SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 2001 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 May 10, 2001, there were 9,046,004 shares of the registrant's common stock
outstanding.
VDI MULTIMEDIA
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, March 31,
2000 2001
(unaudited)
Current assets:
Cash and cash equivalents $ 769,000 $ 1,180,000
Accounts receivable, net of allowances for doubtful
accounts of $1,473,000 and $1,417,000, respectively 16,315,000 15,436,000
Notes receivable from officers 1,001,000 1,001,000
Income tax receivable 1,362,000 1,422,000
Inventories 1,031,000 1,116,000
Prepaid expenses and other current assets 2,066,000 2,095,000
Deferred income taxes 1,574,000 1,574,000
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Total current assets 24,118,000 23,824,000
Property and equipment, net 25,236,000 25,334,000
Other assets, net 920,000 912,000
Goodwill and other intangibles, net 27,387,000 27,298,000
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Total assets $ 77,661,000 $ 77,368,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,850,000 $ 7,676,000
Accrued expenses 2,513,000 3,480,000
Current portion of capital lease obligations 54,000 34,000
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Total current liabilities 11,417,000 11,190,000
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Deferred income taxes 2,271,000 2,083,000
Notes payable, less current portion 31,024,000 31,024,000
Capital lease obligations, less current portion 30,000 21,000
Derivative valuation liability - 279,000
Shareholders' equity
Preferred stock - no par value; 5,000,000 authorized;
none outstanding - -
Common stock - no par value; 50,000,000 authorized;
9,162,670 and 9,046,004, respectively, issued
and outstanding 18,272,000 18,012,000
Comprehensive income - FAS 133 - 283,000
Retained earnings 14,647,000 14,476,000
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Total shareholders' equity 32,919,000 32,771,000
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Total liabilities and shareholders' equity $ 77,661,000 $ 77,368,000
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See accompanying notes to consolidated financial statements.
2
VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
March 31,
2000 2001
---- ----
Revenues $ 19,090,000 $ 19,108,000
Cost of goods sold (10,885,000) (12,643,000)
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Gross profit 8,205,000 6,465,000
Selling, general and administrative expense (5,335,000) (5,499,000)
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Operating income 2,870,000 966,000
Interest expense, net (685,000) (785,000)
Derivative fair value change (Note 5) - (253,000)
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Income (loss) before income taxes 2,185,000 (72,000)
(Provision for) benefit from income taxes (898,000) 40,000
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Income (loss) before adoption of SAB 101 (2000)
and FAS 133 (2001) 1,287,000 (32,000)
Cumulative effect of adopting SAB 101 (2000)
and FAS 133 (2001) (322,000) (139,000)
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Net income (loss) $ 965,000 $ (171,000)
============= =============
Earnings per share:
Basic:
Income (loss) per share before
adoption of SAB 101 (2000) and FAS 133 (2001) $ 0.14 $ -
Cumulative effect of adopting SAB 101 (2000)
and FAS 133 (2001) (0.04) (0.02)
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Net income (loss) $ 0.10 $ (0.02)
============ =============
Weighted average number of shares 9,214,808 9,136,559
Diluted:
Income (loss) per share before
adoption of SAB 101 (2000) and FAS 133 (2001) $ 0.13 $ -
Cumulative effect of adopting SAB 101 (2000)
and FAS 133 (2001) (0.03) (0.02)
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Net income (loss) $ 0.10 $ (0.02)
============ =============
Weighted average number of shares including
the dilutive effect of stock options 9,848,996 9,145,516
See accompanying notes to consolidated financial statements.
3
VDI MULTIMEDIA
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2000 2001
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Cash flows from operating activities:
Net income $ 965,000 $ (171,000)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,311,000 1,649,000
Provision for doubtful accounts 144,000 143,000
Deferred income taxes 392,000 (327,000)
Other non cash items - 323,000
Cumulative effect of adopting SAB 101 322,000 -
Cumulative effect of adopting FAS 133 - 139,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (219,000) 736,000
Decrease (increase) in inventories 95,000 (85,000)
(Increase) in prepaid expenses and
other current assets (676,000) (29,000)
Decrease in other assets 14,000 8,000
(Decrease) in accounts payable. (833,000) (1,174,000)
Increase in accrued expenses 532,000 1,246,000
(Decrease) in income taxes payable (842,000) (60,000)
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Net cash provided by operating activities 1,205,000 2,398,000
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Cash used in investing activities:
Capital expenditures (2,178,000) (1,325,000)
Net cash paid for acquisitions (299,000) (333,000)
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Net cash used in investing activities (2,477,000) (1,658,000)
Cash flows from financing activities:
Repurchase of common stock - (300,000)
Proceeds from exercise of stock options 165,000 -
Repayment of notes payable (1,459,000) -
Repayment of capital lease obligations (61,000) (29,000)
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Net cash used in financing activities (1,355,000) (329,000)
Net (decrease) increase in cash (2,627,000) 411,000
Cash at beginning of period 3,030,000 769,000
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Cash at end of period $ 403,000 $ 1,180,000
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Supplemental disclosure of cash flow information
Cash paid for:
Interest $ 685,000 $ 565,000
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Income tax $ 820,000 $ 37,000
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See accompanying notes to consolidated financial statements
4
VDI MULTIMEDIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
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 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, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. 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 - 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.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("FAS 133"). The standard, as amended, requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in other income. See Note 5
for further detail.
5
NOTE 3 - 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. In September 2000, the
board of directors authorized the Company to allocate an additional $5,000,000
to purchase its common stock. As of March 31, 2001, the Company had repurchased
860,766 shares of the Company's common stock in connection with this program.
NOTE 4 - 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.
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. The bank waived compliance with the covenants and amended the
Agreement in April 2001. In connection with the amendment, the Company paid the
banks $225,000 which will be expensed in the second quarter of 2001.
NOTE 5 - DERIVATIVE AND HEDGING ACTIVITIES
The Company entered into an interest rate swap transaction with a bank on
November 28, 2000. The swap transaction was for a notional amount of $15,000,000
for three years and fixes the interest rate paid by the Company on such amount
at 6.50%, plus the applicable LIBOR margin, not to exceed 2.75%. FAS 133
requires that the hedge contract be "marked-to-market" at the time of adoption
of FAS 133 and quarterly by recording (i) a cumulative-effect type adjustment at
January 1, 2001 equal to the fair value of the hedge contract on that date, (ii)
amortizing the cumulative-effect type adjustment quarterly over the life of the
derivative contract, and (iii) a charge or credit to income in the amount of the
difference between the theoretical value of the hedge contract at the beginning
and end of such quarter. By the end of the hedge contract, the initial
cumulative-effect type adjustment and any amounts recognized as income or
expense will reverse to zero as the contract will then have no further
theoretical value. Other than the economic impact of fixing the interest rate,
the amount of income and expense required by application of FAS 133 does not
impact the Company's cash flow. The effect of adopting FAS 133 was to record the
following adjustments:
Increase (Decrease) Income
---------------------------------------------
Derivative (Provision for) Net Derivative
Fair Value Benefit from Fair Value
Change Income Taxes Change
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1. Initial cumulative-effect type
adjustment $ (309,000) $ 170,000 $ (139,000)
========== ========== ==========
2. Amortization of cumulative-effect
type adjustment $ 26,000 $ (14,000) $ 13,000
3. Difference in the derivative
fair value between the
beginning and end of the
quarter (279,000) 153,000 (126,000)
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$ (253,000) $ 139,000 $ (113,000)
========== ========== ==========
6
VDI MULTIMEDIA
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000.
REVENUES. Revenues increased by $0.01 million or 0.1% to $19.1 million for
the three-month period ended March 31, 2001, compared to $19.0 million for the
three-month period ended March 31, 2000.
GROSS PROFIT. Gross profit decreased $1.7 million or 21.2% to $6.5 million
for the three-month period ended March 31, 2001, compared to $8.2 million for
the three-month period ended March 31, 2000. As a percent of revenues, gross
profit decreased from 43.0% to 33.8%. The decrease in gross profit as a
percentage of revenues was due to higher wages related to the digital television
services department, higher maintenance and equipment rental costs, and
increased depreciation associated with investments in high definition equipment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.1 million, or 3.1% to $5.4 million for the
three-month period ended March 31, 2001, compared to $5.3 million for the
three-month period ended March 31, 2000. The fiscal 2000 quarter included $0.8
million of expenses associated with a terminated merger. As a percentage of
revenues, selling, general and administrative expense increased to 28.8% for the
three-month period ended March 31, 2001, compared to 27.9% for the three-month
period ended March 31, 2000. This increase was due to $0.3 million of severance
accruals and $0.4 million of higher consulting and administrative salary costs.
OPERATING INCOME. Operating income decreased $1.9 million or 66.3% to $1.0
million for the three-month period ended March 31, 2001, compared to $2.9
million for the three-month period ended March 31, 2000.
INTEREST EXPENSE. Interest expense increased $0.1 million, or 14.6%, to
$0.8 million for the three-month period ended March 31, 2001, compared to $0.7
million for the three-month period ended March 31, 2000. This increase was due
to increased borrowing under credit facilities.
ADOPTION OF FAS 133 AND DERIVATIVE FAIR VALUE CHANGE. On January 1, 2001,
the Company adopted FAS 133 by recording a cumulative effect adjustment of
$139,000 after tax benefit. During the quarter ended March 31, 2001, the Company
recorded the difference between the derivative fair value of the Company's hedge
contract at the beginning and end of the first quarter, or $279,000 ($126,000
net of tax benefit), offset by amortization of the cumulative-effect adjustment
during the quarter.
INCOME TAXES. The Company's effective tax rate was 55% for the first
quarter of 2001 and 41% for the first quarter of 2000. The higher tax rate is
due to the effect of permanent differences on a lower pre-tax income base.
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 (LOSS). The net loss for the three-month period ended March 31,
2001 was $171,000, a decrease of $1.1 million compared to $1.0 million for the
three-month period ended March 31, 2000. The Company earned $82,000, or $0.01
per share, in the current quarter before the FAS 133 adjustments.
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, 2001, the Company's cash and cash equivalents aggregated $1.2
million. The Company's operating activities provided cash of $2.4 million for
the three months ended March 31, 2001.
The Company's investing activities used cash of $1.7 million in the three
months ended March 31, 2001. The Company spent approximately $1.3 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's financing
activities used cash of $0.3 million in the three months ended March 31, 2001.
7
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 March 31, 2001, 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.
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.
8
CUSTOMER AND INDUSTRY CONCENTRATION. Although we have an active client list of
over 2,500 customers, seven motion picture studios accounted for approximately
33% of the Company's revenues during the three months ended March 31 2001. 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.
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
9
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 53%. 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.
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.
10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company's market risk exposure with respect to financial
instruments is to changes in the London Interbank Offering Rate ("LIBOR"). The
Company had borrowings of $31,024,000 at March 31, 2001 under a credit agreement
and may borrow up to an additional $14 million subject to the level of Company
assets (borrowing base). Amounts outstanding under the credit agreement bear
interest at the bank's reference rate plus a base rate margin not to exceed
1.00%, or, at the Company's election, at LIBOR plus a LIBOR margin not to exceed
2.75%.
The Company entered into an interest rate swap transaction with a bank on
November 28, 2000. The swap transaction was for a notational amount of
$15,000,000 for three years and fixes the interest rate paid by the Company on
such amount at 6.50%, plus the applicable LIBOR margin, not to exceed 2.75%.
11
VDI MULTIMEDIA
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to Second Amended and Restated Credit Agreement
and Waiver dated April 5, 2001 among the Company, the Lenders
party to the Credit Agreement and Union Bank of California, N.A.
as administrative agent for such Lenders. (1)
10.2 Form of indemnity agreement.
(1) Filed with the Securities and Exchange Commission on April 11,
2001 as an exhibit to the Company's Form 10-K and incorporated
herein by reference.
(b) Reports On Form 8-K
None.
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 15, 2001 BY:/s/ Alan Steel
------------------------------
Alan Steel
Executive Vice President, Finance
and Administration (duly authorized officer
and principal financial officer)