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 October 31, 1999
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. 19,693,629 shares of
Common Stock, $.01 par value, as of December 10, 1999.
FOUR MEDIA COMPANY
Index
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
Number
------
Condensed Consolidated Balance Sheets as of August 1, 1999
and October 31, 1999........................................ 4
Condensed Consolidated Statements of Income for the Three
Months Ended November 1, 1998 and October 31, 1999.......... 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended November 1, 1998 and October 31, 1999.... 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 October 31, 1999 Compared to Three
Months Ended November 1, 1998............................... 13
Liquidity and Capital Resources............................. 14
Year 2000 Compliance........................................ 14
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, October 31,
1999 1999
----------- -----------
ASSETS (Unaudited)
Current assets:
Cash................................................................. $ 9,841 $ 6,245
Trade accounts receivable, net of allowance for doubtful accounts
of $1,618 and $1,732 as of August 1, 1999 and October 31, 1999,
respectively....................................................... 34,777 45,948
Inventory............................................................ 1,793 1,684
Prepaid expenses and other current assets............................ 4,692 4,494
Property held for sale............................................... 10,654 10,654
-------- --------
Total current assets............................................... 61,757 69,025
Property, plant and equipment, net..................................... 173,266 174,842
Deferred income taxes.................................................. 8,582 8,582
Long-term receivable................................................... 4,103 3,662
Goodwill, less accumulated amortization of $3,343 and $4,178 as of
August 1, 1999 and October 31, 1999, respectively.................... 88,952 88,186
Note receivable from officer........................................... 2,000 2,000
Other assets........................................................... 4,883 4,669
-------- --------
Total assets........................................................ $343,543 $350,966
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations... $ 12,975 $ 12,929
Accounts payable..................................................... 19,593 17,387
Accrued and other liabilities........................................ 12,510 13,869
Deferred income taxes................................................ 2,173 2,173
-------- --------
Total current liabilities.......................................... 47,251 46,358
Long-term debt and capital lease obligations........................... 171,321 176,031
-------- --------
Total liabilities................................................... 218,572 222,389
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
October 31, 1999................................................... 196 196
Additional paid-in capital........................................... 112,441 112,435
Retained earnings.................................................... 13,940 17,604
Accumulated other comprehensive loss................................. (1,606) (1,658)
-------- --------
Total stockholders' equity......................................... 124,971 128,577
-------- --------
Total liabilities and stockholders' equity......................... $343,543 $350,966
======== ========
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)
Three Months Ended
-------------------------
November 1, October 31,
1998 1999
----------- -----------
Revenues:
Television......................................... $33,077 $37,480
Mastering and distribution......................... 9,829 16,074
Broadcast and syndication.......................... 5,331 5,649
Film............................................... 1,312 2,217
------- -------
Total revenues................................... 49,549 61,420
------- -------
Operating costs:
Direct operating costs............................. 29,272 32,526
Depreciation and amortization...................... 6,356 8,001
Sales, general and administrative.................. 8,417 11,241
------- -------
Total operating costs............................ 44,045 51,768
------- -------
Income from operations......................... 5,504 9,652
Other income (expense):
Interest income.................................... -- 129
Interest expense................................... (3,521) (3,407)
Other income....................................... 1 87
------- -------
Total other income (expense)..................... (3,520) (3,191)
------- -------
Income before income taxes..................... 1,984 6,461
------- -------
Provision for income taxes.......................... -- 2,797
------- -------
Net income..................................... $ 1,984 $ 3,664
======= =======
Earnings per common share - Basic................... $ .19 $ .19
Earnings per common share - Diluted................. $ .16 $ .19
Weighted average number of common shares
outstanding:
Basic.............................................. 10,203 19,693
======= =======
Diluted............................................ 12,275 19,803
======= =======
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)
Three Months Ended
-------------------------
November 1, October 31,
1998 1999
----------- -----------
Cash flows from operating activities:
Net income....................................................... $ 1,984 $ 3,664
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization................................... 6,356 8,001
Amortization of debt issuance costs............................. 120 155
Provision for doubtful accounts................................. 284 230
Gain on sale of equipment....................................... -- (38)
Changes in operating assets and liabilities, net of
Acquisitions of businesses:
(Increase) in trade and long-term receivables................. (6,129) (10,944)
Increase in inventory......................................... 90 109
Decrease in prepaid expenses and other assets................. 121 11
(Decrease) in accounts payable and accrued liabilities........ (1,045) (884)
-------- --------
Net cash provided by operating activities................... 1,781 304
Cash flows from investing activities:
Purchases of property, plant and equipment....................... (10,708) (8,614)
Proceeds from sale of equipment.................................. -- 140
Acquisitions of businesses, net of cash acquired................. (42,991) --
-------- --------
Net cash used in investing activities....................... (53,699) (8,474)
Cash flows from financing activities:
Proceeds from long term borrowings............................... 45,000 --
Repayments of long term borrowings............................... (18,917) (1,340)
Net proceeds from revolving credit facility...................... 29,000 6,000
-------- --------
Net cash provided by (used in) financing activities......... 55,083 4,660
Effect of exchange rate changes on cash........................... 150 (86)
-------- --------
Net increase (decrease) in cash................................... 3,315 (3,596)
Cash at beginning of period....................................... 3,301 9,841
-------- --------
Cash at end of period............................................. $ 6,616 $ 6,245
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................................ $ 3,245 $ 3,298
Income taxes.................................................... -- --
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
October 31, 1999 and for the three month periods ended November 1, 1998 and
October 31, 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 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 October 31,
1999 and for the three month periods ended November 1, 1998 and October 31, 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 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 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)
--------------------------------------
Three Months Ended Three Months Ended
November 1, 1998 October 31, 1999
------------------ ------------------
Revenues................................ $60,776 $61,420
Net income.............................. 2,618 3,664
Earnings per common share
Basic.................................. $ 0.26 $ 0.19
Diluted................................ 0.21 0.19
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)
-------------------------------------------------------------------------------
Three Months Ended Three Months Ended
November 1, 1998 October 31, 1999
-------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Net income............................... $1,984 -- $3,664
Basic EPS................................ 1,984 10,203 $0.19 3,664 19,693 $0.19
===== =====
Effects of Dilutive Securities:
Options and convertible preferred stock.. -- 2,072 -- 110
------ ------ ------ ------
Diluted EPS.............................. $1,984 12,275 $0.16 $3,664 19,803 $0.19
====== ====== ===== ====== ====== =====
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):
Three Months Ended
------------------------------------
November 1, 1998 October 31, 1999
------------------------------------
Net income................................ $1,984 $3,664
Foreign currency translation Adjustments.. 507 (52)
------ ------
Comprehensive income (loss)............... $2,491 $3,612
====== ======
4. Business Segment Information
The following table presents revenue and other financial information by
business segment (In thousands):
Three Months Ended
---------------------------
November 1, October 31,
1998 1999
------------ ------------
REVENUES
Television....................................... $33,077 $37,480
Mastering and distribution....................... 9,829 16,074
Broadcast and syndication........................ 5,331 5,649
Film and animation............................... 1,312 2,217
------- -------
Total reportable segments..................... $49,549 $61,420
======= =======
EBITDA
Television...................................... $ 7,591 $10,932
Mastering and distribution...................... 2,309 4,087
Broadcast and syndication....................... 1,838 2,312
Film and animation.............................. (961) 139
------- -------
Total reportable segments.................... 10,777 17,470
Corporate and other............................. 1,083 183
------- -------
$11,860 $17,653
======= =======
9
FOUR MEDIA COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 of 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. Subsequent Event
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. Closing
is anticipated to occur in the first quarter of calendar 2000.
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. We
anticipate the closing will occur in the first quarter of calendar 2000.
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 October 31, 1999 Compared To Three Months Ended November 1,
1998.
Revenues. Total revenues for the three months ended October 31, 1999
increased $11.9 million, or 24.0%, to $61.4 million compared to $49.5 million
for the three months ended November 1, 1998. The revenue increase was
attributable primarily to the factors set forth below.
Television revenues for the three months ended October 31, 1999 increased
$4.4 million, or 13.3%, to $37.5 million compared to $33.1 million for the three
months ended November 1, 1998. The major components of this increase include
increased telecine revenues ($3.2 million), editorial revenues ($2.1 million),
sound revenues ($1.0 million); offset by decreased duplication revenues ($1.3
million) and graphics revenues ($0.6 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 ($1.8 million).
Mastering and distribution revenues for the three months ended October 31,
1999 increased $6.3 million, or 64.3%, to $16.1 million compared to $9.8 million
for the three months ended November 1, 1998. The major components of this
increase include revenue of approximately $5.3 million from the UK acquisitions
(TVP and TVi), increased telecine revenues ($0.7 million), and increased
professional duplication revenues ($0.4 million), offset by decreased laboratory
revenues of ($0.1 million).
Broadcast and syndication revenues for the three months ended October 31,
1999 increased $0.3 million, or 5.7%, to $5.6 million compared to $5.3 million
for the three months ended November 1, 1999. This increase is attributed to a
6.0% increase in revenues from our Singapore operations resulting from increased
services provided to Nickelodeon beginning in November 1998.
Film and animation revenues for the three months ended October 31, 1999
increased $0.9 million, or 69.2%, to $2.2 million compared to $1.3 million for
the three months ended November 1, 1998. This increase is attributed to new
film projects obtained during the period.
Direct Operating Costs. Direct operating costs for the three months ended
October 31, 1999 increased $3.2 million, or 10.9%, to $32.5 million compared to
$29.3 million for the three months ended November 1, 1998. As a percentage of
revenues, direct operating costs decreased 6.1% to 53.0% compared to 59.1% 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 October 31, 1999 increased $1.6 million, or
25.0%, to $8.0 million compared to $6.4 million for the three months ended
November 1, 1998. 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 three months ended October 31, 1999 increased
$2.8 million, or 33.3%, to $11.2 million compared to $8.4 million for the three
months ended November 1, 1998. As a percentage of revenues, such expenses
increased 1.3% to 18.3% compared to 17.0% in fiscal 1999. The increase as a
percentage of revenues was primarily attributable to increased overhead costs
associated with our acquisitions.
Interest Income and Expense. Interest income and expense for the three
months ended October 31, 1999 decreased $0.2 million, or 5.7%, to $3.3 million
compared to $3.5 million for the three months ended November 1, 1998.
Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA
for the three months ended October 31, 1999 increased $5.8 million, or 48.7%, to
$17.7 million compared to $11.9 million for the three months ended November 1,
1998. The increase in EBITDA results from the factors discussed above.
13
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 November 1, 1998. We recognized a provision for
income taxes of $2.8 million, an effective rate of 43.3%, for the three months
ended October 31, 1999. Our effective tax rate for the three months ended
October 31, 1999 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 $0.3 million for the three months ended October 31, 1999 compared
to $1.8 million for the three months ended November 1, 1998. The decrease in
net cash provided by operations in fiscal 2000 was primarily attributable to the
growth of accounts receivable offset by increased income before depreciation and
amortization.
Net Cash Provided by Financing Activities. Net cash provided by financing
activities was $4.7 million for the three months ended October 31, 1999 compared
to $55.1 million for the three months ended November 1, 1998. During the three
month period ended October 31, 1999, we borrowed an additional $6.0 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
State of Readiness. We are currently working to resolve the potential
impact of the Year 2000 problem on our 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.
We have divided the Year 2000 readiness task by the following functional
areas: IT infrastructure, business systems, operational systems, facilities, and
third party business partners. IT infrastructure includes our 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 our day-to-day
operations in the post-production 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. We have appointed a task force chaired by our chief technology
officer and coordinated by our information systems manager. Representatives of
each of our divisions are included on the task force, as well as an attorney
from our legal department.
With minor exceptions noted below, we have completed a four phase program
for resolving the Year 2000 issues that are reasonably within our control. The
four phases of the program included inventory, assessment, remediation and
testing, and implementation. The inventory phase consisted of a company wide
inventory of computer hardware, software, business applications, and operational
and facilities equipment. The inventory was then used to generate a master
assessment list and identify equipment vendors. The assessment phase consisted
of identifying at-risk systems and products and ranking the products by
criticality to the business. Each product was then assigned to a task force
member to determine whether the product was in compliance and, if not, whether
the system should be upgraded or replaced. The remediation and testing phase
consisted 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 consisted of
implementing remediation on systems and products company wide. The only
remaining remediation tasks consist of (1) follow up with respect to four
facilities systems; and (2) one minor telephone upgrade, which we expect to
complete by December 20, 1999.
Third Parties. Like every other business, we are at risk from potential
Year 2000 failures on the part of our 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,
14
transportation, and communications. We initially requested information from
significant third party businesses regarding their efforts in addressing Year
2000 issues in early 1999. Second and third requests for information were sent
in May and August 1999, respectively. We will continue to follow up where
questions remain with respect to Y2K readiness of its business partners. The
process of determining our vulnerability if these third parties fail to
remediate their Year 2000 problems is ongoing. 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 us.
Costs. We have incurred approximately $138,998 to date in addressing the
Year 2000 issue. These costs are being funded through operating cash flows. We
anticipate that we will incur an additional $25,000 to $50,000 by the end of the
1999 calendar year. In addition, we have and anticipate that we will continue
to incur additional costs in the form of redeployment of internal resources from
other activities. We do not expect these redeployments to have a material
adverse effect on other ongoing business operations.
Risks. System failures resulting from the Year 2000 problem could
potentially affect operations and financial results in all aspects of our
business. For example, failures could affect all aspects of our television,
film and animation, mastering and distribution, and broadcast and syndication
operations, as well as inventory records, payroll operations, security, billing,
and collections. At this time, we believe that our most likely worst case
scenario involves potential disruption in areas in which our 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 our or third parties' systems, we
could suffer a reduction in our operations. Such a reduction may result in a
fluctuation in the price of our common stock.
Contingency Plan. We have created a task force comprised of accounting,
legal, and technical employees that is prepared to address any Year 2000 issues
as they arise. We will continue to develop our contingency plan during 1999 as
part of our ongoing Year 2000 compliance effort.
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 October 31, 1999 were
approximately 13.4% of total revenues. Our net assets maintained in a
functional currency other than US dollars for the quarter ended October 31, 1999
were approximately 8.6% of total net assets.
Interest Rate Risks
As of October 31, 1999, we had fixed interest rate debt of approximately
$5.9 million and floating interest rate debt of approximately $183.1 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.
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: December 15, 1999 By: /s/ Christopher M. R. Phillips
-----------------------------------
Christopher M. R. Phillips,
Executive Vice President and
Chief Financial Officer
18