SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE QUARTER PERIOD ENDED MARCH 31, 1997 Commission File Number 0-21917
_________________
VDI MEDIA
(Exact name of registrant as specified in its charter)
California 95-4272619
(State of or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6920 Sunset Boulevard, 90028
Hollywood, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (213) 957-5500
Securities registered pursuant to Section 12(b) of the Act
None.
Securities registered pursuant to Section 12(g) of the Act
Common Stock, no par value.
_____________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /x/ No / /
As of May 13, 1997, there were 9,580,000 shares of Common Stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VDI MEDIA
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31, MARCH 31,
------------ ------------
1996 1997
---- ----
(UNAUDITED)
Current assets:
Cash................................................. $ 564,000 $11,626,000
Accounts receivable, net allowances for doubtful
accounts of $460,000 and $620,000, respectively.... 4,537,000 6,540,000
Amounts receivable from officer...................... 1,214,000
Amounts receivable from employees.................... 224,000 8,000
Inventories.......................................... 144,000 213,000
Prepaid expenses and other current assets............ 2,000 38,000
------------ ------------
Total current assets............................... 6,685,000 18,425,000
Property and equipment, net.......................... 3,520,000 6,125,000
Deferred offering costs.............................. 876,000
Goodwill, net (Note 2)............................... 2,081,000
Other assets, net.................................... 97,000 98,000
------------ ------------
Total assets....................................... $11,178,000 $26,729,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 2,394,000 $ 2,763,000
Accrued expenses.................................... 1,606,000 1,998,000
Current portion of notes payable.................... 728,000 33,000
Current portion of capital lease obligations........ 32,000 657,000
Deferred tax liability (Note 3) 185,000
------------ ------------
Total current liabilities......................... 4,760,000 5,636,000
------------ ------------
Notes payable, less current portion................. 1,102,000 1,000
------------ ------------
Capital lease obligations, less current portion..... 75,000 1,222,000
------------ ------------
Shareholders' equity:
Preferred stock; no par value; 5,000,000 shares
authorized; none outstanding......................
Common stock; no par value; 50,000,000 shares
authorized, 9,580,000 shares issued and
outstanding 1,015,000 19,056,000
Retained earnings.................................... 4,226,000 814,000
------------ ------------
Total shareholders' equity......................... 5,241,000 19,870,000
------------ ------------
$11,178,000 $26,729,000
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements
2
VDI MEDIA
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------
1996 1997
---- ----
Revenues............................................... $ 5,837,000 $ 8,487,000
Cost of good sold...................................... 3,647,000 5,072,000
------------ ------------
Gross profit........................................... 2,190,000 3,415,000
Selling, general and administrative expense............ 1,418,000 2,151,000
------------ ------------
Operating income....................................... 772,000 1,264,000
Interest expense....................................... 70,000 119,000
Interest income........................................ 5,000 51,000
------------ ------------
Income before income taxes............................. 707,000 1,196,000
Provision for income taxes............................. 12,000 190,000
Establishment of deferred tax liability (Note 3)....... 185,000
------------ ------------
Net income............................................. $ 695,000 $ 821,000
------------ ------------
------------ ------------
Net income per share................................... $ 0.11
------------
------------
Weighted average number of shares...................... 7,522,667
------------
------------
See accompanying notes to consolidated financial statements
3
VDI MEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------
1996 1997
---- ----
Cash flows from operating activities:
Net income............................................ $ 695,000 $ 821,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization......................... 451,000 798,000
Increase in deferred taxes............................ 185,000
Provision for doubtful accounts....................... 72,000 20,000
Changes in assets and liabilities net of effects from
purchase of Woodholly Productions:
Increase in accounts receivable....................... (138,000) (431,000)
(Increase) decrease in other receivables.............. (20,000) 206,000
(Increase) decrease in inventories.................... 60,000 (69,000)
Decrease in prepaid expenses and other current assets. 35,000 25,000
Decrease in other assets.............................. 1,000
(Increase) decrease in deferred offering costs........ (25,000) 875,000
Decrease in accounts payable.......................... (496,000) (120,000)
(Decrease) increase in accrued expenses............... (138,000) 97,000
------------ ------------
Net cash provided by operating activities................. 497,000 2,407,000
Cash used in investing activities:
Capital expenditures.................................. (314,000) (232,000)
Payment for purchase of Woodholly, net of cash
acquired............................................. (4,091,000)
------------ ------------
Net cash used in investing activities..................... (314,000) (4,323,000)
Cash flows from financing activities:
Distributions to shareholders......................... (4,233,000)
Change in revolving credit agreement.................. (100,000)
Proceeds from sale of common stock.................... 18,041,000
Repayment of notes payable............................ (194,000) (1,795,000)
Repayment of amounts receivable from officer.......... 1,225,000
Repayment of subordinated notes payable to related
parties.............................................. (20,000)
Repayment of capital lease obligations................ (38,000) (260,000)
------------ ------------
Net cash (used in) provided by financing activities....... (352,000) 12,978,000
Net (decrease) increase in cash........................... (169,000) 11,062,000
Cash at beginning of period............................... 415,000 564,000
------------ ------------
Cash at end of period..................................... $ 246,000 $ 11,626,000
------------ ------------
------------ ------------
Supplemental disclosure of cash flows information:
Cash paid for:
Interest.............................................. $ 64,000 $ 119,000
------------ ------------
------------ ------------
Income tax............................................ $ 40,000 $ 53,000
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements
4
VDI MEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 1 -- THE COMPANY
VDI MEDIA ("The Company") is a provider of high quality value-added video
distribution and duplication services including distribution of national
television spot advertising, trailers and electronic press kits. The
Company's services consist of (i) the physical and electronic delivery of
broadcast quality advertising, including spots, trailers, electronic press
kits and infomercials, and syndicated television programming to television
stations, cable television and other end-users nationwide and (ii) a broad
range of video services, including the duplication of video in all formats,
element storage, standards conversions, closed captioning and transcription
services, and video encoding for air play verification purposes. The Company
also provides its customers value-added post production and editing services.
The Company is headquartered in Hollywood, California and has additional
facilities in West Los Angeles and Culver City, California and Tulsa,
Oklahoma.
In the first quarter of 1997, the Company completed the sale of 3,120,000
common shares, no par value ("Common Stock"), in an initial public offering
(the "Offering"). Prior to the Offering, the Company had elected S
Corporation status for federal and state income tax purposes. As a result of
the Offering, the S Corporation status terminated. Thereafter, the Company
has paid federal and state income taxes as a C Corporation. The termination
of the Company's S Corporation status resulted in the establishment of a net
deferred tax liability calculated at normal federal and state income rates,
causing a one-time non-cash charge of $185,000 against earnings for
additional income tax expense in the quarter ended March 31, 1997.
In May 1996, the Company effected a 333-for-1 common stock split and
increased the number of authorized shares to 50,000,000 shares of Common
Stock. All share amounts in the accompanying financial statements have been
retroactively restated to reflect this split.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and the Securities
and Exchange Commission's rules and regulations for reporting interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. These
financial statements should be read in conjunction with the financial
statements and related notes contained in the Company's Form 10-K for the year
ended December 31, 1996.
NOTE 2--WOODHOLLY ACQUISITION
On January 1, 1997, the Company acquired all of the assets of Woodholly
Productions ("Woodholly Productions"). Woodholly Productions provides full
service duplication, distribution, video content storage and ancillary
services to major motion picture studios, advertising agencies and
independent production companies for both domestic and international use.
As consideration, the company will pay the partners of woodholly productions
a maximum of $9 million, of which $4 million is to be paid in installments
commencing in January 1997. The remaining balance is subject to earn-out
provisions which are predicated upon Woodholly Productions attaining certain
operating income goals, as set forth in the purchase agreement in each quarter
through December 31, 2001. The Company has accounted for this acquisition as a
purchase. The contingent purchase price, to the extent earned, will be
recorded as an increase to goodwill and will be amortized over 20 years.
5
The accompanying consolidated financial statements include the accounts
of Woodholly Productions and the Company. All material intercompany
transactions and balances have been eliminated. The consolidated statement
of income includes Woodholly Productions' results of operations only for
the period subsequent to the acquisition.
NOTE 3 -- S CORPORATION TERMINATION
In connection with the termination of its S Corporation status (see Note
1), the Company distributed $3.0 million of the net proceeds of the Offering
("S Corp Distribution") to its three shareholders in respect of previously
taxed and undistributed earnings of the Company. A final distribution of
approximately $1.5 million is expected to be made in June 1997.
6
VDI MEDIA
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, certain of the
matters discussed in this report are "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995, which involve
certain risks and uncertainties, which could cause actual results to differ
materially from those discussed herein, including but not limited to the risk
of competition from competitors in the industry, customer and industry
concentration, the Company's dependence on technological developments, risks
of expansion, ability to maintain and improve service quality, dependence on
key personnel, fluctuation in results of operations and seasonality, and risks
relating to control by management. See the relevant discussions elsewhere
herein, and the risk factors set forth in the Company's prospectus as filed
with the Securities and Exchange Commission on February 19, 1997, for a
further discussion of these and other risks and uncertainties applicable to
the Company's business.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES. Revenues increased by $2.7 million or 45.4% to $8.5 million
for the three month period ended March 31, 1997 compared to $5.8 million for
the three month period ended March 31, 1996 due to the acquisition of
Woodholly Productions as well as the increased use of the Company's services
by existing customers and the addition of new customers. This increase in
use of the Company's services and addition of new customer was due to (i) the
availability of new services and capacity resulting from the acquisition of
Woodholly Productions and (ii) substantially increased marketing of the
Company's national distribution capabilities through the Tulsa Control
Center.
GROSS PROFIT. Gross profit increased $1.2 million or 55.9% to $3.4
million for the three month period ended March 31, 1997 compared to $2.2
million for the three month period ended March 31, 1996. As a percentage of
revenues, gross profit increased from 37.5% to 40.2%. The increase in gross
profit as a percentage of revenues was attributable to (i) a reduction in the
cost of fiber optic and satellite costs which resulted from improved video
trafficking logistics through the Tulsa Control Center and (ii) lower
shipping expenses for the services provided by Woodholly Productions which
generally distributes to fewer locations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.7 million or 51.6% to $2.2 million for
the three month period ended March 31, 1997 compared to $1.4 million for the
three month period ended March 31, 1996. As a percentage of revenues,
selling, general and administrative expense increased to 25.3% for the three
month period ended March 31, 1997 compared to 24.3% for the three month
period ended March 31, 1996. This increase is due to increased staffing in
the Company's sales and marketing departments and, in addition, selling,
general and administrative expense for the three months ended March 31, 1997
includes salaries paid to the former owners of Woodholly Productions; such
amounts were formerly recorded as partnership distributions and, as such,
were not reflected in Woodholly Productions' results of operations.
OPERATING INCOME. Operating income increased $0.5 million or 63.9% to
$1.3 million for the three month period ended March 31, 1997 compared to $0.8
million for the three month period ended March 31, 1996.
INCOME TAXES. The Company previously has operated as an S Corporation.
As such, the Company was not responsible for federal income taxes and
provided for state income taxes at reduced rates. As a result of the
Offering, the Company's S Corporation status has terminated. Accordingly,
the Company will, in future periods, provide for all income taxes at higher
statutory rates. These factors are estimated to result in an effective tax
rate for periods subsequent to the Offering of approximately 40%. For the
quarter ending March 31, 1997, the Company has recorded an additional
one-time non-cash charge of $0.2 million for additional deferred taxes based
upon an increase in the effective tax rate from the Company's S Corporation
status (1.5%) to C Corporation status (40%) applied to the temporary
differences between the financial reporting and tax bases of the Company's
assets and liabilities.
NET INCOME. Net income for the three month period ended March 31, 1997
increased $0.1 million or 19.3% to $0.8 million compared to $0.7 million in
1996. Such increase is primarily attributable to the previously described
factors.
7
VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
This discussion should be read in conjunction with the notes to the
financial statements and the corresponding information more fully described
in the Company's Form 10-K for the year ended December 31, 1996.
Since its inception, the Company has financed its operations through
internally generated cash flow, borrowings under lending agreements with
financial institutions and, to a lesser degree, borrowings from related
parties. On February 24, 1997 the Company completed the Offering of 2,800,000
shares of Common Stock, 200,000 of which were sold on behalf of a selling
shareholder. The net proceeds of the Offering to the Company were
approximately $15.9 million after deducting the underwriters' discount of
approximately $1.3 million and offering expenses of approximately $1.1
million. Additionally, on March 25, 1997, the underwriters of the Offering
exercised their over-allotment option for an additional 320,000 shares of
Common Stock with net proceeds to the Company of approximately $2.1 million
after deduction of the underwriters' discount of approximately $0.2 million.
At March 31, 1997, the Company's cash and cash equivalents aggregated
$11.6 million. The Company's operating activities provided cash of $2.4
million for the three months ended March 31, 1997 and $0.5 million for the
three months ended March 31, 1996.
The Company's investing activities used cash of $4.3 million for the
three months ended March 31, 1997 including the effect of the acquisition of
Woodholly Productions. Investing activities used cash of $0.3 million for
the three months ended March 31, 1996. Such activities represent the
addition and replacement of capital equipment necessary to accommodate
increased customer demand for the Company's services. The Company's business
is equipment intensive, requiring periodic expenditures of cash or the
incurrence of additional debt to acquire additional videotape duplication
equipment in order to increase capacity or replace existing equipment.
The Company spent approximately $0.2 million on capital expenditures
during the first quarter of 1997, primarily to upgrade and replace equipment,
and for management information systems upgrades.
The Company's financing activities provided cash of $13.0 million in
the first quarter of 1997; financing activities used cash of $0.4 million for
the three months ended March 31, 1996. Cash flows from financing activities
during the first quarter of fiscal 1997 include the effect of the Offering
and the subsequent exercise of the over-allotment option, which raised net
proceeds of approximately $18.0 million. Using the proceeds of the Offering,
the Company repaid $1.8 million outstanding under its term loan with a bank.
In addition the Company paid the first installment of the final S Corp
Distribution to its shareholders. Such distribution represents previously
taxed and undistributed earnings of the Company while an S Corporation. The
final installment, which is currently estimated to be approximately $1.5
million, is expected to be paid on or before June 30, 1997.
In January 1997 the Company acquired substantially all of the assets and
assumed certain liabilities of Woodholly Productions (the "Woodholly
Acquisition"). In connection with the Woodholly Acquisition the Company
executed $4.0 million promissory notes. These promissory notes bore interest
at 8% per annum and were repaid on February 28, 1997. The purchase price
consists of an initial purchase price of $4.0 million plus an as yet
undetermined contingent purchase price. The contingent purchase price is to
be earned and paid based on the total operating income (as defined) resulting
from the financial results of Woodholly Productions as a separate division of
the Company. The contingent purchase price, in total, is limited to $4.0
million, with an additional bonus payment of $1.0 million if Woodholly
Productions achieves certain additional revenue and profitability targets.
The excess of the initial consideration over the fair value of the assets
acquired and liabilities assumed of approximately $1.8
8
VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
million has been allocated to goodwill. The contingent purchase price,
to the extent earned, will be treated as an increase in goodwill and
will be amortized coterminously with the original 20 year period. On
April 15, 1997 the Company made a $187,000 aggregate earn-out payment to
the former partners of Woodholly Productions. To the extent additional
contingent purchase price payments are made, amortization will increase
in future periods. If the full contingent purchase price were earned or
paid, goodwill would be increased by a total of $5.0 million, and annual
amortization expense associated with such additional goodwill would be
$0.3 million (for an aggregate annual amortization expense of $0.4
million). Management of the Company is in the process of reviewing the
allocation of the purchase price and, when completed, may modify its
preliminary allocation. The final allocation of the purchase price may
vary as additional information is obtained, and accordingly, the
ultimate allocation may differ from that used in the unaudited pro forma
combined financial statements. The Woodholly Acquisition was accounted
for by the Company under the purchase method of accounting.
In connection with the purchase of a portion of the Common Stock owned by
one of the Company's founders in April 1996, the Company borrowed an
additional $1.2 million under its revolving credit agreement and loaned such
amount to the Company's chief executive officer. This loan was repaid after
consummation of the Offering.
As a result of termination of its S Corporation status, the Company was
required to record deferred taxes which relate primarily to differences
between financial and income tax reporting of depreciation and certain
valuation allowances. This one-time non-cash charge of $185,000 has been
recorded in the quarter ended March 31, 1997. In addition, the Company
distributed approximately $3 million of the net proceeds of the Offering to
the Company's shareholders of record prior to the Offering in respect of
previously taxed and undistributed earnings of the Company for the period
ending December 31, 1996.
The Company has a $2.0 million revolving credit agreement with Union Bank
(the "Revolving Credit Agreement"). As of May 12, 1997 the Company had $2.0
million available for borrowing under the Revolving Credit Agreement. Amounts
available pursuant to this agreement are determined by eligible accounts
receivable, as defined, and are secured by substantially all of the Company's
assets. In addition, repayment of amounts borrowed is guaranteed by the
Company's principal shareholders. Interest accrues at either the London
Interbank Offering Rate "(LIBOR)" plus 2.25% or the bank's reference rate.
The Revolving Credit Agreement imposes a number of financial and other
conditions upon the Company, including limitations on indebtedness and
changes in lines of business, restrictions on the disposition of assets,
restrictions on acquisitions and certain financial ratios. In addition,
consummation of significant acquisitions may be subject to obtaining prior
bank consent under the Revolving Credit Agreement. At March 31, 1997, the
Company was in compliance with these covenants and conditions. The Revolving
Credit Agreement expires on June 30, 1997. Management expects to be able to
renew the Revolving Credit Agreement at similar terms prior to its scheduled
expiration. At May 13, 1997, no balance was outstanding.
In July 1995, the Company obtained a term loan in the original amount of
approximately $2.8 million with a bank. The term loan was secured by the
assets of the Company and was to be repaid in monthly installments of
principal and interest through July 2000. Interest accrued at LIBOR plus
2.5%. The term of the loan agreement included covenants regarding the
maintenance of various financial ratios. Amounts outstanding under the term
loan were repaid by the Company in February 1997 with a portion of the
proceeds of the Offering.
Management believes that cash generated from the Offering, ongoing
operations, borrowings under its bank line of credit and its existing working
capital will fund necessary capital expenditures and provide adequate working
capital for at least the next twelve months.
9
VDI MEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
The Company, from time to time, considers the acquisition of businesses
complementary to its current operations. Consummation of any such
acquisition or other expansion of the business conducted by the Company, may
be subject to the Company securing additional financing.
INFLATION. The Company does not believe that inflation will have a
significant impact on its financial condition, results of operations or
prospects.
The Company has been awarded the opportunity to provide services to
several new clients during the three months ended March 31, 1997, including
United Airlines and Hunt & Wesson. However, no material revenues were
recorded in the quarter for these accounts and the Company cannot guarantee
that any significant revenues will be recorded as a result of these new
customers. Typically, new clients do not begin using the Company's services
on an exclusive basis immediately, but rather increase their usage over
several quarters.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
------- -----------
10.14 Lease agreement between Woodholly Productions and
The Dorothy M. Krueger Living Trust, et al.,
dated May 25, 1993 (Woodholly storage facility).
10.15 Lease agreement among the Company, Rodger D.
Parker and Jasper A. Watt, Jr., dated January 24,
1997 (Woodholly facility).
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
10
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.
VDI MEDIA
DATE: May 14, 1997 BY: /s/ DONALD R. STINE
--------------------
Donald R. Stine
Chief Financial Officer
and Treasurer
(duly authorized officer
and principal financial officer)
11