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 January 30, 2000
OR
[_] TRANSITION 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
2813 West Alameda Avenue, Burbank, CA 91505
(Address of principal executive offices) (Zip code)
818-840-7000
(Registrant's telephone number including area code)
_______________
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
------
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 19,730,295 shares of
Common Stock, $.01 par value, as of March 1, 2000.
FOUR MEDIA COMPANY
Index
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
Number
------
Condensed Consolidated Balance Sheets as of August 1, 1999
and January 30, 2000............................................................................ 4
Condensed Consolidated Statements of Income for the
Six Months Ended January 31, 1999 and January 30, 2000 and the
Three Months Ended January 31, 1999 and January 30, 2000........................................ 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended January 31, 1999 and January 30, 2000.......................................... 6
Notes to Condensed Consolidated Financial Statements............................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview........................................................................................ 12
Three Months Ended January 30, 2000 Compared to
Three Months Ended January 31, 1999............................................................. 13
Six Months Ended January 30, 2000 Compared to
Six Months Ended January 31, 1999............................................................... 14
Liquidity and Capital Resources................................................................. 15
Year 2000 Compliance............................................................................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 17
Item 2. Changes in Securities........................................................................... 17
Item 3. Defaults Upon Senior Securities................................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............................................. 17
Item 5. Other Information............................................................................... 17
Item 6. Exhibits and Reports on Form 8-K................................................................ 17
Signatures ............................................................................................... 18
2
PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
3
FOUR MEDIA COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
August 1, January 30,
1999 2000
-------- --------
ASSETS (Unaudited)
Current assets:
Cash.................................................................................. $ 9,841 $ 5,353
Trade accounts receivable, net of allowance for doubtful accounts of
$1,618 and $2,073 as of August 1, 1999 and January 30, 2000,
respectively....................................................................... 34,777 43,142
Inventory............................................................................. 1,793 1,738
Prepaid expenses and other current assets............................................. 4,692 4,199
Property held for sale................................................................ 10,654 -
---------- ----------
Total current assets.............................................................. 61,757 54,432
Property, plant and equipment, net..................................................... 173,266 187,473
Deferred income taxes.................................................................. 8,582 8,582
Long-term receivable................................................................... 4,103 3,351
Goodwill, less accumulated amortization of $3,343 and $5,032 as of
August 1, 1999 and January 30, 2000, respectively................................... 88,952 87,258
Note receivable from officer........................................................... 2,000 2,000
Other assets........................................................................... 4,883 4,048
---------- ----------
Total assets..................................................................... $ 343,543 $ 347,144
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations................... $ 12,975 $ 12,414
Accounts payable..................................................................... 19,593 9,820
Accrued and other liabilities........................................................ 12,510 12,726
Deferred income taxes................................................................ 2,173 2,173
---------- ----------
Total current liabilities........................................................ 47,251 37,133
Long-term debt and capital lease obligations........................................... 171,321 180,276
---------- ----------
Total liabilities................................................................ 218,572 217,409
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, 150,000
Series A Convertible shares issued and outstanding; liquidation
preference $15,000,000............................................................. - -
Common stock, $.01 par value; 50,000,000 shares authorized,
19,693,629 shares issued and outstanding as of August 1, 1999 and
19,726,962 as of January 30, 2000................................................... 196 196
Additional paid-in capital........................................................... 112,441 112,688
Retained earnings.................................................................... 13,940 18,274
Accumulated other comprehensive loss................................................. (1,606) (1,423)
---------- ----------
Total stockholders' equity........................................................ 124,971 129,735
---------- ----------
Total liabilities and stockholders' equity........................................ $ 343,543 $ 347,144
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
FOUR MEDIA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Six Months Ended Three Months Ended
-------------------------------------- ---------------------------------
January 31, January 30, January 31, January 30,
1999 2000 1999 2000
---------- -------- ------------ ----------
Revenues:
Television........................ $64,968 $ 71,114 $31,891 $33,634
Mastering and distribution........ 19,099 30,908 9,270 14,834
Broadcast and syndication......... 11,068 11,593 5,737 5,944
Film and animation................ 2,294 4,009 982 1,792
------- -------- ------- -------
Total revenues................... 97,429 117,624 47,880 56,204
------- -------- ------- -------
Operating costs:
Direct operating costs............ 56,530 63,371 27,258 30,845
Depreciation and amortization..... 12,691 16,102 6,335 8,101
Sales, general and
administrative.................. 16,676 23,565 8,259 12,324
------- -------- ------- -------
Total operating costs............ 85,897 103,038 41,852 51,270
------- -------- ------- -------
Income from operations.......... 11,532 14,586 6,028 4,934
Other income (expense):
Interest income................... - 248 - 119
Interest expense.................. (7,256) (7,290) (3,735) (3,883)
Other income...................... 21 10 20 (77)
------- -------- ------- -------
Total other income (expense)..... (7,235) (7,032) (3,715) (3,841)
------- -------- ------- -------
Income before income taxes...... 4,297 7,554 2,313 1,093
Provision for income tax........... - 3,220 - 423
------- -------- ------- -------
Net income...................... $ 4,297 $ 4,334 $ 2,313 $ 670
======= ======== ======= =======
Earnings per common share - Basic.. $ 0.42 $ 0.22 $ 0.22 $ 0.03
======= ======== ======= =======
Earnings per common share -
Diluted......................... $ 0.35 $ 0.21 $ 0.19 $ 0.03
======= ======== ======= =======
Weighted average common and common
equivalent shares outstanding:
Basic............................. 10,283 19,696 10,363 19,698
======= ======== ======= =======
Diluted........................... 12,362 20,437 12,450 21,070
======= ======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
FOUR MEDIA COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
----------------
January 31, January 30,
1999 2000
-------- --------
Cash flows from operating activities:
Net income...................................................................... $ 4,297 $ 4,334
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization.................................................. 12,691 16,102
Amortization of debt issuance costs............................................ 240 311
Provision for doubtful accounts................................................ 531 856
Gain on sale of equipment...................................................... - 52
Changes in operating assets and liabilities, net of
Acquisitions of businesses:
(Increase) in trade and long-term receivables................................ (3,914) (8,465)
Increase in inventory........................................................ (95) 55
Decrease in prepaid expenses and other assets................................ 1,207 665
(Decrease) in accounts payable and accrued liabilities....................... (5,999) (9,557)
-------- --------
Net cash provided by operating activities................................... 8,958 4,353
Cash flows from investing activities:
Purchases of property, plant and equipment...................................... (15,299) (17,896)
Proceeds from sale of equipment................................................. - 179
Acquisitions of businesses, net of cash acquired................................ (42,991) -
-------- --------
Net cash used in investing activities....................................... (58,290) (17,717)
Cash flows from financing activities:
Net proceed from stock issuance................................................. - 248
Proceeds from long term borrowings.............................................. 45,000 -
Repayments of long term borrowings.............................................. (21,114) (3,105)
Net proceeds from revolving credit facility..................................... 29,000 11,500
-------- --------
Net cash provided by (used in) financing activities......................... 52,886 8,643
Effect of exchange rate changes on cash.......................................... (24) 233
-------- --------
Net increase (decrease) in cash.................................................. 3,530 (4,488)
Cash at beginning of period...................................................... 3,301 9,841
-------- --------
Cash at end of period............................................................ $ 6,831 $ 5,353
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest....................................................................... $ 6,286 $ 6,486
Income taxes................................................................... - $ 622
Non cash investing and financing activities:
Stock issued in connection with Encore acquisition............................. $ 2,131 -
The accompanying notes are an integral part of these consolidated financial
statements.
6
FOUR MEDIA COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Basis of Presentation, and Acquisitions
Business. Four Media Company (the "Company") is a 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 business is divided into four divisions: television;
mastering and distribution; broadcast and syndication; and film and animation.
In each of these divisions, the Company offers most of the systems and technical
solutions that constitute the processes that are integral to the creation,
enhancement and distribution of entertainment content. The television division,
located in Burbank, Hollywood, Culver City, Santa Monica, and San Francisco,
California assembles film or video principal photography into a form suitable
for domestic network, syndicated, cable or foreign television. The mastering and
distribution division, located in Burbank and Universal City, California, and
London, England manages, formats and distributes existing content libraries to
end users in the United States and internationally. The broadcast and
syndication division, located in Burbank and the Republic of Singapore,
assembles and distributes cable television channels and programming via
satellite to viewers in the United States, Canada and Asia. The film and
animation division, located in Santa Monica, California provides creators of
special visual effects with certain services required to digitally create or
manipulate images in high resolution formats for integration in feature films
and television commercials.
Basis of Presentation. The accompanying condensed consolidated financial
statements of Four Media Company and its subsidiaries as of August 1, 1999 and
January 30, 2000 and for the six and three month periods ended January 31, 1999
and January 30, 2000 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 1, 1999 was derived from audited
financial statements included in the Company's Form 10-K for the fiscal year
ended August 1, 1999 (the "Form 10-K"). The financial statements at January 30,
2000 and for the six and three month periods ended January 31, 1999 and January
30, 2000 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 reclassifications have been made to prior year
amounts to conform to the current year presentation.
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 are presented on a consolidated basis
and include the accounts of Four Media Company and its wholly owned and majority
owned subsidiaries. All material inter-company accounts and transactions have
been eliminated in consolidation.
Acquisitions. 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
$45.0 million. This amount includes $41.9 million paid in cash to the Encore
shareholders (including $11.2 million for the purchase of real estate), $1.0
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 post
production services for approximately $10.3 million in cash, including the
repayment of debt and $0.3 million in estimated transaction costs. In addition,
the Company is required to pay the
7
FOUR MEDIA COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Business, Basis of Presentation, and Acquisitions (continued)
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 post production services, for approximately $11.7 million in
cash, including $0.3 in estimated transaction costs. Upon completion of the TVi
acquisition, the Company paid out approximately $0.4 million of the Deferred
Consideration.
On June 22, 1999, the Company acquired all of the outstanding shares of
capital stock of Ross Digital Sound and Picture, Inc. ("DSP") for approximately
$7.7 million in cash, including $0.5 million in estimated transaction costs.
Each of the above acquisitions was accounted for using the purchase method
of accounting and the operating results of the acquired companies have been
included in the accompanying financial statements from their acquisition dates.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company, Encore, TVP, TVi, and DSP as if the acquisitions
had occurred at the beginning of fiscal 1999 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 elimination of
certain acquisition related costs. The pro forma summary does not necessarily
reflect the results of operations as they would have been if the Company and
Encore, TVP, TVi, and DSP had constituted a single entity during such periods:
(in thousands)
----------------------------------------------------
Six Months Ended Six Months Ended
January 31, 1999 January 30, 2000
------------------------ ------------------------
Revenues........................................................ $115,626 $117,624
Net income...................................................... 5,452 4,334
Earnings per common share
Basic.......................................................... $ 0.53 $ 0.22
Diluted........................................................ $ 0.44 $ 0.21
2. Earnings Per Share
Effective with the period ended February 1, 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:
8
FOUR MEDIA COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Earnings Per Share (continued)
(in thousands except per share data)
--------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
January 31, 1999 January 30, 2000
---------------------------------------------- -------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ -------------- ------------ ------------- -------------- -------------
Net income....................... $ 4,297 - $4,334
Basic EPS........................ 4,297 10,283 $0.42 4,334 19,696 $0.22
===== =====
Effects of Dilutive Securities:
Options and convertible
preferred stock................ - 2,079 - 741
-------- ------- ------ ------
Diluted EPS...................... $ 4,297 12,362 $0.35 $4,334 20,437 $0.21
======== ======= ===== ====== ====== =====
(in thousands except per share data)
--------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
January 31, 1999 January 30, 2000
---------------------------------------------- -------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ -------------- ------------ ------------- -------------- -------------
Net income....................... $ 2,313 - $ 670
Basic EPS........................ 2,313 10,363 $ 0.22 670 19,698 $ 0.03
====== ======
Effects of Dilutive Securities:
Options and convertible
preferred stock................ - 2,087 - 1,372
-------- ------ ------- ------
Diluted EPS...................... $ 2,313 12,450 $ 0.19 $ 670 21,070 $ 0.03
======== ====== ====== ======= ====== ======
Certain options were omitted in 1999 and 2000 because the exercise prices
(between $6.50 and $10) 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. The Company's comprehensive income is as follows (In thousands):
Six Months Ended Three Months Ended
-------------------------------------------------------------------------------------
January 31, 1999 January 30, 2000 January 31, 1999 January 30, 2000
-------------------------------------------------------------------------------------
Net income....................... $ 4,297 $4,334 $2,313 $ 670
Foreign currency translation
Adjustments..................... 202 183 (305) 235
------- ------ ------ ------
Comprehensive income (loss)...... $ 4,499 $4,517 $2,008 $ 905
======= ====== ====== ======
9
FOUR MEDIA COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Business Segment Information
The following table presents revenue and other financial information by
business segment (In thousands):
Six Months Ended Three Months Ended
---------------- ------------------
January 31, January 30, January 31, January 30,
1999 2000 1999 2000
---- ---- ---- ----
REVENUES
Television............................................ $ 64,968 $ 71,114 $ 31,891 $ 33,634
Mastering and distribution............................ 19,099 30,908 9,270 14,834
Broadcast and syndication............................. 11,068 11,593 5,737 5,944
Film and animation.................................... 2,294 4,009 982 1,792
---------- --------- --------- ---------
Total reportable segments.......................... $ 97,429 $ 117,624 $ 47,880 $ 56,204
========== ========= ========= =========
EBITDA
Television............................................ $ 14,746 $ 18,721 $ 7,155 $ 7,789
Mastering and distribution............................ 5,227 6,672 2,918 2,585
Broadcast and syndication............................. 4,046 4,594 2,208 2,282
Film and animation.................................... (1,835) (125) (874) (264)
---------- --------- -------- ---------
Total reportable segments.......................... 22,184 29,862 11,407 12,392
Corporate and other...................................... 2,039 826 956 643
---------- --------- -------- ---------
$ 24,223 $ 30,688 $ 12,363 $ 13,035
========== ========= ======== =========
5 Related Parties
On April 8, 1999, the Company loaned its chief executive officer, on an
unsecured basis, $2,000,000 at an interest rate of 4.59% per annum, compounded
semi-annually. The loan, plus interest, is due within 30 days of April 8, 2004,
or becomes immediately due and payable in the event he incurs a Termination With
Cause. The loan will automatically be fully forgiven and he will have no payment
obligation if (i) he incurs a Termination Without Cause or a Termination With
Good Reason during his employment term, (ii) a change in control of the Company
occurs during his employment term, (iii) the Company achieves $327 million or
more in Gross Operating Revenues (as defined) during the period beginning on the
fourth anniversary of his employment agreement and ending on the fifth
anniversary of his employment (the "Measurement Period"), (iv) the Company
achieves $87 million or more in Consolidated EBITDA (as defined) during the
Measurement Period, or (v) following the Measurement Period, the Board
determines the loan will be forgiven.
6. Acquisition of Company by Liberty Media Corporation
On December 6, 1999 the Company announced that it had entered into a
definitive agreement to sell 100% of the Company's issued and outstanding common
stock to Liberty Media Corporation (NYSE: LMG.A). Liberty Media will acquire
each issued and outstanding share of Four Media Company common stock for a
combination of $6.25 of cash and approximately 0.1613 of a share of class A
Liberty Media Group stock, par value $1.00 ("LMG.A share(s"), in a taxable
exchange.
Warburg, Pincus Equity Partners, L.P., Fleming Asset Management USA and
Robert T. Walston, collectively holders of approximately 70% of the issued and
outstanding shares of Four Media, have entered into agreements with Liberty
Media to vote in favor of the transaction. The transaction is subject to
expiration of applicable waiting periods under pre-notification regulations,
Four Media stockholder approval and other customary closing conditions. A
special meeting of the stockholders has been set for April 6, 2000, at 9:00am
local time, to be held at the Waldorf-Astoria Hotel, 301 Park Avenue, New York,
New York 10022. Closing is anticipated to occur as soon as practicable after the
special meeting.
10
PART I - FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
11
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
our Form 10-K dated August 1, 1999, as amended. When used in the following
discussion, the words "believes," "anticipates," "intends," "expects" and
similar expressions are intended to identify forward-looking statements. These
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 of this Form 10-Q.
Overview
We are 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 other 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.
On December 6, 1999, we announced that we have entered into a definitive
agreement to sell 100% of our issued and outstanding common stock to Liberty
Media Corporation (NYSE: LMG.A). Pursuant to the terms of the merger agreement
relating to the transaction, Liberty Media will acquire each issued and
outstanding share of Four Media Company common stock for a combination of $6.25
of cash and approximately 0.1613 of a share of Class A Liberty Media Group
stock, par value $1.00 ("LMG.A share(s)"), in a taxable exchange.
Warburg, Pincus Equity Partners, L.P., Fleming Asset Management USA and
Robert T. Walston, collectively holders of approximately 70% of our issued and
outstanding shares of common stock, have entered into agreements with Liberty
Media to vote in favor of the transaction. The transaction is subject to
expiration of applicable waiting periods under pre-notification regulations,
Four Media stockholder approval and other customary closing conditions. A
special meeting of the stockholders has been set for April 6, 2000, at 9:00am
local time, to be held at the Waldorf-Astoria Hotel, 301 Park Avenue, New York,
New York 10022. Closing is anticipated to occur as soon as practicable after the
special meeting.
Our business is divided into four divisions: television; mastering and
distribution; broadcast and syndication; and film and animation. In each of
these divisions, we offer most of the systems and technical solutions that
constitute the processes that are integral to the creation, enhancement and
distribution of entertainment content. Our television division, located in
Burbank, Hollywood, Culver City, Santa Monica, and San Francisco, California
assembles film or video principal photography into a form suitable for domestic
network, syndicated, cable or foreign television. Our mastering and distribution
division, located in Burbank and Universal City, California, and London, England
manages, formats and distributes existing content libraries to end users in the
United States and internationally. Our broadcast and syndication division,
located in Burbank and the Republic of Singapore, assembles and distributes
cable television channels and programming via satellite to viewers in the United
States, Canada and Asia. Our film and animation division, located in Santa
Monica, California provides creators of special visual effects with certain
services required to digitally create or manipulate images in high resolution
formats for integration in feature films and television commercials.
We believe that EBITDA is an important measure of our financial
performance. "EBITDA" is defined as earnings before interest, taxes,
depreciation and amortization, excluding gains and losses on asset sales and
nonrecurring charges. Our investments in new infrastructure, machine capacity,
technology and goodwill resulting from our significant acquisition activity have
produced a relatively high depreciation and amortization expense and will remain
a significant non-cash charge to earnings. 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, we intend 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 our capital expenditures which may be required to maintain our market
share, revenues and leadership position in our industry. Moreover, not all
EBITDA will be available to pay interest or repay debt. Our presentation of
EBITDA may not be comparable to similarly titled measures reported by other
companies.
12
Three Months Ended January 30, 2000 Compared To Three Months Ended January 31,
1999.
Revenues. Total revenues for the three months ended January 30, 2000
increased $8.3 million, or 17.3%, to $56.2 million compared to $47.9 million for
the three months ended January 31,1999. The revenue increase was attributable
primarily to the factors set forth below.
Television revenues for the three months ended January 30, 2000 increased
$1.7 million, or 5.3%, to $33.6 million compared to $31.9 million for the three
months ended January 31, 1999. The major components of this increase include
increased telecine revenues ($1.4 million), editorial revenues ($1.0 million),
sound revenues ($0.8 million); offset by decreased duplication revenues ($1.2
million) and graphics revenues ($0.3 million). These revenue increases are
primarily attributable to the addition of DSP acquired in July 1999 ($1.3
million).
Mastering and distribution revenues for the three months ended January 30,
2000 increased $5.5 million, or 59.1%, to $14.8 million compared to $9.3 million
for the three months ended January 31, 1999. The major components of this
increase include revenue of approximately $5.0 million from the UK acquisitions
(TVP and TVi), increased telecine revenues ($0.7 million), and increased
laboratory revenues ($0.2 million), offset by decreased quality control revenues
of ($0.3 million) and decreased professional duplication revenues of ($0.1
million).
Broadcast and syndication revenues for the three months ended January 30,
2000 increased $0.2 million, or 3.5%, to $5.9 million compared to $5.7 million
for the three months ended January 31, 1999.
Film and animation revenues for the three months ended January 30, 2000
increased $0.8 million, or 80.0%, to $1.8 million compared to $1.0 million for
the three months ended January 31, 1999. This increase is attributed to new film
projects obtained during the period.
Direct Operating Costs. Direct operating costs for the three months ended
January 30, 2000 increased $3.5 million, or 12.8%, to $30.8 million compared to
$27.3 million for the three months ended January 31, 1999. As a percentage of
revenues, direct operating costs decreased 2.2% to 54.8% compared to 57.0% in
fiscal 1999. This reduction was primarily the result of our continued ability to
leverage our existing cost structure, including improved pricing from vendors,
to operate our expanded operations.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the three months ended January 30, 2000 increased $1.8 million, or
28.6%, to $8.1 million compared to $6.3 million for the three months ended
January 31, 1999. This increase was primarily attributed to the acquisition of
equipment and amortization of goodwill recorded as a result of the TVP, TVi, and
DSP acquisitions.
Sales, General, and Administrative Expenses. Sales, general, and
administrative expenses for the three months ended January 30, 2000 increased
$4.0 million, or 48.2%, to $12.3 million compared to $8.3 million for the three
months ended January 31, 1999. As a percentage of revenues, such expenses
increased 4.6% to 21.9% compared to 17.3% in fiscal 1999. The increase as a
percentage of revenues was primarily attributable to increased personnel costs
associated with our expanded operations and other increased overhead costs
associated with our acquisitions.
Interest Income and Expense. Interest income and expense for the three
months ended January 30, 2000 increased $0.1 million, or 2.7%, to $3.8 million
compared to $3.7 million for the three months ended January 31, 1999.
Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA for
the three months ended January 30, 2000 increased $0.6 million, or 4.8%, to
$13.0 million compared to $12.4 million for the three months ended January 31,
1999. The increase in EBITDA results from the factors discussed above.
Income Taxes. Due to the utilization of net operating loss carry forwards
and the tax holiday status of the Singapore subsidiary, there was no provision
for the three months ended January 31, 1999. We recognized a provision for
income taxes of $0.4 million, an effective rate of 38.7%, for the three months
ended January 30, 2000.
13
Six Months Ended January 30, 2000 Compared To Six Months Ended January 31, 1999.
Revenues. Total revenues for the six months ended January 30, 2000
increased $20.2 million, or 20.7%, to $117.6 million compared to $97.4 million
for the six months ended January 31,1999. The revenue increase was attributable
primarily to the factors set forth below.
Television revenues for the six months ended January 30, 2000 increased
$6.1 million, or 9.4%, to $71.1 million compared to $65.0 million for the six
months ended January 31, 1999. The major components of this increase include
increased telecine revenues ($4.6 million), editorial revenues ($3.2 million),
sound revenues ($1.8 million); offset by decreased duplication revenues ($2.5
million) and graphics revenues ($1.0 million). These revenue increases are
primarily attributable to the addition of Encore acquired in September 1998
($5.3 million), and DSP acquired in July 1999 ($3.0 million).
Mastering and distribution revenues for the six months ended January 30,
2000 increased $11.8 million, or 61.8%, to $30.9 million compared to $19.1
million for the six months ended January 31, 1999. The major components of this
increase include revenue of approximately $10.3 million from the UK acquisitions
(TVP and TVi), increased telecine revenues ($1.4 million), and increased
professional duplication revenues of ($0.3 million), and increased .laboratory
revenues ($0.1 million); offset by decreased quality control revenues of ($0.3
million).
Broadcast and syndication revenues for the six months ended January 30,
2000 increased $0.5 million, or 4.5%, to $11.6 million compared to $11.1 million
for the six months ended January 31, 1999.
Film and animation revenues for the six months ended January 30, 2000
increased $1.7 million, or 73.9%, to $4.0 million compared to $2.3 million for
the six months ended January 31, 1999. This increase is attributed to new film
projects obtained during the period.
Direct Operating Costs. Direct operating costs for the six months ended
January 30, 2000 increased $6.9 million, or 12.2%, to $63.4 million compared to
$56.5 million for the six months ended January 31, 1999. As a percentage of
revenues, direct operating costs decreased 4.1% to 53.9% compared to 58.0% in
fiscal 1999. This reduction was primarily the result of our continued ability to
leverage our existing cost structure, including improved pricing from vendors,
to operate our expanded operations.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the six months ended January 30, 2000 increased $3.4 million, or
26.8%, to $16.1 million compared to $12.7 million for the six months ended
January 31, 1999. This increase was primarily attributed to the acquisition of
equipment and amortization of goodwill recorded as a result of the Encore, TVP,
TVi, and DSP acquisitions.
Sales, General, and Administrative Expenses. Sales, general, and
administrative expenses for the six months ended January 30, 2000 increased $6.9
million, or 41.3%, to $23.6 million compared to $16.7 million for the six months
ended January 31, 1999. As a percentage of revenues, such expenses increased
3.0% to 20.1% compared to 17.1% in fiscal 1999. The increase as a percentage of
revenues was primarily attributable to increased personnel costs associated with
our expanded operations and other increased overhead costs associated with our
acquisitions.
Interest Income and Expense. Interest income and expense for the six months
ended January 30, 2000 decreased $0.3 million, or 4.3%, to $7.0 million compared
to $7.3 million for the six months ended January 31, 1999.
Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA for
the six months ended January 30, 2000 increased $6.5 million, or 26.9%, to $30.7
million compared to $24.2 million for the six months ended January 31, 1999.
14
Income Taxes. Due to the utilization of net operating loss carry forwards
and the tax holiday status of the Singapore subsidiary, there was no provision
for the six months ended January 31, 1999. We recognized a provision for income
taxes of $3.2 million, an effective rate of 42.6%, for the six months ended
January 30, 2000. Our effective tax rate for the six months ended January 30,
2000 was higher than the expected rate primarily due to the non-deductible
amortization of goodwill related to our acquisitions partially offset by the
continued tax holiday status of the Singapore subsidiary.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. Net cash provided by operating
activities was $4.4 million for the six months ended January 30, 2000 compared
to $9.0 million for the six months ended January 31, 1999. The decrease in net
cash provided by operations in fiscal 2000 was primarily attributable to the
growth of accounts receivable and reduction of the accounts payable and accrued
liabilities partially offset by increased depreciation and amortization.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities was $8.6 million for the six months ended January 30, 2000 compared
to $52.9 million for the six months ended January 31, 1999. During the six month
period ended January 31, 1999, we borrowed an additional $74.0 million under our
existing credit facility. These funds were used to fund the Encore acquisition
(including the repayment of most of Encore's outstanding debt), and for working
capital purposes. During the six month period ended January 30, 2000, we
borrowed an additional $11.5 million under our existing credit facility to fund
capital expenditures.
We believe that the cash flow from operations, combined with our borrowing
capabilities, will be sufficient to meet our anticipated working capital and
capital expenditure requirements through the end of 2000. We would have to
obtain other financing, either debt or equity, if we were to acquire additional
businesses for cash.
Year 2000 Compliance Issue
In prior years, we have discussed the nature and progress of our plans to
become Year 2000 ready. In late 1999, we completed our remediation and testing
of systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We incurred approximately
$138,998 during 1999 in connection with remediating our systems. We are not
aware of any material problems resulting from Year 2000 issues, either with our
products, our internal systems, or the products and services of third parties.
We will continue to monitor our mission critical computer applications and those
of our suppliers and vendors throughout the Year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
15
PART I - FINANCIAL INFORMATION
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange
Substantially all of our foreign transactions are denominated in foreign
currencies, including the liabilities of our foreign subsidiaries, 4MC Asia,
TVP, and Tvi. Although our foreign transactions are not generally subject to
foreign exchange transactions gains or losses, the financial statements of our
foreign subsidiaries are translated into United States dollars as part of our
consolidated financial reporting. Fluctuations in the exchange rate therefore
will affect our consolidated balance sheets and statements of operations. In
fiscal 1999 and 2000, the Singapore dollar and British pound have been stable
relative to the United States dollar. Our total revenues denominated in a
currency other than US dollars for the quarter ended January 30, 2000 were
approximately 14.0% of total revenues. Our net assets maintained in a functional
currency other than US dollars for the quarter ended January 30, 2000 were
approximately 8.9% of total net assets.
Interest Rate Risks
As of January 30, 2000, we had fixed interest rate debt of approximately
$4.3 million and floating interest rate debt of approximately $188.4 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 our earnings by $0.5 million for the quarter. A similar change in the
interest rate would impact the total fair value of our fixed rate debt by less
than $0.1 million
16
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings..................................... No change
Previously reported in the Company's Annual Report
on Form 10-K, as amended (File No. 0-21943).
Item 2. Changes in Securities................................. None
Item 3. Defaults Upon Senior Securities....................... None
Item 4. Submission of Matters to a Vote of Security Holders... None
Item 5. Other Information..................................... None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27. Financial Data Schedule
b. Reports on Form 8-K
1. Form 8-K filed November 1, 1999 relating to the Liberty
Media transaction.
2. Form 8-K filed December 7, 1999 relating to the Liberty
Media transaction.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FOUR MEDIA COMPANY
Date: March 3, 2000 By: /s/ Christopher M. R. Phillips
-------------------------------------
Christopher M. R. Phillips,
Executive Vice President and
Chief Financial Officer
18