SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act - of 1934.
For the quarterly period ended March 31, 2000 or
Transition report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934.
For the transition period from to
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Commission file number 0-21917
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VDI MultiMedia
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(Exact Name of Registrant as Specified)
California
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(State or Other Jurisdiction of
Incorporation or Organization)
95-4272619
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(IRS Employer Identification Number)
California
(State or Other Jurisdiction of
Incorporation or Organization)
95-4272619
(IRS Employer Identification Number)
7083 Hollywood Boulevard, Suite 200, Hollywood, CA 90028
(Address of principal executive offices) (Zip Code)
(323) 957-7990
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(Registrant's Telephone Number, Including Area Code)
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(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 ____
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As of April 20, 2001, there were 9,046,004 shares of the registrant's common
stock outstanding.
VDI MultiMedia is filing this Amendment to its Quarterly Report on Form 10-Q
for the period ending March 31, 2000 in order to reflect and describe the
restatement of its financial statements and the adoption of SAB 101 as of and
for the three-month periods ended March 31, 2000 and March 31, 1999 and as of
the fiscal year ended December 31, 1999. See Notes 2 and 3.
VDI MULTIMEDIA
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31, MARCH 31,
1999 2000
---- ----
(as restated) (as restated)
Current assets:
Cash and cash equivalents $ 3,030,000 $ 403,000
Accounts receivable, net of allowances for doubtful
accounts of $971,000 and $1,101,000, respectively 19,836,000 19,911,000
Inventories 1,122,000 1,027,000
Prepaid expenses and other current assets 948,000 1,624,000
Deferred income taxes 1,259,000 908,000
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Total current assets 26,195,000 23,873,000
Property and equipment, net 19,564,000 20,855,000
Other assets, net 662,000 648,000
Goodwill and other intangibles, net 26,510,000 26,385,000
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Total assets $ 72,931,000 $ 71,761,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,998,000 $ 6,165,000
Accrued expenses 2,989,000 3,521,000
Income taxes payable 599,000 79,000
Borrowings under revolving credit agreement 5,888,000 5,888,000
Current portion of notes payable 8,309,000 8,300,000
Current portion of capital lease obligations 217,000 180,000
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Total current liabilities 25,000,000 24,133,000
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Deferred income taxes 489,000 531,000
Notes payable, less current portion 16,433,000 14,983,000
Capital lease obligations, less current portion 68,000 44,000
Shareholders' equity
Preferred stock - no par value; 5,000,000 authorized;
none outstanding Common stock - no par value;
50,000,000 authorized; 9,210,697 and 9,238,361 shares,
respectively, issued and outstanding 17,935,000 18,100,000
Retained earnings 13,006,000 13,970,000
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Total shareholders' equity 30,941,000 32,070,000
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Total liabilities and shareholders' equity $ 72,931,000 $ 71,761,000
============ =============
See accompanying notes to consolidated financial statements.
2
VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1999 2000
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(as restated) (as restated)
Revenues $ 19,784,000 $ 19,090,000
Cost of goods sold 12,006,000 10,885,000
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Gross profit 7,778,000 8,205,000
Selling, general and administrative expense 4,981,000 5,335,000
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Operating income 2,797,000 2,870,000
Interest expense, net 501,000 685,000
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Income before income taxes 2,296,000 2,185,000
Provision for income taxes 1,002,000 898,000
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Income before adoption of SAB 101 (Note 3) 1,294,000 1,287,000
Cumulative effect of adopting SAB 101 (Note 3) - (322,000)
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Net income $ 1,294,000 $ 965,000
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Earnings per share:
Basic:
Income per share before adoption of SAB 101 $ 0.13 $ 0.14
Cumulative effect of adopting SAB 101 - (0.04)
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Net income $ 0.13 $ 0.10
============ ============
Weighted average number of shares 9,664,531 9,214,808
Diluted:
Income per share before adoption of SAB 101 $ 0.13 $ 0.13
Cumulative effect of adopting SAB 101 - (0.03)
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Net income $ 0.13 $ 0.10
============ ============
Weighted average number of shares including
the dilutive effect of stock options 9,729,973 9,848,996
See accompanying notes to consolidated financial statements.
3
VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
1999 2000
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(as restated) (as restated)
Cash flows from operating activities:
Net income $ 1,294,000 $ 965,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,165,000 1,311,000
Provision for doubtful accounts 324,000 144,000
Deferred income taxes 241,000 392,000
Cumulative effect of adopting SAB 101 322,000 -
Changes in assets and liabilities:
Increase in accounts receivable (1,227,000) (219,000)
(Increase) decrease in inventories (92,000) 95,000
Decrease (increase) in prepaid expenses and
other current assets 2,000 (676,000)
(Increase) decrease in other assets (2,000) 14,000
Decrease in accounts payable. (723,000) (833,000)
Increase in accrued expenses 517,000 532,000
Decrease in income taxes payable (448,000) (842,000)
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Net cash provided by operating activities 1,051,000 1,205,000
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Cash used in investing activities:
Capital expenditures (1,958,000) (2,178,000)
Net cash paid for acquisitions (479,000) (299,000)
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Net cash used in investing activities (2,437,000) (2,477,000)
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Cash flows from financing activities:
Change in revolving credit agreement 5,505,000 -
Repurchase of common stock (2,293,000) -
Proceeds from exercise of stock options - 165,000
Deferred financing costs (258,000) -
Repayment of notes payable (1,469,000) (1,459,000)
Repayment of capital lease obligations (163,000) (61,000)
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Net cash provided by (used in)
financing activities 1,322,000 (1,355,000)
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Net decrease in cash (64,000) (2,627,000)
Cash at beginning of period 2,048,000 3,030,000
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Cash at end of period $ 1,984,000 $ 403,000
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Supplemental disclosure of cash
flow information - Cash paid for:
Interest $ 504,000 $ 685,000
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Income tax $ 1,210,000 $ 820,000
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See accompanying notes to consolidated financial statements
4
VDI MULTIMEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
NOTE 1 - THE COMPANY
VDI MultiMedia ("VDI" or the "Company") is a leading provider of video
and film asset management services to owners, producers and distributors of
entertainment and advertising content. The Company provides the services
necessary to edit, master, reformat, digitize, archive and ultimately distribute
its clients' video content.
The Company provides physical and electronic delivery of commercials,
movie trailers, electronic press kits, infomercials and syndicated programming
to thousands of broadcast outlets worldwide. The Company operates in one
reportable segment. The Company provides worldwide electronic distribution,
using fiber optics and satellites. Additionally, the Company provides 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, editing and digital media
services.
The Company seeks to capitalize on growth in demand for the services
related to the distribution of entertainment content, without assuming the
production or ownership risk of any specific television program, feature film or
other form of content. The primary users of the Company's services are
entertainment studios and advertising agencies that generally choose to
outsource such services due to the sporadic demand of any single customer for
such services and the fixed costs of maintaining a high-volume physical plant.
Since January 1, 1997, the Company has successfully completed eight
acquisitions of companies providing similar services. The Company will continue
to evaluate acquisition opportunities to enhance its operations and
profitability. As a result of these acquisitions, VDI believes it is one of the
largest and most diversified providers of technical and distribution services to
the entertainment and advertising industries, and is therefore able to offer its
customers a single source for such services at prices that reflect the Company's
scale economies.
The accompanying restated 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 footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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, 2000.
NOTE 2 - ADJUSTMENTS TO PRIOR PERIOD FINANCIAL STATEMENTS
During 2000, the Company restated financial results of 1999 and 2000 to
reflect (i) expensing repairs and maintenance costs on equipment when incurred
rather than capitalizing such costs and depreciating them over future periods;
(ii) depreciating leasehold improvements over the shorter of the estimated
useful asset life or the remaining lease term rather than ten years; (iii) the
retroactive write off of undepreciated leasehold improvements to correspond to
certain lease termination dates; (iv) accrual of legal costs incurred for a
failed merger in the period in which the expenses were incurred; (v) reflecting
unrecorded invoices; and (vi) increase of tax provision for nondeductible items
and taxes related to the above items. In addition, the schedule reflects the
adoption of SAB 101 (see Note 3). These adjustments for the periods ended March
31, 1999 and 2000 are summarized as follows:
5
(INCREASE) DECREASE INCOME
1999 2000
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ADJUSTMENTS TO PREVIOUSLY ISSUED FINANCIAL
STATEMENTS:
To expense repairs and maintenance costs that were
previously capitalized (1) $ 395,000 $ (5,000)
To depreciate leasehold improvements over the
proper period and to write off any undepreciated
amounts at the lease termination date (2) 11,000 19,000
To recognize merger expenses in the period incurred (3) - (408,000)
To reflect unrecorded invoices (1) - 49,000
To revise tax provision for nondeductible items and
taxes related to above adjustments (105,000) 145,000
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Subtotal 301,000 (200,000)
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Cumulative impact of adopting SAB 101 (4) - 647,000
Tax effect of adopting SAB 101 - (272,000)
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Subtotal - 375,000
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Total $ 301,000 $ 175,000
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REDUCTION IN PREVIOUSLY REPORTED NET INCOME AFTER TAX
BENEFIT, AND EARNINGS PER SHARE:
Reduction in net income:
Adjustments $ 301,000 $ (200,000)
SAB 101 - 375,000
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Total $ 301,000 $ 175,000
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Basic earnings per share:
Adjustments $ 0.03 $ (0.02)
SAB 101 - 0.04
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Total $ 0.03 $ 0.02
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Diluted earnings per share:
Adjustments $ 0.03 $ (0.02)
SAB 101 - 0.04
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Total $ 0.03 $ 0.02
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(1) Charged to cost of goods sold
(2) Charged to cost of goods sold and selling, general and administrative
expense
(3) Credited to selling, general and administrative expense
(4) Charged to revenues
NOTE 3 - ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. The effect of
applying this Staff Accounting Bulletin has been accounted for as a change in
accounting principle, with a cumulative charge of $322,000, or $0.03 per share,
being recorded on that date. Previously, the Company had recognized revenues
from certain post production services as work was performed. Under SAB 101, the
Company now recognizes these revenues when all services have been completed. As
a result of adopting SAB 101, revenue recognized in the three months ended March
31, 2000, which was included in the cumulative effect adjustment, was $555,000.
6
The table below sets forth pro forma net income and earnings per share
data for the three month period ended March 31, 1999 as if the change in
accounting policy had been adopted at the beginning of such period.
Previously reported (A) $ 1,294,000
Adjustment (46,000)
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Pro forma $ 1,248,000
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Adjustment to earnings per share:
Basic -
Previously reported (A) $ 0.13
Adjustment -
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Pro forma $ 0.13
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Diluted -
Previously reported (A) $ 0.13
Adjustment -
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Pro forma $ 0.13
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(A) After retroactive adjustments described above.
NOTE 4 - STOCK REPURCHASE
In February 1999, the Company commenced a stock repurchase program. The
board of directors authorized the Company to allocate up to $4,000,000 to
purchase its common stock at suitable market prices. As of November 10, 2000,
the Company had repurchased 638,500 shares of the Company's common stock in
connection with this program.
NOTE 5 - LONG TERM DEBT AND NOTES PAYABLE
In November 1998, the Company borrowed $29,000,000 on a term loan with a
bank, payable in 60 monthly installments of $483,000 plus interest. The term
loan was repaid in 2000 with the proceeds of a new borrowing arrangement with a
group of banks.
NOTE 6 - SUBSEQUENT EVENTS
STOCK REPURCHASE
In September 2000, the board of directors authorized the Company to
allocate an additional $5,000,000 to purchase its common stock.
LONG TERM DEBT AND NOTES PAYABLE
In September 2000, the Company entered into a credit agreement
("Agreement") with a group of banks providing a revolving credit facility of up
to $45,000,000. The purpose of the facility was to repay previously outstanding
amounts under a prior agreement with a bank, fund working capital and capital
expenditures and for general corporate purposes including up to $5,000,000 of
stock repurchases under the Company's repurchase program. The Agreement provides
for interest at the banks' reference rate, the federal funds effective rate plus
0.5%, or a LIBOR adjusted rate. Loans made under the Agreement are
collateralized by substantially all of the Company's assets. The borrowing base
under the Agreement is limited to 90% of eligible accounts receivable, 50% of
inventory and 100% of operating machinery and equipment, which percentages
decline after 2001 for receivables and equipment. The Agreement provides that
the aggregate commitment will decline by $5,000,000 on each December 31
beginning in 2002 until expiration of the entire commitment on December 31,
2005.
The Agreement also contains covenants requiring certain levels of annual
earnings before interest, taxes, depreciation and amortization (EBITDA) and net
worth, and limits the amount of capital expenditures. By December 31, 2000, the
Company had borrowed $31,024,000 under the Agreement and was not in compliance
with certain financial covenants due to adjustments recorded to prior years' and
2000 results (see Note 2). The bank has waived compliance with the covenants and
the Company has renegotiated the breached financial covenants.
7
VDI MULTIMEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is based on restated financial statements appearing in
this Form 10-Q. Reference is made to Note 2 of notes to consolidated financial
statements for an itemization of adjustments.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999.
REVENUES. Revenues decreased by $0.7 million or 3.5% to $19.1 million
for the three-month period ended March 31, 2000, compared to $19.8 million for
the three-month period ended March 31, 1999. This decrease was due to a decrease
in the use of the Company's services in 2000 by certain customers resulting from
service failures that occurred during the integration of its two largest
facilities in 1999. Revenues were also negatively impacted by the
discontinuation of certain business lines which were either unprofitable or shut
down to accommodate the rollout of the Company's high definition television
services.
GROSS PROFIT. Gross profit increased $0.4 million or 5.5% to $8.2
million for the three-month period ended March 31, 2000, compared to $7.8
million for the three-month period ended March 31, 1999. As a percent of
revenues, gross profit increased from 39.3% to 43.0%. The increase in gross
profit as a percentage of revenues was due primarily to the lower cost of direct
materials resulting from volume purchasing discounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.4 million, or 7.1% to $5.3 million for the
three-month period ended March 31, 2000, compared to $4.9 million for the
three-month period ended March 31, 1999. As a percentage of revenues, selling,
general and administrative expense increased to 27.9% for the three-month period
ended March 31, 2000, compared to 25.2% for the three-month period ended March
31, 1999. This increase was due to legal costs associated with a terminated
merger.
OPERATING INCOME. Operating income increased $0.1 million or 2.6% to
$2.9 million for the three-month period ended March 31, 2000, compared to $2.8
million for the three-month period ended March 31, 1999.
INTEREST EXPENSE. Interest expense increased $0.2 million, or 36.7%, to
$0.7 million for the three-month period ended March 31, 2000, compared to $0.5
million for the three-month period ended March 31, 1999. This increase was due
to increased borrowing under credit facilities.
INCOME TAXES. The Company's effective tax rate was 41.1% for the first
quarter of 2000 and 43.6% for the first quarter of 1999.
CUMULATIVE EFFECT OF ADOPTING SAB 101. During Fiscal 2000, the company
adopted SAB 101. The effect of applying this change in accounting principle is a
cumulative charge, after tax, of $322,000, or $0.03 per share. Previously, the
Company had recognized revenues from certain post-production processes as work
was performed. Under SAB 101, the Company now recognizes these revenues when the
entire project is completed.
NET INCOME. Net income for the three-month period ended March 31, 2000
decreased $0.3 million or 25.4% to $1.0 million, compared to $1.3 million for
the three-month period ended March 31, 1999.
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, 2000.
On March 31, 2000, the Company's cash and cash equivalents aggregated
$0.4 million. The Company's operating activities provided cash of $1.2 million
for the three months ended March 31, 2000.
The Company's investing activities used cash of $2.5 million for the
three months ended March 31, 2000. The Company spent approximately $2.2 million
for the addition and replacement of capital equipment and for investments in
digital television services equipment and management information systems. The
Company's business is equipment intensive, requiring periodic expenditures of
cash or the incurrence of additional debt to acquire additional fixed assets in
order to increase capacity or replace existing equipment. The Company expects to
spend approximately $7.5 million on capital expenditures during the last nine
months of 2000 to upgrade and replace equipment, upgrade the Company's
management information systems and invest in high definition and other digital
equipment.
8
The Company's financing activities used cash of $1.4 million in the
three months ended March 31, 2000. Cash flows from financing activities included
the repayment of $1.5 million related to notes payable.
In September 2000, the Company signed a $45 million revolving credit
facility agented by Union Bank of California. The new facility provides the
Company with funding for capital expenditures, working capital needs and support
for its acquisition strategies. The amount available under the facility reduces
to $40 million on December 31, 2002, to $35 million on December 31, 2003 and to
$30 million on December 31, 2004. The facility expires on December 31, 2005. As
of December 31, 2000, there was $31 million outstanding under the facility.
Management believes that cash generated from its ongoing operations and
its credit facility will fund necessary capital expenditures and provide
adequate working capital for at least the next twelve months.
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.
CAUTIONARY STATEMENTS AND RISK FACTORS
In our capacity as Company management, we may from time to time make
written or oral forward-looking statements with respect to our long-term
objectives or expectations which may be included in our filings with the
Securities and Exchange Commission, reports to stockholders and information
provided in our web site.
The words or phrases "will likely," "are expected to," "is anticipated,"
"is predicted," "forecast," "estimate," "project," "plans to continue,"
"believes," or similar expressions identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. We wish to caution you not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. In connection with the "Safe Harbor" provisions on the Private
Securities Litigation Reform Act of 1995, we are calling to your attention
important factors that could affect our financial performance and could cause
actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current statements.
The following list of important factors may not be all-inclusive, and we
specifically decline to undertake an obligation to publicly revise any
forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Among the factors that could have an impact
on our ability to achieve expected operating results and growth plan goals
and/or affect the market price of our stock are:
o Our highly competitive marketplace.
o The risks associated with dependence upon significant customers.
o Our ability to execute our expansion strategy.
o The uncertain ability to manage growth.
o Our dependence upon and our ability to adapt to technological
developments.
o Dependence on key personnel.
o Our ability to maintain and improve service quality.
o Fluctuation in quarterly operating results and seasonality in certain of
our markets.
o Possible significant influence over corporate affairs by significant
shareholders.
o The potential impact of a possible labor action affecting our studio and
television customers.
These risk factors are discussed further below.
COMPETITION. Our broadcast video post production, duplication and distribution
industry is a highly competitive, service-oriented business. In general, we do
not have long-term or exclusive service agreements with our customers. Business
is acquired on a purchase order basis and is based primarily on customer
satisfaction with reliability, timeliness, quality and price.
We compete with a variety of post production, duplication and distribution
firms, some of which have a national presence, and to a lesser extent, the
in-house post production and distribution operations of major motion picture
studios and advertising agencies. Some of these firms, and all of the studios,
have greater financial, distribution and marketing resources and have achieved a
higher level of brand recognition than the Company. In the future, we may not be
able to compete effectively against these competitors merely on the basis of
reliability, timeliness quality and price or otherwise.
9
We may also face competition from companies in related markets which could offer
similar or superior services to those offered by the Company. For example,
telecommunications providers could enter the market as competitors with
materially lower electronic delivery transportation costs. We believe that an
increasingly competitive environment could lead to a loss of market share or
price reductions, which could have a material adverse effect on our financial
condition, results of operations and prospects.
CUSTOMER AND INDUSTRY CONCENTRATION. Although we have an active client list of
over 2,500 customers, seven motion picture studios accounted for approximately
39% of the Company's revenues during the three months ended March 31 2000. If
one or more of these companies were to stop using our services, our business
could be adversely affected. Because we derive substantially all of our revenue
from clients in the entertainment and advertising industries, the financial
condition, results of operations and prospects of the Company could also be
adversely affected by an adverse change in conditions which impact those
industries.
EXPANSION STRATEGY. Our growth strategy involves both internal development and
expansion through acquisitions. We currently have no agreements or commitments
to acquire any company or business. Even though we have completed eight
acquisitions in the last three fiscal years, we cannot be sure additional
acceptable acquisitions will be available or that we will be able to reach
mutually agreeable terms to purchase acquisition targets, or that we will be
able to profitably manage additional businesses or successfully integrate such
additional businesses into the Company without substantial costs, delays or
other problems.
Certain of the businesses previously acquired by the Company reported net losses
for their most recent fiscal years prior to being acquired, and our future
financial performance will be in part depend on our ability to implement
operational improvements in, or exploit potential synergies with, these acquired
businesses.
Acquisitions may involve a number of special risks including: adverse effects on
our reported operating results (including the amortization of acquired
goodwill), diversion of management's attention and unanticipated problems or
legal liabilities. In addition, we may require additional funding to finance
future acquisitions. We cannot be sure that we will be able to secure
acquisition financing on acceptable terms or at all. We may also use working
capital or equity, or raise financing through equity offerings or the incurrence
of debt, in connection with the funding of any acquisition. Some or all of these
risks could negatively affect our financial condition, results of operations and
prospects or could result in dilution to the Company's shareholders. In
addition, to the extent that consolidation becomes more prevalent in the
industry, the prices for attractive acquisition candidates could increase
substantially. We may not be able to effect any such transactions. Additionally,
if we are able to complete such transactions they may prove to be unprofitable.
The geographic expansion of the Company's customers may result in increased
demand for services in certain regions where it currently does not have post
production, duplication and distribution facilities. To meet this demand, we may
subcontract. However, we have not entered into any formal negotiations or
definitive agreements for this purpose. Furthermore, we cannot assure you that
we will be able to effect such transactions or that any such transactions will
prove to be profitable.
MANAGEMENT OF GROWTH. During the last four years (except for 2000), we have
experienced rapid growth that has resulted in new and increased responsibilities
for management personnel and has placed and continues to place increased demands
on our management, operational and financial systems and resources. To
accommodate this growth, compete effectively and manage future growth, we will
be required to continue to implement and improve our operational, financial and
management information systems, and to expand, train, motivate and manage our
work force. We cannot be sure that the Company's personnel, systems, procedures
and controls will be adequate to support our future operations. Any failure to
do so could have a material adverse effect on our financial condition, results
of operations and prospects.
DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS. Although we intend to utilize the most
efficient and cost-effective technologies available for telecine, high
definition formatting, editing, coloration and delivery of video content,
including digital satellite transmission, as they develop, we cannot be sure
that we will be able to adapt to such standards in a timely fashion or at all.
We believe our future growth will depend in part, on our ability to add to these
services and to add customers in a timely and cost-effective manner. We cannot
be sure we will be successful in offering such services to existing customers or
in obtaining new customers for these services, including the Company's recent
significant investment in high definition technology. We intend to rely on third
part vendors for the development of these technologies and there is no assurance
that such vendors will be able to develop such technologies in a manner that
meets the needs of the Company and its customers. Any material interruption in
the supply of such services could materially and adversely affect the Company's
financial condition, results of operations and prospects.
10
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts and
abilities of certain of its senior management, particularly those of R. Luke
Stefanko, Chairman of the Board of Directors and Chief Executive Officer. The
loss or interruption of the services of key members of management could have a
material adverse effect on our financial condition, results of operations and
prospects if a suitable replacement is not promptly obtained. Although we have
employment agreements with Mr. Stefanko and certain of our other key executives
and technical personnel, we cannot be sure that such executives will remain with
the Company during or after the term of their employment agreements. In
addition, our success depends to a significant degree upon the continuing
contributions of, and on our ability to attract and retain, qualified
management, sales, operations, marketing and technical personnel. The
competition for qualified personnel is intense and the loss of any such persons,
as well as the failure to recruit additional key personnel in a timely manner,
could have a material adverse effect on our financial condition, results of
operations and prospects. There is no assurance that we will be able to continue
to attract and retain qualified management and other personnel for the
development of our business.
ABILITY TO MAINTAIN AND IMPROVE SERVICE QUALITY. Our business is dependent on
our ability to meet the current and future demands of our customers, which
demands include reliability, timeliness, quality and price. Any failure to do
so, whether or not caused by factors within our control could result in losses
to such clients. Although we disclaim any liability for such losses, there is no
assurance that claims would not be asserted or that dissatisfied customers would
refuse to make further deliveries through the Company in the event of a
significant occurrence of lost deliveries, either of which could have material
adverse effect on our financial condition, results of operations and prospects.
Although we maintain insurance against business interruption, such insurance may
not be adequate to protect the Company from significant loss in these
circumstances or that a major catastrophe (such as an earthquake or other
natural disaster) would not result in a prolonged interruption of our business.
In addition, our ability to make deliveries within the time periods requested by
customers depends on a number of factors, some of which are outside of our
control, including equipment failure, work stoppages by package delivery vendors
or interruption in services by telephone or satellite service providers.
FLUCTUATING RESULTS, SEASONALITY. Our operating results have varied in the past,
and may vary in the future, depending on factors such as the volume of
advertising in response to seasonal buying patterns, the timing of new product
and service introductions, the timing of revenue recognition upon the completion
of longer term projects, increased competition, timing of acquisitions, general
economic factors and other factors. As a result, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.
For example, our operating results have historically been significantly
influenced by the volume of business from the motion picture industry, which is
an industry that is subject to seasonal and cyclical downturns, and,
occasionally, work stoppages by actors, writers and others. In addition, as our
business from advertising agencies tends to be seasonal, our operating results
may be subject to increased seasonality as the percentage of business from
advertising agencies increases. In any period our revenues are subject to
variation based on changes in the volume and mix of services performed during
the period. It is possible that in some future quarter the Company's operating
results will be below the expectations of equity research analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected. Fluctuations in sales due to seasonality may
become more pronounced if the growth rate of the Company's sales slows.
CONTROL BY PRINCIPAL SHAREHOLDER; POTENTIAL ISSUANCE OF PREFERRED STOCK;
ANTI-TAKEOVER PROVISIONS. The Company's Chairman, President and Chief Executive
Officer, R. Luke Stefanko, beneficially owned approximately 28% of the
outstanding common stock as of December 31, 2000. Mr. Stefanko's ex-spouse owned
approximately 25% of the common stock on that date. Together, they owned
approximately 59%. In August 2000, Mr. Stefanko was granted a one-time proxy to
vote his ex-spouse's shares in connection with the election of directors at the
Company's annual meeting. By virtue of his stock ownership, Mr. Stefanko may be
able to significantly influence the outcome of matters required to be submitted
to a vote of shareholders, including (i) the election of the board of directors,
(ii) amendments to the Company's Restated Articles of Incorporation and (iii)
approval of mergers and other significant corporate transactions. The foregoing
may have the effect of discouraging, delaying or preventing certain types of
transactions involving an actual or potential change of control of the Company,
including transactions in which the holders of common stock might otherwise
receive a premium for their shares over current market prices. Our Board of
Directors also has the authority to issue up to 5,000,000 shares of preferred
stock without par value (the "Preferred Stock") and to determine the price,
rights, preferences, privileges and restrictions thereof, including voting
rights, without any further vote or action by the Company's shareholders.
Although we have no current plans to issue any shares of Preferred Stock, the
rights of the holders of common stock would be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. Issuance of Preferred Stock could have the effect of
discouraging, delaying, or preventing a change in control of the Company.
Furthermore, certain provisions of the Company's Restated Articles of
Incorporation and By-Laws and of California law also could have the effect of
discouraging, delaying or preventing a change in control of the Company.
11
POSSIBLE STRIKE AFFECTING OUR CUSTOMERS. In May 2001 and July 2001,
screenwriters and actors, respectively, may conduct a work stoppage directly
affecting our studio and television customers. We cannot predict the length of a
strike by either of these groups or the ultimate impact on our customers'
production and ability to provide work to the Company. Either work stoppage,
should it occur, could have a material adverse effect on the Company's results
of operations.
YEAR 2000 COMPLIANCE ISSUE. The risks posed by Year 2000 issues, which arise
because computer systems and software products may be unable to distinguish
21(st) century dates from 20(th) century dates, could harm the Company's
business. Prior to the end of the 1999 the Company completed a review of the
Year 2000 compliance of its IT infrastructure, business and operational systems
and third-party suppliers. The Company's review included testing to determined
how their systems would function at and beyond the Year 2000. To date, the
Company has not experienced any material Year 2000 related problems with its IT
infrastructure, business systems or operational systems. Additionally, the
Company is not aware of any failure by its third-party suppliers to be Year 2000
compliant that could impact its business or operations. However, there is an
ongoing risk that such problems or failures could arise or become apparent in
the future. Any such problems or failures experienced by the Company or its
customers could have negative consequences for the Company, including decreasing
the demand for its products and interrupting its operations. As a result, the
Company's supply chain and revenue could be harmed.
12
VDI MULTIMEDIA
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits None
(b) Reports On Form 8-K
The Company filed a Current Report on Form 8-K on or about
January 11, 2000 relating to its proposed merger with an
affiliate of Bain Capital
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 MULTIMEDIA
DATE: May 9, 2001 BY:/s/ Alan Steel
---------------------------------------
Alan Steel
Executive Vice President,
Finance and Administration
(duly authorized officer and principal financial officer)