 NON-VOTES: 1,482,075
(ii) Approval of an amendment to the Company's 1997 Stock Plan to
(A) increase the number of shares of common stock authorized for
issuance thereunder, (B) change the annual increase in the maximum
number of shares authorized for issuance thereunder and (C) modify
the annual stock option award limits for Robert T. Walston, Jeffrey
J. Marcketta and John H. Donlon.
FOR: 5,785,029 AGAINST: 1,975,629
ABSTAIN: 29,060 NON-VOTES: 1,482,075
(iii) Ratification of the election of seven directors of the
Company, divided into three classes as follows:
Term Expiring in 2000 Term Expiring in 2001 Term Expiring in 2002
--------------------- --------------------- ---------------------
William Amon Jeffrey J. Marcketta Robert T. Walston
William C. Scott Eytan Shapiro Sidney Lapidus
David E. Libowitz
FOR: 8,833,791 AGAINST: 416,642
ABSTAIN: 21,360 NON-VOTES: 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
2.1 Share Capital Sale and Purchase Agreement, dated as of April 29, 1999, by and
between Four Media Company (UK) Limited and TVP Group Plc (incorporated herein
by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated
May 14, 1999).
*10.1 First Amendment to Four Media Company 1997 Stock Plan
*10.2 Employment Agreement by and between the Company and Robert T. Walston
*10.3 Employment Agreement by and between the Company and Jeffrey J. Marcketta
*10.4 Employment Agreement by and between the Company and Christopher Phillips
*10.5 Employment Agreement by and between the Company and John H. Donlon
*10.6 Employment Agreement by and between the Company and Gavin W. Schutz
*10.7 Employment Agreement by and between the Company and Robert Bailey
*10.8 Demand Promissory Note by and between the Company and Robert T. Walston
10.9 Service Agreement, dated as of April 29, 1999, by and between TVP Group Plc
and Simon Paul Kay (incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated May 14, 1999).
10.10 Service Agreement, dated as of April 29, 1999, by and between TVP Group Plc
and Nicholas Paul Pannaman (incorporated herein by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K dated May 14, 1999).
10.11 Common Stock Purchase Warrant issued by the Company to Warburg, Pincus, dated
April 8, 1999 (incorporated herein by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K dated April 23, 1999).
10.12 Registration Rights Agreement between the Company and Fleming US Discovery
Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P., dated April
8, 1999 (incorporated herein by reference to Exhibit 99.9 to the Company's
Current Report on Form 8-K dated April 23, 1999).
10.13 Registration Rights Agreement between the Company and Warburg, Pincus Equity
Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg,
Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands
Equity Partners III, dated as of April 8, 1999 (incorporated herein by
reference to Exhibit 99.10 to the Company's Current Report on Form 8-K dated
April 23, 1999).
16.1 Letter from PricewaterhouseCoopers LLP (incorporated herein by reference to
Exhibit 16.1 to the Company's Current Report on Form 8-K/A dated April 21,
1999, amending the Company's Current Report on Form 8-K dated April 15, 1999).
*27.1 Financial Data Schedule
* Filed herewith.
b. Reports on Form 8-K
1. Form 8-K filed March 23. 1999 announcing stockholder
approval for the Warburg, Pincus transaction.
2. Form 8-K filed April 15, 1999 relating to the change
in the registrants certifying accountants.
3. Form 8-K-A filed April 21, 1999 relating to the
change in the registrants certifying accountants.
4. Form 8-K filed April 23, 1999 relating to the
completion of the Warburg, Pincus transaction.
5. Form 8-K filed May 14, 1999 announcing the
acquisition of TVP.
6. Form 8-K filed June 7, 1999 announcing the
acquisition of TVi.
7. Form 8-K/A filed June 10, 1999 relating to the TVP
acquisition.
15
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 10, 1999 By: /s/ Christopher M.R. Phillips
------------------------------------
Christopher M.R. Phillips
Executive Vice President and
Chief Financial Officer
16