<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 1996
REGISTRATION NO. 333-4047
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VDI MEDIA
(Exact name of Registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
CALIFORNIA 7814 95-4272619
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
6920 SUNSET BOULEVARD
HOLLYWOOD, CALIFORNIA 90028
(213) 957-5500
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
--------------------------
R. LUKE STEFANKO
6920 SUNSET BOULEVARD
HOLLYWOOD, CALIFORNIA 90028
(213) 957-5500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
BARRY L. DASTIN, Esq. MARC WEINGARTEN, Esq.
Kaye, Scholer, Fierman, Hays & Schulte Roth & Zabel LLP
Handler, LLP
1999 Avenue of the Stars, Suite 1600 900 Third Avenue
Los Angeles, California 90067 New York, New York 10022
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE DATE THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
registration statement for the same offering. / / _____________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AMOUNT TO PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common stock, no par value........ 3,220,000 $12.00 $38,640,000 $11,709.09(3)
</TABLE>
(1) Includes 420,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of determining the registration fee.
(3) Previously paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
<PAGE>
SUBJECT TO COMPLETION--DATED DECEMBER 31, 1996
PROSPECTUS
- --------------------------------------------------------------------------------
2,800,000 Shares
[LOGO]
Common Stock
- ----------------------------------------------------------------------
Of the 2,800,000 shares of common stock, no par value (the "Common Stock")
offered hereby, 2,600,000 shares are being sold by VDI Media ("VDI" or the
"Company") and 200,000 shares are being sold by a selling shareholder of the
Company (the "Selling Shareholder"). The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholder. See "Principal and
Selling Shareholders."
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock of the Company. It is currently anticipated that the initial public
offering price will be between $10.00 and $12.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
The Company intends to make application to The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") for quotation of the Common Stock thereon
under the proposed symbol "VDIM."
SEE "RISK FACTORS" ON PAGES 7 TO 11 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discount and Proceeds to Selling
Public Commissions (1) Company (2) Shareholder
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
- --------------------------------------------------------------------------------------------
Total (3)............... $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $800,000.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 420,000 additional shares of the Common Stock on
the same terms and conditions as set forth above. If all such additional
shares are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be $ , the
total Proceeds to Company will be $ and the total Proceeds to Selling
Shareholder will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Shareholder and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about , 1997.
PRUDENTIAL SECURITIES INCORPORATED OPPENHEIMER & CO., INC.
, 1997
<PAGE>
[ARTWORK]
The inside front cover of the Prospectus sets forth a Company overview table
which groups VDI Media's customers as movie studios, advertising agencies and
commercial producers. The table further divides VDI Media's video tape
Duplication/Value-Added Services into Physical and Electronic Distribution, with
accompanying representative photographs.
[ARTWORK]
The inside back cover of the Prospectus has three photographs of the
Company's facilities captioned "Duplication Room," "Archive Vault," and
"Ancillary Services," respectively.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
THE COMPANY
VDI Media ("VDI" or the "Company") provides broadcast quality video
duplication, distribution and related value-added services including
distribution of national television spot advertising, trailers and electronic
press kits. The primary users of videotape duplication and distribution services
are advertising agencies and motion picture companies which generally outsource
such services. The Company serviced over 1,200 customers in the nine months
ended September 30, 1996, including the Columbia/Tri Star Motion Picture
Companies, Metro-Goldwyn-Mayer Film Group, Fox Filmed Entertainment, MCA Motion
Picture Group, The Walt Disney Motion Picture Group, Paramount Pictures
Corporation and Warner Bros. Services provided to this group of clients
constituted approximately 50.5% of the Company's revenues for the nine months
ended September 30, 1996. The Company has realized significant growth in
revenues, operating income and net income over the past five years, with
compound annual growth rates of 29.5%, 47.7% and 45.7%, respectively.
The Company's services include (i) the physical and electronic delivery of
broadcast quality advertising, including spots, trailers, electronic press kits
and infomercials, and syndicated television programming to more than 945
television stations, cable companies and other end-users nationwide and (ii) a
broad range of video services including the duplication of video in all formats,
element storage, standards conversion, closed captioning and transcription
services, and video encoding for air play verification purposes. The value-added
services provided by the Company further strengthen customer relationships and
create opportunities for increased duplication and distribution business.
The primary method of distribution by the Company, and by others in the
industry, continues to be the physical delivery of videotape to end-users. In
1994, to enhance its competitive position, the Company created Broadcast One, a
national distribution network which employs fiber optic and satellite
technologies in combination with physical distribution methods to deliver
broadcast quality material throughout the United States. The Company's use of
fiber optic and satellite technologies provides rapid and reliable electronic
transmission of video spots and other content with a high level of quality,
accountability and flexibility to both advertisers and broadcasters. Through the
Company's state-of-the-art distribution hub in Tulsa, Oklahoma (the "Tulsa
Control Center"), Broadcast One has enabled the Company to expand its presence
in the national advertising market, allowing for greater diversification of its
customer base. The Company currently derives a small percentage of its revenue
from electronic deliveries and anticipates that this percentage will increase as
such technologies become more widely accepted. The Company intends to add new
methods of distribution as technologies become both standardized and
cost-effective.
The Company operates broadcast tape duplication facilities at its two
California locations and at the Tulsa Control Center, which the Company believes
together currently distribute on average 3,600 videotapes a day. By capitalizing
on Broadcast One's ability through fiber optic and satellite technologies to
link instantaneously the Company's facilities in Los Angeles with its other
facilities and by leveraging the Tulsa Control Center's geographic proximity to
the center of the country, the Company is able to utilize the optimal delivery
method to extend its deadline for same or next-day delivery of time-sensitive
material. As the Company develops or acquires facilities in new markets, the
Broadcast One network will enable it to maximize the usage of its network-wide
duplication capacity by instantaneously transmitting video content to facilities
with available capacity. The Company's Broadcast One network and California
facilities are designed to serve cost-effectively the time-sensitive
distribution needs of the Company's clients. Management believes that the
Company's success is based on its strong customer relationships which are
maintained through the reliability, quality and cost-effectiveness of its
services, and its extended deadline for processing customer orders.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
The broadcast video duplication industry is service-oriented, highly
fragmented and primarily comprised of numerous small companies with regional
customer bases. The Company has targeted a number of these companies, certain of
which VDI currently outsources duplication and production work, as potential
acquisitions. To the extent any such companies are acquired, the Company intends
to integrate their operations into its "hub and spoke" distribution network
controlled through the Tulsa Control Center. The Company will seek to increase
revenues and realize margin gains from such acquisitions through the (i) greater
utilization of its existing high volume duplication and distribution facilities,
(ii) addition of value-added services which the Company currently does not
provide, (iii) capture of a larger percentage of its existing customers'
duplication and distribution business, (iv) addition of new customers, (v)
elimination of redundant management and administrative functions and (vi)
elimination of sub-contracted duplication and production work in markets in
which it does not yet have such capabilities.
The Company recently implemented this acquisition strategy by entering into
a definitive agreement to acquire substantially all of the assets and assume
certain liabilities (the "Woodholly Acquisition") of WOODHOLLY PRODUCTIONS
("Woodholly"). Woodholly provides videotape duplication and distribution, video
content storage and ancillary services to major motion picture studios,
advertising agencies and independent production companies for both domestic and
international use. VDI believes the acquisition of Woodholly will allow it to
gain valuable customer relationships, offer a more complete range of services to
its customers and give VDI the opportunity to capture a larger portion of its
current customers' video duplication and distribution business. The purchase
price, which is subject to adjustment and offset, consists of $4.0 million in
promissory notes and up to $4.0 million in earn-out payments for a total
purchase price of up to $8.0 million. The Company intends to repay the $4.0
million in promissory notes from the net proceeds of this Offering. See "Use of
Proceeds" and "Business--Woodholly Acquisition."
The Company's strategy is to increase its market share within the video
duplication and distribution industry by (i) further penetrating the marketplace
by providing a broad array of high quality, reliable value-added services, (ii)
acquiring companies with strong customer relationships in businesses
complementary to the Company's operations, (iii) continuing to develop
value-added services such as audio encryption, electronic order entry and order
status and air play verification and (iv) increasing the timeliness and
efficiency of its operations by exploiting new technologies as they become both
standardized and cost-effective.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company............ 2,600,000 shares
Common Stock Offered by the Selling
Shareholder................................... 200,000 shares
Common Stock to be Outstanding after the
Offering...................................... 9,260,000 shares (1)
Use of Proceeds by the Company................. To repay indebtedness, including
acquisition indebtedness, to pay an S Corp
distribution to the Company's current
shareholders and for general corporate
purposes, including the acquisition of
businesses complementary to the Company's
operations and capital expenditures. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol......... VDIM
</TABLE>
- ------------------------
(1) Excludes 900,000 shares of Common Stock reserved for issuance in respect of
options to be issued under the Company's 1996 Stock Incentive Plan (the
"1996 Plan"). Upon consummation of this Offering, the Company intends to
grant options to purchase an aggregate of 300,000 shares of Common Stock
under the 1996 Plan, each at an exercise price per share equal to the
initial public offering price per share of Common Stock. See
"Capitalization" and "Management -- 1996 Stock Incentive Plan."
4
<PAGE>
SUMMARY SELECTED FINANCIAL AND OTHER DATA
The summary selected financial and other data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus. The historical statement of operations
data set forth below with respect to the years ended December 31, 1993, 1994 and
1995 and the nine months ended September 30, 1995 and 1996 and the historical
balance sheet data as of September 30, 1996 are derived from the Company's
audited Financial Statements and the Notes thereto included elsewhere in this
Prospectus. The statement of operations data with respect to the years ended
December 31, 1991 and 1992 have been derived from the Company's unaudited
financial statements, which, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
statement of the results for the unaudited periods.
The summary pro forma as adjusted information set forth below reflects (i)
the distribution by the Company to its shareholders of previously taxed and
undistributed earnings calculated as of September 30, 1996, which amount is
expected to increase based upon taxable earnings for the period from October 1,
1996 to the closing date of this Offering, (ii) the recording by the Company of
additional deferred taxes as if the Company were treated as a C Corporation at
September 30, 1996, (iii) the Woodholly Acquisition and (iv) the sale by the
Company of 2,600,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $11.00 per share and the application of the estimated
net proceeds therefrom. See "Use of Proceeds." This information should be read
in conjunction with the Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. This information should also be read in
conjunction with the Company's and Woodholly's audited financial statements and
"Certain Pro Forma Combined Financial Statements" set forth elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ --------------------
HISTORICAL PRO FORMA HISTORICAL
----------------------------------------------------- AS ADJUSTED --------------------
1991 1992 1993 1994 (1) 1995 1995 1995 1996
--------- --------- --------- --------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues..................... $ 6,597 $ 11,546 $ 17,044 $ 14,468 $ 18,538 $ 25,661 $ 13,208 $ 18,182
Cost of goods sold........... 3,297 7,710 10,595 10,042 11,256 15,776 7,924 11,080
--------- --------- --------- --------- --------- ----------- --------- ---------
Gross profit................. 3,300 3,836 6,449 4,426 7,282 9,885 5,284 7,102
Selling, general and
administrative expense...... 2,858 3,498 4,290 3,545 5,181 6,689 3,761 4,204
Costs related to establishing
a new facility.............. -- -- -- 981 -- -- -- --
Dispute settlement........... -- -- -- 458 -- -- -- --
--------- --------- --------- --------- --------- ----------- --------- ---------
Operating income (loss)...... 442 338 2,159 (558) 2,101 3,196 1,523 2,898
Interest expense, net........ 38 170 241 271 333 679 251 223
Provision for income taxes... 17 -- 29 -- 26 1,033 19 45
--------- --------- --------- --------- --------- ----------- --------- ---------
Net income (loss)............ $ 387 $ 168 $ 1,889 $ (829) $ 1,742 $ 1,484 $ 1,253 $ 2,630
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
PRO FORMA STATEMENT OF
OPERATIONS DATA (2)
Pro forma provision (benefit)
for income taxes.............. $ 162 $ 67 $ 767 $ (332) $ 707 $ 509 $ 1,070
Pro forma net income (loss).... 242 101 1,151 (497) 1,061 763 1,605
Pro forma net income per
share......................... 0.16 0.24
Pro forma weighted average
common shares outstanding..... 6,695 6,695
Supplemental pro forma net
income per share (3).......... 0.18 0.25
Supplemental weighted average
common shares outstanding..... 7,053 7,053
OTHER DATA
EBITDA (4)................... $ 728 $ 1,059 $ 3,152 $ 2,209 $ 3,680 $ 5,819 $ 2,692 $ 4,120
Capital expenditures......... 765 1,672 1,379 2,071 1,137 2,905 722 1,043
<CAPTION>
PRO FORMA
AS ADJUSTED
1996
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA
Revenues..................... $ 23,738
Cost of goods sold........... 14,994
-----------
Gross profit................. 8,744
Selling, general and
administrative expense...... 5,415
Costs related to establishing
a new facility.............. --
Dispute settlement........... --
-----------
Operating income (loss)...... 3,329
Interest expense, net........ 463
Provision for income taxes... 1,146
-----------
Net income (loss)............ $ 1,720
-----------
-----------
PRO FORMA STATEMENT OF
OPERATIONS DATA (2)
Pro forma provision (benefit)
for income taxes..............
Pro forma net income (loss)....
Pro forma net income per
share.........................
Pro forma weighted average
common shares outstanding.....
Supplemental pro forma net
income per share (3)..........
Supplemental weighted average
common shares outstanding.....
OTHER DATA
EBITDA (4)................... $ 5,458
Capital expenditures......... 1,770
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996
------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............................................................... $ 273 $ 15,822
Working capital......................................................................... 1,229 18,616
Property and equipment, net............................................................. 3,820 7,082
Total assets............................................................................ 11,555 33,791
Borrowings under revolving credit agreement............................................. 1,114 22
Long-term debt, net of current portion.................................................. 1,354 1,390
Shareholders' equity.................................................................... 4,385 26,813
</TABLE>
- ------------------------
(1) The 1994 results of operations reflect (i) the disposition of the Company's
telecine (film-to-videotape transfer) business during the first quarter of
1994, (ii) one-time start-up costs of $1.0 million related to establishing
the Tulsa Control Center, which costs were in addition to capital
expenditures of $0.9 million and (iii) one-time costs of $0.5 million in
connection with a settlement of a dispute. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Prior to this Offering, the Company had been exempt from payment of federal
income taxes and had paid certain state income taxes at a reduced rate as a
result of its S Corporation election. Pro forma statement of operations data
reflect the income tax expense that would have been recorded had the Company
not been exempt from paying taxes under the S Corporation election. As a
result of terminating the Company's S Corporation status prior to completion
of this Offering, the Company will be required to record a one-time,
non-cash charge against historical earnings for additional deferred taxes
based upon the increase in the effective tax rate from the Company's S
Corporation status (1.5%) to C Corporation status (40%). This charge will
occur in the year ending December 31, 1996. If this charge were recorded at
September 30, 1996, the amount would have been approximately $0.4 million.
This amount may vary as of the closing date of this Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 2 and 3 of Notes to Financial Statements.
(3) Supplemental pro forma net income per share is calculated after giving
effect to the number of shares of Common Stock whose net proceeds are to be
used to retire certain outstanding debt upon completion of this Offering and
the elimination of interest expense related to such debt.
(4) EBITDA is defined herein as earnings before interest, taxes, depreciation,
amortization and non-recurring charges. EBITDA does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles ("GAAP"), is not to be considered as an alternative to
net income or any other GAAP measurements as a measure of operating
performance and is not necessarily indicative of cash available to fund all
cash needs. Management believes that EBITDA is a useful measure of cash flow
available to the Company to pay interest, repay debt, make acquisitions or
invest in new technologies.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS,
IN CONNECTION WITH AN INVESTMENT IN THE SHARES OF COMMON STOCK. THIS PROSPECTUS
MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"). DISCUSSIONS CONTAINING SUCH
FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH UNDER "RISK
FACTORS", "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS", AS WELL AS IN THE PROSPECTUS GENERALLY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES AND
THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING, WITHOUT
LIMITATION, THE RISK FACTORS SET FORTH BELOW AND THE MATTERS SET FORTH IN THIS
PROSPECTUS GENERALLY.
COMPETITION. The broadcast videotape duplication and distribution industry
is a highly competitive, service-oriented business. The Company has no long-term
or exclusive service agreements with any of its customers. Business is acquired
on a purchase order basis and is based primarily on customer satisfaction with
reliability, timeliness, quality and price.
The Company competes with a variety of duplication and distribution firms,
some of which have a national presence, certain post-production companies and,
to a lesser extent, the in-house duplication and distribution operations of
major motion picture studios and ad 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. There is no
assurance that the Company will be able to compete effectively against these
competitors merely on the basis of reliability, timeliness, quality and price or
otherwise.
The Company may 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. The Company believes
that an increasingly competitive environment could lead to a loss of market
share or price reductions, which could have a material adverse effect on the
Company's financial condition and prospects. See "Business -- Competition."
CUSTOMER AND INDUSTRY CONCENTRATION. Although the Company serviced over
1,200 customers during the nine months ended September 30, 1996, seven motion
picture studios and advertising agencies accounted for approximately 50.5%,
including the Columbia/Tri Star Motion Picture Companies, which accounted for
approximately 10.5%, of the Company's revenues in such period. If one or more of
these companies were to stop using the Company's services, the business of the
Company could be adversely affected. Because the Company derives substantially
all of its revenues from clients in the entertainment and advertising
industries, the financial condition and prospects of the Company could also be
adversely affected by an adverse change in conditions which impact those
industries.
DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS. Although the Company intends to
utilize the most efficient and cost-effective technologies available for the
delivery of video content, including digital satellite and Internet
transmission, as they develop, there is no assurance that the Company will be
able to adapt to such standards in a timely fashion, or at all. The Company
believes that its future growth will depend, in part, on its ability to add
these services and to add customers in a timely and cost-effective manner. There
is no assurance that the Company will be successful in offering such services to
existing customers or in obtaining new customers for these services. The Company
intends to rely on third party 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 have a material
adverse effect on the Company's financial condition and prospects. The Company's
ability to successfully expand its electronic video delivery services also
depends on its ability to maintain satellite delivery capability and to obtain
cost-effective point to multi-point fiber optic distribution.
7
<PAGE>
EXPANSION STRATEGY. The Company's growth strategy involves a continuing
commitment to both internal development and expansion through acquisitions.
Other than the Woodholly Acquisition, the Company currently has no agreement or
commitment to acquire any company or business. See "Business -- Woodholly
Acquisition." There is no assurance that Woodholly as a division of the Company
will attain the same earnings as it has historically or that the integration of
Woodholly's management and other personnel into the Company will be successful.
Finally, insofar as Woodholly's earnings have declined over the past three
years, there is no assurance that the Woodholly Acquisition will contribute
significant revenues or profits to the Company. There is no assurance that the
Woodholly Acquisition or any other acquisition will be successful. There is no
assurance that the Company will be able to continue to grow, or to identify and
reach mutually agreeable terms to purchase acquisition targets, or that the
Company will be able to profitably manage additional businesses or successfully
integrate such additional businesses into the Company without substantial costs,
delays or other problems. Acquisitions may involve a number of special risks
including: adverse effects on the Company's reported operating results;
diversion of management's attention; unanticipated problems or legal
liabilities; and amortization of acquired intangible assets. In addition, the
Company may require additional funding to finance its future acquisitions. There
is no assurance that the Company will be able to secure acquisition financing on
acceptable terms or at all. The Company may use working capital (including the
proceeds of this Offering), or equity, or raise financing through other equity
offerings or the incurrence of debt, in connection with the funding of any
acquisition. Some or all of these risks could have a material adverse effect on
the Company's financial condition 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. There is no assurance that the Company
will be able to effect any such transactions or that any such transactions, if
consummated, will prove to be profitable. See "Business -- Strategy."
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. In
addition, the operations of Woodholly are dependent on the efforts and abilities
of Yvonne Parker, Rodger Parker, Jim Watt and Kim Watt, the current partners of
Woodholly. The loss or interruption of the services of key members of management
could have a material adverse effect on the Company's financial condition and
prospects if a suitable replacement is not promptly obtained. The Company has
obtained a $5.0 million "key man" life insurance policy on Mr. Stefanko.
Although the Company has employment agreements with Mr. Stefanko and certain of
the Company's other key executives (including the Woodholly partners), there is
no assurance that such executives will remain with the Company during or after
the term of their employment agreement. In addition, the Company's success
depends to a significant degree upon the continuing contributions of, and on its
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 of such persons, as well as the failure to recruit
additional key personnel in a timely manner, could have a material adverse
effect on the Company's financial condition and prospects. There is no assurance
that the Company will be able to continue to attract and retain qualified
management and other personnel for the development of its business. See
"Management."
ABILITY TO MAINTAIN AND IMPROVE SERVICE QUALITY. The Company's business is
dependent on its ability to meet the current and future demands of its
customers, which include reliability, timeliness, quality and price. Any failure
to do so, whether or not caused by factors within the control of the Company,
could result in losses to such clients. Although the Company disclaims 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 a material adverse effect on the Company's financial
condition and prospects. Although the Company maintains insurance against
business interruption, there is no assurance that such insurance will 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 the Company's business. In addition,
the Company's ability to make deliveries within the time periods requested by
8
<PAGE>
customers depends on a number of factors, some of which are outside of its
control, including equipment failure, work stoppages by package delivery vendors
or interruption in services by fiber optic or satellite service providers.
MANAGEMENT OF GROWTH. Since its inception, the Company has experienced
rapid growth that has resulted in new and increased responsibilities for
management personnel and has placed and continues to place increased demands on
the Company's management, operational and financial systems and resources. To
accommodate this growth, compete effectively and manage future growth, the
Company will be required to continue to implement and improve its operational,
financial and management information systems, and to expand, train, motivate and
manage its work force. There is no assurance that the Company's personnel,
systems, procedures and controls will be adequate to support the Company's
future operations. Any failure to do so could have a material adverse effect on
the Company's financial condition and prospects. See "Management."
The geographic expansion of the Company's customer base has resulted in
increased demand for the Company's services in certain regions where it
currently does not have duplication and distribution facilities. To meet this
demand, the Company has had to subcontract an increasing amount of tape
duplication and production work. This subcontracting has led to increased
expenses and a decrease in gross margins from 40% for the nine month period
ended September 30, 1995 compared to 39% in the comparable period in 1996. As
Broadcast One grows, there could be a further decrease in the Company's gross
margins to the extent the Company is required to increase the amount of work it
subcontracts. The Company intends to acquire complementary businesses in these
markets in order to decrease the amount of work it subcontracts. However, the
Company has not entered into any formal negotiations or definitive agreements
for this purpose. Furthermore, there is no assurance that the Company will be
able to effect such transactions or that any such transactions will prove to be
profitable. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
BROAD DISCRETION AS TO USE OF PROCEEDS. The Company intends to use the net
proceeds from the sale of the Common Stock offered hereby to repay approximately
$7.2 million of indebtedness (including acquisition indebtedness), to pay an S
Corp distribution to the Company's current shareholders and for general
corporate purposes, including the acquisition of businesses complementary to the
Company's operations and for capital expenditures. Other than with respect to
the Woodholly Acquisition, the Company does not have any agreement or commitment
to acquire any particular business nor has it identified particular capital
expenditure projects. The Company's management will therefore have broad
discretion with respect to the use of a portion of the proceeds of this Offering
and there is no assurance that the Company will be able to consummate
acquisitions or identify and arrange projects that meet the Company's
requirements. See "-- Expansion Strategy" and "Use of Proceeds."
FLUCTUATING RESULTS; SEASONALITY. The Company's operating results have in
the past and may in the future vary depending on factors such as the volume of
advertising in response to seasonal buying patterns, the timing of new product
and service introductions, increased competition, general economic factors, and
other factors. As a result, the Company believes that period to period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indication of future performance. For example,
the Company's 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. In any period, the Company's
revenues and delivery costs are subject to variation based on changes in the
volume and mix of deliveries 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
CONTROL BY PRINCIPAL SHAREHOLDER; POTENTIAL ISSUANCE OF PREFERRED STOCK;
ANTI-TAKEOVER PROVISIONS. Upon completion of this Offering, R. Luke Stefanko
will beneficially own approximately 60.4% of the
9
<PAGE>
outstanding Common Stock. By virtue of this stock ownership, Mr. Stefanko will
be able to determine the outcome of substantially all 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. See
"Principal and Selling Shareholders" and "Description of Capital Stock." In
addition, the Company's Board of Directors has the authority to issue up to
5,000,000 shares of 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 the
Company has 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. See
"Management," "Principal and Selling Shareholders" and "Description of Capital
Stock."
NO PRIOR MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE; PRICE
VOLATILITY. Prior to this Offering there has been no public market for the
Common Stock and there can be no assurance that an active trading market will
develop or be sustained after this Offering. The initial public offering price
of the Common Stock offered hereby will be determined through negotiations among
the Company, the Selling Shareholder and the representatives of the Underwriters
(the "Representatives") and may not be indicative of future market prices. There
can be no assurance that the market price of the Common Stock will not decline
below the initial public offering price. The trading price of the Company's
Common Stock may be subject to wide fluctuations in response to a number of
factors, including variations in operating results, changes in earnings
estimates by equity research analysts, announcements of extraordinary events
such as litigation or acquisitions, announcements of technological innovations
or new products or services by the Company or its competitors, as well as
general trends in the Company's industry and general economic, political and
market conditions. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have a total of 9,260,000 shares of Common Stock outstanding
(9,680,000 if the Underwriters' over-allotment option is exercised in full). The
2,800,000 shares of Common Stock offered hereby (3,220,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or registration under the Securities Act, by
persons other than "affiliates" (as defined under the Securities Act) of the
Company. The remaining 6,460,000 shares of Common Stock are "restricted
securities," as that term is defined under Rule 144 ("Rule 144") promulgated
under the Securities Act, and must be sold pursuant to Rule 144 or another
exemption from registration under the Securities Act. Without consideration of
the lock-up provisions referred to below, all of the restricted shares will
become eligible for sale 90 days after the Offering, subject to compliance with
volume and other limitations imposed by Rule 144.
The Company, its directors and officers, its stockholders (including the
Selling Shareholder), who hold in the aggregate 6,460,000 restricted shares of
Common Stock (6,460,000 restricted shares if the Underwriters' over-allotment
option is exercised in full) and holders of options to purchase 300,000 shares
of Common Stock, have agreed, subject to certain exceptions, that they will not,
directly or indirectly, publicly offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise dispose or transfer (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other disposition or transfer) of any shares of Common
Stock or other capital stock of the Company or any securities convertible into,
or exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, for a period of 180 days from the
date of this Prospectus. See "Shares Eligible for Future Sale" and
"Underwriting."
10
<PAGE>
The Company intends to file a registration statement under the Securities
Act covering approximately 900,000 shares of Common Stock reserved for issuance
under the 1996 Plan. That registration statement is expected to be filed within
90 days after the date hereof and will automatically become effective upon
filing. Upon consummation of this Offering, the Company intends to grant options
to purchase an aggregate of 300,000 shares of Common Stock under the 1996 Plan,
each at an exercise price per share equal to the initial public offering price.
See "Management -- 1996 Stock Incentive Plan."
IMMEDIATE AND SUBSTANTIAL DILUTION. Assuming an initial public offering
price of $11.00 per share, investors participating in this offering will incur
immediate and substantial dilution in pro forma net tangible book value per
share of Common Stock of approximately $8.37. See "Dilution."
11
<PAGE>
THE COMPANY
The Company provides broadcast quality video duplication, distribution and
related value-added services including distribution of national television spot
advertising, trailers and electronic press kits. The primary users of videotape
duplication and distribution services are advertising agencies and motion
picture companies who generally outsource such services. The Company serviced
over 1,200 customers in the nine months ended September 30, 1996, including the
Columbia/Tri Star Motion Picture Companies, Metro-Goldwyn-Mayer Film Group, Fox
Filmed Entertainment, MCA Motion Picture Group, The Walt Disney Motion Picture
Group, Paramount Pictures Corporation and Warner Bros. Services provided to this
group of clients constituted approximately 50.5% of the Company's revenues for
the nine months ended September 30, 1996. The Company has realized significant
growth in revenues, operating income and net income over the past five years,
with compound annual growth rates of 29.5%, 47.7% and 45.7%, respectively.
The Company's services include (i) the physical and electronic delivery of
broadcast quality advertising, including spots, trailers, electronic press kits
and infomercials, and syndicated television programming to more than 945
television stations, cable companies and other end-users nationwide and (ii) a
broad range of video services including the duplication of video in all formats,
element storage, standards conversion, closed captioning and transcription
services, and video encoding for air play verification purposes. The value-added
services provided by the Company further strengthen customer relationships and
create opportunities for increased duplication and distribution business.
The primary method of distribution by the Company, and by others in the
industry, continues to be the physical delivery of videotape to end-users. In
1994, to enhance its competitive position, the Company created Broadcast One, a
national distribution network which employs fiber optic and satellite
technologies in combination with physical distribution methods to deliver
broadcast quality material throughout the United States. The Company's use of
fiber optic and satellite technologies provides rapid and reliable electronic
transmission of video spots and other content with a high level of quality,
accountability and flexibility to both advertisers and broadcasters. Through the
Tulsa Control Center, Broadcast One has enabled the Company to expand its
presence in the national advertising market, allowing for greater
diversification of its customer base. The Company currently derives a small
percentage of its revenues from electronic deliveries and anticipates that this
percentage will increase as such technologies become more widely accepted. The
Company intends to add new methods of distribution as technologies become both
standardized and cost-effective.
The Company derives revenues primarily from major and independent motion
picture and television studios, cable television program suppliers, advertising
agencies and, on a more limited basis, national television networks, local
television stations, television program syndicators, corporations and
educational institutions. The Company receives orders with specific routing and
timing instructions provided by the customer. These orders are then entered into
the Company's computer system and scheduled for electronic or physical delivery
via the Company's Hollywood facility or the Tulsa Control Center. When a video
spot is received, the Company's quality control personnel inspect the video to
ensure that it meets customer specifications and then initiate the sequence to
distribute the video to the designated television stations either
electronically, over fiber optic lines and/or satellite, or via the most
suitable package carrier. The Company believes that fiber optic delivery is
superior to satellite delivery due to its transmission quality. To the extent
such technologies become standardized and cost-effective, the Company plans to
add digital satellite and Internet transmission capabilities in the future.
The Company was incorporated in California in 1990. The Company's executive
offices are located at 6920 Sunset Boulevard, Hollywood, California 90028, and
its telephone number is (213) 957-5500.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be $25.8 million (assuming an initial public
offering price of $11.00 per share), after deduction of the underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company will not receive any proceeds from the sale of Common Stock
by the Selling Shareholder. Approximately $7.2 million of the estimated net
proceeds will be used to repay certain indebtedness including (i) $4.0 million
incurred to finance the Woodholly Acquisition, (ii) $2.0 million of debt
outstanding under the Company's term loan incurred primarily to acquire capital
equipment, (iii) $1.1 million outstanding under the Company's revolving credit
agreement and (iv) $0.1 million of outstanding capital lease obligations. The
promissory notes executed to finance the Woodholly Acquisition bear interest at
8.0% per annum and is payable in February 1997. The amounts outstanding under
the term loan bear interest at the London Interbank Offering Rate plus 2.1% and
are payable in monthly installments through July 2000. Approximately $3.0
million of the estimated net proceeds will be distributed (the "S Corp
distribution") to the Company's current shareholders in respect of previously
taxed and undistributed earnings of the Company as of September 30, 1996. This
amount is expected to increase based upon the Company's taxable earnings for the
period from October 1, 1996 to the closing date of this Offering. Purchasers of
Common Stock in this Offering will not participate in the S Corp distribution.
The Company intends to use the remainder of the net proceeds for general
corporate purposes, including the potential acquisition of businesses
complementary to the Company's operations, and for capital expenditures. Other
than with respect to the Woodholly Acquisition, the Company currently has no
commitments or agreements to acquire any particular business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." Pending such uses, the Company intends to
invest the net proceeds in short-term investment grade, interest-bearing
securities and certificates of deposit.
DIVIDEND POLICY
The Company currently intends to retain any earnings for use in its business
and does not anticipate declaring or paying cash dividends on its Common Stock
in the foreseeable future other than the S Corp distribution described above.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (i) on an actual basis and (ii) on a pro forma basis
reflecting (a) the distribution by the Company to its shareholders of previously
taxed and undistributed earnings calculated as of September 30, 1996, which
amount is expected to increase based upon taxable earnings for the period from
October 1, 1996 to the closing date of this Offering (b) the recording by the
Company of additional deferred taxes as if the Company were treated as a C
Corporation at September 30, 1996, (c) the Woodholly Acquisition and (d) the
sale by the Company of 2,600,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $11.00 per share and the application of
the estimated net proceeds therefrom. See "Use of Proceeds." This information
should be read in conjunction with the Financial Statements and related Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1996
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit agreement....................................................... $ 1,114 $ 22
Long-term debt, including current portion........................................ 2,159 2,157
Shareholders' equity (1):
Preferred Stock, no par value, 5,000,000 shares
authorized, no shares issued.................................................. -- --
Common Stock, no par value, 50,000,000 shares
authorized, 6,660,000 shares issued and outstanding and 9,260,000 shares
issued as adjusted............................................................ 1,015 26,813
Retained earnings.............................................................. 3,370 --
--------- -----------
Total shareholders' equity..................................................... 4,385 26,813
--------- -----------
Total capitalization......................................................... $ 7,658 $ 28,992
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes 900,000 shares of Common Stock reserved for issuance under the 1996
Plan. Upon consummation of this Offering the Company intends to grant
options to purchase an aggregate of 300,000 shares of Common Stock under the
1996 Plan, each at an exercise price per share equal to the initial public
offering price of the Common Stock. See "Management -- 1996 Stock Incentive
Plan."
14
<PAGE>
DILUTION
Purchasers of Common Stock offered hereby will experience an immediate and
substantial dilution in the net tangible book value of the Common Stock from the
initial public offering price. The Company's pro forma net tangible book value
(deficit) as of September 30, 1996 prior to this Offering was $(1.4) million or
approximately $(0.21) per share of Common Stock. Pro forma net tangible book
value per share represents the amount of the Company's tangible assets less
total liabilities, divided by the number of shares of Common Stock outstanding,
after giving effect to (i) the distribution by the Company to its shareholders
of previously taxed and undistributed earnings calculated as of September 30,
1996, which amount is expected to increase based upon taxable earnings for the
period from October 1, 1996 to the closing date of this Offering, (ii) the
Woodholly Acquisition and (iii) the recording by the Company of additional
deferred taxes as if the Company were treated as a C Corporation at September
30, 1996. After giving effect to the sale by the Company of 2,600,000 of the
shares of Common Stock offered hereby at an assumed initial public offering
price of $11.00 per share (after deducting underwriting discounts and
commissions and the estimated offering expenses to be paid by the Company and
giving effect to the shareholder transaction described above), the pro forma net
tangible book value of the Company as of September 30, 1996 would have been
$24.4 million or approximately $2.63 per share. This represents an immediate
increase of $2.84 per share to the existing shareholders and an immediate
dilution of $8.37 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price................................ $ 11.00
Pro forma net tangible deficit at September 30, 1996............... $ (.21)
Increase per share attributable to new investors................... 2.84
---------
Pro forma net tangible book value per share after the Offering....... 2.63
---------
Dilution per share to new investors.................................. $ 8.37
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1996 (after giving effect to the distribution to the Company's current
shareholders prior to the Offering of previously taxed and undistributed
earnings, calculated as of September 30, 1996), the difference between the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and by the investors purchasing shares of Common Stock offered
hereby.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
----------------------- --------------------------
NUMBER PERCENT AMOUNT PERCENT AVERAGE PRICE
---------- ----------- ------------- ----------- PER SHARE
-------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..................... 6,660,000 72% $ 1,015,000 3% $ 0.15
New investors............................. 2,600,000 28 28,600,000 97 11.00
---------- --- ------------- ---
Total................................. 9,260,000 100% $ 29,615,000 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
The foregoing computations exclude 900,000 shares of Common Stock reserved
for issuance under the 1996 Plan. Upon consummation of this Offering, the
Company intends to grant options to purchase an aggregate of 300,000 shares of
Common Stock under the 1996 Plan, each at an exercise price per share equal to
the initial public offering price. See "Management -- 1996 Stock Incentive
Plan."
15
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The selected financial and other data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus. The historical statement of operations
data set forth below with respect to the years ended December 31, 1993, 1994 and
1995 and the nine months ended September 30, 1995 and 1996, and the historical
balance sheet data as of December 31, 1994 and 1995, and September 30, 1996 are
derived from the Company's audited Financial Statements and the Notes thereto
included elsewhere in this Prospectus. The statement of operations data with
respect to the years ended December 31, 1991 and 1992, and the balance sheet
data as of December 31, 1991, 1992 and 1993 have been derived from the Company's
unaudited financial statements, which, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
statement of the results for the unaudited periods.
The summary pro forma as adjusted information set forth below reflects (i)
the distribution by the Company to its shareholders of previously taxed and
undistributed earnings calculated as of September 30, 1996, which amount is
expected to increase based upon taxable earnings for the period from October 1,
1996 to the closing date of this Offering, (ii) the recording by the Company of
additional deferred taxes as if the Company were treated as a C Corporation at
September 30, 1996, (iii) the Woodholly Acquisition and (iv) the sale by the
Company of 2,600,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $11.00 per share and the application of the estimated
net proceeds therefrom. See "Use of Proceeds." This information should be read
in conjunction with the Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. This information should also be read in
conjunction with the Company's and Woodholly's audited financial statements and
"Certain Pro Forma Combined Financial Statements" set forth elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ --------------------
HISTORICAL PRO FORMA HISTORICAL
----------------------------------------------------- AS ADJUSTED --------------------
1991 1992 1993 1994 (1) 1995 1995 1995 1996
--------- --------- --------- --------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues............................... $ 6,597 $ 11,546 $ 17,044 $ 14,468 $ 18,538 $ 25,661 $ 13,208 $ 18,182
Cost of goods sold..................... 3,297 7,710 10,595 10,042 11,256 15,776 7,924 11,080
--------- --------- --------- --------- --------- ----------- --------- ---------
Gross profit........................... 3,300 3,836 6,449 4,426 7,282 9,885 5,284 7,102
Selling, general and administrative
expense............................... 2,858 3,498 4,290 3,545 5,181 6,689 3,761 4,204
Costs related to establishing a new
facility.............................. -- -- -- 981 -- -- -- --
Dispute settlement..................... -- -- -- 458 -- -- -- --
--------- --------- --------- --------- --------- ----------- --------- ---------
Operating income (loss)................ 442 338 2,159 (558) 2,101 3,196 1,523 2,898
Interest expense, net.................. 38 170 241 271 333 679 251 223
Provision for income tax............... 17 -- 29 -- 26 1,033 19 45
--------- --------- --------- --------- --------- ----------- --------- ---------
Net income (loss)...................... $ 387 $ 168 $ 1,889 $ (829) $ 1,742 $ 1,484 $ 1,253 $ 2,630
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
PRO FORMA STATEMENT OF OPERATIONS DATA(2)
Pro forma provision (benefit) for
income taxes.......................... $ 162 $ 67 $ 767 $ (332) $ 707 $ 509 $ 1,070
Pro forma net income (loss)............ 242 101 1,151 (497) 1,061 763 1,605
Pro forma net income per share......... 0.16 0.24
Pro forma weighted average common
shares outstanding.................... 6,695 6,695
Supplemental pro forma net income per
share (3)............................. 0.18 0.25
Supplemental weighted average common
shares outstanding.................... 7,053 7,053
OTHER DATA
EBITDA (4)............................. $ 728 $ 1,059 $ 3,152 $ 2,209 $ 3,680 $ 5,819 $ 2,692 $ 4,120
Capital expenditures................... 765 1,672 1,379 2,071 1,137 2,905 722 1,043
<CAPTION>
PRO FORMA
AS ADJUSTED
1996
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA
Revenues............................... $ 23,738
Cost of goods sold..................... 14,994
-----------
Gross profit........................... 8,744
Selling, general and administrative
expense............................... 5,415
Costs related to establishing a new
facility.............................. --
Dispute settlement..................... --
-----------
Operating income (loss)................ 3,329
Interest expense, net.................. 463
Provision for income tax............... 1,146
-----------
Net income (loss)...................... $ 1,720
-----------
-----------
PRO FORMA STATEMENT OF OPERATIONS DATA(2)
Pro forma provision (benefit) for
income taxes..........................
Pro forma net income (loss)............
Pro forma net income per share.........
Pro forma weighted average common
shares outstanding....................
Supplemental pro forma net income per
share (3).............................
Supplemental weighted average common
shares outstanding....................
OTHER DATA
EBITDA (4)............................. $ 5,458
Capital expenditures................... 1,770
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------------------------------------------- AS OF
SEPTEMBER 30, 1996
HISTORICAL ------------------------
----------------------------------------------------- PRO FORMA
1991 1992 1993 1994 1995 HISTORICAL AS ADJUSTED
--------- --------- --------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................. $ 35 $ 44 $ 33 $ 60 $ 415 $ 273 $ 15,822
Working capital (deficit)................. 122 (646) 392 (1,329) 1,079 1,229 18,616
Property and equipment, net............... 1,544 3,271 3,670 4,402 3,992 3,820 7,082
Total assets.............................. 3,179 5,806 7,253 8,189 9,340 11,555 33,791
Borrowings under revolving credit
agreement................................ 350 775 525 1,644 100 1,114 22
Long-term debt, net of current portion.... 652 1,552 1,388 1,457 2,150 1,354 1,390
Shareholders' equity...................... 1,085 1,253 2,803 1,706 3,019 4,385 26,813
</TABLE>
- ------------------------
(1) The 1994 results of operations reflect (i) the disposition of the Company's
telecine (film-to-videotape transfer) business during the first quarter of
1994, (ii) one-time start-up costs of $1.0 million related to establishing
the Tulsa Control Center, which costs were in addition to capital
expenditures of $0.9 million and (iii) one-time costs of $0.5 million in
connection with a settlement of a dispute. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Prior to this Offering, the Company had been exempt from payment of federal
income taxes and had paid certain state income taxes at a reduced rate as a
result of its S Corporation election. Pro forma statement of operations data
reflect the income tax expense that would have been recorded had the Company
not been exempt from paying taxes under the S Corporation election. As a
result of terminating the Company's S Corporation status prior to completion
of this Offering, the Company will be required to record a one-time,
non-cash charge against historical earnings for additional deferred taxes
based upon the increase in the effective tax rate from the Company's S
Corporation status (1.5%) to C Corporation status (40%). This charge will
occur in the year ending December 31, 1996. If this charge were recorded at
September 30, 1996, the amount would have been approximately $0.4 million.
This amount may vary as of the closing date of this Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 2 and 3 of Notes to Financial Statements.
(3) Supplemental pro forma net income per share is calculated after giving
effect to the number of shares of Common Stock whose net proceeds are to be
used to retire certain outstanding debt upon completion of this Offering and
the elimination of interest expense related to such debt.
(4) EBITDA is defined herein as earnings before interest, taxes, depreciation,
amortization and non-recurring charges. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, and is not to
be considered as an alternative to net income or any other GAAP measurements
as a measure of operating performance and is not necessarily indicative of
cash available to fund all cash needs. Management believes that EBITDA is a
useful measure of cash flow available to the Company to pay interest, repay
debt, make acquisitions or invest in new technologies.
17
<PAGE>
CERTAIN PRO FORMA COMBINED FINANCIAL STATEMENTS
On December 28, 1996, the Company entered into an agreement to acquire
substantially all of the assets and assume certain liabilities of Woodholly. The
following unaudited pro forma financial statements give effect to the Woodholly
Acquisition. The unaudited pro forma combined balance sheet presents the
combined financial position of the Company and Woodholly at September 30, 1996
as if the Company had acquired Woodholly on September 30, 1996. Such pro forma
information is based upon the historical balance sheet data of the Company and
Woodholly on that date. The unaudited pro forma combined statements of
operations for the nine months ended September 30, 1996 and the year ended
December 31, 1995 give effect to the Woodholly Acquisition as if the Company had
acquired Woodholly on January 1, 1995.
The unaudited pro forma combined statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transaction been in effect as of the beginning of the periods presented
and should not be construed as representative of future operations.
The unaudited pro forma combined financial statements reflect the Company's
allocation of the initial consideration of $4.0 million to the assets and
liabilities of Woodholly based upon the Company's current estimates of the fair
values of the assets acquired and liabilities assumed. The excess of the initial
consideration over the fair value of the assets acquired and liabilities assumed
of approximately $1.8 million was allocated to goodwill. The final allocation of
the purchase price may vary as additional information is obtained, and
accordingly, the ultimate allocation may differ from that used in the unaudited
pro forma combined financial statements.
The historical financial statements of the Company and Woodholly are
included elsewhere in this Prospectus and the unaudited pro forma combined
financial statements presented herein should be should be read in conjunction
with those financial statements and related notes.
18
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
The following unaudited pro forma combined balance sheet presents the
combined financial position of the Company and Woodholly as of September 30,
1996. Such unaudited pro forma information is based on the combined historical
balance sheets of the Company and Woodholly as of September 30, 1996, giving
effect to (i) the Woodholly Acquisition accounted for under the purchase method
of accounting and (ii) the pro forma adjustments described in the accompanying
Notes to Pro Forma Combined Financial Statements.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------------------------------
HISTORICAL PRO FORMA
------------------------ --------------------------
VDI WOODHOLLY ADJUSTMENTS COMBINED
----------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 273 -- $ (273)(A) --
Accounts receivable, net....................... 5,200 $ 1,665 (87)(B) $ 6,778
Other receivables.............................. 1,421 -- -- 1,421
Inventories.................................... 124 -- -- 124
Prepaid expenses............................... 27 32 -- 59
----------- ----------- ------------- -----------
Total current assets....................... 7,045 1,697 (360) 8,382
Property and equipment, net...................... 3,820 3,262 -- 7,082
Intangible and other assets...................... 690 -- 1,815(A) 2,505
----------- ----------- ------------- -----------
Total assets............................... $ 11,555 $ 4,959 $ 1,455 $ 17,969
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft................................. -- $ 166 -- $ 166
Notes payable.................................. $ 777 -- -- 777
Accounts payable............................... 2,670 429 $ (87)(B) 3,012
Other accrued liabilities...................... 1,227 -- -- 1,227
Current portion of capitalized lease
obligations................................... 28 767 -- 795
Revolving credit agreement..................... 1,114 22 -- 1,136
Deferred income taxes.......................... -- -- 394(C) 394
----------- ----------- ------------- -----------
Total current liabilities.................. 5,816 1,384 (307) 7,507
----------- ----------- ------------- -----------
Capitalized lease obligations, less current
portion......................................... 83 1,390 -- 1,473
----------- ----------- -----------
Long-term portion of notes payable............... 1,271 -- -- 1,271
----------- -----------
Shareholders' equity:
Partners' capital.............................. -- 2,185 (2,185)(A) --
Common stock................................... 1,015 -- 3,727(A) 4,742
Retained earnings.............................. 3,370 -- (394)(C) 2,976
----------- ----------- ------------- -----------
Total shareholders' equity................. 4,385 2,185 1,148 7,718
----------- ----------- ------------- -----------
Total liabilities and shareholders'
equity.................................... $ 11,555 $ 4,959 $ 1,455 $ 17,969
----------- ----------- ------------- -----------
----------- ----------- ------------- -----------
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
19
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma combined statement of operations presents
the combined results of operations of the Company and Woodholly for the year
ended December 31, 1995 by combining the historical statements of operations of
the Company and Woodholly for the period, giving effect to (i) the Woodholly
Acquisition as of January 1, 1995, accounted for under the purchase method of
accounting and (ii) the pro forma adjustments described in the accompanying
Notes to Pro Forma Combined Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
HISTORICAL PRO FORMA
------------------------ --------------------------
VDI WOODHOLLY ADJUSTMENTS COMBINED
----------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.......................................... $ 18,538 $ 7,411 $ (288)(D) $ 25,661
Cost of goods sold................................ 11,256 4,808 (288)(D) 15,776
----------- ----------- ----- -----------
Gross profit.................................... 7,282 2,603 -- 9,885
Selling, general and administrative expenses...... 5,181 1,375 133(E) 6,689
----------- ----------- ----- -----------
Income from operations............................ 2,101 1,228 (133) 3,196
Interest expense, net............................. 375 355 -- 730
Other income...................................... 42 9 -- 51
----------- ----------- ----- -----------
Income before income taxes........................ 1,768 882 (133) 2,517
Pro forma provision for income taxes.............. 707 -- 300(F) 1,007
----------- ----------- ----- -----------
Pro forma net income.............................. $ 1,061 $ 882 $ (433) $ 1,510
----------- ----------- ----- -----------
----------- ----------- ----- -----------
Pro forma earnings per share...................... $ 0.16 $ 0.21
----------- -----------
----------- -----------
Pro forma weighted average number of shares....... 6,692 376(G) 7,068
----------- ----- -----------
----------- ----- -----------
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
20
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The following unaudited pro forma combined statements of operations presents
the combined results of operations of the Company and Woodholly for nine months
ended September 30, 1996 by combining the historical statements of operations of
the Company and Woodholly for the period, giving effect to (i) the Woodholly
Acquisition as of January 1, 1995, accounted for under the purchase method of
accounting and (ii) the pro forma adjustments described in the accompanying
Notes to Pro Forma Combined Financial Statements.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------
HISTORICAL PRO FORMA
------------------------ -------------------------
VDI WOODHOLLY ADJUSTMENTS COMBINED
----------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues....................................... $ 18,182 $ 5,829 $ (273)(D) $ 23,738
Cost of goods sold............................. 11,080 4,187 (273)(D) 14,994
----------- ----------- ------------ -----------
Gross profit............................. 7,102 1,642 -- 8,744
Selling, general and administrative expenses... 4,204 1,144 67(E) 5,415
----------- ----------- ------------ -----------
Income from operations......................... 2,898 498 (67) 3,329
Interest expense, net.......................... 236 261 -- 497
Other income, net.............................. 13 21 -- 34
----------- ----------- ------------ -----------
Income before income taxes..................... 2,675 258 (67) 2,866
Pro forma provision for income taxes........... 1,070 -- 76(F) 1,146
----------- ----------- ------------ -----------
Pro forma net income........................... $ 1,605 $ 258 $ (143) $ 1,720
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Pro forma earnings per share................... $ 0.24 $ 0.24
----------- -----------
----------- -----------
Pro forma weighted average number of shares.... 6,692 376(G) 7,068
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See accompanying Notes to Pro Forma Combined Financial Statements.
21
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements have been prepared
assuming that the interim financing obtained in connection with the Woodholly
Acquisition was repaid using proceeds from this Offering. Accordingly, no pro
forma adjustments were made for interest expense.
The following significant adjustments were made to the historical balance
sheets of the Company and Woodholly at September 30, 1996 or historical
statements of operations of the Company and Woodholly, as applicable, to arrive
at the pro forma combined balance sheet and pro forma combined statements of
operations:
(A) Pro forma adjustments have been made to (i) record goodwill of $1.8
million equal to the excess of the initial consideration over the fair
market value assigned to specific assets less liabilities assumed, (ii)
eliminate the equity of Woodholly and (iii) reflect the use of available
cash and net proceeds from this Offering to repay the interim financing
obtained in connection with the Woodholly Acquisition.
(B) Pro forma adjustments have been made to accounts receivable and
accounts payable to eliminate outstanding amounts due between the Company
and Woodholly.
(C) A pro forma adjustment has been made to reflect an increase in the
Company's deferred tax liability of $0.4 million calculated in accordance
with SFAS No. 109 as if termination of the Company's S Corporation status
occurred on September 30, 1996.
(D) Pro forma adjustments have been made to revenues and cost of goods
sold to reverse amounts related to sales between the Company and Woodholly.
(E) Pro forma adjustments have been made to (i) reflect savings from
reduction in workforce based upon specific identification of employees to be
terminated following the acquisition, (ii) reflect reductions in selling,
general and administrative expenses related to life insurance premiums and
other expenses paid by Woodholly on behalf of the former owners, (iii)
recognize compensation expense to be paid to the former owners of Woodholly
under the terms of the purchase agreement and (iv) recognize amortization
expense for the goodwill related to the Woodholly Acquisition, as if the
acquisition had occurred at January 1, 1995. Goodwill is amortized over the
estimated useful life of 20 years. The amounts of these adjustments are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER
1995 30, 1996
------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
(i) salaries eliminated.............................................. $ (171) $ (149)
(ii) expenses paid on behalf of owners................................ (27) (32)
(iii) compensation expense............................................. 240 180
(iv) amortization of goodwill......................................... 91 68
----- -----
Total additional expense......................................... $ 133 $ 67
----- -----
----- -----
</TABLE>
(F) A pro forma adjustment has been made to adjust the pro forma
provision for income taxes to a 40% rate on pro forma income before income
taxes.
(G) Pro forma adjustments have been made to the pro forma weighted
average common shares and pro forma earnings per share to reflect the
issuance of 375,706 shares of Common Stock in this Offering in order to
raise the net proceeds necessary to repay the financing obtained for the
Woodholly Acquisition, as if such shares had been outstanding during each
period presented.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company generates revenues principally from duplication, distribution
and ancillary services. Duplication services are comprised of the physical
duplication of video materials from a source videotape or audiotape "Master" to
a target tape "Clone". Distribution services include the physical or electronic
distribution of video and audio materials to a customer-designated location
utilizing one or more of the Company's delivery methods. Distribution services
typically consist of deliveries of national television spot commercials and
electronic press kits and associated trafficking instructions to designated
stations and supplemental deliveries to non-broadcast destinations. Ancillary
services include video and audio editing services, closed captioning services,
standards conversion and other services related to the modifications of video
and audio content materials prior to distribution.
The Company recognizes revenues for services based on the shipment and/or
delivery of customer materials. Rates charged to customers vary based upon the
time-sensitivity of delivery, number of locations and the time at which video or
audio materials are made available to the Company to begin the duplication and
distribution process. Shorter delivery schedules and shorter lead times
typically command higher prices.
Duplication services generally are priced from $11.00 to $13.50 depending on
the format, length of source material and quantity of tapes ordered. Customers
often combine multiple commercials, or spots, on the same duplication order
("tied spots"). Tied spots are priced at a lower level reflecting the lower
variable cost of adding additional content to single duplication orders. The
Company charges $3.00 to $5.00 for each additional tied spot, depending on the
number of additional spots. Distribution services rates range from $6.00 to
$8.00 for single spots delivered the following morning and from $4.00 to $6.00
for two day delivery. The price is determined by the number of packages and
delivery locations. Production services are typically billed at an hourly rate
for use of the Company's production facilities or on a firm price for specific
services.
The Company's historical business has been concentrated in the provision of
duplication and other services to the major motion picture studios primarily
located in the Los Angeles area. The Company believes that the significant
operating leverage provided by the Broadcast One network and the Tulsa Control
Center could provide the Company the opportunity to grow its revenues at a rate
faster than the growth in its operating costs due to (i) lower per unit delivery
expenses as multiple orders destined for particular television stations are
consolidated and (ii) the reduction of per unit electronic delivery costs as the
use of such services increases. The Company believes that the Tulsa Control
Center can support a substantially higher volume of production and distribution
with low incremental cost increases. The Company has not historically accounted
for revenues derived from its duplication, delivery and ancilliary services
separately.
The Company's cost of goods sold includes salary expenses for personnel in
the areas of customer service, operations and shipping, as well as shipping
expenses, videotape materials, equipment maintenance and packaging supplies.
Additionally, a significant portion of fixed costs, including a portion of
depreciation and occupancy costs, is allocated to cost of goods sold, which
creates operating leverage at higher sales levels.
Selling, general and administrative expenses include the salary, travel
expenses and insurance of all sales and administrative personnel. The Company
believes that its current selling and administrative infrastructure will sustain
higher sales levels.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the amount, and percentage relationship to
revenues, of certain items included within the Company's Statement of Operations
for the years ended December 31, 1993, 1994 and 1995 and for the nine month
periods ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------------------------------------- ----------------------
1993 1994 1995 1995
---------------------- ---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 17,044 100.0% $ 14,468 100.0% $ 18,538 100.0% $ 13,208 100.0%
Cost of goods sold.............. 10,595 62.2 10,042 69.4 11,256 60.7 7,924 60.0
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Gross profit.................... 6,449 37.8 4,426 30.6 7,282 39.3 5,284 40.0
Selling, general and
administrative expense......... 4,290 25.2 3,545 24.5 5,181 27.9 3,761 28.5
Costs related to establishing a
new facility................... -- -- 981 6.8 -- -- -- --
Dispute settlement.............. -- -- 458 3.2 -- -- -- --
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Operating income (loss)......... 2,159 12.6 (558) (3.9) 2,101 11.4 1,523 11.5
Interest expense................ 241 1.4 271 1.9 333 1.8 251 1.9
Provision for income taxes...... 29 0.1 -- -- 26 0.1 19 .1
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Net income (loss)............... $ 1,889 11.1% $ (829) (5.8%) $ 1,742 9.5% $ 1,253 9.5%
--------- ----------- --------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- ----------- --------- -----------
<CAPTION>
1996
----------------------
PERCENT
OF
AMOUNT REVENUES
--------- -----------
<S> <C> <C>
Revenues........................ $ 18,182 100.0%
Cost of goods sold.............. 11,080 60.9
--------- -----------
Gross profit.................... 7,102 39.1
Selling, general and
administrative expense......... 4,204 23.2
Costs related to establishing a
new facility................... -- --
Dispute settlement.............. -- --
--------- -----------
Operating income (loss)......... 2,898 15.9
Interest expense................ 223 1.2
Provision for income taxes...... 45 .2
--------- -----------
Net income (loss)............... $ 2,630 14.5%
--------- -----------
--------- -----------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
REVENUES. Revenues increased by $5.0 million or 37.7% to $18.2 million for
the nine month period ended September 30, 1996 compared to $13.2 million for the
nine month period ended September 30, 1995 due to the increased use of the
Company's services by existing customers and the addition of new customers. This
increase in use of the Company's services and addition of new customers was due
to substantially increased marketing of the Company's national distribution
network through the Tulsa Control Center and the Company's sales office in New
York. In addition, the nine month period ended September 30, 1996 includes
incremental revenues derived from the Company's West Los Angeles duplication and
distribution facility which opened late in fiscal 1995.
GROSS PROFIT. Gross profit increased $1.8 million or 34.4% to $7.1 million
for the nine month period ended September 30, 1996 compared to $5.3 million for
the nine month period ended September 30, 1995. As a percentage of revenues,
gross profit decreased from 40.0% to 39.1%. The decrease in gross profit as a
percentage of revenues was attributable to increased shipping costs and to the
increased use of subcontractors in certain regional markets in which the Company
did not have facilities. This increase was partially offset by a decrease in
direct materials and by a decrease in fixed costs which are allocated to cost of
goods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $0.4 million or 11.8% to $4.2 million for the
nine month period ended September 30, 1996 compared to $3.8 million for the nine
month period ended September 30, 1995. As a percentage of revenues, selling,
general and administrative expense decreased to 23.2% for the nine month period
ended September 30, 1996 compared to 28.5% for the nine month period ended
September 30, 1995. This decrease in selling, general and administrative expense
as a percentage of revenues was primarily due to the spreading of fixed overhead
expenses, in particular the fixed portion of administrative wages, over a higher
revenue base in the nine month period ended September 30, 1996 than in the
comparable period in 1995. Management believes that future increases in revenues
may lead to further decreases in selling, general and administrative expenses as
a percentage of revenues.
OPERATING INCOME. Operating income increased $1.4 million or 90.3% to $2.9
million for the nine month period ended September 30, 1996 compared to $1.5
million for the nine month period ended September 30, 1995.
INCOME TAXES. Prior to the completion of this Offering, the Company
operated as an S Corporation. As such, the Company was not responsible for
federal income taxes and provided for state income taxes at reduced rates. As a
result of the change in tax status prior to the completion of this Offering, the
Company
24
<PAGE>
will, in future periods, provide for all income taxes at higher statutory rates.
These factors are estimated to result in an effective tax rate for periods
subsequent to this Offering of approximately 40%. Consequently, a 40% effective
rate has been used in the pro forma tax provision for all periods presented.
However, for the period in which this Offering closes, the Company will record
an additional one-time non-cash charge for additional deferred taxes based upon
an increase in the effective tax rate for the Company's S Corporation status
(1.5%) to C Corporation status (40%) applied to the temporary differences
between the financial reporting and tax bases of the Company's assets and
liabilities. If this charge were recorded at September 30, 1996, the amount
would have been approximately $0.4 million. This amount may vary as of the
closing date of this Offering.
NET INCOME. Net income for the nine month period ended September 30, 1996
increased $1.3 million or 110% to $2.6 million compared to $1.3 million for the
nine month period ended September 30, 1995. Such increase is primarily
attributable to the previously described factors.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased by $4.0 million or 28.1% to $18.5 million for
the year ended December 31, 1995 compared to $14.5 million for the year ended
December 31, 1994. The primary reason for this increase was the increased use of
the Company's services by existing customers and the addition of new customers.
New customers were obtained as a result of marketing the Company's national
distribution network through the Tulsa Control Center and the Company's revenues
office in New York, both of which opened in September 1994.
GROSS PROFIT. Gross profit increased $2.9 million or 64.5% to $7.3 million
for the year ended December 31, 1995 compared to $4.4 million for the year ended
December 31, 1994. As a percentage of revenues, gross profit increased to 39.3%
in 1995 from 30.6% in 1994. The increase in 1995 gross profit resulted from
several factors, including (i) the spreading of fixed costs over a higher
revenue base, which cost base decreased from 13% of revenues to 11% of revenues,
(ii) decreased videotape costs through the tying of multiple spots onto a single
videotape and negotiation of consignment inventory agreements with major vendors
which reduced the usage of high cost "fill-in" vendors thereby reducing direct
materials usage from 29% of revenues in 1994 to 23% of revenues in 1995 and
(iii) decreased direct labor expenses due to more efficient production and
higher volume reduced production wages from 19% of revenues in 1994 to 15% of
revenue in 1995. These factors which positively impacted 1995 gross profit were
partially offset by increased expenses associated with subcontracting
duplication services in certain regions which increased from 1.9% of revenues in
1994 to 4.5% of revenues in 1995 and increased shipping expenses due to the
Company's establishment of national distribution capabilities which increased
from 1.5% of revenues in 1994 to 3.9% of revenues in 1995. Furthermore, 1994
gross profit was adversely impacted by the Company's decision to discontinue its
telecine operation and the absorption of costs related to the operations of the
Tulsa Control Center which was opened in September 1994, before the generation
of associated Broadcast One revenue. The Company's decision to discontinue its
telecine operation was due to the excessively capital-intensive nature of that
business, as well as the Company's desire to focus on VDI's core duplication and
distribution business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $1.7 million or 46.1% to $5.2 million for the
year ended December 31, 1995 compared to $3.5 million for the year ended
December 31, 1994. As a percentage of revenues, selling, general and
administrative expense increased to 27.9% in 1995 from 24.5% in 1994. This
increase in selling, general and administrative expense as a percentage of
revenues was primarily due to increased expenses relating to the Company's
national distribution network, including the Tulsa Control Center and the
Company's sales office in New York, both of which opened in the third quarter of
1994. These expenses were partially offset by the spreading of certain fixed
expenses, in particular rent and depreciation, over a larger revenues base.
OTHER. During 1994, the Company established the Tulsa Control Center.
Pre-operating costs incurred in connection with the establishment of this
facility, aggregating $1.0 million, have been charged to results of operations.
Such costs were comprised primarily of payroll and other expenses necessary to
prepare this facility for operations and to ensure that the quality of
videotapes produced at the facility conformed to the
25
<PAGE>
Company's standards. In addition, during 1994, management settled a dispute with
an equipment lessor regarding ownership of certain video duplication equipment.
The settlement amount of $0.5 million was recognized as a period cost in the
Company's results of operations.
OPERATING INCOME. Operating income was $2.1 million for the year ended
December 31, 1995 compared to an operating loss of $0.6 million for the year
ended December 31, 1994, primarily as a result of increased production volume
and greater operating leverage as fixed costs related to the Tulsa Control
Center were spread over greater revenues. In addition, the prior year included
certain expenses relating to the establishment of the Broadcast One facility and
the settlement of a dispute with an equipment lessor.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1995
increased $0.1 million or 22.9% to $0.3 million as a result of increased bank
borrowings in connection with the establishment of the Tulsa Control Center.
NET INCOME (LOSS). Net income increased $2.6 million to $1.7 million for
the year ended December 31, 1995 from a loss of $0.8 million for the year ended
December 31, 1994. This increase is primarily attributable to the revenues and
gross profit increases described above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUES. Revenues decreased $2.5 million or 15.1% to $14.5 million for the
year ended December 31, 1994 compared to $17.0 million for the year ended
December 31, 1993. This decrease was primarily attributable to the Company's
disposition of its telecine operation in March 1994 due to the excessively
capital-intensive nature of that business and its reliance upon creative
personnel. The Company exchanged its telecine production equipment for
previously leased video duplication equipment. This decrease was offset in part
by growth in the Company's core duplication and distribution business.
GROSS PROFIT. Gross profit decreased $2.0 million or 31.4% to $4.4 million
for the year ended December 31, 1994 compared to $6.4 million for the year ended
December 31, 1993. As a percentage of revenues, gross profit decreased to 30.6%
in 1994 from 37.8% in 1993. The decrease in gross profit as a percentage of
revenues was primarily attributable to increased video tape costs as a
percentage of revenues, which resulted from the disposition of the Company's
higher margin telecine operations in the first quarter of 1994, as well as the
spreading of certain fixed expenses, in particular rent and depreciation, over a
smaller revenue base. This decrease was partially offset by decreased wage and
equipment rental expenses which also resulted from the disposition of the
Company's telecine operation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased $0.8 million or 17.4% to $3.5 million for the
year ended December 31, 1994 compared to $4.3 million for the year ended
December 31, 1993. As a percentage of revenues, selling, general and
administrative expense decreased to 24.5% in 1994 from 25.2% in 1993. This
decrease in selling, general and administrative expense as a percentage of
revenues was primarily due to the elimination of certain expenses related to the
disposition of the Company's telecine business.
OTHER. During 1994, the Company established the Tulsa Control Center.
Pre-operating costs incurred in connection with the establishment of this
facility, aggregating $1.0 million, have been charged to results of operations.
Such costs principally comprised payroll and other costs necessary to prepare
this facility for operations and to ensure that the quality of videotapes
produced at the facility conformed to the Company's standards. In addition,
during 1994, management settled a dispute with an equipment lessor regarding
ownership of certain video duplication equipment. The settlement amount of $0.5
million was recognized as a period cost in the Company's results of operations.
OPERATING INCOME (LOSS). Operating income decreased $2.7 million to a loss
from operations of $0.8 million for the year ended December 31, 1994 compared to
income from operations of $1.9 million for the year ended December 31, 1993. The
loss is principally attributable to costs incurred in connection with the
establishment of the Tulsa Control Center, the settlement of a dispute with an
equipment lessor and management's disposition of the Company's telecine
operation in 1994.
NET INCOME (LOSS). The Company incurred a loss of $0.8 million for the year
ended December 31, 1994 compared to net income of $1.9 million for the year
ended December 31, 1993. The loss is primarily
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attributable to the revenue decrease related to disposition of the telecine
operation, the incurrence of pre-operating costs of $1.0 million related to the
establishment of the Tulsa Control Center and the settlement of a dispute in the
amount of $0.5 million.
SEASONALITY
The Company's quarterly revenues may demonstrate seasonality, due to the
impact of the Company's customer concentration in the motion picture and
advertising industries. In the years ended 1994 and 1995, revenues from motion
picture customers represented 51% and 48% of revenues, respectively, and
revenues from advertising agencies represented 11% and 13% of revenues,
respectively.
The following table sets forth selected data by quarter included in the
Company's Statements of Operations (unaudited).
<TABLE>
<CAPTION>
QUARTERS ENDED IN 1994 QUARTERS ENDED IN 1995
-------------------------------------------------- ------------------------
MARCH 31 JUNE 30 SEP. 30 DEC. 31 MARCH 31 JUNE 30
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
QUARTERLY STATEMENTS OF OPERATIONS DATA
Revenues....................................... $ 3,417 $ 3,820 $ 3,468 $ 3,763 $ 4,233 $ 4,412
Cost of goods sold............................. 2,602 2,572 2,195 2,673 2,595 2,576
----------- ----------- ----------- ----------- ----------- -----------
Gross profit................................... 815 1,248 1,273 1,090 1,638 1,836
Selling, general and administrative expense.... 914 992 796 843 1,126 1,353
Costs related to establishing a new facility... -- -- 490 491 -- --
Dispute settlement............................. -- -- -- 458 -- --
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)........................ (99) 256 (13) (702) 512 483
Interest expense, net.......................... 56 67 47 101 96 88
Provision for income taxes..................... -- -- -- -- 10 5
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).............................. $ (155) $ 189 $ (60) $ (803) $ 406 $ 390
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
QUARTERS ENDED IN 1996
-------------------------------------
SEP. 30 DEC. 31 MARCH 31 JUNE 30 SEP. 30
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
QUARTERLY STATEMENTS OF OPERATIONS DATA
Revenues....................................... $ 4,614 $ 5,279 $ 5,837 $ 5,471 $ 6,874
Cost of goods sold............................. 2,785 3,300 3,647 3,446 3,987
----------- ----------- ----------- ----------- -----------
Gross profit................................... 1,829 1,979 2,190 2,025 2,887
Selling, general and administrative expense.... 1,289 1,413 1,418 1,306 1,480
Costs related to establishing a new facility... -- -- -- -- --
Dispute settlement............................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Operating income (loss)........................ 540 566 772 719 1,407
Interest expense, net.......................... 67 82 65 80 78
Provision for income taxes..................... 5 6 12 11 22
----------- ----------- ----------- ----------- -----------
Net income (loss).............................. $ 468 $ 478 $ 695 $ 628 $ 1,307
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through
internally generated cash flow, borrowings under lending agreements with
financial institutions and, to a lesser degree, borrowings from related parties.
At September 30, 1996, the Company's cash and cash equivalents aggregated $0.3
million.
The Company's operating activities provided cash of $2.0 million in 1993,
$1.1 million in 1994, $2.6 million in 1995 and $3.9 million in the nine months
ended September 30, 1996.
The Company's investing activities used cash of $1.4 million in 1993, $2.1
million in 1994, $1.1 million in 1995 and $1.0 million in the nine months ended
September 30, 1996. Such activities represent addition of capital equipment
related to facilities expansion to accommodate increased customer demands for
the Company's services and the establishment of the Tulsa Control Center. Such
additions were financed through a combination of internally-generated funds,
bank borrowing and capital leasing arrangements with equipment manufacturers and
leasing companies. The Company's business is equipment intensive, requiring
periodic expenditures of cash or the incurrence of additional debt to acquire
additional videotape duplication equipment in order to increase capacity or
replace existing equipment.
During the nine months ended September 30, 1996, the Company made $1.0
million of capital expenditures in tenant improvements to upgrade its archiving
facilities and increase storage capacity, as well as to build out and to
purchase equipment for its West Los Angeles facility. The Company expects to use
a portion of the net proceeds of this Offering to retire interest-bearing debt
and outstanding capital lease obligations, of which $3.2 million was outstanding
at September 30, 1996. The Company also expects to spend approximately $0.3
million on capital expenditures during the last quarter of 1996 to upgrade and
replace equipment, and for management information systems upgrades.
The Company's financing activities used cash of $0.6 million and $1.1
million in 1993 and 1995 and provided cash of $1.0 million in 1994. Financing
activities include distributions to the Company's shareholders, which
principally represented amounts for the payment of income tax obligations during
the period the Company was an S Corporation, and the borrowing and/or repayment
of borrowing for capital additions.
The Company believes that, subsequent to this Offering, its current banking
relationship will be enhanced through the availability of a larger working
capital line of credit. Management believes that cash generated from operations,
borrowings under its bank line of credit and the net proceeds to the Company of
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<PAGE>
this offering will fund necessary capital expenditures and provide adequate
working capital for at least the next 12 months. The terms of the revolving
credit agreement include covenants regarding the maintenance of various
financial ratios. The Company was in compliance with these covenants as of
September 30, 1996. The revolving credit agreement expires on June 30, 1997.
Management is currently negotiating with its bank to increase amounts available
under, and the term of, its credit facility.
In connection with the purchase of a portion of the Common Stock owned by
one of the Company's founders in April 1996, the Company borrowed an additional
$1.2 million under its revolving credit agreement and loaned such amount to the
Company's chief executive officer. This loan will be repaid prior to
consummation of this Offering from distributions to the Company's current
shareholders of previously taxed but undistributed earnings. See "Certain
Transactions."
The Company has no history of significant uncollectible accounts and
management does not believe that this will change materially in the future.
As a result of termination of its S Corporation status prior to completion
of this Offering, the Company will be required to record deferred taxes which
relate primarily to timing differences between financial and income tax
reporting of depreciation and certain valuation allowances that were
attributable to periods it had elected to be treated as an S Corporation. This
one-time non-cash charge was recorded in the quarter ended September 30, 1996.
The amount of the Company's deferred taxes recorded was approximately $0.4
million. This amount may vary through the closing date of this Offering. See
Notes 2 and 3 of Notes to the Financial Statements.
IMPACT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", which will be effective for the Company beginning
January 1, 1997. SFAS 123 requires expanded disclosures on stock-based
compensation arrangements with employees and encourages, but does not require,
compensation cost to be measured based upon the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will apply APB Opinion No. 25 for
stock-based compensation awards to employees pursuant to the 1996 Plan and will
disclose the required pro forma effect on its net income and earnings per share.
INFLATION
The Company does not believe that inflation will have a significant impact
on its results of operations or financial condition.
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INDUSTRY OVERVIEW
BACKGROUND
The broadcast videotape duplication and distribution industry is a
service-oriented business in which images and sound are processed from film or
videotape onto a master videotape, and then duplicated for television broadcast
and distributed, either by physical or electronic delivery, to television
stations and cable companies, and other end-users. The industry is highly
fragmented and primarily comprised of numerous small companies with regional
customer bases. Success in the industry is based on strong customer
relationships which are maintained through reliability, quality,
cost-effectiveness and timeliness.
The processes used to create and deliver television advertising have evolved
in conjunction with technological developments in the television industry.
Initially, television commercials were delivered by mail to the network or
individual television stations across the country where the commercial was to
air. The use of videotape in the television industry has allowed commercials to
be duplicated more quickly and sent to multiple destinations in a timely
fashion. As overnight courier services developed, commercials could be delivered
more rapidly across the country. Finally, the creation of national networks,
such as the Company's Broadcast One network, has allowed for even more rapid
delivery for same or next-day airing of finished spots.
The primary users of videotape duplication and distribution services are
advertisers, including major motion picture companies, and their agencies.
Advertisers and their agencies constantly seek to increase the speed at which
advertisements are delivered to television stations and to improve the quality
of the commercial being broadcast. In addition, advertisers and agencies require
a method of rapid verification of whether and when a spot has been aired in
order to take advantage of increasingly sophisticated marketing techniques.
Advertisers seek to target ever smaller, more specific demographic groups by
advertising in select geographic markets and by producing many variations of
commercials oriented to different demographic audiences. As a consequence,
routing instructions specifying which stations are to receive particular
commercials, and the traffic instructions given to those stations specifying the
times and rotation of spot airings, have grown increasingly complex. To the
extent that spots can be released just before their scheduled broadcast,
advertising agencies have extra creative time to re-edit spots, and advertisers
gain extra time to refine the spots to respond to competitors' promotions and
shifting market demands. Due to the technological and capital requirements
associated with video duplication and distribution, advertisers and their
agencies have historically chosen to outsource such services to companies such
as VDI.
The fluctuation in the number of releases by major motion picture companies
creates erratic demand for the creation, editing and duplication of publicity
and promotional materials. As a result, the studios generally outsource such
services. The studios' demand for duplication and distribution services is
further enhanced by their practice of promoting releases in part by distributing
electronic press kits which are given to television stations free of charge.
While the television broadcast industry has adopted digital technology for
much of its production processes and certain of its in-station functions, the
predominant method for distributing spot advertisements to television stations
continues to be the physical delivery of analog video tapes. While the core
business of the Company continues to involve such physical distribution,
management believes that customers will migrate to electronic delivery
technologies as they become standardized and widely accepted. These
technologies, including fiber optic and satellite transmission, reduce the time
required for transportation, giving the creators of the content additional time
in which to refine the finished product. However, management believes that use
of these technologies is not wide-spread among end-users due in part to inertia
on the part of decision-makers at television stations to change their reception
systems and concern regarding additional associated costs, quality and
reliability.
The Company provides duplication services to motion picture studios,
advertising agencies and national advertisers. The bulk of the video materials
which are being duplicated and distributed are "spot" advertisements
(commercials) and electronic press kits (video publicity information which is
provided by clients free
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of charge to television and radio stations). Therefore, the services provided by
the Company are directly related to the advertising industry and in most cases
make up a small portion of the cost to advertisers of television and radio
advertising.
TELEVISION ADVERTISING
According to industry sources, approximately $34 billion was spent in the
United States in 1994 on television advertising. This amount includes the
production of commercials and purchase of air time for (i) advertisements to air
on national broadcast and cable network and syndicated programming, where
commercials are distributed in conjunction with the origination of the
programming, (ii) local broadcast and cable television advertising, consisting
of locally produced and aired commercials, and (iii) national spot advertising,
which is produced and distributed nationally to air during commercial time slots
controlled by individual television stations and cable systems.
The market for television advertising has grown by approximately 200% since
1980, with significant expansion in all segments. The following table shows the
expenditures in the television advertising market by segment for certain years
between 1980 and 1994:
TELEVISION ADVERTISING BY SEGMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
TOTAL TV NATIONAL NATIONAL LOCAL NATIONAL CABLE
YEAR ADVERTISING NETWORK SPOT MARKET SYNDICATION ADVERTISING
- ------------------------ ----------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1980.................... $ 11,469 $ 5,130 $ 3,269 $ 2,967 $ 50 $ 53
1985.................... 21,022 8,060 6,004 5,714 520 724
1990.................... 28,405 9,383 7,788 7,856 1,589 1,789
1991.................... 27,402 8,933 7,110 7,565 1,853 1,941
1992.................... 29,409 10,249 7,551 8,079 1,370 2,160
1993.................... 30,584 10,209 7,800 8,435 1,576 2,564
1994.................... 34,167 10,942 8,993 9,464 1,734 3,034
</TABLE>
- ------------------------
Source: Television Bureau of Advertising
MOTION PICTURE STUDIO ADVERTISING
According to industry sources, major and independent motion picture
companies spent in excess of $1.9 billion in 1995 on advertising. This amount
includes the purchase of air time for commercial broadcast and cable television,
as well as traditional forms of print advertisements (E.G., newspaper
advertisements and magazines), but does not include other forms of promotion
such as the production of trailers or electronic press kits. Between 1985 and
1995, advertising spending by major and independent motion picture companies
increased by over 650%.
INFOMERCIAL PROGRAMMING
According to industry sources, infomercial advertising expenditures totalled
$806 million, and infomercial sales totaled $1.6 billion in 1995, up from $663
million and $1.3 billion, respectively, in 1994. An infomercial is an
advertisement, usually approximately one half-hour in length and often produced
in an entertainment format, that is paid for by the advertiser based on the time
of day the infomercial is aired, market size and in certain cases past results
from airing on a particular television station or cable television network.
Regardless of the presentation format, the viewers are provided information that
can be used to make informed purchasing decisions from their homes.
SYNDICATED PROGRAMMING
Syndicated television and radio programming is either produced by the
syndicator or purchased from an independent producer and licensed to a
television or radio station for broadcast. Syndicated programming may be
distributed to network-owned or affiliated stations, independent stations and,
in some cases, cable system operators. Most syndicated programming is owned and
licensed by major syndication companies and is delivered using third-party
distribution facilities such as those provided by the Company's network.
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<PAGE>
RADIO ADVERTISING
According to industry sources, approximately $10.5 billion was spent in the
United States in 1994 on radio advertising. This figure includes the production
of commercials and the purchase of air time for (i) advertisements distributed
in conjunction with syndicated and broadcast network programming, (ii) locally
produced and aired commercials and (iii) national spot advertising. The
predominant methods for distributing national spot advertising to radio stations
are via physical delivery of analog audio tapes and electronic transmission via
telephone lines. The remainder of radio spots are produced in-house at radio
stations, delivered by local delivery services or picked up by station employees
from the originating studio. While the Company historically has not generated a
significant portion of its revenues from distribution of audio tape for radio,
it intends to explore this market as opportunities arise.
The following table shows the expenditures in the radio advertising market
by segment for certain years between 1985 and 1994:
RADIO ADVERTISING BY SEGMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
TOTAL RADIO NATIONAL NATIONAL LOCAL
YEAR ADVERTISING NETWORK SPOT MARKET
- ------------------------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1985.......................... $ 6,490 $ 365 $ 1,335 $ 4,790
1990.......................... 8,726 482 1,635 6,609
1991.......................... 8,476 490 1,575 6,411
1992.......................... 8,654 424 1,505 6,725
1993.......................... 9,457 458 1,657 7,342
1994.......................... 10,529 463 1,902 8,164
</TABLE>
- ------------------------
Source: Television Bureau of Advertising
31
<PAGE>
BUSINESS
VDI provides broadcast quality video duplication, distribution and related
value-added services including distribution of national television spot
advertising, trailers and electronic press kits. The primary users of videotape
duplication and distribution services are advertising agencies and motion
picture companies which generally outsource such services. The Company serviced
over 1,200 customers in the nine months ended September 30, 1996, including the
Columbia/Tri Star Motion Picture Companies, Metro-Goldwyn-Mayer Film Group, Fox
Filmed Entertainment, MCA Motion Picture Group, The Walt Disney Motion Picture
Group, Paramount Pictures Corporation and Warner Bros. Services provided to this
group of clients constituted approximately 50.5% of the Company's revenues for
the nine months ended September 30, 1996. The Company has realized significant
growth in revenues, operating income and net income over the past five years,
with compound annual growth rates of 29.5%, 47.7% and 45.7%, respectively.
The Company's services include (i) the physical and electronic delivery of
broadcast quality advertising, including spots, trailers, electronic press kits
and infomercials, and syndicated television programming to more than 945
television stations, cable companies and other end-users nationwide and (ii) a
broad range of video services including the duplication of video in all formats,
element storage, standards conversion, closed captioning and transcription
services, and video encoding for air play verification purposes. The value-added
services provided by the Company further strengthen customer relationships and
create opportunities for increased duplication and distribution business.
The primary method of distribution by the Company, and by others in the
industry, continues to be the physical delivery of videotape to end-users. In
1994, to enhance its competitive position, the Company created Broadcast One, a
national distribution network which employs fiber optic and satellite
technologies in combination with physical distribution methods to deliver
broadcast quality material throughout the United States. The Company's use of
fiber optic and satellite technologies provides rapid and reliable electronic
transmission of video spots and other content with a high level of quality,
accountability and flexibility to both advertisers and broadcasters. Through the
Tulsa Control Center, Broadcast One has enabled the Company to expand its
presence in the national advertising market, allowing for greater
diversification of its customer base. The Company currently derives a small
percentage of its revenues from electronic deliveries and anticipates that this
percentage will increase as such technologies become more widely accepted. The
Company intends to add new methods of distribution as technologies become both
standardized and cost-effective.
The Company derives revenue primarily from major and independent motion
picture and television studios, cable television program suppliers, advertising
agencies and, on a more limited basis, national television networks, local
television stations, television program syndicators, corporations and
educational institutions. The Company receives orders with specific routing and
timing instructions provided by the customer. These orders are then entered into
the Company's computer system and scheduled for electronic or physical delivery
via the Company's Hollywood facility or the Tulsa Control Center. When a video
spot is received, the Company's quality control personnel inspect the video to
ensure that it meets customer specifications and then initiate the sequence to
distribute the video to the designated television stations either
electronically, over fiber optic lines and/or satellite, or via the most
suitable package carrier. The Company believes that fiber optic delivery is
superior to satellite delivery due to its transmission quality. To the extent
such technologies become standardized and cost-effective, the Company plans to
add digital satellite and Internet transmission capabilities in the future.
STRATEGY
The Company's strategy is to increase its market share within the video
duplication and distribution industry by (i) further penetrating the marketplace
by providing a broad array of high quality, reliable value-added services, (ii)
acquiring companies with strong customer relationships in businesses
complementary to the Company's operations, (iii) continuing to develop
value-added services such as audio encryption, electronic order entry and order
status and air play verification and (iv) increasing the timeliness and
efficiency of its operations by exploiting new technologies as they become both
standardized and cost-effective.
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INCREASE MARKET PENETRATION. The Company intends to increase its market
penetration by continuing to emphasize its reliability, superior service,
extended deadlines, value-added services and customer focused approach. By
capitalizing on Broadcast One's capability to link instantaneously the
Company's facilities through fiber optic and satellite technology and by
leveraging the Tulsa Control Center's strategic location near the center of
the Country, the Company is able to utilize the optimal delivery method and
extend its deadline for next-day delivery of time-sensitive material. In
order to maintain the highest level of service, the Company has established
procedures to monitor quality, track delivery of video instructions to the
stations and verify receipt by each station. Additionally, the Company's
customer support staff is available 24 hours a day to respond to order
status and other inquiries, thus relieving the pressure on customers to
track the status of individual deliveries.
GROW THROUGH ACQUISITIONS. VDI intends to acquire existing content
delivery businesses with strong customer relationships that will complement
the Company's operations. The video duplication and distribution industry is
highly fragmented with many small competitors with regional customer bases.
Management believes that, as a result of consolidation within the
entertainment and advertising agency industries, its customers would prefer
a single company with a national presence to handle all of their media
delivery needs. The Company intends to expand its points of presence in
regional markets, underserviced markets and markets in which the Company
currently outsources work. Building the Company's client base through the
acquisition of companies in different regions or with complementary business
operations will become increasingly more important and create scale
economies, which will provide a competitive advantage over competitors with
regional customer bases. The Company intends to integrate these acquired
operations into its "hub and spoke" distribution network. The Company will
seek to increase revenues and realize margin gains from such acquisitions
through the (i) greater utilization of its existing high volume duplication
and distribution facilities, (ii) addition of value-added services which the
Company currently does not provide, (iii) capture of a larger percentage of
its existing customers' duplication and distribution business, (iv) addition
of new customers, (v) elimination of redundant management and administrative
functions and (vi) elimination of sub-contracted duplication and production
work in markets in which it does not yet have such capabilities.
EXPAND VALUE-ADDED SERVICES. In order to satisfy unmet or underserved
market needs and to provide a broad array of services to its customers, the
Company intends to continue to develop or acquire additional services. This
expansion effort has targeted additional services such as audio encryption,
electronic order entry and order status and air play verification. The
Company may also develop or acquire additional services such as digital
indexing, archiving and on-demand distribution. To further serve its
customers, the Company is developing software products to automate the
process of order entry and verification, thereby reducing customer support
costs by providing direct interfaces to existing automation systems and
providing remote order entry software that features data validation,
verification and editing capabilities. The Company believes that the
value-added services will allow it to capture additional duplication and
distribution business and further strengthen existing customer
relationships.
EXPLOIT NEW TECHNOLOGIES. The Company believes that timely and accurate
delivery is essential to its continued success, and intends to remain
competitive by providing complete market coverage with the most
cost-effective and reliable delivery methods available. As exemplified by
the opening of the Tulsa Control Center, the Company strives to offer
delivery systems utilizing the most current technology accepted in the
evolving marketplace. As new delivery methods become standardized and cost-
effective, the Company intends to rapidly position itself to offer these
services to its clients. The Company expects to remain current with such
technology by means of strategic alliances with reliable and cost-effective
vendors.
DISTRIBUTION NETWORK
VDI operates a full service distribution network providing its customers
with reliable, time-sensitive and high quality distribution services. The
Company's historical customer base consists of motion picture and television
studios and post-production facilities located primarily in the Los Angeles
region. In 1994, the
33
<PAGE>
Company created the Broadcast One network to enhance its national distribution
capabilities. The Company provides tape duplication, shipping, satellite and
point-to-point fiber optic transmission services at its California facilities,
which process video that is both received from and distributed within the Los
Angeles region, and at the Tulsa Control Center, the distribution hub of the
Broadcast One network.
Commercials, trailers, electronic press kits and related distribution
instructions are typically collected at the Company's Hollywood facility and are
processed locally or transmitted over Broadcast One's fiber optic or satellite
network for processing at the Tulsa Control Center. Video content collected from
Broadcast One's clients is generally transmitted via Broadcast One's fiber optic
network directly to the Tulsa Control Center for processing. Orders are
routinely received into the evening hours for delivery the next morning. The
Company has the ability to process customer orders from receipt to transmission
in less than one hour. Customer orders that require immediate, multiple
deliveries in remote markets are often delivered electronically to and serviced
by third parties with duplication and delivery services in such markets.
Upon receipt of an order, the Company creates a master by completing the
required production services, such as closed-captioning, local market
customization or value-added editing services. Once complete, the master is
distributed to television stations either physically or electronically. For
television stations desiring physical distribution, the master is duplicated
onto specific tape formats and, in most cases, shipments of multiple spots are
combined, or tied, onto one tape, then sorted and consolidated into packages by
destination. The increase in the Company's volume has historically provided a
decreasing delivery cost per order due to order consolidation and the volume
discount structure inherent in air courier pricing.
The Tulsa Control Center, which provides the main hub of the Company's
distribution capabilities, is strategically located near the geographic center
of the country which provides an extended deadline for air courier shipments.
Currently, the Tulsa Control Center delivers a majority of VDI's overnight
deliveries. A significant portion of the operating expenses of the Tulsa Control
Center are fixed and the facility contains ample space in which to expand
operations, providing the opportunity for improved operating margins as the
Company's business continues to grow. By utilizing the Tulsa Control Center's
full capacity, the Company believes it can further increase its duplication and
distribution capacity without significant additional capital expenditures.
For electronic distribution, the master is digitized and delivered by fiber
optic or satellite transmission to television stations equipped to receive such
transmissions. The Company's Hollywood and Tulsa facilities have 24-hour access
to its fiber optic network, allowing it to transmit finished projects to
end-users upon completion. The Company currently derives a small percentage of
its revenues from electronic deliveries and anticipates that this percentage
will increase as such technologies become more widely accepted.
In March 1994, the Company entered into a joint operating agreement with
Vyvx, a subsidiary of the Williams Companies, which provides the fiber optic
capability of the Broadcast One network. Under the joint operating agreement,
the Company and Vyvx agree to provide electronic delivery of spot advertisements
to broadcast stations and to share equally in revenues generated therefrom. To
date no such revenues have been earned pursuant to this agreement. The joint
operating agreement terminates in 1999, subject to automatic renewal unless one
or both parties determine to terminate the agreement.
The Company's Hollywood facility has more than 150 broadcast quality
videotape duplication machines. The Hollywood facility operates 24 hours a day,
seven days a week.
Traffic instructions that detail air play information accompany all
deliveries. For fiber optic and satellite deliveries, the traffic instructions
are telecopied to network stations and arrive with or prior to the video
content. For physical deliveries, a printed copy of the traffic instructions is
included with the tape duplications. The Company's customer service staff
contacts television stations each morning to verify receipt of the prior night's
distribution, allowing timely retransmission of any unconfirmed deliveries. Tape
deliveries are verified electronically through an on-line interface with the
Company's air courier services.
Broadcast One is the trade name for the Company's communications network
which is headquartered at the Tulsa Control Center.
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<PAGE>
VALUE-ADDED SERVICES
VDI maintains video and audio post-production and editing facilities as
components of its full service, value-added approach to its customers.
Production services are performed in the Company's offices in Hollywood and West
Los Angeles, California, and at the Tulsa Control Center. The Hollywood and West
Los Angeles facilities also enable the Company to provide duplication and
post-production services for local customers, which include the Columbia/Tri
Star Motion Picture Companies, Metro-Goldwyn-Mayer Film Group, Fox Filmed
Entertainment and MCA Motion Picture Group.
The following summarizes the value-added post-production services that the
Company provides to its customers:
STANDARDS CONVERSION
Throughout the world there are several different broadcasting
"standards" in use. To permit a program recorded in one standard to be
broadcast in another, it is necessary for the recorded program to be
converted to the applicable standard. This process involves changing the
number of video lines per frame, the number of frames per second, and color
system. VDI's headquarters in Hollywood, California has facilities for the
conversion of videotape between all international formats, including NTSC,
PAL and SECAM.
VIDEOTAPE EDITING
VDI provides digital editing services at its West Los Angeles and Tulsa
locations. The editing suites are equipped with (i) state-of-the-art digital
editing equipment that provides precise and repeatable electronic transfer
of video and/or audio information from one or more sources to a new master
videotape and (ii) large production switchers to effect complex transitions
from source to source while simultaneously inserting titles and/or digital
effects over background video. Videotape is edited into completed programs
such as television shows, infomercials, commercials, movie trailers,
electronic press kits, specials, and corporate and educational
presentations.
ENCODING
VDI provides encoding services, known as "veil encoding," in which a
code is placed within the video portion of an advertisement or an electronic
press kit. Such codes can be monitored from standard television broadcasts
to determine which advertisements or portions of electronic press kits are
shown on or during specific television programs, providing customers direct
feedback on allotted air time. The Company provides veil encoding services
for a number of its motion picture studio clients to enable them to
customize their promotional material. The Company has recently acquired an
"ice encoding" system which will enable it to place codes within the audio
portion of a videotape thereby enhancing the overall quality of the encoded
videotape.
ANCILLARY AUDIO SERVICES
VDI provides videotape audio editing and rerecording services for motion
pictures and television programming in addition to commercial and other
non-broadcast purposes. VDI provides such services through non-linear audio
editing systems which allow sound to be generated, processed, modified,
digitized and manipulated to the artistic requirements of the client. Other
audio services available through VDI include voice overs, live sound
effects, digital audio recording with pulse code modulation equipment and an
"automated dialog replacement" system which enables the Company to reproduce
and recreate synchronized dialog. Management anticipates that the Woodholly
Acquisition will complement the Company's services in this area.
ELEMENT STORAGE
The Company provides its clients with storage space for their master
tapes and is well positioned to receive follow-on orders for duplication and
distribution requests with respect to those tapes. The Company believes that
it currently stores more than 100,000 masters and that as a result of growth
in its Broadcast One network, it will have the opportunity to increase
revenues from this service.
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NEW MARKETS
The Company believes that the development of the Broadcast One network and
its array of value-added services will provide the Company with the opportunity
to enter or significantly increase its presence in several new or expanding
markets.
INTERNATIONAL. Woodholly currently provides video duplication services for
suppliers to international markets. Through the Woodholly Acquisition, the
Company intends to leverage these relationships in order to offer access to
international markets for its existing customers. Further, the Company believes
that electronic distribution methods will facilitate its expansion into the
international distribution arena, as such technologies become standardized and
cost-effective. In addition, the Company believes that the growth in the
distribution of domestic content into international markets will create
increased demand for value-added services currently provided by the Company such
as standards conversion and audio and digital mastering.
RADIO. The Company believes that the growth of Broadcast One will
strengthen its relationships with advertisers who make spot market purchases of
both television and radio advertising, resulting in the expansion of its
presence in the distribution of radio advertisements. The Company presently
provides spot radio advertising distribution for a small number of its clients.
CABLE. The Company believes that continued consolidation of cable system
ownership among multiple system operators will attract increasing national spot
advertising on local cable systems, especially in major markets, increasing the
volume of advertisements which could be distributed to cable operators.
WOODHOLLY ACQUISITION
The Company from time to time considers the acquisition of content delivery
or other businesses complementary to its current operations. As part of the
implementation of its strategy to acquire assets that increase its value-added
duplication and distribution capabilities, the Company expanded its operations
with the Woodholly Acquisition in December 1996. Woodholly provides duplication,
distribution, video content storage and ancillary services to major motion
picture studios, advertising agencies and independent production companies. VDI
believes that the acquisition of Woodholly will allow it to gain valuable
customer relationships, offer a more complete range of services to its customers
and give VDI the opportunity to capture a larger portion of its current
customers' video duplication and distribution business. The purchase price,
which is subject to adjustment and offset, consists of $4.0 million in
promissory notes due in February 1997 and up to $4.0 million in earn-out
payments, for a total purchase price of up to $8.0 million. The Company intends
to repay the $4.0 million in promissory notes from the net proceeds of this
Offering. The earn-out payments are due in each quarter in the period ending
December 31, 2001 to the extent that Woodholly, as a separate division of the
Company, achieves specified operating income results. If Woodholly fails to
achieve these results in any particular quarter, the related earn-out payment
will be deferred for up to two years until the results are achieved. No earn-out
payments will be payable after December 31, 2003.
SALES AND MARKETING
Historically, the Company has marketed its services almost exclusively
through industry contacts and referrals and has engaged in very limited formal
advertising. While VDI intends to continue to rely primarily on its reputation
and business contacts within the industry for the marketing of its services, the
Company has recently expanded its direct sales force to communicate the
capabilities and competitive advantages of the Company's distribution network to
potential new customers. In addition, the Company's sales force solicits
corporate advertisers who may be in a position to influence agencies in
directing deliveries through the Company. The Company currently has sales
representatives located in New York and Los Angeles. The Company's marketing
programs are directed toward communicating its unique capabilities and
establishing itself as the predominant value-added distribution network for the
motion picture and advertising industries.
CUSTOMERS
Since its inception in 1990, VDI has added customers and increased its sales
based on a combination of reliability, timeliness, quality and price. The
integration of the Tulsa Control Center with the Company's regional facilities
has given its customers a time advantage in the ability to deliver broadcast
quality material. The Company markets its services to major and independent
motion picture and television production
36
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companies, cable television program suppliers, advertising agencies and, on a
more limited basis, national television networks, local television stations,
television program syndicators, corporations and educational institutions. The
Company's clients include, among others, the Columbia/Tri Star Motion Picture
Companies, Metro-Goldwyn-Mayer Film Group, Fox Filmed Entertainment, The Walt
Disney Motion Picture Group, Paramount Pictures Corporation and Warner Bros.
The Company solicits the motion picture and television industries, other
advertisers and their agencies to generate duplication and distribution
revenues. In the nine months ended September 30, 1996 the Company serviced more
than 1,200 customers of which the seven major motion picture studios accounted
for approximately 50.5%, including the Columbia/Tri Star Motion Picture
Companies which accounted for approximately 10.5%, of the Company's revenues for
the nine months ended September 30, 1996.
The Company has no long-term or exclusive agreements with any of its
clients. Because clients generally do not make arrangements with the Company
until shortly before its facilities and services are required, the Company
usually does not have any significant backlog of service orders. The Company's
services are generally offered on an hourly or per unit basis based on volume.
CUSTOMER SERVICE
VDI believes it has built its strong reputation in the market with a
commitment to customer service. VDI receives customer orders via courier
services, telephone, telecopier and the Internet. The customer service staff
develops strong relationships with clients within the studios and advertising
agencies and are trained to emphasize the Company's ability to confirm delivery,
meet difficult delivery time frames and provide reliable and cost-effective
service. Several studios are customers because of the Company's ability to meet
often-changing or rush delivery schedules.
The Company has a customer service staff of 15 people, at least one member
of which is available 24 hours a day. This staff serves as a single point of
problem resolution and supports not only the Company's customers, but also the
television stations and cable systems to which the Company delivers.
COMPETITION
The videotape duplication and distribution industry is a highly competitive
service-oriented business. Certain competitors (both independent companies and
divisions of large companies) provide all or most of the services provided by
the Company, while others specialize in one or several of these services.
Substantially all of the Company's competitors have a presence in the Los
Angeles area, currently the principal market for the Company's services. Due to
the current and anticipated future demand for videotape duplication and
distribution services in the Los Angeles area, the Company believes that both
existing and new competitors may expand or establish videotape post-production
service facilities in this area.
The Company believes that it maintains a competitive position in its market
by virtue of the quality and scope of the services it provides, and its ability
to provide timely and accurate delivery of these services. The Company believes
that prices for its services are competitive within its industry, although some
competitors may offer certain of their services at lower rates than the Company.
The principal competitive factors affecting this market are reliability,
timeliness, quality and price. The Company competes with a variety of
duplication and distribution firms, some of which have a national presence,
certain post-production companies and, to a lesser extent, the in-house
duplication and distribution operations of major motion picture studios and ad
agencies, that have traditionally distributed taped advertising spots via
physical delivery. Some of these competitors have long-standing ties to clients
that will be difficult for the Company to change. Several companies have systems
for delivering video content electronically. Moreover, some of these
distribution and duplication firms such as Cycle-Sat, Inc., Indenet, Inc., and
Digital Generation Systems, Inc., and post-production companies may have greater
financial, distribution and marketing resources and some of which have achieved
a higher level of brand recognition than the Company. As a result, there is no
assurance that the Company will be able to compete effectively against these
competitors merely on the basis of reliability, timeliness, quality and price or
otherwise. See "Risk Factors -- Competition."
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PROPERTIES AND EQUIPMENT
The Company's 30,000 square foot headquarters in Hollywood, California
houses facilities for its duplication services, a vault utilized for storage of
master videotapes, and offices for the Company's management, administrative and
accounting personnel. The Tulsa Control Center is a 20,000 square foot facility
utilized by the Company as the Broadcast One network control center as well as
VDI's nationwide physical duplication and distribution center. The Company also
maintains an 8,000 square foot facility in West Los Angeles, California utilized
for film-to-tape transfers, video tape editing and audio services.
The Company's leases for its Hollywood and Tulsa facilities expire in 1999.
The Company's lease for the West Los Angeles facility expires in December 1997.
The Company's aggregate rental cost in 1995 was approximately $0.7 million.
Except for approximately 5% of the Company's equipment which is leased on a
long-term basis for terms ranging through 1999, all of the Company's equipment
has been purchased either for cash, on an installment basis or through a
like-kind exchange.
EMPLOYEES
The Company had 141 full-time employees as of December 10, 1996. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with its employees are good.
LEGAL PROCEEDINGS
There are currently no legal proceedings to which the Company is a party,
other than routine matters incidental to the business of the Company. From time
to time, the Company may become a party to various legal actions and complaints
arising in the ordinary course of business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information concerning each person who is
presently an executive officer or director of the Company. All officers and
directors hold office until their respective successors are elected and
qualified, or until their earlier resignation or removal.
<TABLE>
<CAPTION>
NAME POSITION AGE
- ----------------- ---------------------------------------- ---
<S> <C> <C>
R. Luke Stefanko Chairman of the Board, Chief Executive 35
Officer, President and Director
Donald R. Stine Chief Financial Officer, Secretary and 35
(1) Director
Thomas J. Ennis Vice President of Sales and Marketing 37
and Director
Steven W. Terry Vice President and General Manager of 48
Operations
Russell R. Vice President of Engineering 47
Ruggieri
Eric H. Bershon Vice President and General Manager of 30
Broadcast One
Steven J. Schoch Director 38
(2)(3)
Edward M. Philip Director 31
(1)(2)(3)
</TABLE>
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Director nominee to take office upon consummation of this Offering
R. Luke Stefanko has been Chief Executive Officer and Director since he
co-founded the Company in 1990. Mr. Stefanko was appointed President on April 1,
1996 and was elected to the newly-created position of Chairman of the Board in
May 1996. Mr. Stefanko has more than 17 years of experience in the videotape
duplication and distribution industry, including serving as a director and Vice
President/Operations of A.M.E., Inc. ("AME"), a video duplication company, from
1979 to January 4, 1990. Mr. Stefanko is Mr. Stine's brother-in-law.
Donald R. Stine has been Chief Financial Officer and Secretary of the
Company since he joined the Company in August, 1994 and became a Director in
1996. Mr. Stine was a Director of Finance for The Walt Disney Company from 1988
to 1994. Mr. Stine is a director of Sight Effects, Inc., a privately held
production and computer animation company. Mr. Stine is Mr. Stefanko's
brother-in-law.
Thomas J. Ennis joined the Company as a consultant in August 1995 and has
been Vice President of Sales and Marketing since March 1996 and a Director since
June 1996. Prior to joining the Company, Mr. Ennis served as Vice President of
Sales and Infomercial Services at Starcomm Television Services from 1990 to
1995.
Steven W. Terry has been Vice President and General Manager of Operations
since he joined the Company in 1990. Mr. Terry has 27 years of experience in the
video duplication and distribution industry, including positions held at
Vidtronics, Compact Video and AME.
Russell R. Ruggieri joined the Company in 1990 as Director of Engineering
and is currently serving as Vice President of Engineering. Mr. Ruggieri has over
23 years of experience in the television broadcasting and video duplication and
distribution business.
Eric H. Bershon joined the Company in 1993 as Vice President of Sales and is
currently Vice President and General Manager of Broadcast One. Prior to joining
the Company, Mr. Bershon worked at MediaTech West as Vice President and General
Manager from 1988 to 1992.
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Steven J. Schoch has agreed to become a Director of the Company upon the
closing of this Offering. Mr. Schoch is vice president and treasurer of Times
Mirror Corporation. Prior to joining Times Mirror in November 1995, Mr. Schoch
was treasurer of Euro Disney S.C.A., an affiliate of The Walt Disney Company. He
joined that company in 1991 as director of corporate finance, and was promoted
to vice president, assistant treasurer in 1992 prior to his appointment at Euro
Disney in 1994.
Edward M. Philip has agreed to become a Director of the Company upon the
closing of this Offering. Mr. Philip is the Chief Financial Officer and
Secretary of Lycos, Inc. (an Internet services company) and has served in this
capacity since December 1995. From July 1991 to December 1995, Mr. Philip was
employed with the Walt Disney Company where he served in various finance
positions, most recently as Vice President and Assistant Treasurer.
In accordance with the By-laws of the Company, the Board of Directors of the
Company is divided into three classes. R. Luke Stefanko was elected by the
Company's shareholders as a Class I director, with his term expiring at the
annual meeting for 1999; Donald R. Stine and Edward M. Philip were elected by
the Company's shareholders as Class II directors, with terms expiring at the
annual meeting for 1998; Steven J. Schoch and Thomas J. Ennis were elected by
the Company's shareholders as Class III directors with terms expiring at the
annual meeting for 1997.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company is paid a fee of $1,000
for each meeting of the Board of Directors attended. Members of the Board of
Directors who are not employees of the Company receive stock option grants upon
election or re-election. See "-- 1996 Stock Incentive Plan." Directors are
reimbursed for travel and other reasonable expenses relating to meetings of the
Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation, including bonuses and
deferred compensation, paid for the year ended December 31, 1995 by the Company
to (i) its Chief Executive Officer and (ii) each of the Company's four other
most highly compensated individuals who were serving as officers on December 31,
1995 and whose salary plus bonus exceeded $100,000 for such year (the persons
described in (i) and (ii) above, the "Named Executives"). No bonuses or long
term compensation awards were granted to any of the foregoing persons for the
year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY
- ------------------------------------------------------------------------ --------- -------------
<S> <C> <C>
R. Luke Stefanko, Chief Executive Officer............................... 1995 $ 273,000(1)
Robert Semmer, then President........................................... 1995 $ 200,000
Donald R. Stine, Chief Financial Officer................................ 1995 $ 120,000
Robert Bajorek, then Vice President..................................... 1995 $ 273,000(2)
Eric H. Bershon, Vice President and General Manager of Broadcast One.... 1995 $ 110,000
</TABLE>
- ------------------------
(1) Does not include $136,776 distributed by the Company to Mr. Stefanko to fund
the payment of federal and state taxes owed by Mr. Stefanko by virtue of the
Company's status as a Subchapter S Corporation for federal and state tax
purposes.
(2) Does not include $135,289 distributed by the Company to Mr. Bajorek to fund
the payment of federal and state taxes owed by Mr. Bajorek by virtue of the
Company's status as a Subchapter S Corporation.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with each of R. Luke
Stefanko, Thomas J. Ennis and Eric H. Bershon, commencing June 27, 1996, March
19, 1996 and August 31, 1996, respectively. Mr. Stefanko's agreement has a term
of five years ending in June, 2001. The terms of Messrs. Ennis and Bershon's
agreements expire in March 1997 and August 1998, respectively. Mr. Ennis'
agreement may be extended for one year at the option of the Company. Under these
agreements, the current annual salaries of
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Messrs. Stefanko, Bershon, and Ennis are $250,000, $120,000, and $100,000,
respectively. Mr. Stefanko's base salary increases each year in accordance with
increases, in the Consumer Price Index, while Mr. Bershon's base salary
increases at a rate of 2.5% per year. Mr. Ennis' base salary does not change
during the term of the agreement. These base salaries are subject to further
annual increase if approved by the Compensation Committee. Mr. Stefanko is
provided with an automobile expense reimbursement allowance and an annual
allowance to cover premiums for life, health and disability insurance. Mr.
Stefanko's employment agreement entitles him to receive quarterly bonus payments
to the extent the Company achieves quarterly earnings per share results ratified
by the Board of the Directors at the beginning of each year ("Targeted
Earnings"). If the Company attains the Targeted Earnings with respect to a
particular quarter, Mr. Stefanko shall receive a bonus payment of $6,250. If the
Company's actual earnings per share are less than 75% of the Targeted Earnings,
Mr. Stefanko is not entitled to a bonus. If the Company's actual earnings per
share equal 125% or more of the Targeted Earnings, Mr. Stefanko shall receive an
increased bonus payment (subject to a maximum payment in any quarter of
$12,500). To the extent the Company's earnings per share equal between 75% and
125% of the Targeted Earnings, Mr. Stefanko shall be entitled to receive a pro
rated bonus payment in accordance with the range set forth above.
Mr. Bershon's employment agreement entitles him to receive an annual bonus
to the extent the Company achieves sales results ("Projected Sales") and
maintains the minimum gross margin percentages ("Projected Gross Margin")
ratified by the Board of the Directors at the beginning of each year. If the
Company attains the Projected Sales and meets or exceeds the Projected Gross
Margin, Mr. Bershon shall receive a bonus payment of $40,000. If the Company's
sales are less than 80% of the Projected Sales or if gross margins do not meet
or exceed the Projected Gross Margin, Mr. Bershon is not entitled to a bonus. If
the Company's sales equal 133% or more of the Projected Sales and if gross
margins meet or exceed the Projected Gross Margin, Mr. Bershon shall receive an
additional bonus of $40,000. To the extent the Company's sales equal between 80%
and 133% of the Projected Sales with gross margins meeting or exceeding
Projected Gross Margins, Mr. Bershon shall be entitled to receive a pro rated
bonus payment in accordance with the range set forth above.
KEY EXECUTIVE SEVERANCE AGREEMENTS
Mr. Stefanko is party to a key executive severance agreement with the
Company. The key executive severance agreement provides that if Mr. Stefanko's
employment is terminated without cause (as defined in the agreement), except in
the event of disability or retirement, he shall be entitled to receive the
following: (i) if he is terminated within two years following a change in
control of the Company, then he shall be entitled to receive payment of his full
base salary for a period of two years, payment of the amount of any bonus for a
past fiscal year which has not yet been awarded or paid, and continuation of
benefits for a period of two years, or (ii) if his employment is terminated
other than within two years following a change in control of the Company, then
Mr. Stefanko shall be entitled to receive payment of his full base salary for
the remainder of the term of his agreement, payment of the amount of bonuses,
and continuation of benefits. A change in control of the Company is defined to
mean a change in control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such a change
in control is deemed conclusively to have occurred in the event of certain
tender offers, mergers or consolidations, the sale, lease, exchange or transfer
of substantially all of the assets of the Company, the acquisition by a person
or group (other than Mr. Stefanko) of 25% or more of the outstanding voting
securities of the Company, the approval by the shareholders of a plan of
liquidation or dissolution of the Company, or certain changes in the members of
the Board of Directors of the Company. In the event of a decrease in Mr.
Stefanko's then current base salary, a removal from eligibility to participate
in the Company's bonus plan and other events as described in the agreement, then
Mr. Stefanko shall have the right to treat such event as a termination of his
employment by the Company without cause and to receive the payments and benefits
described above. If Mr. Stefanko is terminated for cause (as defined in the
agreement) he shall be entitled to payment of his then current base salary,
reimbursement and continuation of benefits for one year.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
No stock option or stock appreciation rights were granted to the Named
Executives during the fiscal year ended December 31, 1995.
1996 STOCK INCENTIVE PLAN
PLAN SUMMARY
The 1996 Stock Incentive Plan (the "1996 Plan" or the "Plan") authorizes the
granting of awards to officers and key employees of the Company, as well as to
third parties providing valuable services to the Company, e.g., independent
contractors, consultants and advisors to the Company. Members of the Board of
Directors are eligible to receive awards under the 1996 Plan. Non-employee
directors presently receive the non-discretionary stock option awards described
below. At May 15, 1996, there were approximately 130 persons eligible to receive
awards. Awards can be Stock Options ("Options"), Stock Appreciation Rights
("SARs"), Performance Share Awards ("PSAs") and Restricted Stock Awards
("RSAs"). The 1996 Plan is administered by a committee appointed by the Board of
Directors and consisting of two or more members, each of whom must be a
non-employee Director, in the absence of a committee, the Board of Directors, if
each member qualifies as a non-employee Director, (the "Committee"). The
Committee determines the number of shares to be covered by an award, the term
and exercise price, if any, of the award and other terms and provisions of
awards. Members of the Board of Directors who are not also employees of the
Company receive, at such time as they are appointed, elected or re-elected to
serve as members of the Board of Directors, non-discretionary awards of stock
options to purchase 10,000 shares of Common Stock at the fair market value on
the date the stock option is granted. The number and kind of shares available
under the 1996 Plan are subject to adjustment in certain events. Shares relating
to Options or SARs which are not exercised, shares relating to RSAs which do not
vest and shares relating to PSAs which are not issued will again be available
for issuance under the 1996 Plan.
The Company has reserved 900,000 shares of Common Stock for issuance under
the Plan. Upon consummation of this Offering the Company intends to grant
options to purchase 300,000 shares of Common Stock at an exercise price per
share equal to the initial public offering price per share of Common Stock.
An Option granted under the 1996 Plan may be an incentive stock option
("ISO") or a non-qualified Option. ISOs will only be granted to employees of the
Company. The exercise price for Options is to be determined by the Committee,
but in the case of an ISO is not to be less than fair market value of the Common
Stock on the date the Option is granted (110% of fair market value in the case
of an ISO granted to any person who owns more than 10% of the voting power of
the Company). In general, the exercise price is payable in any combination of
cash, shares of Common Stock already owned by the participant for at least six
months, or, if authorized by the Committee, a promissory note secured by the
Common Stock issuable upon exercise. In addition, the award agreement may
provide for "cashless" exercise and payment. The aggregate fair market value
(determined on the date of grant) of the shares of Common Stock for which ISOs
may be granted to any participant under the 1996 Plan and any other plan by the
Company or its affiliates which are exercisable for the first time by such
participant during any calendar year may not exceed $100,000.
The Options granted under the 1996 Plan become exercisable on such dates as
the Committee determines in the terms of each individual Option. A Director who
is not also an employee of the Company will, upon appointment, election or
re-election to the Board of Directors, automatically be granted a nonqualified
option to purchase 3,000 shares, vesting in equal tranches over three years, at
an exercise price equal to the fair market value of Common Stock on the date of
grant. Options become immediately exercisable in full in the event of a
disposition of all or substantially all of the assets or capital stock of the
Company by means of a sale, merger, consolidation, reorganization, liquidation
or otherwise, unless the Committee arranges for the optionee to receive new
Options covering shares of the corporation purchasing or acquiring the assets or
stock of the Company, in substitution of the Options granted under the plan
(which Options shall thereupon terminate). The Committee in any event may, on
such terms and conditions as it deems appropriate,
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<PAGE>
accelerate the exercisability of Options granted under the Plan. An ISO to a
holder of more than 10% of the voting power of the Company must expire no later
than five years from the date of grant. A non-qualified Option must expire no
later than ten years from the date of the grant.
The Options granted under the 1996 Plan are not transferable other than by
will or the laws of descent and distribution. Options which have become
exercisable by the date of termination of employment or of service on the
Committee must be exercised within certain specified periods of time from the
date of termination, the period of time to depend on the reason for termination.
Such Options generally lapse three months after termination of employment other
than by reason of retirement, total disability or death, in which case they
generally terminate one year thereafter. If a participant is discharged for
cause, all Options will terminate immediately. Options which have not yet become
exercisable on the date the participant terminates employment or service on the
Committee for a reason other than retirement, death or total disability shall
terminate on that date.
An SAR is the right to receive payment based on the appreciation in the fair
market value of Common Stock from the date of grant to the date of exercise. At
its discretion, the Committee may grant an SAR concurrently with the grant of an
Option. Such SAR is only exercisable at such time, and to the extent, that the
related Option is exercisable. Upon exercise of an SAR, the holder receives for
each share with respect to which the SAR is exercised an amount equal to the
difference between the exercise price under the related Option and the fair
market value of a share of Common Stock on the date of exercise of the SAR. The
Committee in its discretion may pay the amount in cash, shares of Common Stock
or a combination thereof.
Each SAR granted concurrently with an Option will have the same termination
provisions and exercisability periods as the related Option. In its discretion,
the Committee may also grant SARs independently of any Option, subject to such
conditions consistent with the terms of the Plan as the Committee may provide in
the award agreement. Upon the exercise of an SAR granted independently of any
Option, the holder receives for each share with respect to which the SAR is
exercised an amount in cash based on the percentage specified in the award
agreement of the excess, if any, of fair market value of a share of Common Stock
on the date of exercise over such fair market value on the date the SAR was
granted. The termination provisions and exercisability periods of an SAR granted
independently of any Option will be determined by the Committee.
An RSA is an award of a fixed number of shares of Common Stock subject to
transfer restrictions. The Committee specifies the purchase price, if any, the
recipient must pay for such shares. Shares included in an RSA may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered until they
have vested. The recipient is entitled to dividend and voting rights pertaining
to such RSA shares even though they have not vested, so long as such shares have
not been forfeited.
A PSA is an award of a fixed number of shares of Common Stock, the issuance
of which is contingent upon the attainment of such performance objectives, and
the payment of such consideration, if any, as is specified by the Committee.
The 1996 Plan permits a participant to satisfy his tax withholding with
shares of Common Stock instead of cash if the Committee agrees.
Upon the date a participant is no longer employed by the Company for any
reason, shares subject to the participant's RSAs which have not become vested by
that date or shares subject to a participant's PSAs which have not been issued
shall be forfeited in accordance with the terms of the related award agreements.
The exercisability of all of the outstanding awards may be accelerated,
subject to the discretion of the Committee, upon the occurrence of an "Event",
(defined in the Plan) to include approval by the shareholders of the dissolution
on liquidation of the Company, certain mergers, consolidations, sale of
substantially all of the Company's business and/or assets and a "change in
control". The 1996 Plan defines a change in control to have occurred (i) if a
"person," as defined in Section 13(d) and 14(d) under the Exchange Act acquires
20% or more of the voting power of the then outstanding securities of the
Company and (ii) if during any two consecutive year periods there is a change of
a majority of the members of the Board of Directors, unless the election or
nomination of the new directors is approved by at least three-fourths of the
members still in office from the beginning of the two year period.
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<PAGE>
The 1996 Plan provides for anti-dilution adjustments in the event of a
reorganization, merger, combination recapitalization, reclassification, stock
dividend, stock split or reverse stock split. Upon the dissolution or
liquidation of the Company, or upon a reorganization, merger or consolidation of
the Company as a result of which the Company is not the surviving entity, the
Plan will terminate, and any outstanding awards will terminate and be forfeited,
subject to the Committee's ability to provide for (i) certain payments to
participants in cash or Common Stock in lieu of such outstanding awards, (ii)
the assumption by the successor corporation of either the Plan or the awards
outstanding under the Plan and (iii) continuation of the Plan.
The Board of Directors may, at any time, terminate or suspend the 1996 Plan.
The 1996 Plan currently provides that the Board of Directors or the Committee
may amend the 1996 Plan at any time without the approval of the holders of a
majority of the shares of Common Stock except in certain situations enumerated
in the 1996 Plan and then only to the extent such approval is required by Rule
166-3 under the Exchange Act or Section 162(m) of the Code.
401(K) PLAN
Effective October 1, 1991, the Company adopted an employee defined
contribution 401(k) investment plan (the "401(k) Plan") which is administered by
True Consultants. All full-time employees are eligible to participate in the
401(k) Plan after six months of continuous service with the Company. Under the
401(k) Plan, participants may make regular pre-tax contributions of up to 15% of
their compensation. While the Company does not make matching contributions, it
may, but is not obligated to make profit-sharing contributions in an amount
determined by the Board of Directors. All participant contributions to the
401(k) Plan are vested 100%, while any profit sharing contributions vest in
accordance with the participant's years of service. To date, the Company has not
elected to contribute to the 401(k) Plan. As of September 30, 1996, 38 current
employees were enrolled in the 401(k) Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 1995. As a result,
Messrs. Stefanko and Stine participated in deliberations concerning executive
officer compensation. The Board of Directors will establish a Compensation
Committee prior to the consummation of this Offering.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the liability of directors for
monetary damages to the maximum extent permitted by California law. Such
limitation of liability has no effect on the availability of equitable remedies,
such as injunctive relief or rescission.
The Company's By-laws provide that the Company will indemnify its directors
and officers and may indemnify its employees and agents (other than officers and
directors) against certain liabilities to the fullest extent permitted by
California law. The Company is also empowered under its By-laws to enter into
indemnification agreements with its directors and officers and to purchase
insurance on behalf of any person whom it is required or permitted to indemnify.
The Company has entered into indemnification agreements with each of its current
directors and officers, which provide for indemnification of, and advancement of
expenses to, such persons to the greatest extent permitted by California law,
including by reason of action or inaction occurring in the past and
circumstances in which indemnification and advances of expenses are
discretionary under California law. The Company intends to purchase a directors'
and officers' liability policy insuring directors and officers of the Company
effective upon closing of this offering.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
44
<PAGE>
CERTAIN TRANSACTIONS
Pursuant to a stock purchase agreement dated as of April 1, 1996 (the
"Agreement"), Mr. Stefanko and Mr. Stine purchased 2,264,400 and 666,000 shares
of Common Stock, respectively, from Robert Bajorek, the co-founder of the
Company, for a total of $6.7 million (or $2.29 per share). Pursuant to the
Agreement, Mr. Stefanko paid Mr. Bajorek $1.1 million on April 1, 1996. The
Company extended Mr. Stefanko a demand loan bearing interest at an annual rate
of 7.0% to make that cash payment. Mr. Stefanko has agreed to repay this loan
with a portion of the proceeds of his S Corporation distribution. Mr. Stefanko
and Mr. Stine executed non-recourse notes in the amount of $4.0 million and $1.6
million, respectively, in favor of Mr. Bajorek for the balance of the aggregate
purchase price. These notes amortize commencing in 1998, reach maturity in 2006
and bear interest at a rate of 4.5%. The notes are secured by the Common Stock
purchased thereby and contain acceleration provisions which require Mr. Stefanko
or Mr. Stine, as the case may be, to apply one-half of the proceeds of a sale of
his Common Stock or the sale of substantially all of the assets of VDI towards
the prepayment of the amount then outstanding under such note. In connection
with his sale of Common Stock, Mr. Bajorek agreed not to compete with the
Company in California for a period of three years.
Upon its formation in 1990 the Company elected to be treated as an S
Corporation for federal income tax purposes which resulted in the taxable income
of the Company being taxed directly to its shareholders rather than to the
Company. As a consequence of this offering the Company will no longer qualify as
an S corporation. The Company maintains an accumulated adjustments account (the
"AAA account") which currently holds its taxed but undistributed earnings.
Immediately prior to the consummation of this Offering, VDI will distribute the
balance of the amount in the AAA account, at September 30, 1996 approximately
$0.4 million, to the Company's current shareholders. Purchasers of Common Stock
in this Offering will not be entitled to any portion of such distribution.
A relative of Mr. Stefanko loaned the Company $300,000 in 1991 and an
additional $300,000 in 1995. These loans bore interest at an annual rate of 9%
and 13%, respectively. The Company repaid these loans in full on June 14, 1996.
In 1994 the Company loaned Robert Semmer, a former executive officer of the
Company, $253,000, of which $199,963 remained outstanding as of September 30,
1996. This loan bears interest at an annual rate of 10% and amortizes over five
years beginning in June 1996. The Company expects that this loan will be repaid
prior to the closing of this Offering.
45
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of the date of this
Prospectus, as adjusted to reflect the sale of the shares offered by this
Prospectus, by (i) the Selling Shareholder, (ii) each person who is known by the
Company to beneficially own more than five percent of the Company's outstanding
Common Stock, (iii) each of the Company's directors, (iv) each of the Named
Executives and (v) all current directors and executive officers as a group. The
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED PRIOR BENEFICIALLY OWNED AFTER THE
TO THE OFFERING OFFERING
---------------------------- SHARES BEING -----------------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------------- ---------- ---------------- ------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
R. Luke Stefanko (1)..................... 5,594,400 84.0% -- 5,594,400 60.4%
Donald R. Stine (1)...................... 666,000 10.0% -- 666,000 7.2%
Thomas J. Ennis.......................... -- -- -- -- --
Edward M. Philip (2)..................... -- -- -- -- --
Steven J. Shouch (2)..................... -- -- -- -- --
Robert Semmer............................ -- -- -- -- --
Robert Bajorek........................... 399,600 6.0% 200,000 199,600 2.2%
All current directors and executive
officers as a group (3 persons)......... 6,260,400 94.0% -- 6,260,400 67.6%
</TABLE>
The address of each of these shareholders is 6920 Sunset Boulevard, Hollywood,
California 90028.
- ------------------------
(1) Of such shares, 2,644,400 held by Mr. Stefanko and all of Mr. Stine's shares
are pledged to Mr. Bajorek. See "Certain Transactions."
(2) Messrs. Philip and Shouch have agreed to become directors of the Company
upon closing of this Offering.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
At the closing of this Offering, the authorized capital stock of the Company
will consist of 50,000,000 shares of Common Stock, without par value, and
5,000,000 shares of Preferred Stock, without par value.
COMMON STOCK
As of October 1, 1996, there were 6,660,000 shares of Common Stock
outstanding held of record by three shareholders. Holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
shareholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefore. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior liquidation rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable, and the shares of Common Stock to be
outstanding upon completion of the Offering contemplated by this Prospectus will
be fully paid and non-assessable.
PREFERRED STOCK
As of the date of the sale of shares offered by this Prospectus, 5,000,000
shares of Preferred Stock will be authorized and no shares will be outstanding.
The Board of Directors has the authority to issue the shares of Preferred Stock
in one more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any unissued shares of Preferred Stock
and to fix the number of shares constituting any series and the designations of
such series, without any further vote or action by the shareholders. Although it
presently has no intention to do so, the Board of Directors, without shareholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may have the effect of discouraging, delaying, or
preventing a change in control of the Company. The Company has no present plans
to issue any of the Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS
Certain provisions of law and the fact that only a portion of the members of
the Board of Directors are elected in each year could make the acquisition of
the Company by means of a proxy contest and the removal of incumbent officers
and directors more difficult. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to first negotiate
with the Company.
The Company's Restated Articles of Incorporation also provide that so long
as the Company shall have a class of stock registered pursuant to the Exchange
Act as amended, shareholder action can be taken only at an annual or special
meeting of shareholders and may not be taken by written consent. In addition,
upon qualification of the Company as a "listed corporation" as defined in the
California Corporations Code, cumulative voting will be eliminated.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, 9,260,000 shares of Common Stock
(9,680,000 shares if the Underwriter's over-allotment option is exercised in
full) will be outstanding. Of these shares, the 2,800,000 shares sold in this
Offering (3,220,000 shares if the Underwriter's over-allotment option is
exercised in full) will be freely tradeable without restriction under the
Securities Act. The remaining 6,460,000 shares of Common Stock held by existing
shareholders are "restricted" securities within the meaning of Rule 144 under
the Securities Act. Restricted securities may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144 promulgated under the Securities Act, which rule is summarized below.
All shareholders, officers and directors of the Company have agreed that
they will not directly or indirectly publicly offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract to sell, pledge,
grant any options to purchase or sale or disposition) of any shares of Common
Stock or other capital stock of the Company, or any securities convertible into,
or exercisable or exchangeable for any shares of Common Stock or other capital
stock of the Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, for a period of 180 days from the
date of this Prospectus, subject to certain exceptions. After such 180-day
period, this restriction will expire and shares permitted to be sold under Rule
144 will be eligible for sale. See "Underwriting."
In general, under Rule 144 as currently in effect, if two years have elapsed
since the date of acquisition of beneficial ownership of restricted shares of
Common Stock from the Company or any affiliate, the acquiror or subsequent
holder thereof is entitled to sell within any three-month period a number of
such shares that does not exceed the greater of 1% of the then outstanding
shares of the same series of Common Stock or the reported average weekly trading
volume of the Common Stock on national securities exchanges during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. If three years
have elapsed since the date of acquisition of restricted shares of Common Stock
from the Company or any affiliate and the acquiror or subsequent holder is not
deemed to have been an affiliate of the Company for at least 90 days prior to a
proposed transaction, such person would be entitled to sell such shares under
Rule 144 without regard to the limitations described above.
At May 15, 1996, the Company had reserved 900,000 shares of Common Stock for
issuance pursuant to the 1996 Plan. The Company intends to file a registration
statement on Form S-8 under the Securities Act approximately 90 days after the
date of this Prospectus to register shares to be issued pursuant the 1996 Plan.
Shares of Common Stock issued under the 1996 Plan after the effective date of
such registration statement will be freely tradeable in the public market,
subject to lock-up agreements and, in the case of sales by affiliates, to the
amount, manner of sale, notice and public information requirements of Rule 144.
Prior to this Offering, there has been no public market for the Common Stock
and there is no assurance a significant public market for the Common Stock will
develop or be sustained after this Offering. Therefore, future sales of
substantial amounts of Common Stock in the public market could adversely affect
market prices prevailing from time to time. Furthermore, since only a limited
number of shares will be available for sale shortly after this Offering because
of certain contractual and legal restrictions on resale (described above), sales
of substantial amounts of Common Stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and the
ability of the Company to raise equity capital in the future.
48
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Oppenheimer & Co., Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase from
the Company and the Selling Shareholder the numbers of shares of Common Stock
set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated...............................................
Oppenheimer & Co., Inc...........................................................
----------
Total.......................................................................... 2,800,000
----------
----------
</TABLE>
The Company and the Selling Shareholder are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby, if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Shareholder that they propose to offer the shares of Common
Stock initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of $ per share to
certain other dealers. After the initial public offering, the offering price and
the concession may be changed by the Representatives.
The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
420,000 additional shares of Common Stock at the initial public offering price,
less underwriting discounts and commissions, as set forth on the cover page of
this Prospectus. The Underwriters may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of the shares of Common
Stock offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth opposite each Underwriter's name in the preceding table bears to
2,800,000.
The Company, directors and officers and all of the Company's shareholders
have agreed that they will not, directly or indirectly, publicly offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or other capital stock, or any securities
convertible into, or exercisable or exchangeable for, any shares of Common Stock
or other capital stock of the Company, for a period of 180 days after the date
of this Prospectus, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters; provided, however, that the Company
may issue shares or options to purchase shares of Common Stock (i) in connection
with this Offering or the Underwriters' over-allotment option, (ii) pursuant to
the 1996 Plan or (iii) in certain other instances.
The Company and the Selling Shareholder have agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Representatives have advised the Company and the Selling Shareholder
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
49
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations between the Company, the Selling
Shareholder and the Representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalizations and states of development
of other companies which the Company and the Representatives believe to be
comparable to the Company, estimates of the business potential of the Company,
the present state of the Company's development and other factors deemed
relevant.
LEGAL MATTERS
The validity of the shares of Common Stock being sold in this Offering will
be passed upon for the Company by Kaye, Scholer, Fierman, Hays & Handler, LLP,
Los Angeles, California. Certain legal matters in connection with this Offering
will be passed upon for the Underwriters by Schulte Roth & Zabel LLP, New York,
New York.
EXPERTS
The financial statements of VDI Media as of December 31, 1994 and 1995 and
September 30, 1996 and for each of the three years in the period ended December
31, 1995 and the nine month periods ended September 30, 1995 and 1996 included
in this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of Woodholly as of December 31, 1994 and 1995 and
for the years then ended included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as part
thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and, in
each instance, if such contract or document is filed as an exhibit, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference to such exhibit. A copy of the Registration Statement, and the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. In addition, the Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's web site is http://www.sec.gov.
The Company intends to furnish to its shareholders annual reports containing
financial statements audited by independent auditors and quarterly reports
containing unaudited financial data for the first three quarters of each fiscal
year.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
VDI MEDIA
Report of Independent Accountants................................ F-2
Balance Sheet at December 31, 1994 and 1995 and September 30,
1996............................................................ F-3
Statement of Operations for each of the three years in the period
ended December 31, 1995 and for the nine months ended September
30, 1995 and 1996............................................... F-4
Statement of Shareholders' Equity for each of the three years in
the period ended December 31, 1995 and for the nine months ended
September 30, 1996.............................................. F-5
Statement of Cash Flows for each of the three years in the period
ended December 31, 1995 and for the nine months ended September
30, 1995 and 1996............................................... F-6
Notes to Financial Statements.................................... F-7
WOODHOLLY PRODUCTIONS
Report of Independent Accountants................................ F-13
Balance Sheet at December 31, 1994 and 1995 and September 30,
1996 (unaudited)................................................ F-14
Statement of Operations for each of the two years in the period
ended December 31, 1995
and for the (unaudited) nine months ended September 30, 1995 and
1996............................................................ F-15
Statement of Partners' Capital for each of the two years in the
period ended December 31, 1995 and the (unaudited) nine months
ended September 30, 1996........................................ F-16
Statement of Cash Flows for each of the two years in the period
ended December 31, 1995 and the (unaudited) nine months ended
September 30, 1995 and 1996..................................... F-17
Notes to Financial Statements.................................... F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of VDI Media
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of VDI Media at December 31, 1995 and
1994 and September 30, 1996, and the results of its operations and its cash
flows for the three years in the period ended December 31, 1995 and the nine
month periods ended September 30, 1995 and 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Costa Mesa, California
October 25, 1996
F-2
<PAGE>
VDI MEDIA
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
-------------------------- ----------------------------
1994 1995 1996
------------ ------------ ------------- 1996
-------------
PRO FORMA
(UNAUDITED
NOTE 3)
<S> <C> <C> <C> <C>
Current assets:
Cash................................................. $ 60,000 $ 415,000 $ 273,000 $ 273,000
Accounts receivable, net of allowances for doubtful
accounts of $103,000, $284,000 and $341,000,
respectively........................................ 2,974,000 4,398,000 5,200,000 5,200,000
Amount receivable from officer (Note 9).............. -- -- 1,175,000 1,175,000
Amounts receivable from employees (Note 4)........... 383,000 207,000 246,000 246,000
Inventories.......................................... 252,000 178,000 124,000 124,000
Prepaid expenses and other current assets............ 28,000 52,000 27,000 27,000
------------ ------------ ------------- -------------
Total current assets............................. 3,697,000 5,250,000 7,045,000 7,045,000
Property and equipment, net (Note 5)................. 4,402,000 3,992,000 3,820,000 3,820,000
Deferred offering costs.............................. -- -- 584,000 584,000
Other assets, net.................................... 90,000 98,000 106,000 106,000
------------ ------------ ------------- -------------
$ 8,189,000 $ 9,340,000 $ 11,555,000 $ 11,555,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 1,763,000 $ 2,237,000 $ 2,670,000 $ 2,670,000
Accrued expenses..................................... 451,000 843,000 1,227,000 1,227,000
Accrued settlement obligation (Note 8)............... 458,000 41,000 -- --
Borrowings under revolving credit agreement (Note
6).................................................. 1,644,000 100,000 1,114,000 1,114,000
Current portion of notes payable (Note 7)............ 524,000 773,000 777,000 777,000
Current portion of subordinated notes payable to
related party (Note 7).............................. 60,000 30,000 -- --
Current portion of capital lease obligations......... 126,000 147,000 28,000 28,000
Accrued distribution to shareholders................. -- -- -- 2,976,000
Deferred income taxes (Note 3)....................... -- -- -- 394,000
------------ ------------ ------------- -------------
Total current liabilities........................ 5,026,000 4,171,000 5,816,000 9,186,000
------------ ------------ ------------- -------------
Notes payable, less current portion (Note 7)......... 1,307,000 1,821,000 1,271,000 1,271,000
------------ ------------ ------------- -------------
Subordinated notes payable to related party, less
current portion (Note 7)............................ 30,000 225,000 -- --
------------ ------------ ------------- -------------
Capital lease obligations, less current portion...... 120,000 104,000 83,000 83,000
------------ ------------ ------------- -------------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock -- no par value; 50,000,000 shares
authorized; 6,660,000 shares issued and
outstanding......................................... 1,015,000 1,015,000 1,015,000 1,015,000
Retained earnings.................................... 691,000 2,004,000 3,370,000 --
------------ ------------ ------------- -------------
Total shareholders' equity....................... 1,706,000 3,019,000 4,385,000 1,015,000
------------ ------------ ------------- -------------
$ 8,189,000 $ 9,340,000 $ 11,555,000 $ 11,555,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
VDI MEDIA
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 17,044,000 $ 14,468,000 $ 18,538,000 $ 13,208,000 $ 18,182,000
Cost of goods sold................... 10,595,000 10,042,000 11,256,000 7,924,000 11,080,000
------------- ------------- ------------- ------------- -------------
Gross profit......................... 6,449,000 4,426,000 7,282,000 5,284,000 7,102,000
Selling, general, and administrative
expense............................. 4,290,000 3,545,000 5,181,000 3,761,000 4,204,000
Dispute settlement (Note 8).......... -- 458,000 -- -- --
Costs related to establishing a new
facility (Note 5)................... -- 981,000 -- -- --
------------- ------------- ------------- ------------- -------------
Operating income (loss).............. 2,159,000 (558,000) 2,101,000 1,523,000 2,898,000
Interest expense..................... 254,000 293,000 375,000 280,000 236,000
Interest income...................... 13,000 22,000 42,000 29,000 13,000
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes.... 1,918,000 (829,000) 1,768,000 1,272,000 2,675,000
Provision for income taxes........... 29,000 -- 26,000 19,000 45,000
------------- ------------- ------------- ------------- -------------
Net income (loss).................... $ 1,889,000 $ (829,000) $ 1,742,000 $ 1,253,000 $ 2,630,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Unaudited pro forma data (Note 3):
Income (loss) before income taxes.... $ 1,918,000 $ (829,000) $ 1,768,000 $ 1,272,000 $ 2,675,000
Pro forma provision for (benefits
from) income taxes................ 767,000 (332,000) 707,000 509,000 1,070,000
------------- ------------- ------------- ------------- -------------
Pro forma net income (loss)........ $ 1,151,000 $ (497,000) $ 1,061,000 $ 763,000 $ 1,605,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Pro forma net income (loss) per
share............................. $ 0.16 $ 0.24
------------- -------------
------------- -------------
Pro forma weighted average number
of shares......................... 6,694,879 6,694,879
------------- -------------
------------- -------------
Supplemental pro forma net income
per share......................... $ 0.18 $ 0.25
------------- -------------
------------- -------------
Supplemental weighted average
number of shares.................. 7,052,942 7,052,942
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
VDI MEDIA
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.............................. 6,660,000 $ 1,015,000 $ 238,000 $ 1,253,000
Net income................................................ -- -- 1,889,000 1,889,000
Distributions to shareholders............................. -- -- (338,000) (338,000)
---------- ------------ ------------ -------------
Balance at December 31, 1993.............................. 6,660,000 1,015,000 1,789,000 2,804,000
Net loss.................................................. -- -- (829,000) (829,000)
Distributions to shareholders............................. -- -- (269,000) (269,000)
---------- ------------ ------------ -------------
Balance at December 31, 1994.............................. 6,660,000 1,015,000 691,000 1,706,000
Net income................................................ -- -- 1,742,000 1,742,000
Distributions to shareholders............................. -- -- (429,000) (429,000)
---------- ------------ ------------ -------------
Balance at December 31, 1995.............................. 6,660,000 1,015,000 2,004,000 3,019,000
Net income................................................ -- -- 2,630,000 2,630,000
Distributions to shareholders............................. -- -- (1,264,000) (1,264,000)
---------- ------------ ------------ -------------
Balance September 30, 1996................................ 6,660,000 $ 1,015,000 $ 3,370,000 $ 4,385,000
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
VDI MEDIA
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 1,889,000 $ (829,000) $ 1,742,000 $ 1,240,000 $ 2,630,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization....................... 993,000 1,328,000 1,579,000 1,169,000 1,222,000
Provision for doubtful accounts..................... 43,000 40,000 181,000 133,000 57,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.......... (1,131,000) 12,000 (1,616,000) (556,000) (859,000)
Decrease (increase) in amounts receivable from
employees.......................................... 51,000 (281,000) 176,000 (52,000) (39,000)
(Increase) decrease in inventories.................. (73,000) 52,000 74,000 (20,000) 54,000
(Increase) in prepaid expenses and current other
assets............................................. -- (28,000) (24,000) (12,000) 25,000
(Increase) decrease in other assets................. (19,000) 39,000 (8,000) 6,000 (6,000)
(Decrease) increase in accounts payable............. (57,000) 661,000 474,000 (171,000) 433,000
Increase (decrease) in accrued expenses............. 307,000 (331,000) 392,000 769,000 384,000
Increase (decrease) in accrued settlement
obligation......................................... -- 458,000 (417,000) (292,000) (41,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities....... 2,003,000 1,121,000 2,553,000 2,214,000 3,860,000
------------ ------------ ------------ ------------ ------------
Cash used in investing activities:
Capital expenditures................................ (1,379,000) (2,071,000) (1,137,000) (722,000) (1,043,000)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Distributions to shareholders....................... (338,000) (269,000) (429,000) (361,000) (1,264,000)
Change in revolving credit agreement................ (250,000) 1,119,000 (1,544,000) (1,644,000) 1,014,000
Proceeds from notes payable......................... 500,000 1,000,000 2,783,000 2,783,000
Repayment on notes payable.......................... (305,000) (427,000) (2,021,000) (1,815,000) (577,000)
Proceeds from subordinated notes payable to related
parties............................................ 60,000 -- 300,000 300,000 --
Repayment on subordinated notes payable to related
parties............................................ (122,000) (110,000) (135,000) (45,000) (255,000)
Proceeds from capital leases........................ -- -- 149,000 149,000 --
Repayment on capital lease obligations.............. (180,000) (336,000) (164,000) (124,000) (118,000)
(Increase) in amount receivable from officer........ -- -- -- -- (1,175,000)
(Increase) in deferred offering costs............... -- -- -- -- (584,000)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by financing
activities..................................... (635,000) 977,000 (1,061,000) (757,000) (2,959,000)
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash....................... (11,000) 27,000 355,000 735,000 (142,000)
Cash at beginning of period........................... 44,000 33,000 60,000 60,000 415,000
------------ ------------ ------------ ------------ ------------
Cash at end of period................................. $ 33,000 $ 60,000 $ 415,000 $ 795,000 $ 273,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Supplemental disclosure of cash flows information:
Cash paid for:
Interest.......................................... $ 274,000 $ 294,000 $ 375,000 $ 275,000 $ 236,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Income tax........................................ $ 5,000 $ 30,000 $ (6,000) $ 0 $ 48,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
VDI Media (the "Company") is a provider of high quality value-added video
distribution and duplication services including distribution of national
television spot advertising, trailers and electronic press kits. The Company's
services consists of (i) the physical and electronic delivery of broadcast
quality advertising, including spots, trailers, electronic press kits and
infomercials,and syndicated television programming to television stations, cable
television and other end-users nationwide and (ii) a broad range of video
services, including the duplication of video in all formats, element storage,
standards conversions, closed captioning and transcription services, and video
encoding for air play verification purposes. The Company also provides its
customers value-added post-production and editing services. The Company is
headquartered in Hollywood, California and has additional facilities in Culver
City, California and Tulsa, Oklahoma.
The Company has commenced implementation of a plan to sell a portion of its
common shares in an initial public offering. Prior to the offering, the Company
elected S Corporation status for federal and state income tax purposes. As a
result of the offering, the S corporation status will terminate. Thereafter, the
Company will pay federal and state income taxes as a C Corporation (see Notes 2
and 3).
On May 15, 1996, the Company effected a 333-for-1 common stock split and
increased the number of authorized shares to 50,000,000. All share amounts in
the accompanying financial statements have been retroactively restated to
reflect this split.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUES AND RECEIVABLES
The Company records revenues and receivables at the time products are
delivered to customers. Although sales and receivables are concentrated in the
entertainment industry, credit risk is limited due to the financial stability of
the customer base. The Company performs on-going credit evaluations and
maintains reserves for potential credit losses. Such losses have historically
been within management's expectations.
INVENTORIES
Inventories comprise raw materials, principally tape stock, and are stated
at the lower of cost or market. Cost is determined using the average cost
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions and
major improvements are capitalized. Maintenance, repairs and minor renewals are
expensed as incurred. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the lesser of the
estimated useful lives of the improvements or the remaining lease term. The
estimated useful life of the property and equipment and leasehold improvements
is five years.
INCOME TAXES
The Company has elected to be taxed as an S Corporation for both federal and
state income tax purposes, and, as a result, is not subject to federal taxation
and is subject to state taxation on income at a
F-7
<PAGE>
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
reduced rate (1.5%). Therefore, no asset or liability for federal income taxes
has been included in the historical financial statements. The shareholders are
liable for individual federal and state income taxes on their allocated portions
of the Company's taxable income.
The provision for income taxes includes state taxes currently payable and
deferred taxes arising from the expected future tax consequences of temporary
differences between the carrying amount and the tax bases of certain assets and
liabilities, primarily, property and equipment.
Upon completion of the public offering discussed in Note 1, the Company's S
Corporation status for federal and state income tax purposes will terminate.
This will result in the establishment of a net deferred tax liability calculated
at normal federal and state income tax rates, causing a one-time non-cash charge
against earnings for additional income tax expense equal to the amount of the
net change in the deferred tax liability. As of September 30, 1996, the amount
of the current deferred tax liability which would have been recorded had the
Company's S Corporation status terminated on that date was $394,000 (Note 3).
The deferred tax liability comprises certain asset valuation allowances and
excess tax over book depreciation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of SFAS No. 107 ("Disclosures about Fair
Value of Financial Instruments"), the Company calculates the fair value of
financial instruments and includes this additional information in the notes to
financial statements when the fair value is different than the book value of
those financial instruments. When the fair value is equal to the book value, no
additional disclosure is made. The Company uses quoted market prices whenever
available to calculate these fair values.
NOTE 3 -- PRO FORMA INFORMATION:
PRO FORMA STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)
As discussed in Note 2, the Company has elected treatment as an S
Corporation for federal and state income tax purposes. Upon completion of the
offering discussed in Note 1, the S Corporation status will terminate. The
accompanying statement of operation includes unaudited pro forma income tax
provisions, using a tax rate of 40%, to reflect the estimated income tax expense
of the Company as if it had been subject to normal federal and state income
taxes for the periods presented.
Pro forma net income per share is calculated using the weighted average
number of common shares outstanding after giving effect to the increase in the
number of shares whose proceeds are used to pay a distribution to the Company's
shareholders in excess of current year net income in connection with the
termination of its S Corporation status (see Note 1).
Supplemental pro forma net income per share is calculated after giving
effect to the number of shares of common stock whose proceeds are to be used to
retire certain outstanding debt upon completion of the offering and the
elimination of interest expense related to such debt.
PRO FORMA BALANCE SHEET INFORMATION (UNAUDITED)
The pro forma information presented in the accompanying balance sheet as of
September 30, 1996 reflects (i) the distribution by the Company to its
shareholders of its previously taxed and undistributed earnings calculated as of
September 30, 1996, which amount is expected to increase based upon the
Company's taxable earnings for the period from October 1, 1996 through the
closing date of the proposed initial public offering and (ii) an increase in the
Company's deferred tax liability of $394,000 calculated in accordance with SFAS
109 as if termination of the Company's S Corporation status occurred on
September 30, 1996 (Note 2).
NOTE 4 -- AMOUNTS RECEIVABLE FROM EMPLOYEES:
Amounts loaned to employees are unsecured and bear interest at rates
approximating 10%.
F-8
<PAGE>
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Machinery and equipment.................................... $ 6,233,000 $ 7,146,000 $ 8,068,000
Leasehold improvements..................................... 645,000 742,000 764,000
Equipment under capital lease.............................. 538,000 687,000 687,000
Vehicles................................................... 212,000 210,000 225,000
Computer equipment......................................... 105,000 106,000 205,000
------------- ------------- -------------
7,733,000 8,891,000 9,949,000
Less: Accumulated depreciation and amortization............ (3,331,000) (4,899,000) (6,129,000)
------------- ------------- -------------
$ 4,402,000 $ 3,992,000 $ 3,820,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Depreciation expense aggregated $993,000, $1,328,000 and $1,579,000 for the
three years in the period ended December 31, 1995, and $1,169,000 and $1,222,000
for the nine month periods ended September 30, 1995 and 1996, respectively.
In August 1994, the Company established a distribution facility in Tulsa,
Oklahoma. Equipment and leasehold improvements were capitalized. Costs incurred
in establishing this facility, such as employee costs and initial facility
rental and tape stock, were charged against 1994 results of operations.
In March 1994, the Company entered into a noncash exchange of production
equipment with a net book value of $433,000 for substantially similar assets.
NOTE 6 -- REVOLVING CREDIT AGREEMENT:
The Company has a $2,000,000 revolving credit agreement with a bank. Amounts
available pursuant to this agreement are determined by eligible accounts
receivable, as defined, and are secured by substantially all of the Company's
assets. In addition, repayment of amounts borrowed is guaranteed by the
Company's principal shareholder. Interest accrues at either the London Interbank
Offering Rate (LIBOR) plus 2.25% or the bank's reference rate (6.25% at
September 30, 1996) plus 2.5%. The terms of the revolving credit agreement
include covenants regarding the maintenance of various financial ratios. The
Company was in compliance with these covenants. The revolving credit agreement
expires on June 30, 1997.
NOTE 7 -- LONG-TERM DEBT AND NOTES PAYABLE:
TERM LOAN
The Company also has a $2,825,000 term loan with a bank which is secured by
the assets of the Company. The term loan is to be repaid in monthly installments
of principal and interest through July 2000. Interest accrues at LIBOR plus
2.5%. The terms of the loan agreement include covenants regarding the
maintenance of various financial ratios. The Company was in compliance with
these covenants as of September 30, 1996.
F-9
<PAGE>
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- LONG-TERM DEBT AND NOTES PAYABLE: (CONTINUED)
SUBORDINATED NOTES PAYABLE TO RELATED PARTY
Subordinated notes payable comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
--------- ----------
<S> <C> <C>
Note payable, unsecured, payable in December 1998 along with interest
accrued at a rate of 13%.............................................. -- $ 225,000
Note payable, unsecured, bearing interest at 9% per annum, payable in
monthly installments of $5,000........................................ $ 90,000 30,000
--------- ----------
90,000 255,000
Less current portion................................................... (60,000) (30,000)
--------- ----------
$ 30,000 $ 225,000
--------- ----------
--------- ----------
</TABLE>
The subordinated notes arose from an agreement between the Company and a
relative of the Company's principal shareholder. Such notes payable are
subordinated to amounts borrowed under the revolving credit agreement and term
loan. Interest expense aggregated $21,000, $13,000 and $36,000 for the three
years in the period ended December 31, 1995, respectively, and $24,000 and
$13,000 for the nine month periods ended September 30, 1995 and 1996. The
subordinated notes were repaid in June 1996.
EQUIPMENT FINANCING AND CAPITAL LEASES
The Company has financed the purchase of certain equipment through the
issuance of notes payable and under capital leasing arrangements. Such
obligations are payable in monthly installments through September 1997.
Annual maturities for debt and notes payable are as follows:
<TABLE>
<S> <C>
Three months ending December 31, 1996........................... $ 185,000
Year ending December 31,
1997.......................................................... 723,000
1998.......................................................... 547,000
1999.......................................................... 447,000
2000.......................................................... 163,000
---------
$2,065,000
---------
---------
</TABLE>
NOTE 8 -- COMMITMENTS AND CONTINGENCIES:
The Company leases office and production facilities in California and
Oklahoma under operating leases which expire in May and July 1999, respectively.
The Oklahoma lease provides for a renewal option of five years; the California
lease has no renewal option. Approximate minimum annual rentals under these
noncancellable operating leases are as follows:
<TABLE>
<S> <C>
Three months ended December 31, 1996............................ $ 138,000
Year ending December 31,
1997.......................................................... 553,000
1998.......................................................... 553,000
1999.......................................................... 244,000
---------
Total..................................................... $1,488,000
---------
---------
</TABLE>
F-10
<PAGE>
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Total rental expense was approximately $396,000, $447,000 and $595,000 for
the three years in the period ended December 31, 1995, respectively, and
$432,000 and $471,000 for the nine month periods ended September 30, 1995 and
1996, respectively.
In February 1995, the Company settled a dispute arising out of the asset
exchange described in Note 5. In consideration of a mutual release from further
liability, including threatened litigation, the Company paid $458,000. This
amount has been recorded as of December 31, 1994, as the agreement represents
the culmination of events occurring prior to that date.
In March 1994, the Company entered into a five year joint operating
agreement with a telecommunications company to provide access to its fiber optic
network. In consideration for access to the fiber optic network, the Company
shares 50% of revenues arising from delivery services utilizing this network
with the telecommunications company. The agreement does not include any cost
sharing arrangements. No such revenues have been earned pursuant to this
agreement as of September 30, 1996.
NOTE 9 -- STOCK PURCHASE TRANSACTION:
Effective April 1, 1996, the Company's co-founder and chief executive
officer purchased 2,264,400 shares of common stock of the Company from its
co-founder for total consideration of approximately $5.1 million. In order to
effect this transaction, the chief executive officer borrowed $1.2 million from
the Company bearing an interest rate of 7% and issued a note payable to the
co-founder in the amount of approximately $4 million. This note is to be repaid
in April 2006 and bears interest at a rate of 4.5%. This note is secured by the
common stock purchased.
Concurrently, the co-founder agreed to sell 660,000 shares of common stock
of the Company to the Company's chief financial officer. In exchange, the chief
financial officer also executed a note payable to the co-founder in the amount
of $1.6 million; the terms of the chief financial officer's note are identical
to those issued by the chief executive officer. These notes also contain
acceleration provisions which require that the chief executive officer and chief
financial officer prepay one-half of the proceeds from the sale of any of such
shares of common stock or the sale of substantially all of the assets of VDI.
The chief executive officer expects to repay amounts borrowed from the
Company with the proceeds from an S Corporation distribution and future
borrowings collateralized by his common stock holdings.
NOTE 10 -- STOCKHOLDERS' EQUITY:
In May 1996, the Board of Directors, approved the 1996 Stock Incentive Plan
(the "Plan"). The Plan provides for the award of options to purchase up to
900,000 shares of the Company's common stock, as well as stock appreciation
rights, performance share awards and restricted stock awards. No options have
been granted pursuant to the provisions of the Plan.
The Board has also authorized the issuance of up to 5,000,000 shares of
preferred stock. The voting rights, liquidation preferences and other privileges
inuring to the benefit of preferred stockholders have not yet been established
and no such shares have been issued.
NOTE 11 -- SALES TO MAJOR CUSTOMERS:
For the year ended December 31, 1993, sales to two customers amounted to
$2,686,000 and $1,775,000. Sales to a single customer amounted to $1,735,000 and
$2,066,000 for the years ended December 31, 1994 and 1995, respectively, and
$1,533,000 and $1,913,000 for the nine month periods ending September 30, 1995
and 1996, respectively.
NOTE 12 -- SUPPLEMENTAL CASH FLOW INFORMATION:
As described in Note 5, the Company engaged in a noncash exchange of assets.
F-11
<PAGE>
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- SUPPLEMENTAL CASH FLOW INFORMATION: (CONTINUED)
The Company has financed the acquisition of certain equipment through
capital lease obligations. For the year ended December 31, 1995, assets
aggregating $149,000 were acquired.
NOTE 13 -- SUBSEQUENT EVENTS (UNAUDITED):
In December 1996, the Company agreed to acquire all of the assets of
Woodholly Productions ("Woodholly"). Woodholly provides full service
duplication, distribution, video content storage and ancillary services to major
motion picture studios, advertising agencies and independent production
companies for both domestic and international use. As consideration, the Company
will pay the partners of Woodholly a maximum of $8 million, of which $4 million
will be paid in installments, commencing January 1997. The remaining balance is
subject to earn-out provisions which are currently being negotiated. The Company
anticipates the transaction will close in early 1997 and expects to account for
this acquisition as a purchase.
F-12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Woodholly Productions
In our opinion, the accompanying balance sheet and the related statements of
income, of partners' capital and of cash flows present fairly, in all material
respects, the financial position of Woodholly Productions at December 31, 1995
and 1994, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Costa Mesa, California
November 22, 1996
F-13
<PAGE>
WOODHOLLY PRODUCTIONS
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Accounts receivable, net of allowance for doubtful accounts of $140,000
and $140,000, respectively............................................ $ 2,009,000 $ 2,207,000 $ 1,665,000
Prepaid expenses and other current assets.............................. 146,000 149,000 32,000
------------ ------------ -------------
Total current assets............................................. 2,155,000 2,356,000 1,697,000
Property and equipment, net (Note 3)................................... 2,542,000 3,357,000 3,262,000
------------ ------------ -------------
$ 4,697,000 $ 5,713,000 $ 4,959,000
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Cash overdraft......................................................... $ 340,000 $ 950,000 $ 166,000
Accounts payable and accrued expenses.................................. 22,000 21,000 429,000
Current portion of capital lease obligations (Note 5).................. 407,000 371,000 767,000
Revolving credit agreement (Note 4).................................... 430,000 424,000 22,000
------------ ------------ -------------
Total current liabilities........................................ 1,199,000 1,766,000 1,384,000
Capital lease obligations, net of current portion (Note 5)............. 1,141,000 1,473,000 1,390,000
------------ ------------ -------------
Total liabilities................................................ 2,340,000 3,239,000 2,744,000
Commitments and contingencies (Note 7)
Partners' capital...................................................... 2,357,000 2,474,000 2,185,000
------------ ------------ -------------
$ 4,697,000 $ 5,713,000 $ 4,959,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE>
WOODHOLLY PRODUCTIONS
INCOME STATEMENT
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................................. $ 6,838,000 $ 7,411,000 $ 5,455,000 $ 5,829,000
Cost of services sold.................................... 4,013,000 4,808,000 3,622,000 4,187,000
------------ ------------ ------------ ------------
Gross profit....................................... 2,825,000 2,603,000 1,833,000 1,642,000
Selling, general and administrative expense.............. 1,316,000 1,375,000 950,000 1,144,000
------------ ------------ ------------ ------------
Operating income......................................... 1,509,000 1,228,000 883,000 498,000
Interest expense......................................... 173,000 355,000 196,000 261,000
Other income............................................. (6,000) (9,000) -- (21,000)
------------ ------------ ------------ ------------
Net income............................................... $ 1,342,000 $ 882,000 $ 687,000 $ 258,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
WOODHOLLY PRODUCTIONS
STATEMENT OF PARTNERS' CAPITAL
DECEMBER 31, 1995
<TABLE>
<S> <C>
Balance at December 31, 1993.................................................... $1,663,000
Income.......................................................................... 1,342,000
Distributions to partners....................................................... (648,000)
---------
Balance at December 31, 1994.................................................... 2,357,000
Income.......................................................................... 882,000
Distributions to partners....................................................... (765,000)
---------
Balance at December 31, 1995.................................................... 2,474,000
Unaudited information:
Income.......................................................................... 258,000
Distributions to partners....................................................... (547,000)
---------
Balance at September 30, 1996................................................... $2,185,000
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
WOODHOLLY PRODUCTIONS
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
---------------------------- ----------------------------
1994 1995 1995 1996
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 1,342,000 $ 882,000 $ 687,000 $ 258,000
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization..................... 567,000 953,000 710,000 839,000
Provision for doubtful accounts................... 20,000 -- 55,000 53,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable........ (200,000) (197,000) 42,000 489,000
(Increase) decrease in prepaid expenses and other
current assets................................... (86,000) (3,000) 97,000 117,000
Decrease in other assets.......................... 13,000 -- -- --
(Decrease) increase in accounts payable and
accrued expenses................................. 77,000 609,000 276,000 (376,000)
------------- ------------- ------------- -------------
Net cash provided by operating activities............. 1,733,000 2,243,000 1,867,000 1,380,000
Cash used in investing activities:
Capital expenditures................................ (1,636,000) (1,768,000) (1,564,000) (727,000)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Distributions to partners........................... (648,000) (765,000) (540,000) (547,000)
Change in revolving credit agreement................ 180,000 (6,000) (430,000) (402,000)
Repayment of capital lease obligations.............. (579,000) (801,000) (431,000) (304,000)
Proceeds from capital lease obligations............. 950,000 1,098,000 1,098,000 600,000
------------- ------------- ------------- -------------
Net cash used in financing activities........... (97,000) (474,000) (303,000) (653,000)
Net change in cash.................................... -- -- -- --
Cash at beginning of period........................... -- -- -- --
------------- ------------- ------------- -------------
Cash at end of period................................. $ -- $ -- $ -- $ --
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental disclosure of cash flows information:
Cash paid for:
Interest.......................................... $ 173,000 $ 355,000 $ 196,000 $ 261,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
WOODHOLLY PRODUCTIONS
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE PARTNERSHIP:
Woodholly Productions, a California general partnership (the "Partnership")
provides full service duplication, distribution, video content storage and
ancillary services to major motion picture studios, advertising agencies and
independent production companies for both domestic and international use.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL DATA
The interim financial data is unaudited; however, in the opinion of the
Partnership, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results of
the interim periods.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUES AND RECEIVABLES
The Partnership records revenues and receivables at the time products are
delivered to customers. Although sales and receivables are concentrated in the
entertainment industry, credit risk is limited due to the financial stability of
the customer base. The Partnership performs on-going credit evaluations and
maintains reserves for potential credit losses. Such losses have historically
been within management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions and
major improvements are capitalized. Maintenance, repairs and minor renewals are
expensed as incurred. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the lesser of the
estimated useful lives of the improvements or the remaining lease term. The
estimated useful life of property and equipment is five years.
INCOME TAXES
No provision for income taxes is necessary in the accompanying financial
statements because, as a partnership, it is not subject to income taxes and the
tax effect of its activities accrues to the partners.
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of SFAS No. 107 ("Disclosures about Fair
Value of Financial Instruments"), the Partnership calculates the fair value of
financial instruments and includes this additional information in the notes to
financial statements when the fair value is different than the book value of
those financial instruments. When the fair value is equal to the book value, no
additional disclosure is made. The Partnership uses quoted market prices
whenever available to calculate these fair values.
F-18
<PAGE>
WOODHOLLY PRODUCTIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Equipment under capital lease............................................. $ 3,191,000 $ 4,289,000
Leasehold improvements.................................................... 462,000 1,046,000
Machinery and equipment................................................... 774,000 860,000
------------- -------------
4,427,000 6,195,000
Less: accumulated depreciation and amortization........................... (1,885,000) (2,838,000)
------------- -------------
$ 2,542,000 $ 3,357,000
------------- -------------
------------- -------------
</TABLE>
Depreciation expense aggregated $567,000 and $953,000 for the years ended
December 31, 1994 and 1995, respectively.
During fiscal 1995, the Partnership added leasehold improvements in the
amount of $584,000 in connection with the expansion of its facilities.
NOTE 4 -- REVOLVING CREDIT AGREEMENT:
The Partnership has a $460,000 revolving credit agreement with a bank.
Amounts available pursuant to this agreement are determined by eligible accounts
receivable, as defined, and are secured by substantially all of the
Partnership's assets. In addition, repayment of amounts borrowed is guaranteed
by the partners. Interest accrues at the lenders prime rate (10% at December 31,
1995) plus 1.5%. The terms of the revolving credit agreement include covenants
regarding the maintenance of various financial ratios. The revolving credit
agreement expires on .
NOTE 5 -- CAPITAL LEASE OBLIGATIONS:
The Partnership leases certain equipment under capital lease arrangements.
Future minimum lease commitments are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996.................................................................. $ 606,000
1997.................................................................. 894,000
1998.................................................................. 510,000
1999.................................................................. 316,000
---------
2,326,000
Less: Amount representing interest...................................... (482,000)
---------
Present value of future minimum lease payments.......................... 1,844,000
Less: Current portion................................................... (371,000)
---------
Long-term portion....................................................... $1,473,000
---------
---------
</TABLE>
At December 31, 1995, the Partnership has outstanding letters of credit in
the amount of $30,000 outstanding to secure performance under these leases.
These letters of credit mature in July 1996.
NOTE 6 -- PROFIT SHARING PLAN:
The Partnership sponsors a defined contribution employee benefit plan.
Contributions to this plan are made at the discretion of management. For the
years ended December 31, 1994 and 1995, contributions to this plan aggregated
$151,000 and $105,000.
F-19
<PAGE>
WOODHOLLY PRODUCTIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- COMMITMENTS AND CONTINGENCIES:
The Company leases its principal office and production facility under an
operating lease with one of the partners which expires in December 1997.
Pursuant to an informal agreement, the Partnership pays monthly rent in an
amount equal to the mortgage payment on the property. The Company also leases a
warehouse facility under an operating lease which expires in November 1998 and
provides for a renewal option of five years. Approximate minimum annual rentals
under these noncancellable operating leases for the warehouse is as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996.................................................................. $ 85,000
1997.................................................................. 85,000
1998.................................................................. 78,000
---------
Total............................................................. $ 248,000
---------
---------
</TABLE>
Total rental expense was approximately $116,000 and $174,000 of which
$51,000 and $89,000 was paid to a related party for the years ended December 31,
1994 and 1995, respectively.
The Partnership has entered into an agreement with the customer described in
Note 8. Under the terms of this agreement, the Partnership rebates 10% of cash
remittances for an annual period commencing October 1, subject to adjustment for
sales and use taxes collected and the cost of orders requiring revisions.
NOTE 8 -- SALES TO MAJOR CUSTOMER:
For the year ended December 31, 1994 and 1995, a single customer accounted
for 27% and 29% of the Partnership's sales.
NOTE 9 -- SUPPLEMENTAL CASH FLOW INFORMATION:
The Company has financed the acquisition of certain equipment through
capital lease obligations. For the years ended December 31, 1994 and 1995,
assets with costs aggregating $950,000 and $1,098,000 were acquired.
NOTE 10 -- SUBSEQUENT EVENTS:
In September 1996, the partnership signed a letter of intent pursuant to
which the partners agreed to sell their Partnership interests to VDI Media.
F-20
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary........................................... 3
Risk Factors................................................. 7
The Company.................................................. 12
Use of Proceeds.............................................. 13
Dividend Policy.............................................. 13
Capitalization............................................... 14
Dilution..................................................... 15
Selected Financial and Other Data............................ 16
Certain Pro Forma Combined Financial Statements.............. 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 23
Industry Overview............................................ 29
Business..................................................... 32
Management................................................... 39
Certain Transactions......................................... 45
Principal and Selling Shareholders........................... 46
Description of Capital Stock................................. 47
Shares Eligible for Future Sale.............................. 48
Underwriting................................................. 49
Legal Matters................................................ 50
Experts...................................................... 50
Additional Information....................................... 50
Index to Financial Statements................................ F-1
</TABLE>
2,800,000 Shares
[LOGO]
Common Stock
---------------------
P R O S P E C T U S
---------------------
PRUDENTIAL SECURITIES INCORPORATED
OPPENHEIMER & CO., INC.
, 1997
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with this Offering of the Common Stock being
registered herein are estimated as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 11,857
Legal fees and expenses........................................... 340,000
NASD filing fees.................................................. 3,939
Accounting fees and expenses...................................... 285,000
Blue sky fees and expenses........................................ 10,000
Printing.......................................................... 90,000
Transfer agent fee................................................ 9,000
Nasdaq listing fee................................................ 39,400
Miscellaneous..................................................... 10,804
---------
Total........................................................... $ 800,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317(b) of the California Corporations Code (the "Corporations Code")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any "proceeding" (as defined in Section 317(a)
of the Corporations Code), other than an action by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person is or was a director, officer, employee or other agent of the corporation
(collectively, an "Agent"), against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
proceeding if the Agent acted in good faith and in a manner the Agent reasonably
believed to be in the best interest of the corporation and, in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful.
Section 317(c) of the Corporations Code provides that a corporation shall
have power to indemnify any agent who was or is a party or is threatened to be
made a party to any threatened, pending or completed action by or in the right
of the corporation to procure a judgment in its favor by reason of the fact that
such person is or was an Agent, against expenses actually and reasonably
incurred by the Agent in connection with the defense or settlement of such
action if the Agent acted in good faith and in a manner such Agent believed to
be in the best interest of the corporation and its shareholders.
Section 317(c) further provides that no indemnification may be made
thereunder for any of the following: (i) in respect of any matter as to which an
Agent shall have been adjudged to be liable to the corporation, unless the court
in which such proceeding is or was pending shall determine that such Agent is
fairly and reasonably entitled to indemnity for expenses (ii) of amounts paid in
settling or otherwise disposing of a pending action without court approval and
(iii) of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
Section 317(d) of the Corporations Code requires that an Agent be
indemnified against expenses actually and reasonably incurred to the extent the
Agent has been successful on the merits in the defense of proceedings referred
to in subdivisions(b) or (c) of Section 317.
Except as provided in Section 317(d), and pursuant to Section 317(e),
indemnification under Section 317 shall be made by the corporation only if
specifically authorized and upon a determination that indemnification is proper
in the circumstances because the Agent has met the applicable standard of
conduct, by any of the following: (i) a majority vote of a quorum consisting of
directors who are not parties to the proceeding, (ii) if such a quorum of
directors is not obtainable, by independent legal counsel in a written opinion,
(iii) approval of the shareholders, provided that any shares owned by the Agent
may not vote thereon, or (iv) the court in which such proceeding is or was
pending.
II-1
<PAGE>
Pursuant to Section 317(f) of the Corporations Code, the corporation may
advance expenses incurred in defending any proceeding upon receipt of an
undertaking by the Agent to repay such amount if it is ultimately determined
that the Agent is not entitled to be indemnified.
Section 317(h) provides, with certain exceptions, that no indemnification
shall be made under Section 317 in such case it appears that it would be
inconsistent with a provision of the corporation's articles, bylaws, a
shareholder resolution or any agreement which prohibits or otherwise limits
indemnification, or in such case as it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
Section 317(i) authorizes a corporation to purchase and maintain insurance
on behalf of an Agent for liabilities arising by reason of the Agents' status,
whether or not the corporation would have the power to indemnify the Agent
against such liability under the provisions of Section 317.
Reference is also made to Section 8 of the Underwriting Agreement between
the Representatives, the Selling Shareholder and the Registrant (see Exhibit
1.1), which provides for indemnification of the Registrant under certain
circumstances.
Article III of the Restated Articles of Incorporation of the Registrant
provides for the indemnification of the agents of the Registrant to the fullest
extent permissible under California law.
In addition, Article IV of the Bylaws of the Registrant authorizes the
Registrant to enter into agreements with agents of the Registrant providing for
or permitting indemnification in excess of that permitted under Section 317 of
the Corporations Code, to the extent permissible under California law, and to
purchase and maintain insurance to the extent provided by Section 3.17(i).
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement
3.1 Restated Articles of Incorporation of VDI Media (formerly, VDI)
3.2 By-laws of VDI Media
4.1 Specimen Certificate for Common Stock
4.2 1996 Stock Incentive Plan of VDI Media
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP with respect to legality
10.1 Employment Agreement between VDI Media and Luke Stefanko
10.2 Employment Agreement between VDI Media and Tom Ennis
10.3 Employment Agreement between VDI Media and Eric Bershon
10.5 Business Loan Agreement (Revolving Credit) between VDI Media (formerly, VDI) and
Union Bank dated July 1, 1995, as amended on April 1, 1996, and June 1996
10.6 Joint Operating Agreement effective as of March 1, 1994, between VDI Media
(formerly, VDI) and Vyvx, Inc.
10.7* Lease Agreement between VDI Media (formerly, VDI) and 6920 Sunset Boulevard
Associates dated May 17, 1994 (Hollywood facility)
10.8* Lease Agreement between VDI Media (formerly, VDI) and 3767 Overland Associates,
LTD dated April 25, 1996 (West Los Angeles facility)
10.9* Lease Agreement between VDI Media (formerly, VDI) and The Bovaird Supply Company
dated June 3, 1994 (Tulsa Control Center)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.10* Loan Agreement between VDI Media (formerly, VDI) and R. Luke Stefanko dated as
of April 1, 1996
10.12 Term Loan Agreement between VDI Media (formerly, VDI) and Union Bank
10.13 Asset Purchase Agreement, dated as of December 28, 1996 by and among VDI Media,
Woodholly Productions, Yvonne Parker, Rodger Parker, Jim Watt and Kim Watt
23.1 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit 5.1)
23.2 Consent of Price Waterhouse LLP
23.3** Consent of Edward M. Philip
23.4 Consent of Steven J. Schoch
24.1 Power of Attorney (included on page II-4)
27 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
b. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing date specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to provide prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of such Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act will be deemed to be part of this registration statement as of the
time it was declared effective.
(d) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus will be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment Number 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Los Angeles and State of California, on the 31st day of December, 1996.
VDI MEDIA
By /s/ DONALD R. STINE
------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that, the undersigned directors and officers
of VDI Media, a California corporation (the "Corporation"), hereby constitute
and appoint R. Luke Stefanko and Donald Stine, each with full power of
substitution and resubstitution, his true and lawful attorneys and agents to
sign the names of the undersigned directors and officers in the capacities
indicated below to the registration statement to which this Power of Attorney is
filed as an exhibit, and all amendments (including post-effective amendments and
registration statements filed pursuant to Rule 462) and supplements thereto, and
all instruments or documents filed as a part thereof or in connection therewith,
and to file the same, with all exhibits thereto, and all other instruments or
documents in connection therewith, with the Securities and Exchange Commission;
and each of the undersigned hereby ratifies and confirms all that said
attorneys, agents, or any of them, shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
Number 1 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
NAME TITLE DATE
- ----------------------------------- ------------------------- --------------
/s/ R. LUKE STEFANKO Chief Executive Officer,
- ----------------------------------- President Chairman of December 31,
R. Luke Stefanko the Board and Director 1996
Chief Financial Officer,
/s/ DONALD R. STINE Secretary, Director December 31,
- ----------------------------------- (principal financial 1996
Donald R. Stine officer)
/s/ PAUL RUBEL
- ----------------------------------- Principal Accounting December 31,
Paul Rubel Officer 1996
/s/ TOM ENNIS
- ----------------------------------- Director December 31,
Tom Ennis 1996
II-4
<PAGE>
VDI MEDIA
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------------------------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts $ 103,000 161,000 -- $ 284,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Year ended December 31, 1994
Allowance for doubtful accounts $ 63,000 40,000 -- $ 103,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Year ended December 31, 1993
Allowance for doubtful accounts $ 20,000 43,000 -- $ 63,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- ----------------------------------------------------------------------------------------------
<C> <S> <C>
1.1** Form of Underwriting Agreement
3.1 Restated Articles of Incorporation of VDI Media (formerly, VDI)
3.2 By-laws of VDI Media (formerly, VDI)
4.1 Specimen Certificate for Common Stock
4.2 1996 Stock Incentive Plan of VDI Media
5.1 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP with respect to legality
10.1 Employment Agreement between VDI Media and Luke Stefanko
10.2 Employment Agreement between VDI Media and Tom Ennis
10.3 Employment Agreement between VDI Media and Eric Bershon
10.5 Business Loan Agreement (Revolving Credit) between VDI Media (formerly, VDI) and Union Bank
dated July 1, 1995, as amended on April 1, 1996 and June 1996
10.6 Joint Operating Agreement, effective as of March 1, 1994, between VDI Media (formerly, VDI)
and Vyvx, Inc.
10.7* Lease Agreement between VDI Media (formerly, VDI) and 6920 Sunset Boulevard Associates dated
May 17, 1994 (Hollywood facility)
10.8* Lease Agreement between VDI Media (formerly, VDI) and 3767 Overland Associates, Ltd. dated
April 25, 1996
(West Los Angeles facility)
10.9* Lease Agreement between VDI Media (formerly, VDI) and The Bovaird Supply Company dated June 3,
1994 (Tulsa Control Center)
10.10* Loan Agreement between VDI Media and R. Luke Stefanko dated as of April 1, 1996
10.12 Term Loan Agreement between VDI Media (formerly, VDI) and Union Bank
10.13 Asset Purchase Agreement, dated as of December 28, 1996 by and among VDI Media and Woodholly
Productions, Yvonne Parker, Rodger Parker, Jim Watt and Kim Watt
23.1 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit 5.1)
23.2 Consent of Price Waterhouse LLP
23.3** Consent of Edward M. Philip
23.4 Consent of Steven J. Schoch
24.1 Power of Attorney (included on page II-4)
27 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
<PAGE>
EXHIBIT 3.1
OFFICER'S CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION
OF
VDI
The undersigned certify that:
1. They are the chief executive officer and the secretary, respectively,
of VDI, a California corporation.
2. The Corporation was incorporated on March 29, 1990 under the name
D2D, Inc., which name was changed to VDI by Certificate of Amendment on
August 3, 1990. By this Restated Articles of Incorporation, the Corporation
is changing its name to VDI Media.
3. This Restated Article of Incorporation has been unanimously approved
by the Board of Directors of the Corporation and has been approved by the
shareholders owing a majority of the outstanding shares of the Corporation's
common stock, the sole class of stock currently outstanding.
4. The Articles of Incorporation of this Corporation are amended and
restated to read as follows:
I.
The name of this Corporation is VDI Media.
II.
The purpose of this Corporation is to engage any lawful act or activity for
which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporation Code.
III.
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
This Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) of the
Corporation (the "Agents") for breach of duty to the Corporation and its
shareholders through bylaw provisions or through agreements with the Agents,
or both, in excess of the indemnification otherwise permitted by Section 317
of the
<PAGE>
California Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the California Corporation Code.
IV.
A. AUTHORIZED SHARES. The aggregate number of shares of capital stock
that the Corporation is authorized to issue is fifty-five million
(55,000,000) shares, consisting of (i) fifty million (50,000,000) shares of
Common Stock having no par value and (ii) five million (5,000,000) shares of
Preferred Stock having no par value. All cross references in each subdivision
of this ARTICLE IV refer to other paragraphs in such subdivision
unless otherwise indicated.
B. COMMON STOCK
1. The Board of Directors may, in its discretion, out of funds
legally available for the payment of dividends and at such times and in such
manner as determined by the Board Directors, declare and pay dividends on the
Common Stock.
2. Upon filing of these Restated Articles of Incorporation, each
outstanding share of Common Stock is split up and converted into 333 shares
of Common Stock.
3. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, after there shall have been paid
to or set aside for the holders of shares of Preferred Stock the full
preferential amounts to which they are entitled, if any, the holders of
outstanding shares of Common Stock shall be entitled to receive pro rata,
according to the number of shares of held by each, the remaining assets of the
Corporation available for distribution.
4. Except as otherwise provided by law and except as may be
determined by the Board of Directors with respect to the Preferred Stock
pursuant to Section C of this ARTICLE IV, only the holders of Common Stock
shall be entitled to vote for the election of Directors of the Corporation
and for all other corporate purposes. Upon any such vote the holders of
Common Stock shall, except as otherwise provided by law, be entitled to one
vote for each share of Common Stock held by them respectively.
C. PREFERRED STOCK. The Preferred Stock may be issued from time to
time in one or more series in any manner permitted by law and the provisions of
the Restated Articles of Incorporation of the Corporation, as determined from
time to time by the Board of Directors and stated in the resolution or
resolutions providing for the issuance thereof, prior to the issuance of
2
<PAGE>
any shares thereof. Unless otherwise provided in the resolution establishing a
series of Preferred Stock, prior to the issue of any shares of a series so
established or to be established, the Board of Directors may, by resolution,
amend the relative rights an preferences of the shares of such series, and,
after the issue of shares of a series whose number has been designated by the
Board of Directors, the resolution establishing the series may be amended by the
Board of Directors to increase (but not above the total authorized shares of
the class) or to decrease (but not below the number of shares of such series
then outstanding) the number of shares of that series.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, of each class of stock
shall be governed by the following provisions:
1. The Board of Directors is expressly authorized at any time, and
from time to time, to provide for the issuance of shares of Preferred Stock in
one or more series, with such voting powers, full or limited, or without
voting powers and with such designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions providing for the issue thereof adopted by the Board
of Directors, except if such resolution or resolutions conflict with the
provisions of the Restated Articles of Incorporation of the Corporation. Said
resolution or resolutions may provide for (but not limiting the generally
thereof) the following:
a. The number of shares to constitute each such series, and the
designation of each such series.
b. The dividend rate of each such series, the conditions and
dates upon which such dividends shall be payable, the
relation which such dividends shall bear to the dividends
payable on any other class or classes or on any other series
of any class or classes of stock, and whether such dividends
shall be cumulative or non-cumulative.
c. Whether the shares of each such series shall be subject to
redemption by the Corporation and if made subject to such
redemption, the times, prices and other terms and conditions
of such redemption.
d. The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of each such series.
e. Whether or not the shares of each such series shall be
convertible into or exchangeable for shares of any other
class or classes or any other series of any other class or
classes of stock of the Corporation, and, if provision be
made for conversion or exchange,
3
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the times, prices, rates of exchange, adjustments, and other
terms and conditions of such conversion or exchange.
f. The extent, if any, to which the holders of the shares of
each such series shall be entitled to vote with respect to
the election of Directors or otherwise.
g. The restrictions, if any, on the issue or reissue of any
additional Preferred Stock.
h. The rights of the holders of the shares of each such series
upon the dissolution of, or upon the distribution of the
assets of, the Corporation.
2. Except as otherwise required by law and except for such voting powers
with respect to the election of Directors or other matters as may be stated in
the resolutions of the Board of Directors creating any series of Preferred
Stock, the holders of any such series shall have no voting powers whatsoever.
Any amendment of the Restated Articles of Incorporation of the Corporation
which shall increase or decrease the number of authorized shares of any class or
classes of stock may be adopted by the affirmative vote of the holders of a
majority of the stock of the Corporation entitled to vote. Together with
holders of stock generally entitled to vote, holders of a class of stock are
entitled to vote on an amendment to increase or decrease the number of
authorized shares of such class (as provided for in Section 903 of the
California Corporations Code).
V.
The Corporation shall have perpetual existence.
VI.
For so long as a class of the Corporation's stock is registered pursuant to
the Securities Exchange Act of 1934, as amended, shareholder action shall be
taken only at an annual meeting or special meeting of the shareholders and shall
not be taken by written consent.
5. The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the board of directors.
4
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6. The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the required vote of shareholders in accordance with
Section 902, California Corporations Code. The total number of outstanding
shares of the Corporation is 20,000. The number of shares voting in favor of
the amendment equaled or exceeded the vote required. The percentage vote
required was more than 50%.
DATE: May 15, 1996
/s/ R. Luke Stefanko
---------------------------
R. Luke Stefanko
Chief Executive Officer
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
DATE: May 15, 1996
/s/ R. Luke Stefanko
-----------------------------
R. Luke Stefanko
Chief Executive Officer
/s/ Donald R. Stine
-----------------------------
Donald R. Stine
Secretary
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<PAGE>
EXHIBIT 3.2
BYLAWS
OF
VDI MEDIA
A CALIFORNIA CORPORATION
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
OFFICES
Section 1. Principal Executive Office . . . . . . . . . . . . . . . . 1
Section 2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Qualification to do Business . . . . . . . . . . . . . . . 1
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. Place of Meetings . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Annual Meetings . . . . . . . . . . . . . . . . . . . . . . 2
Section 3. Special Meetings. . . . . . . . . . . . . . . . . . . . . . 2
Section 4. Notice of Meetings of Shareholders. . . . . . . . . . . . . 2
Section 5. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 6. Adjourned Meetings and Notice
Thereof . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 7. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(a) Voting Rights of Shares and
Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 5
(b) Record Date Requirements. . . . . . . . . . . . . . . . . . 5
(c) Voting of Shares by Fiduciaries,
Receivers, Pledgeholders and Minors . . . . . . . . . . . . 6
(d) Voting of Shares by Corporations. . . . . . . . . . . . . . 7
(e) Voting of Shares Owned of Record
by Two or More Persons. . . . . . . . . . . . . . . . . . . 8
(f) Election of Directors; Cumulative
Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 8. Waiver of Notice and Consent of
Absentees . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 9. Action Without a Meeting . . . . . . . . . . . . . . . . . 10
Section 10. Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 11. Inspectors of Election . . . . . . . . . . . . . . . . . . 13
ARTICLE III
DIRECTORS
Section 1. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2. Number and Qualification of
Directors. . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3. Election and Term of Office. . . . . . . . . . . . . . . . 14
Section 4. Resignation and Removal of Directors . . . . . . . . . . . 14
Section 5. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . 15
- i -
<PAGE>
Page
----
Section 6. Place of Meetings. . . . . . . . . . . . . . . . . . . . . 15
Section 7. Regular Meetings . . . . . . . . . . . . . . . . . . . . . 15
Section 8. Special Meetings . . . . . . . . . . . . . . . . . . . . . 16
Section 9. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 10. Waiver of Notice or Consent. . . . . . . . . . . . . . . . 16
Section 11. Adjournment. . . . . . . . . . . . . . . . . . . . . . . . 17
Section 12. Meetings by Conference Telephone . . . . . . . . . . . . . 17
Section 13. Action Without a Meeting . . . . . . . . . . . . . . . . . 17
Section 14. Fees and Compensation. . . . . . . . . . . . . . . . . . . 17
Section 15. Committees . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE IV
OFFICERS
Section 1. Officers . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 2. Elections. . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 3. Other Officers . . . . . . . . . . . . . . . . . . . . . . 19
Section 4. Removal and Resignation. . . . . . . . . . . . . . . . . . 20
Section 5. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 6. Chairman of the Board. . . . . . . . . . . . . . . . . . . 20
Section 7. President. . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8. Vice Presidents. . . . . . . . . . . . . . . . . . . . . . 21
Section 9. Secretary. . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 10. Chief Financial Officer. . . . . . . . . . . . . . . . . . 22
ARTICLE V
MISCELLANEOUS
Section 1. Record Date. . . . . . . . . . . . . . . . . . . . . . . . 22
Section 2. Inspection of Corporate Records. . . . . . . . . . . . . . 23
Section 3. Checks, Drafts, etc. . . . . . . . . . . . . . . . . . . . 24
Section 4. Annual and Other Reports . . . . . . . . . . . . . . . . . 24
Section 5. Contracts, etc., How Executed. . . . . . . . . . . . . . . 25
Section 6. Certificate for Shares . . . . . . . . . . . . . . . . . . 26
Section 7. Representation of Shares of Other
Corporations . . . . . . . . . . . . . . . . . . . . . . . 27
Section 8. Inspection of Bylaws . . . . . . . . . . . . . . . . . . . 27
Section 9. Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 10. Construction and Definitions . . . . . . . . . . . . . . . 27
ARTICLE VI
INDEMNIFICATION
Section 1. Indemnification of Agents. . . . . . . . . . . . . . . . . 28
- ii -
<PAGE>
Page
----
ARTICLE VII
AMENDMENTS
Section 1. Power of Shareholders. . . . . . . . . . . . . . . . . . . 28
Section 2. Power of Directors . . . . . . . . . . . . . . . . . . . . 28
- iii -
<PAGE>
BYLAWS
OF
VDI MEDIA
A CALIFORNIA CORPORATION
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL EXECUTIVE OFFICE.
The principal executive office of the corporation shall be located at
such place as the board of directors shall from time to time determine.
SECTION 2. OTHER OFFICES.
Other offices may at any time be established by the board of directors
at any place or places where necessary or appropriate to carry out the business
of the corporation.
SECTION 3. QUALIFICATION TO DO BUSINESS.
The corporation shall qualify to do business in any jurisdiction in
which its business, properties or activities require it to do so.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS.
All meetings of shareholders shall be held at the principal executive
office of the corporation or at any other place within or without the State of
California which may be designated either by the board of directors or by the
shareholders in accordance with these bylaws.
SECTION 2. ANNUAL MEETINGS.
The board of directors by resolution shall designate the time, place
and date (which shall be in the case of
<PAGE>
the first annual meeting, not more than fifteen (15) months after the
organization of the corporation and, in the case of all other annual meetings,
no more than fifteen (15) months after the date of the last annual meeting) of
the annual meeting of the shareholders for the election of directors and the
transaction of any other proper business.
SECTION 3. SPECIAL MEETINGS.
Special meetings of the shareholders, for the purpose of taking any
action which is within the powers of the shareholders, may be called by the
chairman of the board, or by the president, or by the board of directors, or by
the holders of shares entitled to cast not less than ten percent (10%) of the
votes at the meeting.
SECTION 4. NOTICE OF MEETINGS OF SHAREHOLDERS.
(a) Written notice of each meeting of shareholders, whether annual or
special, shall be given to each shareholder entitled to vote thereat, either
personally or by first class mail or other means of written communication,
charges prepaid, addressed to such shareholder at the address of such
shareholder appearing on the books of the corporation or given by such
shareholder to the corporation for the purpose of notice. If any notice
addressed to the shareholder at the address of such shareholder appearing on the
books of the corporation is returned to the corporation by the United States
Postal Service marked to indicate that the United States Postal Service is
unable to deliver the notice to the shareholder at such address, all future
notices shall be deemed to have been duly given without further mailing if the
same shall be available for the shareholder upon written demand of the
shareholder at the principal executive office of the corporation for a period of
one (1) year from the date of the giving of the notice to all other
shareholders. If no address appears on the books of the corporation or is given
by the shareholder to the corporation for the purpose of notice, notice shall be
deemed to have been given to such shareholder if given either personally or by
first class mail or other means of written communication addressed to the place
where the principal executive office of the corporation is located, or if
published at least once in a newspaper of general circulation in the county in
which the principal executive office is located.
(b) All such notices shall be given not less than ten (10) days nor
more than sixty (60) days before the meeting to each shareholder entitled to
vote thereat. Any such notice shall be deemed to have been given at the time
when
2
<PAGE>
delivered personally or deposited in the mail or sent by other means of written
communication. An affidavit of mailing of any such notice in accordance with
the foregoing provisions, executed by the secretary, assistant secretary or any
transfer agent of the corporation shall be prima facie evidence of the giving of
the notice.
(c) All such notices shall state the place, date and hour of such
meeting. In the case of a special meeting such notice shall also state the
general nature of the business to be transacted at such meeting, and no other
business may be transacted thereat. In the case of an annual meeting, such
notice shall also state those matters which the board of directors at the time
of the mailing of the notice intends to present for action by the shareholders.
Any proper matter may be presented at an annual meeting of shareholders though
not stated in the notice, provided that unless the general nature of a proposal
to be approved by the shareholders relating to the following matters is stated
in the notice or a written waiver of notice, any such shareholder approval will
require unanimous approval of all shareholders entitled to vote:
(1) A proposal to approve a contract or other transaction between the
corporation and one or more of its directors or any corporation, firm or
association in which one or more of its directors has a material financial
interest or is also a director;
(2) A proposal to amend the articles of incorporation;
(3) A proposal to approve the principal terms of a reorganization as
defined in Section 181 of the General Corporation Law;
(4) A proposal to wind up and dissolve the corporation;
(5) If the corporation has both preferred and common shares
outstanding and the corporation is in the process of winding up, a proposal to
adopt a plan of distribution of shares, obligations or securities of any other
corporation or assets other than money which is not in accordance with the
liquidation rights of the preferred shares as specified in the articles.
(d) The notice of any meeting at which directors are to be elected
shall include the names of nominees intended at the time of the notice to be
presented by management for election.
3
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(e) Upon request in writing that a special meeting of shareholders be
called for any proper purpose, directed to the chairman of the board, president,
vice president or secretary by any person (other than the board) entitled to
call a special meeting of shareholders, the officer forthwith shall cause notice
to be given to the shareholders entitled to vote that a meeting will be held at
a time requested by the person or persons calling the meeting, not less than
thirty-five (35) nor more than sixty (60) days after receipt of the request.
SECTION 5. QUORUM.
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote at any meeting shall constitute a quorum for the
transaction of business. The shareholders present at a duly called or held
meeting at which a quorum is present may continue to transact business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the shares required to constitute a quorum.
SECTION 6. ADJOURNED MEETINGS AND NOTICE
THEREOF.
(a) Any shareholders' meeting, annual or special. whether or not a
quorum is present, may be adjourned from time to time by vote of a majority of
the shares, the holders of which are either present in person or by proxy
thereat, but in the absence of a quorum, no other business may be transacted at
any such meeting, except as provided in Section 8 of this Article II.
(b) When a shareholders' meeting is adjourned to another time or
place, except as provided in this subsection (b), notice need not be given of
the adjourned meeting if the time and place thereof are announced at the meeting
at which the adjournment is taken. At the adjourned meeting the corporation may
transact any business which might have been transacted at the original meeting.
If the adjournment is for more than forty-five (45) days or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote at the meeting.
4
<PAGE>
SECTION 7. VOTING.
(a) VOTING RIGHTS OF SHARES AND SHAREHOLDERS.
(1) Except as provided in Section 708 of the General Corporation
Law (Election of Directors) and except as may be otherwise provided in the
articles of incorporation of this corporation, each outstanding share,
regardless of class, shall be entitled to one (1) vote on each matter submitted
to a vote of shareholders.
(2) Any holder of shares entitled to vote on any matter may vote
part of the shares in favor of the proposal and refrain from voting the
remaining shares or vote them against the proposal, other than elections to
office, but, if the shareholder fails to specify the number of shares such
shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares such shareholder is
entitled to vote.
(b) RECORD DATE REQUIREMENTS.
(1) In order that the corporation may determine the shareholders
entitled to notice of any meeting or to vote or entitled to receive payment of
any dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action, the board may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days prior to the date of such meeting nor more than sixty (60) days
prior to any other action.
(2) If no record date is fixed:
(a) The record date for determining shareholders entitled
to notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining shareholders entitled
to give consent to corporate action in writing without a meeting, when no prior
action by the board has been taken, shall be the day on which the first written
consent is given.
(c) The record date for determining shareholders for any
other purpose shall be at the close of
5
<PAGE>
business on the day on which the board adopts the resolution relating thereto,
or the sixtieth (60th) day prior to the date of such other action, whichever is
later.
(3) A determination of shareholders of record entitled to notice
of or to vote at a meeting of shareholders shall apply to any adjournment of the
meeting unless the board fixes a new record date for the adjourned meeting, but
the board shall fix a new record date if the meeting is adjourned for more than
forty-five (45) days from the date set for the original meeting.
(4) Shareholders at the close of business on the record date are
entitled to notice and to vote or to receive the dividend, distribution or
allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the articles or by agreement or
in the General Corporation Law.
(c) VOTING OF SHARES BY FIDUCIARIES, RECEIVERS,
PLEDGEHOLDERS AND MINORS.
(1) Subject to subdivision (3) of subsection (d) hereof, shares
held by an administrator, executor, guardian, conservator or custodian may be
voted by such holder either in person or by proxy, without a transfer of such
shares into the holder's name; and shares standing in the name of a trustee may
be voted by the trustee, either in person or by proxy, but no trustee shall be
entitled to vote shares held by such trustee without a transfer of such shares
into the trustee's name.
(2) Shares standing in the name of a receiver may be voted by
such receiver; and shares held by or under the control of a receiver may be
voted by such receiver without the transfer thereof into the receiver's name if
authority to do so is contained in the order of the court by which such receiver
was appointed.
(3) Subject to the provisions of Section 10 and except where
otherwise agreed in writing between the parties, a shareholder whose shares are
pledged shall be entitled to vote such shares until the shares have been
transferred into the name of the pledgee, and thereafter the pledgee shall be
entitled to vote the shares so transferred.
(4) Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by the minor,
person or by proxy, whether or not the corporation has notice, actual or
6
<PAGE>
constructive, of the nonage, unless a guardian of the minor's property has been
appointed and written notice of such appointment given to the corporation.
(5) If authorized to vote the shares by the power of attorney by
which the attorney in fact was appointed, shares held by or under the control of
an attorney in fact may be voted and the corporation may treat all rights
incident thereto as exercisable by the attorney in fact, in person or by proxy,
without the transfer of the shares into the name of the attorney in fact.
(d) VOTING OF SHARES BY CORPORATIONS.
(1) Shares of this corporation standing in the name of another
corporation, domestic or foreign, may be voted by an officer, agent or
proxyholder as the bylaws of the other corporation may prescribe or, in the
absence of such provision, as the board of the other corporation may determine
or, in the absence of that determination, by the chairman of the board,
president or any vice president of the other corporation, or by any other person
authorized to do so by the chairman of the board, president or any vice
president of the other corporation. Shares which are purported to be voted or
any proxy purported to be executed in the name of a corporation (whether or not
any title of the person signing is indicated) shall be presumed to be voted or
the proxy executed in accordance with the provisions of this subdivision, unless
the contrary is shown.
(2) Shares of this corporation owned by a subsidiary of this
corporation shall not be entitled to vote on any matter.
(3) Shares of this corporation held by this corporation in a
fiduciary capacity, and any of its shares held in a fiduciary capacity by a
subsidiary of this corporation, shall not be entitled to vote on any matter,
except as follows: To the extent that the settlor or beneficial owner possesses
and exercises a right to vote or to give this corporation or the subsidiary of
this corporation binding instructions as to how to vote such shares, or (ii)
where there are one or more cotrustees who are not affected by the prohibitions
of this subsection 7.(d), in which case the shares may be voted by the
cotrustees as if it or they are the sole trustee.
7
<PAGE>
(e) VOTING OF SHARES OWNED OF RECORD BY TWO OR MORE PERSONS.
(1) If shares stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, husband and wife as community property, tenants by the entirety,
voting trustees, persons entitled to vote under a shareholder voting agreement
or otherwise, or if two or more persons (including proxyholders) have the same
fiduciary relationship respecting the same shares, unless the secretary of the
corporation is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect:
(a) If only one votes, such act binds all;
(b) If more than one vote, the act of the majority so
voting binds all;
(c) If more than one vote, but the vote is evenly split on
any particular matter, each faction may vote the securities in question
proportionately.
If the instrument so filed or the registration of the shares shows that any such
tenancy is held in unequal interests, a majority or even split for the purpose
of this section shall be a majority or even split in interest.
(f) ELECTION OF DIRECTORS; CUMULATIVE VOTING.
(1) Every shareholder complying with subsection (2) and entitled
to vote in any election of directors may cumulate such shareholder's votes and
give one (1) candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which the shareholders' shares are
normally entitled, or distribute the shareholder's votes on the same principle
among as many candidates as the shareholder thinks fit.
(2) No shareholder shall be entitled to cumulate votes (i.e.,
cast for any candidate a number of votes greater than the number of votes which
such shareholder normally is entitled to cast) unless such candidate or
candidates' names have been placed in nomination prior to the voting and the
shareholder has given notice at the meeting prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any one (1)
8
<PAGE>
shareholder has given such notice, all shareholders may cumulate their votes for
candidates in nomination.
(3) In any election of directors, the candidates receiving the
highest number of affirmative votes of the shares entitled to be voted for them
up to the number of directors to be elected by such shares are elected; votes
against the director and votes withheld shall have no legal effect.
(4) Elections for directors need not be by ballot unless a
shareholder demands election by ballot at the meeting and before the voting
begins.
SECTION 8. WAIVER OF NOTICE AND CONSENT OF
ABSENTEES.
The transactions of any meeting of shareholders, however called and
noticed and wherever held, are as valid as though had at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy, and if, either before or after the meeting, each of the persons entitled
to vote, not present in person or by proxy, signs a written waiver of notice or
a consent to the holding of the meeting, or an approval of the minutes thereof.
All such waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting. Attendance of a person at
a meeting shall constitute a waiver of notice of and presence at such meeting,
except when the person objects, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened and except that attendance at a meeting is not a waiver of any right to
object to the consideration of matters required by law or these bylaws to be
included in the notice but was not so included if such objection is expressly
made at the meeting, provided however, that any person making such objection at
the beginning of the meeting or to the consideration of matters required to be
but not included in the notice may orally withdraw such objections at the
meeting or thereafter waive such objection by signing a written waiver thereof
or a consent to the holding of the meeting or the consideration of the matters
or an approval of the minutes of the meeting. Neither the business to be
transacted at nor the purpose of any annual or special meeting of shareholders
need be specified in any written waiver of notice, consent to the holding of the
meeting or approval of the minutes thereof, except that the general nature of
the proposals specified in subdivisions (1) through (5) of subsection (c) of
Section 4 of this Article II, shall be so stated.
9
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SECTION 9. ACTION WITHOUT A MEETING.
(a) Directors may be elected without a meeting by a consent in
writing, setting forth the action so taken, signed by all of the persons who
would be entitled to vote for the election of directors, provided that, a
director may be elected at any time to fill a vacancy not filled by the
directors, other than to fill a vacancy created by removal, by the written
consent of a majority of the outstanding shares entitled to vote for the
election of directors.
(b) Any other action which, under any provision of the General
Corporation Law may be taken at any annual or special meeting of the
shareholders, may be taken without a meeting, and without prior notice except as
hereinafter set forth, if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
(c) Unless the consents of all shareholders entitled to vote have
been solicited in writing:
(1) Notice of any shareholder approval without a meeting, by
less than unanimous written consent, of, (i) a contract or other transaction
between the corporation and one or more of its directors or any corporation,
firm or association in which one or more of its directors has a material
financial interest or is also a director, indemnification of an agent of the
corporation as authorized by Section 16, of Article III, of these bylaws, (iii)
a reorganization of the corporation as defined in Section 181 of the General
Corporation Law, or (iv) the distribution of shares, obligations or securities
of any other corporation or assets other than money which is not in accordance
with the liquidation rights of preferred shares if the corporation is in the
process of winding up, shall be given at least ten (10) days before the
consummation of the action authorized by such approval; and
(2) Prompt notice shall be given of the taking of any other
corporate action including the filling of a vacancy on the board of directors
approved by shareholders without a meeting by less than unanimous written
consent, to those shareholders entitled to vote who have not consented in
writing. Such notices shall be given in the manner and shall be deemed to have
been given as provided in Section 4 of Article II of these bylaws.
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(d) Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the secretary of the corporation.
SECTION 10. PROXIES.
(a) Every person entitled to vote shares may authorize another person
or persons to act by proxy with respect to such shares. Any proxy purporting to
be executed in accordance with the provisions of this Section 10 shall be
presumptively valid.
(b) No proxy shall be valid after the expiration of eleven (11)
months from the date thereof unless otherwise provided in the proxy. Every
proxy continues in full force and effect until revoked by the person executing
it prior to the vote pursuant thereto, except as otherwise provided in this
section. Such revocation may be effected by a writing delivered to the
corporation stating that the proxy is revoked or by a subsequent proxy executed
by the person executing the prior proxy and presented to the meeting, or as to
any meeting by attendance at such meeting and voting in person by the person
executing the proxy. The dates contained on the forms of proxy presumptively
determine the order of execution, regardless of the postmark dates on the
envelopes in which they are mailed.
(c) A proxy is not revoked by the death or incapacity of the maker
unless, before the vote is counted, written notice of such death or incapacity
is received by the corporation.
(d) Except when other provision shall have been made by written
agreement between the parties, the record holder of shares which such person
holds as pledgee or otherwise as security or which belong to another shall issue
to the pledgor or to the owner of such shares, upon demand therefor and payment
of necessary expenses thereof, a proxy to vote or take other action thereon.
(e) A proxy which states that it is irrevocable is irrevocable for
the period specified therein (notwithstanding subsection (c)) when it is held by
any of the following or a nominee of any of the following:
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(1) A pledgee;
(2) A person who has purchased or agreed to purchase or holds an
option to purchase the shares or a person who has sold a portion of such
person's shares in the corporation to the maker of the proxy;
(3) A creditor or creditors of the corporation or the
shareholder who extended or continued credit to the corporation or the
shareholder in consideration of the proxy if the proxy states that it was given
in consideration of such extension or continuation of credit and the name of the
person extending or continuing credit;
(4) A person who has contracted to perform services as an
employee of the corporation, if a proxy is required by the contract of
employment and if the proxy states that it was given in consideration of such
contract of employment, the name of the employee and the period of employment
contracted for; or
(5) A person designated by or under an agreement under Section
706 of the General Corporation Law;
(6) A beneficiary of a trust with respect to shares held by the
trust.
Notwithstanding the period of irrevocability specified, the proxy
becomes revocable when the pledge is redeemed, the option or agreement to
purchase is terminated or the seller no longer owns any shares of the
corporation or dies, the debt of the corporation or the shareholder is paid, the
period of employment provided for in the contract of employment has terminated,
the agreement under Section 706 of the General Corporation Law has terminated,
or the person ceases to be a beneficiary of the trust. In addition to the
foregoing subdivisions (1) through (6), a proxy may be made irrevocable
(notwithstanding subsection (c)) if it is given to secure the performance of a
duty or to protect a title, either legal or equitable, until the happening of
events which, by its terms discharge the obligations secured by it.
(f) A proxy may be revoked notwithstanding a provision making it
irrevocable, by a transferee of shares without knowledge of the existence of the
provision unless the existence of the proxy and its irrevocability appears on
the certificate representing such shares.
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SECTION 11. INSPECTORS OF ELECTION.
(a) In advance of any meeting of shareholders, the board of directors
may appoint any persons as inspectors of election to act at such meeting and any
adjournment thereof. If inspectors of election are not so appointed, or if any
persons so appointed fail to appear or refuse to act, the chairman of any such
meeting may, and on the request of any shareholder or his proxy shall, appoint
inspectors of election (or persons to replace those who so fail or refuse) at
the meeting. The number of inspectors shall be either one (1) or three (3). If
appointed at a meeting on the request of one or more shareholders or proxies,
the majority of shares represented in person or by proxy shall determine whether
one (1) or three (3) inspectors are to be appointed.
(b) The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of proxies,
receive votes, ballots or consents, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.
(c) The inspectors of election shall perform their duties
impartially, in good faith, to the best of their ability and as expeditiously as
is practical. If there are three (3) inspectors of election, the decision, act
or certificate of a majority is effective in all respects as the decision, act
or certificate of all. Any report or certificate made in the inspectors of
election is prima facie evidence of the facts stated therein.
ARTICLE III
DIRECTORS
SECTION 1. POWERS.
Subject to the General Corporation Law and any limitations in the
articles of incorporation of this corporation relating to action requiring
approval by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the board of directors.
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SECTION 2. NUMBER AND QUALIFICATION OF
DIRECTORS.
The number of directors of this corporation shall be two (2). After
the issuance of shares this number may be changed only by an amendment to the
articles of incorporation or the bylaws approved by the affirmative vote or
written consent of a majority of the outstanding shares entitled to vote. If
the number of directors is or becomes five (5) or more, an amendment of the
articles of incorporation or the bylaws reducing the fixed number of directors
to less than five (5) cannot be adopted if the votes cast against its adoption
at a meeting or the shares not consenting in the case of action by written
consent are equal to more than sixteen and two-thirds percent (16-2/3%) of the
outstanding shares entitled to vote.
SECTION 3. ELECTION AND TERM OF OFFICE.
The directors shall be elected at each annual meeting of shareholders,
but if any such annual meeting is not held or the directors are not elected at
any annual meeting, the directors may be elected at any special meeting of
shareholders held for that purpose. Each director, including a director elected
to fill a vacancy, shall, subject to Section 4, hold office until the expiration
of the term for which elected and until his successor has been elected and
qualified.
SECTION 4. RESIGNATION AND REMOVAL OF DIRECTORS.
Any director may resign effective upon giving written notice to the
chairman of the board, the president, the secretary or the board of directors of
the corporation, unless the notice specifies a later time for the effectiveness
of such resignation. If the resignation is effective at a future time a
successor may be elected to take office when the resignation becomes effective.
The board of directors may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony. Any or
all of the directors may be removed without cause if such removal is approved by
the affirmative vote of a majority of the outstanding shares entitled to vote;
provided, however, that no director may be removed (unless the entire board is
removed) when the votes cast against removal (or, if such action is taken by
written consent, the shares held by persons not consenting in writing to such
removal) would be sufficient to elect such director if voted cumulatively at an
election at which the same total number of votes were cast (or, if such action
is taken by written consent, all shares entitled to vote were
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voted) and the entire number of directors authorized at the time of the
director's most recent election were then being elected. No reduction of the
authorized number of directors shall have the effect of removing any director
prior to the expiration of his term of office.
SECTION 5. VACANCIES.
A vacancy or vacancies on the board of directors shall exist on the
death, resignation or removal of any director, or if the board declares vacant
the office of a director if he is declared of unsound mind by an order of court
or is convicted of a felony, or if the authorized number of directors is
increased or if the shareholders fail to elect the full authorized number of
directors to be voted for at any shareholders' meeting at which an election of
directors is held. Vacancies on the board of directors (except vacancies
created by the removal of a director) may be filled by a majority of the
directors then in office, or by a sole remaining director. The shareholders may
elect a director at any time to fill any vacancy not filled by the directors or
which occurs by reason of the removal of a director. Any such election by
written consent of shareholders other than to fill a vacancy created by removal,
shall require the consent of a majority of the outstanding shares entitled to
vote. If the resignation of a director states that it is to be effective at a
future time, a successor may be elected to take office when the resignation
becomes effective.
SECTION 6. PLACE OF MEETINGS.
Regular and special meetings OF the board of directors may be held at
any place within or without the State of California which has been designated in
the notice of the meeting, or, if not stated in the notice or there is no
notice, designated by resolution or by written consent of all of the members of
the board of directors. If the place of a regular or special meeting is not
designated in the notice or fixed by a resolution of the board or consented to
in writing by all members of the board of directors, it shall be held at the
corporation's principal executive office.
SECTION 7. REGULAR MEETINGS.
Immediately following each annual shareholders' meeting the board of
directors shall hold a regular meeting to elect officers and transact other
business. Such meeting shall be held at the same place as the annual
shareholders' meeting or such other place as shall be fixed by the board
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of directors. Other regular meetings of the board of directors shall be held at
such times and places as are fixed by the board. Call and notice of regular
meetings of the board of directors shall not be required and is hereby dispensed
with.
SECTION 8. SPECIAL MEETINGS.
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors. Notice of the time and place
of special meetings shall be delivered personally to each director or by
telephone or telegraph or sent to the director by mail. In case notice is given
by mail or telegram, it shall be sent, charges prepaid, addressed to the
director at his address appearing on the corporate records, or if it is not on
these records or is not readily ascertainable, at the place where the meetings
of directors are regularly held. If notice is delivered personally or given by
telephone or telegraph, it shall be given or delivered to the telegraph office
at least forty-eight (48) hours before the meeting. If notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
meeting. Such mailing, telegraphing or delivery, personally or by telephone, as
provided in this section, shall be due, legal and personal notice to such
director. A notice need not specify the purpose of any regular or special
meeting of the board of directors.
SECTION 9. QUORUM
A majority of the authorized number of directors shall constitute a
quorum of the board for the transaction of business. Every act or decision done
or made by a majority of the directors present at a meeting duly held at which a
quorum is present is the act of the board of directors, subject to the
provisions of Section 310 (Transactions with Interested Directors) and
subdivision (e) of Section 317 (Indemnification of Corporate Agents) of the
General Corporation Law. A meeting at which a quorum is initially present may
continue to transact business notwithstanding the withdrawal of directors,
provided that any action taken is approved by at least a majority of the
required quorum for such meeting.
SECTION 10. WAIVER OF NOTICE OR CONSENT.
The transactions of any meeting of the board of directors, however
called and noticed or wherever held,
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shall be as valid as though had at a meeting duly held after regular call and
notice, if a quorum is present and if, either before or after the meeting, each
of the directors not present or who, though present, has prior to the meeting or
at its commencement, protested the lack of proper notice to him, signs a written
waiver of notice, or a consent to holding the meeting, or an approval of the
minutes of the meeting. All such waivers, consents and approvals shall be filed
with the corporate records or made a part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors. Notice of a meeting need not be given to any
director who attends the meeting without protesting, prior to or at its
commencement, the lack of notice to such director.
SECTION 11. ADJOURNMENT.
A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place. If the meeting is
adjourned for more than twenty-four (24) hours, notice of the adjournment to
another time or place shall be given prior to the time of the adjourned meeting
to the directors who were not present at the time of the adjournment.
SECTION 12. MEETINGS BY CONFERENCE TELEPHONE.
Members of the board of directors may participate in a meeting through
use of conference telephone or similar communications equipment, so long as all
members participating in such meeting can hear one another. Participation by
directors in a meeting in the manner provided in this section constitutes
presence in person at such meeting.
SECTION 13. ACTION WITHOUT A MEETING.
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, if all members of the board shall individually
or collectively consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the board. Such
action by written consent shall have the same force and effect as a unanimous
vote of such directors.
SECTION 14. FEES AND COMPENSATION.
Directors and members of committees may receive such compensation, if
any, for their services, and such reimbursement for expenses, as may be fixed or
determined by resolution of the board.
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SECTION 15. COMMITTEES.
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent member at any meeting of the committee. The
appointment of members or alternate members of a committee requires the vote of
a majority of the authorized number of directors. The board may delegate to any
such committee, to the extent provided in such resolution, any of the board's
powers and authority in the management of the corporation's business and affairs
except with respect to:
(a) The approval of any action for which the General Corporation Law
or the articles of incorporation of this corporation also requires shareholders'
approval or approval of the outstanding shares;
(b) The filling of vacancies on the board of directors or any
committee;
(c) The fixing of compensation of directors for serving on the board
or on any committee;
(d) The amendment or repeal of bylaws or the adoption of new bylaws;
(e) The amendment or repeal of any resolution of the board which by
its express terms is not so amendable or repealable;
(f) A distribution to the shareholders of the corporation, except at
a rate or in a periodic amount or within a price range determined by the board;
and
(g) The appointment of other committees of the board or the members
thereof.
The board may prescribe appropriate rules, not inconsistent with these
bylaws, by which proceedings of any such committee shall be conducted. The
provisions of these bylaws relating to the calling of meetings of the board,
notice of meetings of the board and waiver of such notice, adjournments of
meetings of the board, written consents to board meetings and approval of
minutes, action by the board by consent in writing without a meeting, the place
of holding such meetings, meetings by conference telephone or similar
communications equipment, the quorum for such meetings,
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the vote required at such meetings and the withdrawal of directors after
commencement of a meeting shall apply to committees of the board and action by
such committees. In addition, any member of the committee designated by the
board as the chairman or as secretary of the committee or any two (2) members of
a committee may call meetings of the committee. Regular meetings of any
committee may be held without notice if the time and place of such meetings are
fixed by the board of directors or the committee.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS.
The officers of the corporation shall be a chairman of the board or a
president, or both, a secretary and a chief financial officer. The corporation
may also have, at the discretion of the board of directors, one or more vice
presidents, one or more assistant secretaries, one or more assistant treasurers
and such other officers as may be appointed in accordance with the provisions of
Section 3 of this Article IV. Any number of offices may be held by the same
person.
SECTION 2. ELECTIONS.
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 3 or Section 5 of this
Article IV, shall be chosen no less frequently than annual meetings of
shareholders shall be held, by the board of directors, and each such officer
shall serve at the pleasure of the board of directors until the regular meeting
of the board of directors following the annual meeting of shareholders and until
his successor is elected and qualified.
SECTION 3. OTHER OFFICERS.
The board of directors may appoint, and may empower the chairman of
the board or the president or both of them to appoint such other officers as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority and perform such duties as are provided in the
bylaws or as the board of directors may from time to time determine.
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SECTION 4. REMOVAL AND RESIGNATION.
Any officer may be removed with or without cause either by the board
of directors or, except for an officer chosen by the board, by any officer upon
whom the power of removal may be conferred by the board (subject, in each case,
to the rights, if any, of an officer under any contract of employment). Any
officer may resign at any time upon written notice to the corporation (without
prejudice however, to the rights, if any, of the corporation under any contract
to which the officer is a party). Any such resignation shall take effect upon
receipt of such notice or at any later time specified therein. If the
resignation is effective at a future time, a successor may be elected to take
office when the resignation becomes effective. Unless a resignation specifies
otherwise, its acceptance by the corporation shall not be necessary to make it
effective.
SECTION 5. VACANCIES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
the bylaws for regular appointments to such office.
SECTION 6. CHAIRMAN OF THE BOARD.
The board of directors may, in its discretion, elect a chairman of the
board, who, unless otherwise determined by the board of directors, shall preside
at all meetings of the board of directors at which he is present and shall
exercise and perform any other powers and duties assigned to him by the board or
prescribed by the bylaws. If the office of president is vacant, the chairman of
the board shall be the general manager and chief executive officer of the
corporation and shall exercise the duties of the president as set forth in
Section 7. He shall preside as chairman at all meetings of the shareholders
unless otherwise determined by the board of directors.
SECTION 7. PRESIDENT.
Subject to any supervisory powers, if any, that may be given by the
board of directors or the bylaws to the chairman of the board, if there be such
an officer, the president shall be the corporation's general manager and chief
executive officer and shall, subject to the control of the board of directors,
have general supervision, direction and control of the business, affairs and
officers of the corporation. Unless otherwise determined by the board of
directors, and in the absence of the chairman of the board,
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or if there be none, he shall preside as chairman at all meetings of the board
of directors and of the shareholders. He shall have the general powers and
duties of management usually vested in the office of president of a corporation;
shall have any other powers and duties that are prescribed by the board of
directors or the bylaws; and shall be primarily responsible for carrying out all
orders and resolutions of the board of directors.
SECTION 8. VICE PRESIDENTS.
In the absence or disability of the chief executive officer, the vice
presidents in order of their rank as fixed by the board of directors, or if not
ranked, the vice president designated by the board of directors, or if there has
been no such designation, the vice president designated by the chief executive
officer, shall perform all the duties of the chief executive officer, and when
so acting, shall have all the powers of, and be subject to all the restrictions
on, the chief executive officer. Each vice president shall have any of the
powers and perform any other duties that from time to time may be prescribed for
him by the board of directors or the bylaws or the chief executive officer.
SECTION 9. SECRETARY.
The secretary shall keep or cause to be kept a book of minutes of all
meetings and actions by written consent of all directors, shareholders and
committees of the board of directors. The minutes of each meeting shall state
the time and place that it was held and such other information as shall be
necessary to determine whether the meeting was held in accordance with law and
these bylaws and the actions taken thereat. The secretary shall keep or cause
to be kept at the corporation's principal executive office, or at the office of
its transfer agent or registrar, a record of the shareholders of the
corporation, giving the names and addresses of all shareholders and the number
and class of shares held by each. The secretary shall give, or cause to be
given, notice of all meetings of shareholders, directors and committees required
to be given under these bylaws or by law, shall keep or cause the keeping of the
corporate seal in safe custody and shall have any other powers and perform any
other duties that are prescribed by the board of directors or the bylaws or the
chief executive officer. If the secretary refuses or fails to give notice of
any meeting lawfully called, any other officer of the corporation may give
notice of such meeting. The assistant secretary, or if there be more than one,
any assistant secretary, may perform any or all of the duties and exercise any
or all of the
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powers of the secretary unless prohibited from doing so by the board of
directors, the chief executive officer or the secretary, and shall have such
other powers and perform any other duties as are prescribed for him by the board
of directors or the chief executive officer.
SECTION 10. CHIEF FINANCIAL OFFICER.
The chief financial officer, who shall also be deemed to be the
treasurer, when a treasurer may be required, shall keep and maintain, or cause
to be kept and maintained, adequate and correct books and records of account.
The chief financial officer shall cause all money and other valuables in the
name and to the credit of the corporation to be deposited at the depositories
designated by the board of directors or any person authorized by the board of
directors to designate such depositories. He shall render to the chief
executive officer and board of directors when requested by either of them, an
account of all his transactions as chief financial officer and of the financial
condition of the corporation; and shall have any other powers and perform any
other duties that are prescribed by the board of directors or the bylaws or the
chief executive officer. The assistant treasurer, or if there be more than one,
any assistant treasurer, may perform any or all of the duties and exercise any
or all of the powers of the chief financial officer unless prohibited from
doing so by the board of directors, the chief executive officer or the chief
financial officer, and shall have such other powers and perform any other duties
as are prescribed for him by the board of directors, the chief executive officer
or the chief financial officer.
ARTICLE V
MISCELLANEOUS
SECTION 1. RECORD DATE.
The board of directors may fix, in advance, a record date for the
determination of the shareholders entitled to notice of any meeting of
shareholders or to vote or entitled to receive payment of any dividend or
distribution or allotment of any rights or entitled to exercise any rights in
respect of any other lawful action. The record date so fixed shall be not more
than sixty (60) days nor less than ten (10) days prior to the date of such
meeting, nor more than sixty (60) days prior to any other action for the
purposes of which it is fixed. When a record date is so
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fixed, only shareholders of record at the close of business on that date are
entitled to notice of and to vote at any such meeting, to receive a dividend,
distribution, or allotment of rights, or to exercise the rights, as the case may
be, notwithstanding any transfer of any shares on the books of the corporation
after the record date, except as otherwise provided in the articles of
incorporation or bylaws.
SECTION 2. INSPECTION OF CORPORATE RECORDS.
The accounting books and records and record of shareholders, and
minutes of proceedings of the shareholders and the board and committees of the
board of this corporation or of a subsidiary of this corporation shall be open
to inspection upon the written demand on the corporation of any shareholder or
holder of a voting trust certificate at any time during usual business hours,
for a purpose reasonably related to such holder's interests as a shareholder or
as the holder of such voting trust certificate. Such inspection by a
shareholder or holder of a voting trust certificate may be made in person or by
agent or attorney, and the right of inspection includes the right to copy and
make extracts.
A shareholder or shareholders holding at least five percent (5%) in
the aggregate of the outstanding voting shares of the corporation or who hold at
least one percent (1%) of such voting shares and have filed a Schedule 14B with
the United States Securities and Exchange Commission relating to the election of
directors of the corporation shall have (in person, or by agent or attorney) the
absolute right to inspect and copy the record of shareholders' names and
addresses and shareholdings during usual business hours upon five (5) business
days' prior written demand upon the corporation or to obtain from the transfer
agent for the corporation, upon written demand and upon the tender of its usual
charges, a list of the shareholders' names and addresses, who are entitled to
vote for the election of directors, and their shareholdings, as of the most
recent record date for which it has been compiled or as of a date specified by
the shareholder subsequent to the date of demand. The list shall be made
available on or before the later of five (5) business days after the demand is
received or the date specified therein as the date as of which the list is to be
compiled.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of this corporation and any subsidiary of this
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corporation. Such inspection by a director may be made in person or by agent or
attorney and the right of inspection includes the right to copy and make
extracts.
SECTION 3. CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for payment of money, notes or
other evidences of indebtedness, issued in the name of or payable to the
corporation, shall be signed or endorsed by such person or persons and in such
manner as, from time to time, shall be determined by resolution of the board of
directors. The board of directors may authorize one or more officers of the
corporation to designate the person or persons authorized to sign such documents
and the manner in which such documents shall be signed.
SECTION 4. ANNUAL AND OTHER REPORTS.
(a) The statutory requirement that the board of directors cause an
annual report to be sent to shareholders is hereby waived.
(b) If no annual report for the last fiscal year has been sent to the
shareholders, the corporation shall, upon the written request of any
shareholder made more than one hundred twenty (120) days after the close of such
fiscal year, deliver or mail to the person making the request within thirty (30)
days thereafter the annual report for the last year. A shareholder or
shareholders holding at least five percent (5%) of the outstanding shares of any
class of the corporation may make a written request to the corporation for an
income statement of the corporation for the three (3) month, six (6) month or
nine (9) month period of the current fiscal year ended more than thirty (30)
days prior to the date of the request and a balance sheet of the corporation as
of the end of such period and, in addition, if no annual report for the last
fiscal year has been sent to shareholders, then the annual report for the last
fiscal year. The statements shall be delivered or mailed to the person making
the request within thirty (30) days thereafter. A copy of such statements shall
be kept on file in the principal executive office of the corporation for twelve
(12) months and they shall be exhibited at all reasonable times to any
shareholder demanding an examination of them or a copy shall be mailed to such
shareholder.
(c) The quarterly income statements and balance sheets referred to in
this section shall be accompanied by the report thereon, if any, of any
independent accountants engaged by the corporation or the certificate of an
authorized officer of the corporation that such financial
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statements were prepared without audit from the books and records of the
corporation.
(d) Unless otherwise determined by the board of directors or the
chief executive officer, the chief financial officer and any assistant treasurer
are each authorized officers of the corporation to execute the certificate that
the annual report and quarterly income statements and balance sheets referred to
in this section were prepared without audit from the books and records of the
corporation.
Any report sent to the shareholders shall be given personally or by
mail or other means of written communication, charges prepaid, addressed to such
shareholder at the address of such shareholder appearing on the books of the
corporation or given by such shareholder to the corporation for the purpose of
notice or set forth in the written request of the shareholder as provided in
this section. If any report addressed to the shareholder at the address of such
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the report to the shareholder
at such address, all future reports shall be deemed to have been duly given
without further mailing if the same shall be available for the shareholder upon
written demand of the shareholder at the principal executive office of the
corporation for a period of one (1) year from the date of the giving of the
report to all other shareholders. If no address appears on the books of the
corporation or is given by the shareholder to the corporation for the purpose of
notice or is set forth in the written request of the shareholder as provided in
this section, such report shall be deemed to have been given to such shareholder
if sent by mail or other means of written communication addressed to the place
where the principal executive office of the corporation is located, or if
published at least once in a newspaper of general circulation in the county in
which the principal executive office is located. Any such report shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by other means of written communication. An affidavit of
mailing of any such report in accordance with the foregoing provisions, executed
by the secretary, assistant secretary or any transfer agent of the corporation
shall be prima facie evidence by the giving of the report.
SECTION 5. CONTRACTS, ETC., HOW EXECUTED.
The board of directors, except as the bylaws or articles of
incorporation otherwise provide, may authorize
25
<PAGE>
any officer or officers, agent or agents, to enter into any contract or execute
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
SECTION 6. CERTIFICATE FOR SHARES.
(a) Every holder of shares in the corporation shall be entitled to
have a certificate signed in the name of the corporation by the chairman or vice
chairman of the board or the president or a vice president and by the chief
financial officer or an assistant treasurer or the secretary or any assistant
secretary, certifying the number of shares and the class or series of shares
owned by the shareholder. Any or all of the signatures on the certificate may
be facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
(b) Any such certificate shall also contain such legend or other
statement as may be required by Section 418 of the General Corporation Law, the
Corporate Securities Law of 1968, and any agreement between the corporation and
the issuee thereof, and may contain such legend or other statement as may be
required by any other applicable law or regulation or agreement.
(c) Certificates for shares may be issued prior to full payment
thereof, under such restrictions and for such purposes, as the board of
directors or the bylaws may provide, provided, however, that any such
certificates so issued prior to full payment shall state the total amount of the
consideration to be paid therefor and the amount paid thereon.
(d) No new certificate for shares shall be issued in place of any
certificate theretofore issued unless the latter is surrendered and cancelled at
the same time; provided, however, that a new certificate may be issued without
the surrender and cancellation of the old certificate if the certificate
theretofore issued is alleged to have been lost, stolen or destroyed. In case
of any such allegedly lost, stolen or destroyed certificate, the corporation may
require the owner thereof or the legal representative of such owner to give the
corporation a bond (or other adequate security) sufficient to indemnify it
against any claim that may be made against it (including any
26
<PAGE>
expense or liability) on account of the alleged loss, theft or destruction of
any such certificate or the issuances of such new certificate.
SECTION 7. REPRESENTATION OF SHARES OF OTHER
CORPORATIONS.
Unless the board of directors shall otherwise determine, the chairman
of the board, the president, any vice president and the secretary of this
corporation are each authorized to vote, represent and exercise on behalf of
this corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation. The
authority herein granted to such officers to vote or represent on behalf of this
corporation any and all shares held by this corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
person authorized so to do by proxy or power of attorney or other document duly
executed by any such officer.
SECTION 8. INSPECTION OF BYLAWS.
The corporation shall keep in its principal executive office in
California, or if its principal executive office is not in California, at its
principal business office in California, the original or a copy of the bylaws as
amended to date, which shall be open to inspection by the shareholders at all
reasonable times during office hours. If the corporation has no office in
California, it shall upon the written request of any shareholder, furnish him a
copy of the bylaws as amended to date.
SECTION 9. SEAL.
The corporation may have a common seal.
SECTION 10. CONSTRUCTION AND DEFINITIONS.
Unless the context otherwise requires, the general provisions, rules
of construction and definitions contained in the General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of the
foregoing, the masculine gender includes the feminine and neuter, the singular
number includes the plural and the plural number includes the singular, and the
term "Person" includes a corporation as well as a natural person.
27
<PAGE>
ARTICLE VI
INDEMNIFICATION
SECTION 1. INDEMNIFICATION OF AGENTS.
The board of directors of this corporation is authorized to enter into
an agreement or agreements with any agent or agents of the corporation,
providing for or permitting indemnification in excess of that permitted under
Section 317 of the General Corporation Law, subject to the limitations of
Section 204 of the General Corporation Law.
ARTICLE VII
AMENDMENTS
SECTION 1. POWER OF SHAREHOLDERS.
New bylaws may be adopted or these bylaws may be amended or repealed
by the affirmative vote of a majority of the outstanding shares entitled to vote
or by the written assent of shareholders entitled to vote such shares, except as
otherwise provided by law or by the articles of incorporation of this
corporation.
SECTION 2. POWER OF DIRECTORS.
Subject to the right of shareholders as provided in Section 1 of this
Article VII to adopt, amend or repeal bylaws, bylaws other than a bylaw or
amendment thereof changing the authorized number of directors may be adopted,
amended or repealed by the board of directors.
28
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting secretary of D2D, INC., a
California corporation; and
(2) That the foregoing bylaws, comprising twenty-eight (28) pages,
constitute the bylaws of such corporation as duly adopted by unanimous written
consent action of the board of directors of the corporation duly taken as of May
1, 1990.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of such corporation this 11th of May 1990.
/s/ Kim Bajorek
-----------------------------------------
Kim Bajorek
Secretary
<PAGE>
OFFICERS' CERTIFICATE OF
AMENDMENT OF BYLAWS
OF
VDI MEDIA
VDI Media, a corporation organized and existing under and by virtue of the
Corporations Code of the State of California (hereafter the "Corporation") does
hereby certify:
1. This Amendment of the Bylaws of the Corporation has been unanimously
approved by the Board of Directors of the Corporation and has been approved by
the shareholders owning a majority of the outstanding shares of the
Corporation's common stock, the sole class of stock currently outstanding.
2. Article II, Section 7(f) of the Bylaws of the Corporation was restated
to read in its entirety as follows:
At such time as this Corporation shall become a "listed corporation",
as that term was used in Section 301.5 of the California Corporations
Code, the shareholders of the Corporation shall have no right to
cumulative votes for the election of directors, and any such rights
are hereby eliminated as permitted in said Section 301.5.
3. Article III, Section 2 of the Bylaws of the Corporation was restated
to read in its entirety as follows:
The number of directors of this corporation shall be five(5). After
the issuance of shares this number may be changed only by an amendment
to the articles of incorporation or Bylaws approved by the affirmative
vote or written consent of a majority of the directors of this
Corporation.
4. Article VI of the Bylaws of this Corporation was restated to read in
its entirety as follows:
SECTION 1. INDEMNIFICATION OF AGENTS.
The board of directors of this Corporation is authorized to enter
into an agreement or agreements with any agent or agents of the Corporation,
providing for or permitting indemnification in excess of that permitted under
Section 317 of the General Corporation Law, subject to the limitations of
Section 204 of the General Corporation Law.
SECTION 2. INSURANCE.
The Corporation may purchase and maintain insurance to the extent
provided by Section 317(i) on behalf of any Agent against any liability by him
in any such position, or arising out of his status as such, whether or not the
Corporation would have the power to
<PAGE>
indemnify him against such liability under Section 317, the articles of
incorporation or hereunder.
5. Article VII, Section 2 of the Bylaws of the Corporation was restated
to read in its entirety as follows:
Subject to the right of shareholders, as provided in Section 1 of this
Article VII, to adopt, amend or repeal bylaws, bylaws may be adopted,
amended or repealed by the board of directors without the approval of
shareholders.
The following officers of the Corporation declare under penalty of perjury
under the laws of the State of California that the matters set forth in this
certificate are true and correct to the best of our knowledge.
Date: May 15, 1996 /s/ R. Luke Stefanko
-------------------------
R. Luke Stefanko
Chief Executive Officer
/s/ Donald R. Stine
-------------------------
Donald R. Stine
Secretary
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS
THE STATE OF CALIFORNIA RELATING TO RIGHTS
PREFERENCES, PRIVILEGES AND
RESTRICTIONS, IF ANY
CUSIP
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF
VDI Media
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signature of its duly authorized officers.
Dated:
VDI Media
INCORPORATED
March 22, 1990
CALIFORNIA
Donald R. Stine R. Luke Stefanko
Secretary President and Chief Executive
Officer
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRANT
By
AUTHORIZED SIGNATURE
<PAGE>
The Corporation is authorized to issue two classes of stock, Common
Stock and Preferred Stock. The Board of Directors of the Corporation has the
authority to fix the number of shares and the designation of any series of
Preferred Stock and to determine or alter the rights, preferences, privileges
and restrictions granted to or imposed upon any unissued series of Preferred
Stock.
A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares and
upon the holders thereof as established by the Articles of Incorporation of
the Corporation and by any certificate of determination, and the number of
shares constituting each class or series and the designations thereof, may be
obtained by any shareholder of the Corporation upon written request and
without charge from the Secretary of the Corporation as its corporate
headquarters.
The following abbreviations, when used in the incorporation on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entries
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ..........Custodian...........
(Cust) (Minor)
under Uniform Gifts to Minors
Act ..........................
(State)
UNIF TRF MIN ACT -- .... Custodian (Until age ....)
(Cust)
....... under Uniform Transfers
(Minor)
to Minors Act .................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
/ /
- --------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_________________________________
X _______________________________________
X _______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
By _____________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS), STOCKHOLDERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO a.s.c. RULE 17ad15.
<PAGE>
EXHIBIT 4.2
1996 STOCK INCENTIVE PLAN OF
VDI MEDIA
<PAGE>
TABLE OF CONTENTS
PAGE
I. DEFINITIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 DEFINITIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. THE PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 PURPOSE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 PARTICIPATION.. . . . . . . . . . . . . . . . . . . . . . . . . 5
2.4 STOCK SUBJECT TO THE PLAN.. . . . . . . . . . . . . . . . . . . 5
2.5 GRANT OF AWARDS.. . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 EXERCISE OF AWARDS. . . . . . . . . . . . . . . . . . . . . . . 6
III. OPTIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.1 GRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.2 OPTION PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3 OPTION PERIOD.. . . . . . . . . . . . . . . . . . . . . . . . . 9
3.4 EXERCISE OF OPTIONS.. . . . . . . . . . . . . . . . . . . . . . 9
3.5 LIMITATIONS ON GRANT OF INCENTIVE STOCK OPTIONS.. . . . . . . . 9
3.6 ADDITIONAL RIGHTS.. . . . . . . . . . . . . . . . . . . . . . .10
IV. STOCK APPRECIATION RIGHTS.. . . . . . . . . . . . . . . . . . . . . . . .10
4.1 GRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
4.2 EXERCISE OF STOCK APPRECIATION RIGHTS.. . . . . . . . . . . . .11
4.3 PAYMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . .11
V. RESTRICTED STOCK AWARDS.. . . . . . . . . . . . . . . . . . . . . . . . .12
5.1 GRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.2 RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . .12
VI. PERFORMANCE SHARE AWARDS. . . . . . . . . . . . . . . . . . . . . . . . .13
6.1 GRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
i
<PAGE>
VII. OTHER PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES. . .13
7.2 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. . . . . . . . . . .14
7.3 TERMINATION OF EMPLOYMENT.. . . . . . . . . . . . . . . . . . .15
7.4 ACCELERATION OF AWARDS. . . . . . . . . . . . . . . . . . . . .16
7.5 GOVERNMENT REGULATIONS. . . . . . . . . . . . . . . . . . . . .16
7.6 TAX WITHHOLDING.. . . . . . . . . . . . . . . . . . . . . . . .17
7.7 AMENDMENT, TERMINATION AND SUSPENSION.. . . . . . . . . . . . .17
7.8 PRIVILEGES OF STOCK OWNERSHIP, NONDISTRIBUTIVE INTENT.. . . . .18
7.9 EFFECTIVE DATE OF THE PLAN. . . . . . . . . . . . . . . . . . .18
7.10 TERM OF THE PLAN. . . . . . . . . . . . . . . . . . . . . . . .19
7.11 GOVERNING LAW.. . . . . . . . . . . . . . . . . . . . . . . . .19
ii
<PAGE>
VDI MEDIA
1996 Stock Incentive Plan
I. DEFINITIONS.
1.1 DEFINITIONS.
(a) "Award" shall mean an Option, which may be designated as a
Nonqualified Stock Option or an Incentive Stock Option, a Stock Appreciation
Right, a Restricted Stock Award or Performance Share Award, in each case granted
under this Plan.
(b) "Award Agreement" shall mean a written agreement setting forth
the terms of an Award.
(c) "Award Date" shall mean the date upon which the Committee took
the action granting an Award or such later date as is prescribed by the
Committee.
(d) "Award Period" shall mean the period beginning on an Award Date
and ending on the expiration date of such Award.
(e) "Beneficiary" shall mean the person, persons, trust or trusts
entitled by will or the laws of descent and distribution to receive the benefits
specified under this Plan in the event of a Participant's death.
(f) "Board" shall mean the Board of Directors of the Corporation.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(h) "Commission" shall mean the Securities and Exchange Commission.
(i) "Committee" shall mean either a committee appointed by the Board
and consisting of two or more members, each of whom is a Non-Employee Director,
or the entire Board if each member is a Non-Employee Director (except as
otherwise permitted under Rule 166-3 promulgated under the Exchange Act). If
there are two or more members of the Board who are "outside directors" within
the meaning of Section 162(m) of the code and the regulations promulgated
thereunder, then the Committee shall consist only of such members.
<PAGE>
(j) "Common Stock" shall mean the Common Stock, without par value, of
the Corporation.
(k) "Company" shall mean, collectively, the Corporation and its
Subsidiaries.
(l) "Corporation" shall mean VDI Media, a California corporation, and
its successors.
(m) "Eligible Person" shall mean an employee, director, officer, key
employee of the Company or any other person who, in the opinion of the
Committee, is rendering valuable services to the Company, including, without
limitation, an independent contractor, outside consultant or advisor to the
Company.
(n) "Event" shall mean any of the following:
(1) Approval by the shareholders of the Corporation of the
dissolution or liquidation of the Corporation;
(2) Approval by the shareholders of the Corporation of an
agreement to merge or consolidate, or otherwise reorganize, with or into
one or more entities which are not Subsidiaries, as a result of which less
than 50% of the outstanding voting securities of the surviving or resulting
entity are, or are to be, owned by former shareholders of the Corporation;
(3) Approval by the shareholders of the Corporation of the sale
of substantially all of the Corporation's business and/or assets to a
person or entity which is not a Subsidiary; or
(4) A Change in Control. A "Change in Control" shall be deemed
to have occurred if (A) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Corporation representing 20% or more of the combined
voting power of the Corporation's then outstanding securities; or (B)
during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof, unless the election, or the
nomination for election by the Corporation's shareholders, of each new
Board member was approved by a vote of at least three-fourths of the Board
members then still in office who were Board members at the beginning of
such period.
(o) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
2
<PAGE>
(p) "Fair Market Value" shall mean (i) if the stock is listed or
admitted to trade on a national securities exchange, the closing price of the
stock on the Composite Tape, as published in The Wall Street Journal, of the
principal national securities exchange on which the stock is so listed or
admitted to trade, on such date, or, if there is no trading of the stock on such
date, then the closing price of the stock as quoted on such Composite Tape on
the next preceding date on which there was trading in such shares; (ii) if the
stock is not listed or admitted to trade on a national securities exchange, the
last price for the stock on such date, as furnished by the National Association
of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market
Reporting System or a similar organization if the NASD is no longer reporting
such information; (iii) if the stock is not listed or admitted to trade on a
national securities exchange and is not reported on the National Market
Reporting System, the mean between the closing bid and asked price for the stock
on such date, as furnished by the NASDAQ; (iv) if the stock is not listed or
admitted to trade on a national securities exchange, is not reported on the
National Market Reporting System and if bid and asked prices for the stock are
not furnished by the NASDAQ or a similar organization, the values established by
the Committee for purposes of granting Options under the Plan.
(q) "Incentive Stock Option" shall mean an Option which is designated
as an incentive stock option within the meaning of Section 422 of the Code, the
award of which contains such provisions as are necessary to comply with that
section.
(r) "Non-Employee Director" shall mean a Non-Employee Director
within the meaning of the applicable regulatory requirement promulgated under
Section 16 of the Exchange Act.
(s) "Nonqualified Stock Option" shall mean an Option which is
designated as a Nonqualified Stock Option.
(t) "Option" shall mean an option to purchase Common Stock under this
Plan. An Option shall be designated by the Committee as a Nonqualified Stock
Option or an Incentive Stock Option.
(u) "Participant" shall mean an Eligible Person, who has been awarded
an Award.
(v) "Performance Share Award" shall mean an award of shares of Common
Stock, issuance of which is contingent upon attainment of performance objectives
specified by the Committee.
(w) "Personal Representative" shall mean the person or persons who,
upon the disability or incompetence of a Participant, shall have acquired on
behalf of the Participant by legal proceeding or otherwise the power to exercise
the rights and receive the benefits specified in this Plan.
(x) "Plan" shall mean the VDI Media 1996 Stock Incentive Plan.
(y) "Restricted Stock" shall mean those shares of Common Stock issued
pursuant to a Restricted Stock Award which are subject to the restrictions set
forth in the related Award Agreement.
3
<PAGE>
(z) "Restricted Stock Award" shall mean an award of a fixed number of
shares of Common Stock to the Participant subject, however, to payment of such
consideration, if any, and such forfeiture provisions, as are set forth in the
Award Agreement.
(aa) "Retirement" shall mean termination of employment with the
Company pursuant to the Company's retirement policy, as in effect from time to
time.
(bb) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(cc) "Stock Appreciation Right" shall mean a right to receive a number
of shares of Common Stock or an amount of cash, or a combination of shares and
cash, determined as provided in Section 4.3(a).
(dd) "Subsidiary" shall mean any corporation or other entity a
majority or more of whose outstanding voting stock or voting power is
beneficially owned directly or indirectly by the Corporation.
(ee) "Tax-Offset Bonus" shall mean a bonus payable pursuant to a
disqualifying disposition of Common Stock acquired pursuant to the exercise of
an Incentive Stock Option, determined as provided in Section 3.6.
(ff) "Total Disability" shall mean a "permanent and total disability"
within the meaning of Section 22 (e)(3) of the Code.
II. THE PLAN.
2.1 PURPOSE.
The purpose of this Plan is to promote the success of the Company by
providing an additional means to attract and retain key personnel through added
long-term incentives for high levels of performance and for significant efforts
to improve the financial performance of the Company by granting Awards.
2.2 ADMINISTRATION.
(a) This Plan shall be administered by the Committee. Action of the
Committee with respect to the administration of this Plan shall be taken
pursuant to a majority vote or the written consent of a majority of its members.
In the event action by the Committee is taken by written consent, the action
shall be deemed to have been taken at the time specified in the consent or, if
none is specified, at the time of the last signature. The Committee may
delegate administrative functions (other than functions which are required to be
performed by the Committee pursuant to requirements promulgated under Section 16
of the Exchange Act and Section 162(m) of the Code) to individuals who are
officers or employees of the Company.
4
<PAGE>
(b) Subject to the express provisions of this Plan, the Committee
shall have the authority to construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and Participants under this
Plan, to further define the terms used in this Plan, to prescribe, amend and
rescind rules and regulations relating to the administration of this Plan, to
determine the duration and purposes of leaves of absence which may be granted to
Participants without constituting a termination of their employment for purposes
of this Plan and to make all other determinations necessary or advisable for the
administration of this Plan. The determinations of the Committee on the
foregoing matters shall be conclusive.
(c) Any action taken by, or inaction of, the Corporation, any
Subsidiary, the Board or the Committee relating to this Plan shall be within the
absolute discretion of that entity or body and shall be conclusive and binding
upon all persons. No member of the Board or Committee, or officer of the
Corporation or Subsidiary, shall be liable for any such action or inaction of
the entity or body, of another person or, except in circumstances involving bad
faith, of himself or herself. Subject only to compliance with the express
provisions hereof, the Board and Committee may act in their absolute discretion
in matters related to this Plan.
(d) Subject to the requirements of Section 1.1 (i), the Board, at any
time it so desires, may increase or decrease the number of members of the
Committee, may remove from membership on the Committee all or any portion of its
members, and may appoint such person or persons as it desires to fill any
vacancy existing on the Committee, whether caused by removal, resignation or
otherwise.
2.3 PARTICIPATION.
Awards may be granted only to Eligible Persons. An Eligible Person
who has been granted an Award may, if otherwise eligible, be granted additional
Awards if the Committee shall so determine.
2.4 STOCK SUBJECT TO THE PLAN.
The stock to be offered under this Plan shall be shares of the
Corporation's authorized but unissued Common Stock. The aggregate amount of
Common Stock that may be issued or transferred pursuant to Awards granted
under this Plan shall not exceed 900,000 shares, subject to adjustment as set
forth in Section 7.2; provided that any Stock Appreciation Rights granted
concurrently in accordance with Section 4.1 are not subject to the foregoing
limitation. If an Option and any Stock Appreciation Right shall lapse or
terminate without having been exercised in full, or any Common Stock subject
to a Restricted Stock Award shall not vest or any Common Stock subject to a
Performance Share Award shall not have been transferred, the unpurchased or
nontransferred shares subject thereto shall again be available for purposes
of this Plan; provided, however, that the counting of shares subject to
Awards granted under the Plan against the number of shares available for
further Awards shall in all cases conform to the requirements of Rule 16b-3
under the Exchange Act; and provided, further,
5
<PAGE>
that with respect to any Option and any Stock Appreciation Right granted to any
Eligible Person who is a "covered employee" as defined in Section 162(m) of the
Code and the regulations promulgated thereunder, that is canceled, the number of
shares subject to such Option and Stock Appreciation Right shall continue to
count against the maximum number of shares which may be the subject of Options
and Stock Appreciation Rights granted to such Eligible Person. For purposes of
the preceding sentence, if, after grant, the exercise price of an Option and/or
the base amount of any Stock Appreciation Right is reduced, such reduction shall
be treated as a cancellation of such Option and Stock Appreciation Right and the
grant of a new Option and Stock Appreciation Right (if any), and both the
cancellation of the Option and Stock Appreciation Right and the new Option and
Stock Appreciation Right shall reduce the maximum number of shares for which
Options and Stock Appreciation Rights may be granted to the holder of such
Option and Stock Appreciation Right to the extent required by Section 162(m)
of the Code and the regulations promulgated thereunder.
2.5 GRANT OF AWARDS.
Subject to the express provisions of the Plan, the Committee shall
determine from the class of Eligible Persons those individuals to whom Awards
under the Plan shall be granted, the terms of Awards (which need not be
identical) and the number of shares of Common Stock subject to each Award;
provided, however, that no Eligible Person may be granted Options and Stock
Appreciation Rights relating in the aggregate to more than 250,000 shares of
Common Stock (subject to adjustment as provided in Section 7.2) in any
calendar year; and provided, further, that any shares of Common Stock
relating to Stock Appreciation Rights granted concurrently with one or more
Options in accordance with Section 4.1 shall only be counted once for
purposes of such limit. The maximum number of shares of Common Stock which
may be the subject of Options and Stock Appreciation Rights granted to any
individual in any calendar year shall not exceed 250,000 shares. Each Award
shall be subject to the terms and conditions set forth in the Plan and such
other terms and conditions established by the Committee as are not
inconsistent with the purpose and provisions of the Plan. The grant of an
Award is made on the Award Date.
2.6 EXERCISE OF AWARDS.
An Option or Stock Appreciation Right shall be deemed to be exercised
when the Secretary of the Corporation receives written notice of such exercise
from the Participant, together with payment of the exercise price made in
accordance with Section 3.2(a), except to the extent payment may be permitted to
be made following delivery of written notice of exercise in accordance with
Section 3.2(b). Notwithstanding any other provision of this Plan, the Committee
may impose, by rule and in Award Agreements, such conditions upon the exercise
of Awards (including, without limitation, conditions limiting the time of
exercise to specified periods) as may be required to satisfy applicable
regulatory requirements, including, without limitation, Rule 16b-3 (or any
successor rule) promulgated by the Commission pursuant to the Exchange Act.
III. OPTIONS.
3.1 GRANTS.
(a) One or more Options may be granted to any Eligible Person other
than members of the Committee and any other director who is not also an employee
of the Company. Each Option so granted shall be designated by the Committee as
either a Nonqualified Stock Option or an Incentive Stock Option. Members of the
Committee and non-employee directors shall be granted Options only in
accordance with Section 3.1(b).
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(b) Notwithstanding any other provision of the Plan, effective on
August 15, 1996 and on each subsequent date a director who is not also an
employee of the Company is appointed, elected or, commencing in 1997,
re-elected to the Board, such director will automatically be granted a
Nonqualified Stock Option, having a duration of ten years, to purchase 3,000
shares of Common Stock for an exercise price per share equal to the Fair
Market Value of the Common Stock on the date of grant, vest in equal
tranches of one-third (1/3) of such shares on each of the three anniversaries
of the date of grant. The exercise price of any shares purchased pursuant to
any such Option shall be paid in full at the time of each purchase in cash or
by certified or cashier's check payable to the order of the Corporation.
Notwithstanding anything to the contrary contained in Section 7.2 or 7.4,
each such Option shall be adjusted and shall accelerate, respectively, in the
following events:
(i) If the outstanding shares of Common Stock are increased,
decreased or changed into, or exchanged for, a different number or
kind of shares or securities of the Corporation through a
reorganization or merger in which the Corporation is the surviving
entity, or through a combination, recapitalization, reclassification,
stock split, stock dividend, stock consolidation or otherwise, an
appropriate adjustment shall be made in the number and kind of shares
that may be issued pursuant to each Option. Any such adjustment,
however, shall be made without change in the total payment, if any,
applicable to the portion of the Option not exercised but with a
corresponding adjustment in the price for each share.
(ii) Upon the dissolution or liquidation of the Corporation, or
upon a reorganization, merger or consolidation of the Corporation with
one or more corporations as a result of which the Corporation is not
the surviving corporation, any such Option then outstanding shall
terminate and be forfeited. In the event the Options terminate as
aforesaid in connection with such a dissolution, liquidation,
reorganization, merger or consolidation, the holder of any such Option
shall be entitled to receive from the Corporation cash in an amount
equal to the excess of (A) the Fair Market Value (determined on the
basis of the amount received by shareholders in connection with such
transaction) of the shares of Common Stock subject to the portion of
the Option not theretofore exercised (whether or not the Option is
then exercisable pursuant to its terms or otherwise), over (B) the
aggregate exercise price which would be payable for such shares upon
the exercise of the Option.
(iii) In adjusting Options to reflect the changes described in
this Section 3.1 (b) or in determining that no such adjustment is
necessary, the Committee shall make only such adjustment as shall be
necessary to maintain the proportionate interest of the holder and
preserve the value of the respective Option and may rely upon the
advice of independent counsel and accountants of the Corporation, and
the determination of the Committee shall be conclusive. No fractional
shares of stock shall be issued under this Plan on account of any such
adjustment.
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(iv) Upon the occurrence of an Event, each such Option shall
become immediately exercisable to the full extent theretofore not
exercisable. Such acceleration shall comply with applicable regulatory
requirements, including without limitation Rule 16b-3 promulgated by
the Commission pursuant to the Exchange Act.
All or any part of any remaining unexercised Options granted
pursuant to this Section 3.1 (b) may be exercised (after approval of the Plan
by shareholders of the Corporation, but in no event during the six-month
period commencing on the later of the date of grant or the date of such
shareholder approval, unless such exercise complies with applicable
regulatory requirements) in the event of the holder's cessation of service as
a director of the Company due to the holder's death, during the period
beginning on the date of death and ending 12 months thereafter, but in no
event after the expiration of the term of the Option. Any Option granted
pursuant to this Section 3.1(b), to the extent unexercised, shall terminate
immediately upon the holder's ceasing to serve as a director of the Company
due to Total Disability, except that the holder or the holder's Personal
Representative shall have 12 months following such cessation of service to
exercise any unexercised Option that the holder could have exercised on the
day on which such service terminated; provided that such exercise must be
accomplished prior to the expiration of the term of such Option. Any Option
granted pursuant to this Section 3.1 (b), to the extent unexercised, shall
terminate immediately upon the holder's ceasing to serve as a director of the
Company (for reasons other than Total Disability or death), except that the
holder shall have three months from the date of such cessation of service to
exercise any unexercised Option that he or she could have exercised on the
day on which such service terminated; provided that such exercise must be
accomplished prior to the expiration of the term of such Option.
Notwithstanding the preceding, if the service as a director of any holder of
an Option granted pursuant to this Section 3.1 (b) shall be terminated
because of the holder's (a) fraud or intentional misrepresentation, or (b)
embezzlement, misappropriation or conversion of assets or opportunities of
the Company, then all such unexercised Options of the holder shall terminate
immediately upon such holder's ceasing to serve as a director.
Subject to the limitations of Section 7.7, the award formula in this
Section 3.1(b) may be amended from time to time by the Board with respect to
timing and amount; provided that such formula will not be modified to provide an
award in excess of Options to acquire 5,000 shares of Common Stock per year; and
provided, further, that the provisions of this Section 3.1 (b) shall not be
amended more than once every six months, other than to comport with changes in
the Code or the Employee Retirement Income Security Act of 1974, as amended (and
to such extent, if any, as it may be applicable to the Plan) or the rules and
regulations thereunder.
3.2 OPTION PRICE.
(a) The exercise price per share of the Common Stock covered by each
Option shall be determined by the Committee, but in the case of Incentive Stock
Options shall not be less than 100% (110% in the case of a Participant who owns
more than 10% of the total combined voting power of all classes of stock of the
Company) of the Fair Market Value of the Common Stock on the date the Incentive
Stock Option is granted. The exercise price of any shares purchased shall be
paid in full at the time of each purchase in one or a combination of the
following methods: (i) in cash, or by certified or cashier's check payable to
the order of the Corporation; (ii) if authorized by
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the Committee or specified in the Option being exercised, by a promissory note
made by the Participant in favor of the Corporation, upon the terms and
conditions determined by the Committee but at a rate of interest at least equal
to the imputed interest specified under Section 483 or Section 1274, whichever
is applicable, of the Code, and secured by the Common Stock issuable upon
exercise in compliance with applicable law (including, without limitation, state
corporate law and federal margin requirements); or (iii) by shares of Common
Stock of the Corporation already owned by the Participant; provided, however,
that the Committee may in its absolute discretion limit the Participant's
ability to exercise an Option by delivering shares, and any shares delivered
which were initially acquired upon exercise of a stock option must have been
owned, or deemed to have been owned, by the Participant at least six months as
of the date of delivery. Shares of Common Stock used to satisfy the exercise
price of an Option shall be valued at their Fair Market Value on the date of
exercise.
(b) In addition to the payment methods described in subsection (a),
the Option may provide that the Option can be exercised and payment made by
delivering a properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Corporation the amount of
sale or loan proceeds necessary to pay the exercise price and, unless otherwise
disallowed by the Committee, any applicable tax withholding under Section 7.6.
The Corporation shall not be obligated to deliver certificates for the shares
unless and until it receives full payment of the exercise price therefor.
3.3 OPTION PERIOD.
Each Option and all rights or obligations thereunder shall expire on
such date as shall be determined by the Committee, but not later than 10 years
after the Award Date of an Incentive Stock Option or 10 years and one day after
the Award Date of a Nonqualified Stock Option, and shall be subject to earlier
termination as hereinafter provided.
3.4 EXERCISE OF OPTIONS.
Except as otherwise provided in Section 7.4, an Option may become
exercisable, in whole or in part, on the date or dates specified in the Award
Agreement, and thereafter shall remain exercisable until the expiration or
earlier termination of such Option. The Committee may, at any time after
grant of the Option and from time to time increase the number of shares
purchasable at any time so long as the total number of shares subject to the
Option is not increased. No Option shall be exercisable except in respect of
whole shares, and fractional share interests shall be disregarded. Not less
than 100 shares of Common Stock may be purchased at one time unless the
number purchased is the total number at the time available for purchase under
the terms of the Option.
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3.5 LIMITATIONS ON GRANT OF INCENTIVE STOCK OPTIONS.
(a) The aggregate Fair Market Value (determined as of the Award Date)
of the Common Stock for which Incentive Stock Options may first become
exercisable by any Participant during any calendar year under this Plan (other
than as a result of acceleration pursuant to Section 7.2 or 7.4), together with
that of common stock subject to incentive stock options first exercisable by
such Participant under any other plan of the Corporation or any Subsidiary,
shall not exceed $100,000; to the extent such limitation is exceeded for any
reason, including as a result of acceleration, Options shall be treated as
Nonqualified Stock Options.
(b) There shall be imposed in the Award Agreement relating to
Incentive Stock Options such terms and conditions as are required in order that
the Option qualify as an "incentive stock option" as that term is defined in
Section 422 of the Code.
(c) No Incentive Stock Option may be granted to any person who, at
the time the Incentive Stock Option is granted, owns shares of stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Corporation or any Subsidiary, unless the exercise price of such Option is at
least 110% of the Fair Market Value of the stock subject to the Option and such
Option by its terms is not exercisable after the expiration of five years from
the date such Option is granted.
(d) No Incentive Stock Option may be granted to any person who is not
an employee of the Company.
3.6 ADDITIONAL RIGHTS.
In its discretion the Committee may, in the Award Agreement, provide
for a Tax-Offset Bonus to any Participant who elects to make a disqualifying
disposition (as defined in Section 422(a)(1) of the Code) of Common Stock
acquired pursuant to the exercise of an Incentive Stock Option. The Tax-Offset
Bonus shall be in the form of a cash payment equal to a percentage of the
difference between the exercise price and the lesser of (a) the Fair Market
Value on the date of exercise of the Common Stock with respect to which the
disqualifying disposition occurs or (b) the amount realized from such
disqualifying disposition. Such percentage shall be set out in the Award
Agreement and shall be designed to offset the impact of additional taxes which
result from the disqualifying disposition. Notwithstanding the preceding
sentence, the Committee may reserve the right to from time to time change the
percentage applicable with respect to the Award Agreement.
IV. STOCK APPRECIATION RIGHTS.
4.1 GRANTS.
In its discretion, the Committee may grant Stock Appreciation Rights
concurrently with the grant of Options. A Stock Appreciation Right shall extend
to all or a portion of the shares
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covered by the related Option. A Stock Appreciation Right shall entitle the
Participant who holds the related Option, upon exercise of the Stock
Appreciation Right and surrender of the related Option, or portion thereof, to
the extent the Stock Appreciation Right and related Option each were previously
unexercised, to receive payment of an amount determined pursuant to Section 4.3.
Any Stock Appreciation Right granted in connection with an Incentive Stock
Option shall contain such terms as may be required to comply with the provisions
of Section 422 of the Code and the regulations promulgated thereunder. In its
discretion, the Committee may also grant Stock Appreciation Rights independently
of any Option subject to such conditions as the Committee may in its absolute
discretion provide.
4.2 EXERCISE OF STOCK APPRECIATION RIGHTS.
(a) A Stock Appreciation Right granted concurrently with an Option
shall be exercisable only at such time or times, and to the extent, that the
related Option shall be exercisable and only when the Fair Market Value of the
stock subject to the related Option exceeds the exercise price of the related
Option.
(b) In the event that a Stock Appreciation Right granted concurrently
with an Option is exercised, the number of shares of Common Stock subject to the
related Option shall be charged against the maximum amount of Common Stock that
may be issued or transferred pursuant to Awards under this Plan. The number of
shares subject to the Stock Appreciation Right and the related Option of the
Participant shall be reduced by such number of shares.
(c) If a Stock Appreciation Right granted concurrently with an Option
extends to less than all the shares covered by the related Option and if a
portion of the related Option is thereafter exercised, the number of shares
subject to the unexercised Stock Appreciation Right shall be reduced only if and
to the extent that the remaining number of shares covered by such related Option
is less than the remaining number of shares subject to such Stock Appreciation
Right. The number of shares subject to unexercised Stock Appreciation Rights
may also be reduced proportionately.
(d) A Stock Appreciation Right granted independently of any Option
shall be exercisable pursuant to the terms of the Award Agreement.
(e) In order to achieve the Plan's objective of encouraging ownership
of the Common Stock, the Committee may require that Stock Appreciation Rights
can only be exercised if the Participant uses all or a portion of any cash
received upon exercise of the Stock Appreciation Right to concurrently exercise
all or a portion of the Option he or she holds.
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4.3 PAYMENT.
(a) Upon exercise of a Stock Appreciation Right and surrender of an
exercisable portion of the related Option, the Participant shall be entitled to
receive payment of an amount determined by multiplying
(i) the difference obtained by subtracting the exercise price
per share of Common Stock under the related Option from the Fair
Market Value of a share of Common Stock on the date of exercise of the
Stock Appreciation Right, by
(ii) the number of shares with respect to which the Stock
Appreciation Right shall have been exercised.
(b) The Committee, in its sole discretion, may settle the amount
determined under subsection (a) above solely in cash, solely in shares of Common
Stock (valued at Fair Market Value on the date of exercise of the Stock
Appreciation Right), or partly in such shares and partly in cash, provided that
the Committee shall have determined that such exercise and payment are
consistent with applicable law. In any event, cash shall be paid in lieu of
fractional shares. Absent a determination to the contrary, all Stock
Appreciation Rights shall be settled in cash as soon as practicable after
exercise. Notwithstanding the foregoing, the Committee may, in the Award
Agreement, determine the maximum amount of cash or stock or a combination
thereof which may be delivered upon exercise of a Stock Appreciation Right.
(c) Upon exercise of a Stock Appreciation Right granted independently
of any Option, the Participant shall be entitled to receive payment in cash of
an amount based on a percentage, specified in the Award Agreement, of the
difference obtained by subtracting the Fair Market Value per share of Common
Stock on the Award Date from the Fair Market Value per share of Common Stock on
the date of exercise of the Stock Appreciation Right.
V. RESTRICTED STOCK AWARDS.
5.1 GRANTS.
Subject to Section 2.4, the Committee may, in its discretion, grant
one or more Restricted Stock Awards to any Eligible Person. Each Restricted
Stock Award Agreement shall specify the number of shares of Common Stock to
be issued to the Participant, the date of such issuance, the price, if any,
to be paid for such shares by the Participant and the restrictions imposed on
such shares. Shares of Restricted Stock shall be evidenced by a stock
certificate registered only in the name of the Participant, which stock
certificate shall bear a legend making appropriate reference to the
restrictions imposed and shall be held by the Corporation until the
restrictions on such shares shall have lapsed and those shares shall have
thereby vested.
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5.2 RESTRICTIONS.
(a) Shares of Common Stock included in Restricted Stock Awards may
not be sold, assigned, transferred, pledged or otherwise disposed of or
encumbered, either voluntarily or involuntarily, until such shares have vested.
(b) Participants receiving Restricted Stock shall be entitled to
voting and dividend rights for the shares issued even though they are not
vested; provided that any dividends declared and paid on the shares issued but
not yet vested shall be returned to the Corporation immediately as to any
forfeited Restricted Stock.
(c) In the event that the Participant shall have paid cash in
connection with the Restricted Stock Award, the Award Agreement shall specify
whether and to what extent such cash shall be returned upon a forfeiture (with
or without an earnings factor).
VI. PERFORMANCE SHARE AWARDS.
6.1 GRANTS.
The Committee may, in its discretion, grant Performance Share Awards
to Eligible Persons based upon such factors as the Committee shall determine. A
Performance Share Award Agreement shall specify the number of shares of Common
Stock subject to the Performance Share Award, the price, if any, to be paid for
such shares by the Participant and the conditions upon which issuance to the
Participant shall be based.
VII. OTHER PROVISIONS.
7.1 RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES.
(a) Status as an Eligible Person shall not be construed as a
commitment that any Award will be made under this Plan to an Eligible Person or
to Eligible Persons generally.
(b) Nothing contained in this Plan (or in Award Agreements or in any
other documents related to this Plan or to Awards) shall confer upon any
Eligible Person or Participant any right to continue in the employ of the
Company or constitute any contract or agreement of employment, or interfere in
any way with the right of the Company to reduce such person's compensation or to
terminate the employment of such Eligible Person or Participant, with or without
cause, but nothing contained in this Plan or any document related thereto shall
affect any other contractual right of any Eligible Person or Participant.
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(c) Amounts payable pursuant to an Award shall be paid only to the
Participant or, in the event of the Participant's death, to the Participant's
Beneficiary or, in the event of the Participant's Total Disability, to the
Participant's Personal Representative or, if there is none, to the Participant.
Other than by will or the laws of descent and distribution, or pursuant to a
"qualified domestic relations order" as defined by the Code, no benefit payable
under, or interest in, this Plan or in any Award shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge and any such attempted action shall be void and no such benefit or
interest shall be, in any manner, liable for or subject to, debts, contracts,
liabilities, engagements or torts of any Eligible Person, Participant or
Beneficiary. The Committee shall disregard any attempted transfer, assignment
or other alienation prohibited by the preceding sentence and shall pay or
deliver such cash or shares of Common Stock in accordance with the provisions of
this Plan.
(d) No Participant, Beneficiary or other person shall have any right,
title or interest in any fund or in any specific asset (including shares of
Common Stock) of the Company by reason of any Award granted hereunder. Neither
the provisions of this Plan (or of any documents related hereto), nor the
creation or adoption of this Plan, nor any action taken pursuant to the
provisions of this Plan shall create, or be construed to create, a trust of any
kind or a fiduciary relationship between the Company and any Participant,
Beneficiary or other person. To the extent that a Participant, Beneficiary or
other person acquires a right to receive an Award hereunder, such right shall be
no greater than the right of any unsecured general creditor of the Company.
7.2 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) If the outstanding shares of Common Stock are increased,
decreased or changed into, or exchanged for, a different number or kind of
shares or securities of the Corporation through a reorganization or merger in
which the Corporation is the surviving entity, or through a combination,
recapitalization, reclassification, stock split, stock dividend, stock
consolidation or otherwise, an appropriate adjustment shall be made in the
number and kind of shares that may be issued pursuant to Awards. A
corresponding adjustment to the consideration payable with respect to Awards
granted prior to any such change and to the price, if any, paid in connection
with Restricted Stock Awards or Performance Share Awards shall also be made.
Any such adjustment, however, shall be made without change in the total payment,
if any, applicable to the portion of the Award not exercised but with a
corresponding adjustment in the price for each share. Corresponding adjustments
shall be made with respect to Stock Appreciation Rights based upon the
adjustments made to the Options to which they are related or, in the case of
Stock Appreciation Rights granted independently of any Option, based upon the
adjustments made to Common Stock. Corresponding adjustments may also be made in
particular stock grants with respect to extraordinary cash dividends.
(b) Upon the dissolution or liquidation of the Corporation, or upon a
reorganization, merger or consolidation of the Corporation with one or more
corporations as a result of which the Corporation is not the surviving
corporation, the Plan shall terminate, and any outstanding Awards shall
terminate and be forfeited. Notwithstanding the foregoing, the Committee may
provide in writing in connection with, or in contemplation of, any such
transaction for any or all of the following alternatives (separately or in
combinations): (i) for the assumption by the
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successor corporation of the Awards theretofore granted or the substitution by
such corporation for such Awards of awards covering the stock of the successor
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number and kind of shares and prices; (ii) for the continuance of the
Plan by such successor corporation in which event the Plan and the Awards shall
continue in the manner and under the terms so provided; or (iii) for the payment
in cash or shares of Common Stock in lieu of and in complete satisfaction of
such Awards.
(c) In adjusting Awards to reflect the changes described in this
Section 7.2, or in determining that no such adjustment is necessary, the
Committee may rely upon the advice of independent counsel and Accountants of the
Corporation, and the determination of the Committee shall be conclusive. No
fractional shares of stock shall be issued under this Plan on account of any
such adjustment.
7.3 TERMINATION OF EMPLOYMENT.
(a) If the Participant's employment by the Company terminates for any
reason other than Retirement, death or Total Disability, the Participant shall
have, subject to earlier termination pursuant to or as contemplated by Section
3.3, three months (or up to one year if so determined by the Committee in the
grant or otherwise) from the date of termination of employment to exercise any
Option to the extent it shall have become exercisable on that date, and any
Option not exercisable on that date shall terminate. Notwithstanding the
preceding sentence, in the event the Participant is discharged for cause as
determined by the Committee in its sole discretion, all Options shall lapse
immediately upon such termination of employment.
(b) If the Participant's employment by the Company terminates as a
result of Retirement or Total Disability, the Participant or Participant's
Personal Representative, as the case may be, shall have, subject to earlier
termination pursuant to or as contemplated by Section 3.3, 12 months from the
date of termination of employment (or three months from the date of
termination of employment as a result of Retirement, with respect to an
Incentive Stock Option) to exercise any Option to the extent it shall have
become exercisable by that date, and any Option not exercisable on that date
shall terminate.
(c) If the Participant's employment by the Company terminates as a
result of death while the Participant is employed by the Company or during the
12-month period referred to in subsection (b) above, the Participant's Option
shall be exercisable by the Participant's Beneficiary, subject to earlier
termination pursuant to or as contemplated by Section 3.3, during the 12-month
period or such shorter period as is provided in the Award Agreement following
the Participant's death, as to all or any part of the shares of Common Stock
covered thereby including all shares as to which the Option would not otherwise
be exercisable.
(d) Each Stock Appreciation Right granted concurrently with an Option
shall have the same termination provisions and exercisability periods as the
Option to which it relates. The termination provisions and exercisability
periods of any Stock Appreciation Right granted independently of an Option shall
be established in accordance with Section 4.2(d). The
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exercisability period of a Stock Appreciation Right shall not exceed that
provided in Section 3.3 or in the related Award Agreement, and the Stock
Appreciation Right shall expire at the end of such exercisability period.
(e) In the event of termination of employment with the Company for
any reason, (i) shares of Common Stock subject to the Participant's Restricted
Stock Award shall be forfeited in accordance with the provisions of the related
Award Agreement to the extent such shares have not become vested on that date;
and (ii) shares of Common Stock subject to the Participant's Performance Share
Award shall be forfeited in accordance with the provisions of the related Award
Agreement to the extent such shares have not been issued or become issuable on
that date.
(f) In the event of termination of employment with the Company for
any reason, other than discharge for cause, the Committee may, in its
discretion, increase the portion of the Participant's Award available to the
Participant, or Participant's Beneficiary or Personal Representative, as the
case may be, upon such terms as the Committee shall determine.
(g) If an entity ceases to be a Subsidiary, such action shall be
deemed for purposes of this Section 7.3 to be a termination of employment of
each employee of that entity.
(h) Upon forfeiture of a Restricted Stock Award pursuant to this
Section 7.3, the Participant, or his or her Beneficiary or Personal
Representative, as the case may be, shall transfer to the Corporation the
portion of the Restricted Stock Award not vested at the date of termination of
employment, without payment of any consideration by the Company for such
transfer unless the Participant paid an exercise price in which case repayment,
if any, of that price shall be governed by the Award Agreement. Notwithstanding
any such transfer to the Corporation, or failure, refusal or neglect to
transfer, by the Participant, or his or her Beneficiary or Personal
Representative, as the case may be, such nonvested portion of any Restricted
Stock Award shall be deemed transferred automatically to the Corporation on the
date of termination of employment. The Participant's original acceptance of the
Restricted Stock Award shall constitute his or her appointment of the
Corporation and each of its authorized representatives as attorney(s)-in-fact to
effect such transfer and to execute such documents as the Corporation or such
representatives deem necessary or advisable in connection with such transfer.
7.4 ACCELERATION OF AWARDS.
Unless prior to an Event the Committee determines that, upon its
occurrence, there shall be no acceleration of Awards or determines those
Awards which shall be accelerated and the extent to which they shall be
accelerated, upon the occurrence of an Event (a) each Option and each Stock
Appreciation Right shall become immediately exercisable to the full extent
theretofore not exercisable, (b) Restricted Stock shall immediately vest free
of restrictions, and (c) the number of shares covered by each Performance
Share Award shall be issued to the Participant. Acceleration of Awards shall
comply with applicable regulatory requirements, including,
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without limitation, Rule 16b-3 promulgated by the Commission pursuant to the
Exchange Act and Section 422 of the Code.
7.5 GOVERNMENT REGULATIONS.
This Plan, the granting of Awards under this Plan and the issuance or
transfer of shares of Common Stock (and/or the payment of money) pursuant
thereto are subject to all applicable federal and state laws, rules and
regulations and to such approvals by any regulatory or governmental agency
(including, without limitation, interpretive letters of the Commission) which
may, in the opinion of counsel for the Corporation, be necessary or advisable in
connection therewith. Without limiting the generality of the foregoing, no
Awards may be granted under this Plan, and no shares shall be issued by the
Corporation, or cash payments made by the Corporation, pursuant to or in
connection with any such Award, unless and until, in each such case, all legal
requirements applicable to the issuance or payment have, in the opinion of
counsel to the Corporation, been complied with. In connection with any stock
issuance or transfer, the person acquiring the shares shall, if requested by the
Corporation, give assurances satisfactory to counsel to the Corporation in
respect of such matters as the Corporation may deem desirable to assure
compliance with all applicable legal requirements.
7.6 TAX WITHHOLDING.
(a) Upon the disposition by a Participant or other person of
shares of Common Stock acquired pursuant to the exercise of an Incentive
Stock Option prior to satisfaction of the holding period requirements of
Section 422 of the Code, or upon the exercise of a Nonqualified Stock Option
or a Stock Appreciation Right, the vesting of a Restricted Stock Award, the
payment of a Performance Share Award, payment pursuant to a Stock
Appreciation Right or payment of a Tax-Offset Bonus, the Company shall have
the right to (i) require such Participant or other person to pay by cash, or
certified or cashier's check payable to the Company, the amount of any taxes
which the Company may be required to withhold with respect to such
transactions or (ii) deduct from amounts paid in cash the amount of any taxes
which the Company may be required to withhold with respect to such cash
amounts. The above notwithstanding, in any case where a tax is required to
be withheld in connection with the issuance or transfer of shares of Common
Stock under this Plan, the Participant may elect, pursuant to such rules as
the Committee may establish, to have the Company reduce the number of such
shares issued or transferred by the appropriate number of shares to
accomplish such withholding; provided that the Committee may impose such
conditions on the payment of any withholding obligation as may be required to
satisfy applicable regulatory requirements, including, without limitation,
Rule 16b-3 promulgated by the Commission pursuant to the Exchange Act.
(b) The Committee may, in its discretion, permit a loan from the
Company to a Participant (other than a member of the Committee) in the amount of
any taxes which the Company may be required to withhold with respect to shares
of Common Stock received pursuant to a transaction described in subsection (a)
above. Such a loan will be for a term, at a rate of interest and pursuant to
such other terms and rules as the Committee may establish.
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7.7 AMENDMENT, TERMINATION AND SUSPENSION.
(a) The Board may, at any time, terminate or, from time to time,
amend, modify or suspend this Plan (or any part hereof). In addition, the
Committee may, from time to time, amend or modify any provision of this Plan
and, with the consent of the Participant, make such modifications of the terms
and conditions of such Participant's Award as it shall deem advisable. The
Committee, with the consent of the Participant, may also amend the terms of any
Option to provide that the exercise price of the shares remaining subject to the
original Award shall be reestablished at a price not less than 100% of the Fair
Market Value of the Common Stock on the effective date of the amendment. No
modification of any other term or provision of any Option which is amended in
accordance with the foregoing shall be required, although the Committee may, in
its discretion, make such further modifications of any such Option as are not
inconsistent with or prohibited by this Plan. No Awards may be granted during
any suspension of this Plan or after its termination.
(b) If an amendment would (i) materially increase the benefits
accruing to Participants within the meaning of Rule 16b-3(a) under the
Exchange Act or any successor thereto, (ii) increase the aggregate number of
shares which may be issued under this Plan or to any individual, (iii) modify
the requirements of eligibility for participation in this Plan, or (iv)
require shareholder approval in order to qualify Options and Stock
Appreciation Rights as "performance-based compensation," within the meaning
of Section 162(m) of the Code and the regulations promulgated thereunder, the
amendment shall be approved by the Board or the Committee and a majority of
the shareholders. If the provisions of Rule 16b-3 under the Exchange Act or
any successor thereto or Section 162(m) of the Code regulations promulgated
thereunder permit the amendment of stock options plans without compliance
with the shareholder approval requirements then set forth therein, the
foregoing restrictions on the ability of the Board and the Committee to amend
the Plan shall terminate to the extent such approval is not required
thereunder (or under any other applicable law or regulation), and the Board
and the Committee shall be empowered to amend the Plan without regard to the
terminated restrictions in appropriate circumstances.
(c) In the case of Awards issued before the effective date of any
amendment, suspension or termination of this Plan, such amendment, suspension or
termination of the Plan shall not, without specific action of the Board or the
Committee and the consent of the Participant, in any way modify, amend, alter or
impair any rights or obligations under any Award previously granted under the
Plan.
7.8 PRIVILEGES OF STOCK OWNERSHIP, NONDISTRIBUTIVE INTENT.
A Participant shall not be entitled to the privilege of stock
ownership as to any shares of Common Stock not actually issued to him. Upon the
issuance and transfer of shares to the Participant, unless a registration
statement is in effect under the Securities Act, relating to such issued and
transferred Common Stock and there is available for delivery a prospectus
meeting the requirements of Section 10 of the Securities Act, the Common Stock
may be issued and transferred to the Participant only if he represents and
warrants in writing to the Corporation that the shares are being acquired for
investment and not with a view to the resale or distribution thereof. No shares
shall be issued and transferred unless and until there shall have been full
compliance with any then applicable regulatory requirements (including those of
exchanges upon which any Common Stock of the Corporation may be listed).
7.9 EFFECTIVE DATE OF THE PLAN.
This Plan is conditioned upon its approval by the shareholders of the
Corporation on or before July 1, 1996 by the vote of the holders of a majority
of the stock of the Corporation voting
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at such meeting in person or by proxy; except that this Plan is adopted and
approved by the Board effective May 15, 1996 to permit the grant of Awards prior
to the approval of the Plan by the shareholders of the Corporation as aforesaid.
Any Awards granted prior to shareholder approval shall not vest or become
exercisable prior to such approval. In the event that this Plan is not approved
by the shareholders of the Corporation as aforesaid, this Plan and any Awards
granted hereunder shall be void and of no force or effect.
7.10 TERM OF THE PLAN.
Unless previously terminated by the Board, this Plan shall terminate
at the close of business on May 15, 2006, and no Awards shall be granted under
it thereafter, but such termination shall not affect any Award theretofore
granted.
7.11 GOVERNING LAW.
This Plan and the documents evidencing Awards and all other related
documents shall be governed by, and construed in accordance with, the laws of
the State of California. If any provision shall be held by a court of competent
jurisdiction to be invalid and unenforceable, the remaining provisions of this
Plan shall continue to be fully effective.
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EXHIBIT 5.1
[LETTERHEAD]
December 20, 1996
VDI Media
6920 Sunset Boulevard
Hollywood, CA 90028
Re: Shares of Common Stock of VDI Media
-----------------------------------
Gentlemen:
We have acted as special counsel to VDI Media, a California corporation
(the "Company"), in connection with its Registration Statement on Form S-1, as
amended (the "Registration Statement"), filed pursuant to the Securities Act of
1933, as amended (the "Act"), relating to the proposed offering by the Company
of an aggregate of up to 2,645,000 shares (the "Shares") of the Company's Common
Stock, no par value (the "Common Stock").
In that connection, we have reviewed the Restated Articles of Incorporation
of the Company, its By-Laws, as amended, resolutions of its Board of Directors
and such other documents and records as we have deemed appropriate.
On the basis of such review and having regard to legal considerations that
we deemed relevant, it is our opinion that the Shares have been duly authorized,
and upon issuance, delivery and payment therefor in the manner contemplated by
the Registration Statement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the prospectus included therein. In giving this opinion, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Securities and Exchange Commission.
Very truly yours,
/s/ Kaye, Scholer, Fierman,
Hays & Handler, LLP
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into this 27th day of June,
1996, by and between VDI Media, a California corporation ("VDI"), and R. Luke
Stefanko("Employee").
Whereas, VDI desires to assure that VDI retains the services of Employee,
whose experience, knowledge and abilities with respect to the business and
affairs of VDI are valuable to VDI;
Now, therefore, VDI and Employee agree as follows:
1. POSITIONS AND DUTIES.
1.1 VDI hereby employs Employee as Chief Executive Officer and
President of VDI during the term of this Agreement, with powers and duties
consistent with such position. Employee shall report to the Board of Directors
of VDI.
1.2 Employee shall devote his full working time to the promotion of
the VDI's business and welfare, and use his best efforts to promote the VDI's
products and services. During the term of his employment with VDI, Employee
will not accept employment or engage in any manner, directly or indirectly, in
any other business. Employee shall perform such duties and responsibilities
incidental to his employment as may from time to time be requested by VDI and
shall faithfully observe the VDI's policies and procedures.
2. COMPENSATION AND BENEFITS.
2.1 GENERALLY; BASE SALARY. Beginning on the date of this Agreement,
during the term of employment, for the services to be rendered by Employee
hereunder, Employee shall receive the following compensation and benefits,
payable as earned, in the intervals indicated, and prorated for any partial
year:
(a) An annual salary (the "Base Salary"), at the rate of Two
Hundred Fifty Thousand dollars ($250,000) payable from the period commencing as
of the date of commencement of the Term. The Base Salary shall automatically
increase annually by a percentage equal to the change in the Consumer Price
Index. The Base Salary may be increased (but not decreased) by the
<PAGE>
Compensation Committee of the Board of Directors of VDI by a vote at a meeting
duly held; provided that Employee shall abstain from participating in such
vote. The Base Salary shall be payable no less frequently than monthly. VDI
may deduct from each installment of the Base Salary an amount sufficient to
cover applicable federal, state and/or local income tax withholdings, old age
and survivors and other social security payments, state disability insurance
premiums and any other amounts which VDI is required to withhold by applicable
law;
(b) a stock option grant as of or prior to the commencement of
the Term of with respect to 20,000 shares (the "Option Shares") of VDI common
stock, to be issued pursuant to the 1996 Stock Incentive Plan(the "Stock
Options"); and
(c) the quarterly bonus payments described below to the extent
VDI achieves quarterly earnings per share results adopted by the Board of the
Directors at the beginning of each year, or, with respect to the fourth quarter
of 1996, on or before September 30, 1996, ("Targeted Earnings"). If VDI attains
the Targeted Earnings with respect to a particular quarter, Employee shall
receive a bonus payment of $6,250 within 45 days after the last day of such
quarter. If VDI's actual earnings per share are less than 75% of the Targeted
Earnings, Employee shall not receive any bonus. If VDI's actual earnings per
share equal 125% or more of the Targeted Earnings, Employee shall receive an
increased bonus payment (subject to a maximum payment in any quarter of
$12,500). To the extent VDI's earnings per share equal between 75% and 125% of
the Targeted Earnings, Employee shall be entitled to receive a pro rated bonus
payment within the range set forth above.
2.2 FRINGE BENEFITS. Employee shall receive the following fringe
benefits from VDI during the Term:
(a) four weeks of paid vacation during each fiscal year of VDI
(as used in this Paragraph, a "fiscal year" shall be the date which is 12 months
following the date of commencement of the Term under this Agreement and each 12-
month period thereafter). Any such vacation shall be taken at times in
accordance with the vacation policies of VDI, unless approved otherwise by VDI,
or if accrued by Employee and not taken in any fiscal year shall be accrued and
carried forward to the subsequent fiscal year;
2
<PAGE>
(b) payment of the premium payable with respect to the health
insurance plan provided by VDI for its executive officers and their families as
from time to time in effect. In addition, Employee shall be permitted during
the term hereof, if and to the extent eligible, to participate in any group
life, hospitalization or disability insurance plan, health program, pension
plan, similar benefit or other fringe benefits of VDI which may be available to
executive officers of VDI;
(c) an automobile allowance in the amount of Two Thousand
dollars($2,000)per month (such allowance to include related automobile insurance
and ordinary maintenance costs); and
(d) reimbursement to Employee for all reasonable costs and
expenses he incurs in connection with the performance of his duties and
obligations under this Agreement, and which are consistent with the policies of
VDI for executive officers.
3. TERM. The term of this Agreement (the "Term") shall commence on the
date hereof and shall terminate upon the first to occur of the following events:
3.1 June 27, 2001;
3.2 The death or permanent disability of Employee as defined in
Section 5.1 herein;
3.3 The discharge of Employee for cause as defined in Section
5.2(a)herein.
4. COVENANT NOT TO SOLICIT OR HIRE EMPLOYEES OR CUSTOMERS. For a period
of two years commencing upon the termination of Employee's employment, Employee
shall not, directly or indirectly, solicit or induce any of VDI's employees to
terminate their employment with VDI, hire or cause any of the then current
employees of VDI to be hired by any other company, or solicit or assist in
soliciting any business from any of the then current customers or prospective
customers of VDI on behalf of Employee or any other company.
5. TERMINATION.
5.1 TERMINATION DUE TO DISABILITY, ETC. VDI may, by written notice
to Employee, terminate his employment under the
3
<PAGE>
Agreement as of the date of that notice if Employee shall fail or be unable to
perform his duties as the result of any physical or mental disability for 180
consecutive days or during any 210 days in any 240-day period (a "Permanent
Disability"); Employees's employment under this Agreement shall terminate
automatically upon Employee's death or adjudication of incompetency.
5.2 TERMINATION FOR CAUSE. By complying with the provisions of
Section 5.2(b) hereof, VDI may terminate Employee's employment under this
Agreement for "Cause."
(a) For purposes of this agreement, "Cause" shall mean:(i)
fraud, embezzlement or conviction of or the pleading of guilty or no contest to
any felony or to any misdemeanor involving dishonesty, (ii) gross negligence or
willful failure of Employee to perform his duties hereunder, or (iii) any breach
by Employee of his covenants or obligations under this Agreement.
(b) If any one or more of the events enumerated under (a) above
shall occur, VDI shall provide written notice (the "Warning Notice") to Employee
of its intention to terminate this Agreement for Cause, the basis of such Cause,
and the steps which VDI believes should be taken by the Employee to correct and
cure the same. Unless Employee, within 30 days following receipt of the Warning
Notice, substantially corrects and cures all matters delineated in the Warning
Notice to VDI's reasonable satisfaction or if the matters set forth in the
Warning Notice are not reasonably susceptible of being so cured or corrected
within such 30-day period, VDI may terminate this Agreement so that VDI shall
have no further obligation to Employee except as set forth in Section 5.3
herein, by delivering a notice of termination to Employee, which notice of
termination shall be effective as of the date of delivery of such notice;
PROVIDED HOWEVER, that Employee shall not be entitled to any notice or
opportunity to cure a termination arising as a result of the "Cause" set forth
in Section 5.2(a)(i) hereof.
5.3 PAYMENTS UPON TERMINATION.
(a) In the event Employee is terminated for any reason, VDI
shall pay to Employee all accrued and unpaid Base Salary, all accrued and unpaid
vacation and other accrued and unpaid benefits set forth herein to the date of
termination, reimbursement of expenses prior to the date of termination in
4
<PAGE>
accordance with the provisions of this Agreement; continued insurance benefits
under such circumstances and for such periods of time as are mandated by
applicable state or federal law; and such other benefits or entitlements that
are deemed to be vested pursuant to the provisions of Employee Retirement Income
Security Act of 1974, as from time to time amended, and any regulations
promulgated pursuant thereto. Such benefits shall be payable in accordance with
the provisions therefor in this Agreement, or with regard to benefits for which
no provision is made, promptly following termination of employment.
(b) In the event Employee is terminated by VDI without Cause,
then, in addition to the payments due to Employee under Section 5.3(a), and as
Employee's sole and exclusive rights and remedies, VDI shall, for the remainder
of the Term, be obligated to continue to provide to the Employee his Base Salary
in accordance with the terms hereof (but no other payments or benefits except
the Options vested in accordance with the Stock Option Agreement).
(c) If a Change in Control of VDI shall have occurred while
Employee is an employee of VDI, upon the subsequent Termination of the
Employment of Employee within two years of such Change in Control, then, in
addition to the payments due to Employee under Section 5.3(a), (i) VDI shall pay
Employee his full Base Salary on a bi-weekly basis at the rate in effect at the
time the notice of terminatino is given for a period of two years following the
date of termination and (ii) VDI shall continue to provide Employee with medical
insurance, life insurance, disability insurance and such other similar insurance
benefits until Employee obtains other employment on a full-time basis, but not
to exceed two years from the date of termination.
(d) Employee shall have no duty to seek alternative employment
in the event of termination. Notwithstanding the foregoing, VDI and Employee
agree that if Employee enters into employment after termination by VDI hereunder
without Cause, the total compensation earned by Employee together with any
welfare or other benefits earned or received by Employee during any period that
Employee continues to receive Base Salary shall be deducted from the amount, if
any, which VDI would otherwise be required to pay or provide to Employee during
such period hereunder. Employee agrees that he
5
<PAGE>
shall give written notice to VDI (promptly after accepting any engagement or
employment or furnishing his services after termination of his employment with
VDI) of any amounts earned (or to be earned) by Employee and any benefits
provided (or to be provided) to Employee pursuant to his new engagement or
employment arrangement.
(e) For the purposes of this Agreement, "Change in Control" of
VDI shall mean a change in control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided
that, without limitation, such a change in control shall be deemed to have
occurred if (i) a tender offer shall be made and consummated for the ownership
of 25% or more of the outstanding voting securities of VDI,(ii) VDI shall be
merged or consolidated with another corporation and as a result of such merger
or consolidation less than 75% of the outstanding voting securities of the
surviving or resulting corporation shall be owned in the aggregate by the former
shareholders of VDI, other than affiliates (within the meaning of the Exchange
Act) of any party to such merger or consolidation, as the same shall have
existed immediately prior to such merger or consolidation, (iii) VDI shall sell,
lease, exchange or transfer substantially all of its assets to another
corporation, entity or person which is not a wholly-owned subsidiary, (iv) a
person (other than Employee), as defined in Sections 13(d) and 14(d)(as in
effect on the date hereof) of the Exchange Act, shall acquire 25% or more of the
outstanding voting securities of VDI (whether directly, indirectly, beneficially
or of record),(v) the shareholders of VDI approve a plan or proposal for the
liquidation or dissolution of VDI, or (vi) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors cease for any reason to constitute at least a majority thereof unless
the election, or the nomination for election by VDI's shareholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period. For purposes
hereof, ownership of voting securities shall take into account and shall include
ownership as determined by applying the provisions of Rule 13d-3 (as in effect
on the date hereof) under the Exchange Act.
(f) The phrase "Termination of the Employment" of Employee for
purposes of this Agreement shall mean:
6
<PAGE>
(i) Termination by VDI of the employment of Employee for any
reason other than death, disability, or for Cause as defined above; or
(ii) Termination by Employment of his employment by VDI within
six months of the occurrence of any of the following events:
(a) The assignment to Employee of any duties inconsistent
with his positions, duties, responsibilities and status with the Company
immediately prior thereto, or a change in Employee's reporting responsibilities,
titles or offices as in effect immediately prior thereto, or any removal of
Employee from or any failure to re-elect Employee to any of such positions,
except in connection with the termination of Employee's employment due to death,
disability or for Cause;
(b) A reduction by VDI in Employee's Base Salary as in
effect on the date hereof or as the same may be increased from time to time;
(c) Without his express written consent, VDI requiring
Employee to be based anywhere other than within thirty-five (35) miles of
Employee's present office location, except for required travel on VDI's business
to an extent substantially consistent with Employee's present business travel
obligations;
(d) Subsequent to a Change in Control of VDI, the failure
by VDI to continue in effect any benefit or compensation plan, stock ownership
plan, stock purchase plan, stock option plan, life insurance plan,
health-and-accident plan or disability plan in which Employee is participating
at the time of a Change in Control of VDI (or plans providing him with
substantially similar benefits), the taking of any action by VDI which would
adversely affect Employee's benefits under any of such plans or deprive Employee
of any material fringe benefit enjoyed by him at the time of the Change in
Control, or the failure by VDI to provide Employee with the number of paid
vacation days to which he is then entitled in accordance with VDI's normal
vacation policy in effect on the date hereof;
(e) Subsequent to a Change in Control of VDI, the failure
by VDI to obtain the assumption of this Agreement by any successor.
7
<PAGE>
6. CONFIDENTIAL INFORMATION. Employee acknowledges that the information,
observations and data obtained by him while employed by VDI concerning the
business or affairs of VDI (the "Confidential Information") are the property of
VDI. Therefore, Employee agrees that Employee shall not disclose to any
unauthorized person or use for Employee's own account any Confidential
Information without the prior written consent of the Board of Directors of the
Company, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result of
Employee's acts or omissions to act or unless such information is required to be
disclosed in connection with an administrative or judicial proceeding, provided
that in such case, Employee agrees to notify VDI of the Confidential Information
to be disclosed sufficiently in advance of such disclosure, and agrees, if
requested, to use reasonable efforts to cooperate with VDI in seeking a
protective order for such information. Employee shall deliver to VDI at the
termination of the Term, or at any other time VDI may request, all "documents"
and "writings", as defined in the California Evidence Code, and copies thereof,
relating to the Confidential Information, work product or the business of VDI
which Employee may then possess or have under his control. In the event of the
breach or a threatened breach by Employee of any of the provisions of this
Section 6, VDI, in addition and supplementary to other rights and remedies
existing in its favor, may apply to any court of law or equity of competent
jurisdiction for specific performance and/or injunctive or other relief in order
to enforce or prevent any violations of the provisions hereof (without posting a
bond or other security). Employee acknowledges and agrees that the covenant
under this Section 6 shall apply during the Term and thereafter regardless of
the reason for the termination of Employee's employment.
7. RIGHT TO INJUNCTION. Employee acknowledges that any remedy at law for
a breach by him of the provisions of Sections 4.1 or 6 hereof will be
inadequate. Accordingly, in the event of the breach or threatened breach by
Employee of Sections 4.1 or 6 hereof, VDI shall be entitled to injunctive relief
in addition to any other remedy it may have.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties and supersedes all prior agreements of the parties with respect to
the subject matter hereof. This Agreement may not changed or amended except in
writing signed by the parties and approved by VDI.
8
<PAGE>
9. GOVERNING LAW. This Agreement shall be subject to, and be governed
by, the laws of the State of California.
10. ASSIGNMENT. Employee may not assign, transfer or convey this
Agreement or any interest therein. This Agreement and all of VDI's rights and
obligations hereunder may be assigned or transferred by it, in whole but not in
part, to and shall be binding upon and inure to the benefit of any successor of
VDI, but any such assignment shall not relieve VDI of any of its obligations.
The term "successor" shall mean only any corporation or other business entity
which by merger, consolidation, purchase of assets or otherwise succeeds to or
otherwise acquires all or substantially all of the assets of VDI.
11. SEVERABILITY. If any provision of this Agreement as applied to either
party or to any circumstances shall be adjudged by a court of competent
jurisdiction to be void or unenforceable, the same shall in no way affect any
other provision of this Agreement or the validity or enforceability of this
Agreement.
12. WAIVER. Waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach.
13. COUNTERPARTS. This Agreement shall be executed in a number of
identical counterparts, each of which shall be construed as an original for all
purposes, but all of which taken together shall constitute one and the same
Agreement.
14. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and delivered in person or sent by registered or
certified Unites States mail, postage and fees prepaid, to the addresses of the
parties set forth below, or such other address as shall be furnished by notice
hereunder by any such party:
VDI VDI Media
6920 Sunset Boulevard
Hollywood, CA 90028
with copy to:
EMPLOYEE: R. Luke Stefanko
6920 Sunset Boulevard
Hollywood, CA 90028
9
<PAGE>
No failure or refusal to accept delivery of any envelope containing such notice
shall affect the validity of such notice or the giving thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
VDI Media
By: /s/ Donald R. Stine
---------------------------------
Title: CFO
---------------------------------
R. Luke Stefanko
---------------------------------
Employee
10
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") made this 19th day of March 1996,
between VDI ("Employer") and Tom Ennis ("Employee").
The parties agree as follows:
1. TERM OF AGREEMENT. The term of this Agreement will commence on
March 18, 1996, and shall continue until March 18, 1997, or upon an earlier
termination date, as provided in Paragraph 8. This Agreement, or any parts
thereof, may be renewed for another one year period at the sole option of
Employer, at the same terms and conditions set forth herein, with the
exception of the weekly bonus described in paragraph 4.2. Employer shall
retain the option to renew this Agreement at any time up to 60 days after the
expiration of the term of this Agreement.
2. DUTIES OF EMPLOYEE. Employee shall be initially employed in the
position of Vice President Marketing. Employee's duties shall include such
services and duties normally associated with the position of Vice President
Marketing. Such duties shall include but not be limited to maintaining and
improving the relationships with Employer's existing clients, developing
additional business, other services and duties as may be assigned from time
to time by Employer's CEO.
3. TIME AND EFFORTS. Employee will use Employee's full time and
efforts in the discharge of Employee's services and duties. Employee will at
all times faithfully and industriously and to the best of Employee's ability,
experience and talents perform all of the services and duties that may be
required to the satisfaction of Employer. Such services and duties shall be
rendered at such place or places as Employer shall require, or as the
interests, needs, business and opportunities of Employer shall require or
deem advisable. Employer shall give Employee ninety (90) days notice of
relocation.
4. COMPENSATION. In full payment for Employee's performance,
Employer shall pay to Employee compensation determined in accordance with
this paragraph 4.
4.1 SALARY. Employee shall receive a weekly salary of One
Thousand Nine Hundred Twenty-Three Dollars and Eight Cents ($1,923.08).
<PAGE>
4.2 WEEKLY BONUS. For the period March 18, 1996 through March
18, 1997, Employee shall be eligible for a bonus of Four Hundred Eighty
Dollars and Seventy-Seven Cents ($480.77) to be earned and paid on a weekly
basis, based on Employee's continued employment during each applicable week
and satisfactory performance of Employee's duties, as determined by Employer.
5. STOCK OPTION ELIGIBILITY. In the event that a stock option plan
is developed and becomes effective during the term of this Agreement, so long
as Employee is employed as a Vice President Marketing of Employer, Employee
will be eligible for participation pursuant to the provisions of such plan.
6. EXPENSES. Employer shall, in accordance with its established
policies, reimburse Employee for all reasonable and necessary business
expenses (i.e., travel, entertainment and lodging) incurred by Employee in
the discharge of Employee's duties.
7. VACATIONS, HOLIDAYS AND GROUP INSURANCE. Employee will be
eligible for benefits, vacations, holidays and group insurance coverage,
under the terms of Employer's existing policies and procedures, which are made
available to Employer's employees generally. Employer reserves the right, in
its sole discretion, at any time, to amend or cancel its policies and
procedures related to vacations, holidays or group insurance, or other
benefits. Employer shall advance Employee five (5) days paid vacation
benefits for use by Employee by August 1, 1996. In the event Employee's
employment ends before Employee has accrued the advanced vacation, Employee
hereby authorizes Employer to deduct the advanced vacation pay from
Employee's paychecks, including the final paycheck, and weekly bonus amounts,
and will execute any other written authorization for the deduction(s), as may
be required.
8. TERMINATION.
8.1 This Agreement may be terminated at any time by Employer,
only for cause. In addition, if, at any time, Employee breaches this
Agreement, or fails or refuses or neglects to perform any of Employee's
obligations under this Agreement, Employer may immediately terminate this
Agreement.
8.2 Upon termination:
(1) All of Employer's obligations under this Agreement
cease, except Employer shall be liable to Employee for that portion of the
salary and bonus fully earned and unpaid under paragraph 4 above, as of the
termination date. Employee's obligations under paragraphs 9, 10, 13 and 14
shall continue in full force. In
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addition, paragraphs 17, 18, 19, 20, 21, 24, 25 and 26 shall continue in full
force and effect with regard to any dispute or Claim as defined in paragraph
17.
(2) Employee will immediately return all Employer files,
records, documents, plans, drawings, specifications, equipment, pictures,
videotapes, and papers or other documents or similar items including any
copies or abstracts thereof, concerning the business or operations of
Employer, its parent or subsidiary, or any affiliated entity of any of the
foregoing, whether prepared by Employee or otherwise coming into Employee's
possession or control.
(3) Employee will cooperate with and assist Employer, its
parent, any subsidiary, affiliated entity of any of the foregoing or any of
their officers or representatives, its officers, directors, employees and
their agents and representatives, in the orderly transition of management and
assist and cooperate, including, but not limited to testifying or providing
information to Employer, its parent, any subsidiary, affiliated entity of any
of the foregoing or any of their officers or representatives, in the
investigation, preparation or handling of any actual or threatened court
action, arbitration or administrative proceeding involving any matter that
arose during, related to or in connection with the period of Employee's
employment. Such assistance and cooperation will be rendered at times and
places convenient to the parties.
9. INVENTIONS AND PATENTS. Employee will assign all of Employee's
rights in any invention to Employer as follows: all inventions developed
during Employee's working time; all inventions which Employee developed using
Employer's equipment, supplies, facilities, or trade secret information; and
all inventions developed entirely on Employee's own time if those inventions
relate, at the time of conception or reduction to practice of the invention,
to Employer's business or to actual or demonstrably anticipated research or
development of Employer, or if those inventions resulted from any work
performed by Employee for Employer. This does not apply to an invention of
Employee's which is protected from being assigned to Employer under
California Labor Code Section 2870.
10. TRADE SECRETS AND CONFIDENTIAL AND PROPRIETARY INFORMATION OF
EMPLOYER. Employee understands and agrees that the trade secrets and
confidential and proprietary information of Employer are valuable to Employer
and are essential in the operations of Employer's business. Employee further
understands and agrees that Employer is entering into this Agreement based
upon and in reliance upon, among other things, Employee's agreements set
forth in this paragraph 10.
10.1 Employee may have access to, may acquire and become
acquainted with various trade secrets and confidential and proprietary
information
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("proprietary information"), relating to Employer's activities, business,
services, operations, guests and clients, including but not limited to:
information about clients; client, employee, supplier, and distributor lists;
contacts, addresses, information about employees and employee relations;
training manuals and procedures; recruitment methods and procedures;
employment contracts; employee handbooks; information about clients;
information about suppliers; activities of clients, employees, officers,
directors, agents and representatives; information about Employer's
owner(s), its affiliates; price lists; costs and expenses; documents;
budgets; proposals; financial information; inventions; patterns; processes;
formulas; computer programs; information about development, manufacturing,
sales and marketing programs and techniques; information about recruitment
and distribution techniques, specifications; and tapes and compilations of
information; and other information that is not generally known to the public.
The proprietary information is owned by Employer, its parent, any subsidiary
or any related entity of any of the foregoing, or clients of any of the
foregoing; and/or is used in the operation of Employer's, its parent, any
subsidiary or any related entity of any of the foregoing, or client's
business.
10.2 Employee shall hold in strictest confidence and shall not
(other than as specifically allowed in writing by Employer) disclose or use
any proprietary information, directly or indirectly, either during the term
of Employee's employment, or for ten (10) years after termination, except as
required by Employer in the course of Employee's employment.
10.3 All items referred to in this paragraph 10 and its
subparts and similar items relating to the business of Employer, its parent,
any subsidiary or affiliated entity of any of the foregoing or a client,
whether prepared by Employee or otherwise, shall remain the exclusive
property of Employer, its parent, any subsidiary or affiliated entity of any
of the foregoing or client and shall not be removed from Employer's premises
or the premises of its parent, any subsidiary or affiliated entity of any of
the foregoing or client's without prior written consent of Employer. Employee
shall not copy or reproduce such documents or other materials for the use or
benefit of any person or entity other than Employer without Employer's prior
written permission.
10.4 The remedy at law for breach of this paragraph 10 and its
subparts is inadequate and Employer, in addition to any other remedy, can
seek appropriate injunctive relief from an appropriate court or arbitrator,
at Employer's election, pursuant to paragraph 18 below.
11. COMPLIANCE WITH EMPLOYER POLICIES. Employee will be subject to
and will adhere to all of Employer's policies and procedures applicable to
Employer's employees generally, including, but not limited to, all policies
relating to standards of
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conduct, conflicts of interest, and compliance with Employer's rules,
regulations and policies.
12. EXCLUSIVITY OF EMPLOYMENT. During the term of this Agreement,
Employee's services shall be exclusive to Employer. During the term of this
Agreement, Employee shall not (a) engage in any other employment; (b) engage
in any activity that is competitive to Employer; (c) attempt to influence any
of Employer's clients or guests, potential clients or guests, suppliers, or
the employees, directors, officers, agents or representatives of any of the
foregoing, either to divert their business, or to perform services for, any
of Employer's competitors or to become an employee, agent or representatives
of any of Employer's competitors; or (d) form, attempt to form or discuss the
formation of any business competitive with Employer, its parent, any
subsidiary or affiliated entity of any of the foregoing with any third person
or entity, unless Employer's CEO provides specific written approval in
advance.
13. PERFORMANCE OF SERVICE FOR A COMPANY OTHER THAN EMPLOYER.
Employee agrees that the following recital is correct.
In the event Employee solicits or provides services to any client,
supplier, competitor, developer, distributor or manufacturer of
Employer, either during the term of Employee's employment or at any time
thereafter, Employee necessarily would have to make use of those trade
secrets and/or confidential or proprietary information referred to in
paragraph 10 and its subparts of this Agreement.
Therefore, Employee will not, directly or indirectly, solicit, assist in
solicitation, provide services, or assist in the provision of services to any
client, supplier, competitor, developer, distributor or manufacturer of
Employer, its parent, any subsidiary or any affiliated entity of any of the
foregoing, during the term of this Agreement, or for a period of one (1) year
thereafter. Notwithstanding the above recital, and the one-year limitation
set forth herein, the terms of paragraph 10 and its subparts related to trade
secrets, confidential and proprietary information shall continue in full
force and effect for ten (10) years.
14. NO SOLICITATION OF EMPLOYEES. Employee will not, either during
the term of this Agreement or at any time thereafter, attempt to solicit or
influence any of Employer's employees to: (a) become employees of, or render
services to, any other employer, business, person or entity; (b) engage in
any business or commercial undertaking not sponsored by Employer, without
Employer's prior written permission; or (c) engage in any activity contrary
to or conflicting with the interests of Employer, while the employee is
employed at Employer. The remedy at law for breach of this paragraph is
inadequate and Employer, in addition to any other remedy, can seek appropriate
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injunctive relief from an appropriate court or arbitrator, at its election,
pursuant to paragraph 18.
15. OWNERSHIP IN COMPETING BUSINESS. During employment with
Employer, neither Employee, nor a member of Employee's immediate family
shall own or have a financial interest in any entity with which Employer, its
parent, any subsidiary or any affiliated entity of any of the foregoing, in
any way conducts business or competes, except with prior written
authorization by the CEO of Employer. In addition, neither Employee nor a
member of Employee's immediate family shall enter into any transaction with
any person or entity which Employee knows or should know is, or is closely
connected with, a client of Employer, its parent, any subsidiary or any
affiliated entity of any of the foregoing, or significantly affected by the
work or activities of Employer, its parent, any subsidiary or any affiliated
entity of any of the foregoing, except with prior written authorization by
the CEO of Employer. This paragraph 15 shall not apply to the ownership of
non-restricted shares constituting less than five percent (5%) of all
outstanding shares in a publicly held corporation. Employee will promptly
notify Employer, in writing, in the event Employee's spouse, child or other
immediate family member becomes employed by a vendor or competitor of
Employer.
16. RELIEF FROM DUTIES. If for any reason, Employee is unable to
perform the essential functions of Employee's job in a manner satisfactory to
Employer due to disability or otherwise, without waiving its rights under
paragraph 8, Employer reserves the right to relieve Employee of all duties
and responsibilities without further compensation or accrual of bonus or
benefits, until Employer is assured to its satisfaction, that Employee is able
to perform all essential job functions on a full-time basis with or without
reasonable accommodation. Subject to applicable law: (a) Employer reserves
the right to hire a permanent replacement when Employee is relieved of all
duties and responsibilities under this paragraph; and (b) there is no
guarantee that Employee's position will be available when, if ever, Employee
is ready to resume Employee's normal full-time duties. If appropriate,
Employer may require Employee to be examined by a physician chosen by
Employer, at Employer's expense prior to Employee's resumption of normal
duties.
17. DISPUTE RESOLUTION PROCEDURE. If a Claim (as defined below)
arises, whether or not arising out of Employee's employment, termination of
employment, or otherwise, that the Employer may have against Employee, or
that Employee may have against the Employer or against its parent,
subsidiaries, affiliated entities of any of the foregoing, the shareholders,
officers, directors, employees, agents or any other representatives of any of
the foregoing, such Claim shall be resolved in accordance with the procedure
set forth below. A Claim must be processed in the manner set forth below,
otherwise the Claim shall be void and deemed waived even if there is a
federal or state statute of limitations which would allow more time to pursue
the Claim.
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17.1 Within 180 days from the date that the aggrieved party knew
or should have known of the facts that gave rise to the Claim, the aggrieved
party must give written notice of the Claim to the other party hereto. The
parties will hold informal discussions and attempt to resolve the Claim. If
written notice of the Claim is not given within the 180-day period, the Claim
will be deemed to be time-barred.
17.2 If the Claim is not resolved within 30 days after the
written notice of the Claim was given pursuant to paragraph 17.1, either
party may initiate arbitration by serving upon the other party written Demand
for Arbitration and by filing the Demand for Arbitration in conformance with
the rules of the American Arbitration Association ("AAA"). The written Demand
for Arbitration must be served within 45 days after the end of such 30-day
period.
17.3 The written Demand for Arbitration shall describe the
factual basis of all Claims asserted, and shall be served upon the other
party hereto by certified or registered mail, return receipt requested. If
Demand for Arbitration is not served within the applicable time period, the
Claim will be deemed to be time-barred.
17.4 Written notice or Demand for Arbitration, or both, to
Employee will be mailed to Employee's address as it appears in the Employer's
records. Written notice or Demand for Arbitration, or both, to the Employer,
or its officers, directors, employees or agents, shall be sent to VDI,
Attention: Don Stine, 6920 Sunset Boulevard, Hollywood, CA 90028.
17.5 The arbitration shall be conducted in accordance with the
then-current Employment Dispute Resolution Rules of the AAA before a single
arbitrator. The arbitration shall take place in Los Angeles County,
California.
(1) The Arbitrator shall be selected as follows. The AAA
shall give each party a list of 11 arbitrators drawn from its panel of labor
and employment arbitrators. Each side may strike all names on the list it
deems unacceptable. If only one common name remains on the lists of all
parties, that individual shall be the Arbitrator. If more than one common
name remains on the lists of all parties, the parties shall strike names
alternately, in a telephone conference no more than five (5) days after the
parties receive notice that more than one acceptable arbitrator remains,
until only one remains. If no common name remains on the lists of all
parties, the AAA shall furnish one additional list, and the above procedure
will be utilized. If no arbitrator is designated from the second list, the
procedure of the Employment Resolution Rules will be utilized to select the
arbitrator.
(2) Any party may be represented in the arbitration by an
attorney or other representative selected by such party.
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(3) The parties waive the provisions of California Code of
Civil Procedure Section 1283.05. Each party shall have the right to take the
deposition of one individual and any expert witness designated by the other
party. Each party also shall have the right to make requests for production
of documents to the other party. Additional discovery may be had only where
the arbitrator so orders, upon a showing of substantial need. All issues
related to discovery will be resolved by the arbitrator.
(4) At least fourteen (14) days before the arbitration,
the parties must exchange lists of witnesses, including any experts, and
copies of all exhibits intended to be used at the arbitration.
(5) The arbitrator will have no authority to: (a) adopt
new Employer policies or procedures, (b) modify this Agreement or existing
Employer policies, procedures, wages or benefits, or (c) in the absence of
written waiver pursuant to paragraph 17.11 below, hear or decide any matter
that was not processed in accordance with this Agreement. The arbitrator
shall have exclusive authority to resolve any Claim, including, but not
limited to, any contention that all or any part of this Agreement is void or
voidable. The arbitrator will have the authority to award any form of remedy
or damages that would be available in a court of law.
(6) The parties shall each pay one-half of the fees of the
American Arbitration Association and the arbitrator. The parties will pay
their own attorneys' fees and expenses associated with the arbitration.
17.6 EACH PARTY WAIVES THE RIGHT TO A JURY TRIAL OR COURT TRIAL.
THE SOLE AND EXCLUSIVE METHOD TO RESOLVE ANY CLAIM IS ARBITRATION AS PROVIDED
IN THIS AGREEMENT. Subject to paragraph 17.9 neither party shall initiate or
prosecute any lawsuit in any way related to any Claim covered by this
Agreement. To the extent permitted by law, Employee agrees not to initiate
or prosecute against Employer any administrative action (other than an
administrative charge of discrimination) in any way related to any Claim
covered by this Agreement.
17.7 The arbitration will be conducted in private, and will not
be open to the public or the media. The testimony and other evidence
presented, and the results of the arbitration, unless otherwise agreed to in
writing by both parties, are confidential and may not be made public or
reported in any way or through any means, including, but not limited to, to
any news agency or legal publisher or service, except pursuant to a court
order, provided that Employer or Employee shall give written notice, as soon
as reasonably practicable after it becomes aware or should have become aware
of any judicial proceeding to enable the other to seek a protective order
before disclosure occurs.
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17.8 The arbitrator shall render a written decision and award
(the "Award"), which shall set forth the facts and reasons that support the
Award. The Award shall be final and binding on Employer and Employee.
17.9 The term "Claim" is defined to include, but is not limited
to, controversies relating to: compensation or benefits, breach of any
contract, torts, discrimination under state, federal or local law; and
violation of any federal, state, or other governmental law, statute,
regulation, or ordinance. However, this Dispute Resolution Procedure shall
not apply to any Claim: for workers' compensation or unemployment benefits.
Claims by Employer for injunctive and/or other equitable relief for any Claim
including but not limited to (i) unfair competition, or (ii) the use and/or
unauthorized disclosure of proprietary information, or (iii) the solicitation
or influence of Employer's employees, may at Employer's election be brought
either in arbitration or in a court. If Employer seeks injunctive relief in
court, it may then proceed with arbitration under this Agreement.
17.10 For the purpose of this paragraph 17 and its subparts, the
term "Employer" is defined to include its shareholders, officers and
directors, agents, managers, its parent and all subsidiary and related or
affiliated entities and their shareholders, agents, managers, officers and
directors, all benefit plans, the benefit plans' sponsors, fiduciaries,
administrators, affiliates, and all successors and assigns of any of them.
17.11 Either party, in their sole discretion, may, in writing,
waive, in whole or in part, the other's failure to follow any time limit or
other requirement set forth in this Agreement. Any such waiver shall not be
deemed the waiver of any other time limit or requirement or any subsequent
failure to follow any time limit or other requirement.
18. INJUNCTIVE RELIEF. The services of Employee, as well as the
proprietary information of Employer are of a special, unique, unusual and
extraordinary nature, which gives them a peculiar value, the loss of which
cannot reasonably or adequately be compensated for in damages in an action at
law. The breach by Employee of any provision of this Agreement would cause
the Employer irreparable injury and damage, the measure of which could not be
adequately measured at law. Employer shall be entitled, as a matter of right
in addition to and without the prejudice of any other right or remedy, to
injunctive and other equitable relief in an appropriate court to prevent the
violation of any provision of this Agreement by Employee and/or to cause
Employee to comply with the respective provisions hereof, as applicable.
Employee hereby consents to the granting of such injunctive or other
equitable relief, provided notice pursuant to paragraph 20, of such action is
given to Employee. The exercise by Employer of any of
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its rights hereunder shall not constitute a waiver by Employer of any other
rights which it may have to damages or otherwise.
19. CONSENT TO JURISDICTION. All legal proceedings in connection
with this Agreement shall be undertaken before an arbitrator pursuant to
paragraph 17 and its subparts, except that claims for injunctive or other
equitable relief, or extraordinary writs, may, at the option of Employer, be
brought in a proper court in the State of California, County of Los Angeles.
Employer's election to seek such relief in court shall not constitute a
waiver of arbitration pursuant to paragraph 17 and its subparts, but shall be
used to preserve the status quo pending arbitration. Both parties hereby
consent to the jurisdiction of any arbitrator or court, state or federal, in
the State of California, provided notice is given, as provided in paragraph
20 below, of the commencement of such action. Any court of competent
jurisdiction may enforce the decision of the arbitrator as such decision is
determined pursuant to paragraph 17 and its subparts.
20. NOTICE. Any notices to be given hereunder shall be deemed given
upon mailing thereof, if mailed by certified mail, return receipt requested,
to the following addresses (or to such other address or addresses, as shall
be specified in any notice given):
IN THE CASE OF EMPLOYER:
------------------------
VDI
6920 Sunset Boulevard
Hollywood, CA 90028
Attention: Don Stine
IN THE CASE OF THE EMPLOYEE:
----------------------------
Tom Ennis
24711 Via Madera
Calabasas, CA 91302
21. ENTIRE AGREEMENT. This Agreement is an integrated document which
embodies the entire understanding between the parties and supersedes all
prior discussions, communications, understandings or agreements between them
relating in any way, directly or indirectly, to Employee's employment with
Employer or the matters covered by this Agreement. No party shall be bound by
any definitions, conditions, agreements, warranties, or representations other
than as expressly stated in this
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Agreement or as subsequently set forth in a writing signed by the duly
authorized representatives of all of the parties hereto or the party whose
rights are affected.
22. NO ORAL CHANGE: AMENDMENT. This Agreement may be amended or
modified only in writing signed by both parties. Any provision hereof may
only be waived in or by a writing signed by the party against whom
enforcement of any waiver is sought. No waiver of any provision or breach
shall be deemed a waiver of any other provision or breach of any subsequent
application of any provision or any subsequent breach.
23. ENFORCEABILITY. If any term or provision of this Agreement is
held to be invalid, illegal or unenforceable, the remaining portions of this
Agreement will continue to be valid and will be performed, construed and
enforced to the fullest extent permitted by law, and the invalid, illegal or
unenforceable term will be deemed amended and limited in accordance with the
intent of the parties, as determined from the face of the Agreement, to the
extent necessary to permit the maximum enforceability and/or validation of
such term or provision.
24. GOVERNING LAW. This Agreement will be governed by the laws of
the State of California applicable to employment contracts without giving
effect to any conflict of law provisions thereof.
25. BINDING EFFECT. This Agreement shall be binding on Employee's
heirs, executors, administrators and estate. Employer may assign this
Agreement to any successor entity. Employee is prohibited from assigning his
rights, duties or obligations under this Agreement, and any purported
assignment by Employee shall be null and void.
26. TITLES. The titles in this Agreement are for the convenience of
the parties and the Agreement shall be interpreted without reference thereto.
27. MERGER OF EMPLOYER. If Employer shall at any time be merged or
consolidated into or with any other corporation or if substantially all of
the assets of Employer are transferred to another corporation, the provisions
of this Agreement shall be binding upon and inure to the benefit of the
corporation resulting from such merger or consolidation or to which such
assets shall be transferred, and this provision shall apply in the event of
any subsequent merger, consolidation, or transfer.
28. ATTORNEYS' FEES. In the event that any of the parties must
resort to legal action in order to enforce the provisions of this Agreement
or to defend such suit, the prevailing party shall be entitled to receive
reimbursement from the non-prevailing party for all reasonable attorneys'
fees and all other costs incurred in commencing or defending such suit.
Employee agrees that the following recital is correct.
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Employee is not subject to any agreement, whether express or oral
or in writing, including but not limited to any agreement of
continued employment, with any of Employee's former Employer(s),
including but not limited to, DBL International ("DBL").
On the basis of the above recital, Employer agrees to indemnify, defend
and hold Employee harmless from and against any and all liabilities,
obligations and losses based on allegations of breach of contract, including
related costs and expenses, any and all of which not to exceed a total of
$25,000.00, arising out of or incurred in connection with any demands,
claims, suits, or cause of action brought against Employee by DBL during the
term of this Agreement, which is based upon or arises out of: 1) a breach of
contract claim; 2) employment of Employee by Employer; or 3) the August 4,
1995 agreement by and between VDI and DBL.
29. EMPLOYEE ACKNOWLEDGMENT. Employee acknowledges that Employee:
(a) has carefully read this Agreement, and has voluntarily agreed to its
terms; (b) has been given the opportunity to discuss this Agreement with
Employee's private legal counsel and has utilized that opportunity to the
extent Employee wishes to do so.
NOTICE: BY SIGNING THIS AGREEMENT, YOU ARE AGREEING THAT ALL DISPUTES
WILL BE DECIDED BY NEUTRAL ARBITRATION, AND YOU ARE GIVING UP YOUR RIGHT
TO A JURY TRIAL OR COURT TRIAL (SEE PARAGRAPH 17.6).
The date indicated and Employee's signature below acknowledges
Employee's review, understanding and full, knowing and voluntary acceptance
of the terms and conditions set forth in this Agreement.
VDI
Date: 3/19/96 By: /s/ Donald R. Stine
---------------------- ----------------------------------------------
Date: 3/19/96 /s/ Tom Ennis
---------------------- -------------------------------------------------
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EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into this 31st day of August,
1996, by and between VDI Media, a California corporation ("VDI"), and Eric
Bershon ("Employee").
Whereas, VDI desires to assure that VDI retains the services of Employee,
whose experience, knowledge and abilities with respect to the business and
affairs of VDI are valuable to VDI;
Now, therefore, VDI and Employee agree as follows:
1. POSITIONS AND DUTIES.
1.1 VDI hereby employs Employee as Vice President and General Manager
of Broadcast One of VDI during the term of this Agreement, with powers and
duties consistent with such position. Employee shall report to the Board of
Directors of VDI and to the Chief Executive Officer, or its designee, of VDI.
Employee shall, during the term of this Agreement, perform such additional or
different duties, and accept the election or appointment to such other offices
or positions, as may mutually be agreeable to Employee and VDI.
1.2 Employee shall devote his full working time to the promotion of
the VDI's business and welfare, and use his best efforts to promote the VDI's
products and services. During the term of his employment with VDI, Employee
will not accept employment or engage in any manner, directly or indirectly, in
any other business. Employee shall perform such duties and responsibilities
incidental to his employment as may from time to time be requested by VDI and
shall faithfully observe the VDI's policies and procedures.
2. COMPENSATION AND BENEFITS.
2.1 GENERALLY; BASE SALARY. Beginning on the date of this Agreement,
during the term of employment, for the services to be rendered by Employee
hereunder, Employee shall receive the following compensation and benefits,
payable as earned, in the intervals indicated, and prorated for any partial
year:
<PAGE>
(a) An annual salary (the "Base Salary"), at the rate of One
Hundred Twenty Thousand dollars ($120,000) payable from the period commencing as
of the date of commencement of the Term and increasing therefrom at the rate of
two and one-half percent (2.5%) per annum on each January 1st thereafter. The
Base Salary shall be payable no less frequently than monthly. VDI may deduct
from each installment of the Base Salary an amount sufficient to cover
applicable federal, state and/or local income tax withholdings, old age and
survivors and other social security payments, state disability insurance
premiums and any other amounts which VDI is required to withhold by applicable
law;
(b) stock option grant as of or prior to the commencement of the
Term of Five Thousand shares (the "Option Shares") of VDI common stock, pursuant
to VDI's 1996 Stock Incentive Plan, and such recurring stock option grants as
awarded and approved by VDI's Board of Directors at its sole discretion;
(c) reimbursement to Employee for all reasonable costs and
expenses he incurs in connection with the performance of his duties and
obligations under this Agreement, and which are consistent with the policies of
VDI for executive officers.
(d) the annual bonus payments described below to the extent
VDI's Broadcast One division ("Broadcast One") achieves its sales projections
("Projected Sales") and maintains at least the minimum gross margin percentages
("Projected Gross Margin") ratified by the Board of Directors of VDI at the
beginning of each year, and calculated according to generally accepted
accounting principles ("GAAP"). If Broadcast One attains the Projected Sales
and meets or exceeds the Projected Gross Margin, Employee shall receive a bonus
payment of $40,000. If Broadcast One's sales are less than 80% of the Projected
Sales or if gross margins do not meet or exceed the Projected Gross Margin,
Employee shall not receive a bonus in respect of such year. If Broadcast One's
sales equal 133% or more of the Projected Sales and if gross margins meet or
exceed Projected Gross Margin, Employee shall receive an additional bonus of
$40,000. To the extent Broadcast One's sales, with gross margins which meet or
exceed Projected Gross Margin, equal between 80% and 133% of the Projected
Sales, Employee shall be entitled to receive a pro rated payment in accordance
with the range set forth above. The maximum total for bonus payments pursuant
to this paragraph shall be $80,000.
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3. TERM. The term of this Agreement (the "Term") shall commence on the
date hereof and shall terminate upon the first to occur of the following events:
3.1 August __, 1998;
3.2 The death or permanent disability of Employee as defined in
Section 5.1(a) herein;
3.3 The discharge of Employee for cause or special cause as defined
in Section 5.2(a) or 5.3 herein.
4. COVENANT NOT TO SOLICIT OR HIRE EMPLOYEES OR CUSTOMERS. Until August
__, 1998, Employee shall not, directly or indirectly, solicit or induce any of
VDI's employees to terminate their employment with VDI, hire or cause any of the
then current employees of VDI to be hired by any other company, or solicit or
assist in soliciting any business from any of the then current customers or
prospective customers of VDI on behalf of Employee or any other company.
5. TERMINATION.
5.1 TERMINATION DUE TO DISABILITY, ETC. VDI may, by written notice
to Employee, terminate his employment under the Agreement as of the date of that
notice if Employee shall fail or be unable to perform his duties as the result
of any physical or mental disability for 180 consecutive days or during any 210
days in any 240-day period (a "Permanent Disability"); Employees's employment
under this Agreement shall terminate automatically upon Employee's death or
adjudication of incompetency.
5.2 TERMINATION FOR CAUSE. By complying with the provisions of
Section 5.2(b) hereof, VDI may terminate Employee's employment under this
Agreement for "Cause."
(a) For purposes of this agreement, "Cause" shall mean: (i)
conviction or judgment by a court of competent jurisdiction or the pleading of
guilty or no contest to any felony or misdemeanor or civil cause of action
involving dishonesty, including, without limitation, fraud or embezzlement, (ii)
gross negligence or willful failure of Employee to perform his duties hereunder,
or (iii) any breach by Employee of his covenants or obligations under this
Agreement.
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(b) If any one or more of the events enumerated under (a) above
shall occur, VDI shall provide written notice (the "Warning Notice") to Employee
of its intention to terminate this Agreement for Cause, the basis of such Cause,
and the steps which VDI believes should be taken by the Employee to correct and
cure the same. Unless Employee, within 30 days following receipt of the Warning
Notice, substantially corrects and cures all matters delineated in the Warning
Notice to VDI's reasonable satisfaction or if the matters set forth in the
Warning Notice are not reasonably susceptible of being so cured or corrected
within such 30-day period, VDI may terminate this Agreement so that VDI shall
have no further obligation to Employee except as set forth in Section 5.4
herein, by delivering a notice of termination to Employee, which notice of
termination shall be effective as of the date of delivery of such notice;
PROVIDED HOWEVER, that Employee shall not be entitled to any notice or
opportunity to cure a termination arising within reasonable expectation as a
result of the "Cause" set forth in Section 5.2(a)(i) hereof.
5.3 TERMINATION FOR SPECIAL CAUSE. VDI may, at its option, terminate
Employee's employment under the Agreement for "Special Cause."
(a) For purposes of this Agreement, "Special Cause" shall mean a
failure by Broadcast One to achieve at least 80% of the Projected Sales or a
failure to meet or exceed the Projected Gross Margin established for a
particular year at the end of such year.
(b) Upon a determination by VDI that Special Cause has occurred,
Employee may thereafter be terminated for Special Cause, provided, however, that
VDI may continue his employment despite his failure to achieve the Projected
Sales and/or Projected Gross Margin objectives outlined above.
5.4 PAYMENTS UPON TERMINATION.
(a) In the event Employee is terminated for any reason
whatsoever, VDI shall pay to Employee all accrued and unpaid Base Salary, all
accrued and unpaid vacation and other accrued and unpaid benefits set forth
herein to the date of termination, reimbursement of expenses prior to the date
of termination in accordance with the provisions of this Agreement;
4
<PAGE>
continued insurance benefits under such circumstances and for such periods of
time as are mandated by applicable state or federal law; and such other benefits
or entitlements that are deemed to be vested pursuant to the provisions of
Employee Retirement Income Security Act of 1974, as from time to time amended,
and any regulations promulgated pursuant thereto. Such benefits shall be
payable in accordance with the provisions therefor in this Agreement, or with
regard to benefits for which no provision is made, promptly following
termination of employment.
(b) In the event Employee is terminated by VDI (other than
pursuant to Section 5.3) without Cause, then, in addition to the payments due to
Employee under Section 5.4(a), and as Employee's sole and exclusive rights and
remedies, VDI shall, for the remainder of the Term, be obligated to continue to
provide to the Employee his Base Salary in accordance with the terms hereof.
(c) Employee shall have no duty to seek alternative employment
in the event of termination. Notwithstanding the foregoing, VDI and Employee
agree that if Employee enters into employment after termination by VDI hereunder
without Cause or Special Cause, the total compensation earned by Employee
together with any welfare or other benefits earned or received by Employee
during any period that Employee continues to receive Base Salary shall be
deducted from the amount, if any, which VDI would otherwise be required to pay
or provide to Employee during such period hereunder. Employee agrees that he
shall give written notice to VDI (promptly after accepting any engagement or
employment or furnishing his services after termination of his employment with
VDI) of any amounts earned (or to be earned) by Employee and any benefits
provided (or to be provided) to Employee pursuant to his new engagement or
employment arrangement.
6. CONFIDENTIAL INFORMATION. Employee acknowledges that the information,
projections, customer lists and all related business affairs of VDI and
Broadcast One of which he has knowledge through his employment at VDI, (the
"Confidential Information") are the property of VDI. Therefore, Employee agrees
that Employee shall not disclose to any unauthorized person or use for
Employee's own account any Confidential Information without the prior written
consent of the Board,
5
<PAGE>
unless and to the extent that the aforementioned matters become generally known
to and available for use by the public other than as a result of Employee's acts
or omissions to act or unless such information is required to be disclosed in
connection with an administrative or judicial proceeding, provided that in such
case, Employee agrees to notify VDI of the Confidential Information to be
disclosed sufficiently in advance of such disclosure, and agrees, if requested,
to use reasonable efforts to cooperate with VDI in seeking a protective order
for such information. Employee shall deliver to VDI at the termination of the
Term, or at any other time VDI may request, all "documents" and "writings", as
defined in the California Evidence Code, and copies thereof, relating to the
Confidential Information, work product or the business of VDI which Employee may
then possess or have under his control. In the event of the breach or a
threatened breach by Employee of any of the provisions of this Section 6, VDI in
addition and supplementary to other rights and remedies existing in its favor,
may apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive or other relief in order to enforce or prevent any
violations of the provisions hereof (without posting a bond or other security).
Employee acknowledges and agrees that the covenant under this Section 6 shall
apply during the Term and for a period of ten (10) years following the Term
regardless of the reason for the termination of Employee's employment.
7. RIGHT TO INJUNCTION. Employee acknowledges that any remedy at law for
a breach by him of the provisions of Sections 4.1 or 6 hereof will be
inadequate. Accordingly, in the event of the breach or threatened breach by
Employee of Sections 4.1 or 6 hereof, VDI shall be entitled to injunctive relief
in addition to any other remedy it may have.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties and supersedes all prior agreements of the parties with respect to
the subject matter hereof. This Agreement may not changed or amended except in
writing signed by the parties and approved by VDI.
9. GOVERNING LAW. This Agreement shall be subject to, and be governed
by, the laws of the State of California.
10. ASSIGNMENT. Employee may not assign, transfer or convey this
Agreement or any interest therein. This Agreement and all of VDI's rights and
obligations hereunder may be assigned
6
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or transferred by it, in whole but not in part, to and shall be binding upon and
inure to the benefit of any successor of VDI, but any such assignment shall not
relieve VDI of any of its obligations. The term "successor" shall mean only any
corporation or other business entity which by merger, consolidation, purchase of
assets or otherwise succeeds to or otherwise acquires all or substantially all
of the assets of VDI.
11. SEVERABILITY. If any provision of this Agreement as applied to either
party or to any circumstances shall be adjudged by a court of competent
jurisdiction to be void or unenforceable, the same shall in no way affect any
other provision of this Agreement or the validity or enforceability of this
Agreement.
12. WAIVER. Waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach.
13. COUNTERPARTS. This Agreement shall be executed in a number of
identical counterparts, each of which shall be construed as an original for all
purposes, but all of which taken together shall constitute one and the same
Agreement.
14. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and delivered in person or sent by registered or
certified Unites States mail, postage and fees prepaid, to the addresses of the
parties set forth below, or such other address as shall be furnished by notice
hereunder by any such party:
VDI VDI Media
6920 Sunset Boulevard
Hollywood, CA 90028
with copy to:
EMPLOYEE: Eric Bershon
__________________
___________________
7
<PAGE>
No failure or refusal to accept delivery of any envelope containing such notice
shall affect the validity of such notice or the giving thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
VDI Media
By: /s/ Illegible
-------------------------------
Title: CEO
------------------------
/s/ Eric Bershon
----------------------------------
Employee
8
<PAGE>
ERIC BERSHON CONTRACT
EXHIBIT A
SALES PROJECTIONS
YEAR 1996 1997
SALES* $6,000,000 $10,280,000
GROSS MARGIN** 43% 45%
(*) EXCLUDING ALL SALES ACQUIRED THROUGH ACQUISITION OR TRANSFERRED FROM VDI
(**) INCREASES TO 48% in the FOURTH QUARATER OF 1996, AND AS CALCULATED BY,
AND CONSISTENTLY APPLIED, ACCORDING TO GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) AND AS AUDITED BY PRICE WATERHOUSE.
AS APPROVED BY:
/s/ ILLEGIBLE
- -------------
ILLEGIBLE
Chairman of the Board of Directors
/s/ ILLEGIBLE
- -------------
ILLEGIBLE
<PAGE>
EXHIBIT 10.5
BUSINESS LOAN AGREEMENT
This Business Loan Agreement (this "Agreement") is entered into as of the date
set forth below between Union Bank ("Bank") and the undersigned ("Borrower")
with respect to each and every extension of credit (whether one or more,
collectively referred to as the "Loan") from Bank to Borrower. In consideration
of the Loan, Bank and Borrower agree to the following terms and conditions:
1. THE LOAN.
1.1 THE NOTE. The Loan is evidenced by one or more promissory notes or
other evidences of indebtedness, including each amendment, extension,
renewal or replacement thereof, which are incorporated herein by this
reference (whether one or more, collectively referred to as the "Note").
1.2 BORROWING BASE. An amount of the Loan equal to $2,000,000,* evidenced
by a Note dated July 1, 1995 is a revolving loan subject to a borrowing
base ("Borrowing Base Loan"). Notwithstanding any other provision of this
Agreement or any other Loan Document, Bank shall not be obligated to
advance funds under the Borrowing Base Loan, if the principal amount of
such Borrowing Base Loan including such advance exceeds 80% of Borrower's
Eligible Accounts.
* Wherever "N/A" appears in a blank in this Agreement, it means the
Subsection in which it appears is deemed deleted from this Agreement.
The term "Accounts" means all presently existing and hereafter arising
accounts receivable, contract rights, chattel paper, and all other forms of
obligations owing to Borrower, payable in U.S. Dollars, arising out of the
sale or lease of goods, or the rendition of services by Borrower, whether
or not earned by performance, and any and all credit insurance, guaranties
and other security, as well as all merchandise returned to or reclaimed by
Borrower and Borrower's books and records relating to any of the foregoing.
The term "Eligible Accounts" means those Accounts, net of finance charges,
that have been validly assigned to Bank and strictly comply with all of
Borrower's warranties and representations to Bank, but Eligible
Accounts shall not include the following:
(a) Any Account with respect to which the account debtor is an officer,
shareholder, director, employee or agent of Borrower;
(b) Any Account with respect to which the account debtor is a subsidiary
of, related to, or affiliated or has common officers or directors with
Borrower;
(c) Any Account with respect to which goods are placed on consignment,
guaranteed sale or other terms by reason of which the payment by the
account debtor may be conditional;
(d) Any Account in excess of $100,000 with respect to which the account
debtor is not a resident of the United States or Canada;
(e) Any Account with respect to which the account debtor is the United
States or any department, agency or instrumentality of the United
States;
(f) Any Account with respect to which Borrower is or may become liable
to the account debtor for goods sold or services rendered by the account
debtor to Borrower;
(g) Any Account with respect to which there is asserted a defense,
counterclaim, discount or setoff, whether well-founded or otherwise,
except for those discounts, allowances and returns arising in the
ordinary course of Borrower's business;
(h) Any Account with respect to which the account debtor becomes
insolvent, fails to pay its debts as they mature or goes out of business
or is owed by an account debtor which has become the subject of a
proceeding under any provision of the United States Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law, including, but
not limited to, assignments for the benefit of creditors, formal or
informal moratoriums, compositions or extensions with all or
substantially all of its creditors;
(i) Any Account that is not paid by the account debtor within 60 days of
the date of invoice;
1
<PAGE>
(j) That portion of any Account owed by any single account debtor which
exceeds 25% of all of the Accounts;
(k) Any Account which Bank deems not to be an Eligible Account; and
(l)
---------------------------------------------------------------------
-----------------------------------------------------------------------
1.3 REVOLVING LOAN CLEAN-UP PERIOD. For any portion of the Loan which is a
revolving loan, at least 30 consecutive days during each 12 month period
the principal amount outstanding under such revolving loans must be no more
than $500,000.
1.4 TERM LOAN AVAILABILITY PERIOD. For any portion of the Loan which is a
term loan, loan proceeds shall be available for disbursement from July 1,
1995, through July 30, 1995 only.
1.5 FEE. Borrower shall pay to Bank a fee of $ N/A.
1.6 COLLATERAL. The payment and performance of all obligations of Borrower
under the Loan Documents is and shall be during the term of the Loan secured
by a perfected security interest in such real or personal property
collateral as is required by Bank and each security interest shall rank in
first priority unless otherwise specified in writing by Bank.
1.7 GUARANTY. The payment and performance of all obligations of Borrower
under the Loan Documents are and shall be during the term of the Loan
guaranteed by: Luke Stefanko and Robert Bajorek limited to no
more than $2,750,000 each, respectively.
1.8 SUBORDINATION. Certain other obligations of Borrower are and shall be
during the term of the Loan subordinated, to the repayment of the Loan and
all other obligations of Borrower to Bank, pursuant to one or more
subordination agreement(s) in favor of Bank executed and delivered by:
Yolsi Stefanko.
2. CONDITIONS TO AVAILABILITY OF THE LOAN. Before Bank is obligated to
disburse all or any portion of the Loan, Bank must have received (a) the Note
and every other document required by Bank in connection with the Loan, each of
which must be in form and substance satisfactory to Bank (together with this
Agreement, referred to as the "Loan Documents"), (b) confirmation of the
perfection of its security interest in any collateral for the Loan, and (c)
payment of any fee required in connection with the Loan.
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants (and each
request for a disbursement of the proceeds of the Loan shall be deemed a
representation and warranty made on the date of such request) that:
3.1 Borrower is an individual or Borrower is duly organized and existing
under the laws of the state of its organization and is duly qualified to
conduct business in each jurisdiction in which its business is conducted;
3.2 The execution, delivery and performance of the Loan Documents executed
by Borrower are within Borrower's power, have been duly authorized, are
legal, valid and binding obligations of Borrower, and are not in conflict
with the terms of any charter, bylaw, or other organization papers of
Borrower or with any law, indenture, agreement or undertaking to which
Borrower is a party or by which Borrower is bound or affected;
3.3 All financial statements and other financial information submitted by
Borrower to Bank are true and correct in all material respects, and there
has been no material adverse change in Borrower's financial condition since
the date of the latest of such financial statements;
3.4 Borrower is properly licensed and in good standing in each state in
which Borrower is doing business, and Borrower has complied with all laws
and regulations affecting Borrower, including without limitation, each
applicable fictitious business name statute;
3.5 There is no event which is, or with notice or lapse of time or both
would be, an Event of Default (as defined in Article 5);
3.6 Borrower is not engaged in the business of extending credit for the
purpose of, and no part of the Loan will be used, directly or indirectly,
for purchasing or carrying margin stock within the meaning of Federal
Reserve Board Regulation U; and
2
<PAGE>
3.7 Borrower is not aware of any fact, occurrence or circumstance which
Borrower has not disclosed to Bank in writing which has, or could
reasonably be expected to have, a material adverse effect on Borrower's
ability to repay the Loan or perform its obligations under the Loan
Documents.
4. COVENANTS. Borrower agrees, so long as the Loan or any commitment to make
any advance under the Loan is outstanding and until full and final payment of
all sums outstanding under any Loan Document, that Borrower will:
4.1 MAINTAIN:
(a) Working Capital equal to at least $ N/A. As used herein, "Working
Capital" means the excess of current assets over current liabilities);
(b) A ratio of current assets to current liabilities of at least N/A
:1.00;
(c) A quick ratio of cash, accounts receivable and marketable securities
to current liabilities of at least .70:1.00;
(d) Tangible Net Worth of at least $2,500,000. (As used herein
"Tangible Net Worth" means net worth increased by indebtedness of
Borrower subordinated to Bank and decreased by patents, licenses,
trademarks, trade names, goodwill and other similar intangible assets,
organizational expenses, security deposits, and expenses and monies due
from affiliates including officers, shareholders and directors);
(e) A ratio of total liabilities to Tangible Net Worth of not greater
than 2.5:1.00 (As used herein "Tangible Net Worth" means net worth
increased by indebtedness of Borrower subordinated to Bank and decreased
by patents, licenses, trademarks, trade names, goodwill and other
similar intangible assets, organizational expenses, security deposits,
and expenses and monies due from affiliates including officers,
shareholders and directors);
(f) Not post an operating or net loss in any two consecutive fiscal
quarters of any fiscal year;
(g) A ratio of Cash Flow to Debt Service of 1.1:1.00. Compliance with
this subsection to be measured as of the end of each fiscal year of
Borrower. (As used herein, "Debt Service" means interest expense,
unfinanced equipment purchases, dividend distributions and that portion
of long-term liabilities and capital leases coming due within 12 months
of the date of calculation, and "Cash Flow" means net profit after taxes
less interest expenses, to which depreciation, amortization and other
non-cash expenses are added for the 12 month period immediately
preceding the date of calculation); and
(h)
---------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
All accounting terms used in this Agreement shall have the definitions given
them by generally accepted accounting principles, unless otherwise defined
herein.
4.2 Give written notice to Bank within 15 days of the following:
(a) Any litigation or arbitration proceeding affecting Borrower where
the amount in controversy is $100,000 or more;
(b) Any material dispute which may exist between Borrower and any
government regulatory body or law enforcement body;
(c) Any Event of Default or any event which, upon notice, or lapse of
time, or both, would become an Event of Default;
(d) Any other manner which has resulted or is likely to result in a
material adverse change in Borrower's financial condition or operation;
and
(e) Any change in Borrower's name or the location of Borrower's
principal place of business, or the location of any collateral for the
Loan, or the establishment of any new place of business or the
discontinuance of any existing place of business.
4.3 Furnish to Bank an income statement, balance sheet, and statement of
retained earnings, with supportive schedules ("Financial Statement"), and
any other financial information requested by Bank, prepared in accordance
with generally accepted accounting principles
3
<PAGE>
and in a form satisfactory to Bank as follows:
(a) Within 45 days after the close of each quarter, Borrower's Financial
Statement as of the close of such period;
(b) Within 120 days after the close of each fiscal year, a copy of
Borrower's annual Financial Statement prepared by a certified public
accountant on a(n) reviewed basis. Any independent certified public
accountant who prepares Borrower's Financial Statement shall be selected
by Borrower and reasonably satisfactory to Bank;
(c) Within 90 days after the close of each fiscal year, a copy of each
guarantor's annual Financial Statement;
(d) If any portion of the Loan is a Borrowing Base Loan, within 30 days
after each calendar month end, a copy of Borrower's monthly accounts
receivable and accounts payable agings, and a certification of
compliance with the borrowing base described in Section 1.2 above,
executed by Borrower, which certificate shall accurately report
Borrower's accounts receivable and Eligible Accounts; and
(e) Promptly upon request, any other financial information requested by
Bank.
4.4 Furnish to Bank, on Bank's request, a copy of Borrower's and each
guarantor's most recently filed federal income tax return with all
accompanying schedules.
4.5 Borrower will pay or reimburse Bank for all costs, expenses and fees
incurred by Bank in preparing and documenting this Agreement and the Loan,
and all amendments and modifications thereof, including but not limited to
all filing and recording fees, costs of appraisals, insurance and
attorneys' fees, including the reasonable estimate of the allocated costs
and expenses of in-house legal counsel and staff.
4.6 Maintain and preserve Borrower's existence, present form of business
and all rights, privileges and franchises necessary or desirable in the
normal course of its business, and keep all of Borrower's properties in
good working order and condition.
4.7 Maintain and keep in force insurance with companies acceptable to Bank
and in such amounts and types, including without limitation fire and public
liability insurance, as is usual in the business carried on by Borrower, or
as Bank may reasonably request. Such insurance policies must be in form
and substance satisfactory to Bank.
4.8 Maintain adequate books, accounts and records and prepare all financial
statements required hereunder in accordance with generally accepted
accounting principles, and in compliance with the regulations of any
governmental regulatory body having jurisdiction over Borrower or
Borrower's business and permit employees or agents of Bank at any
reasonable time to inspect Borrower's assets and properties, and to examine
or audit Borrower's books, accounts and records and make copies and
memoranda thereof.
4.9 At all times comply with, or cause to be complied with, all laws,
statutes, rules, regulations, orders and directions of any governmental
authority having jurisdiction over Borrower or Borrower's business, and all
material agreements to which Borrower is a party.
4.10 Except as provided in this Agreement, or in the ordinary course of its
business as currently conducted, not make any loans or advances, become a
guarantor or surety, pledge its credit or properties in any manner, or
extend credit.
4.11 Not purchase the debt or equity of another person or entity except for
savings accounts and certificates of deposit of Bank, direct U.S.
Government obligations and commercial paper issued by corporations with top
ratings of Moody's or Standard & Poor's, provided that all such permitted
investments shall mature within one year of purchase.
4.12 Not create, assume or suffer to exist any mortgage, encumbrance,
security interest, pledge or lien ("Lien") on Borrower's real or personal
property, whether nor owned or hereafter acquired, or upon the income or
profits thereof except the following: (a) Liens in favor of Bank, (b) Liens
for taxes or other items not delinquent or contested in good faith, (c)
other Liens which do not exceed in the aggregate $600,000 at any one time.
4.13 Not sell or discount any account receivable or evidence of
indebtedness, except to Bank; not borrow any money, become contingently
liable for money borrowed, except pursuant to agreements made with Bank.
4.14 Neither liquidate, dissolve, enter into any consolidation, merger,
partnership, or other combination; nor convey, sell or lease all or the
greater part of its assets or business; nor purchase or lease all or the
greater part of the assets or business of another.
4.15 Not engage in any business activities or operations substantially
different from or unrelated to present business activities and
4
<PAGE>
operations.
4.16 Not, in any single fiscal year of Borrower, expend or incur
obligations of more than $1,500,000 for the acquisition of fixed or
capital assets.
4.17 Not, in any single fiscal year of Borrower, enter into any lease of
real or personal property which would cause Borrower's aggregate annual
obligations under all such real and personal property leases to exceed
$600,000.
4.18 Borrower will promptly, upon demand by Bank, take such further action
and execute all such additional documents and instruments in connection
with this Agreement as Bank in its reasonable discretion deems necessary,
and promptly supply Bank with such other information concerning its affairs
as Bank may request from time to time.
5. EVENTS OF DEFAULT. The occurrence of any of the following events ("Events of
Default") shall terminate any obligation on the part of Bank to make or continue
the Loan and automatically, unless otherwise provided under the Note, shall make
all sums of interest and principal and any other amounts owing under the Loan
immediately due and payable, without notice of default, presentment or demand
for payment, protest or notice of nonpayment or dishonor, or any other notices
or demands:
5.1 Borrower shall default in the due and punctual payment of the principal
of or the interest on the Note or any of the Loan Documents;
5.2 Any default shall occur under the Note;
5.3 Borrower shall default in the due performance or observance of any
covenant or condition of the Loan Documents;
5.4 Any guaranty or subordination agreement required hereunder is breached
or becomes ineffective, or any guarantor or subordinating creditor dies or
disavows or attempts to revoke or terminate such guaranty or subordination
agreement; or
5.5 There is a change in ownership or control of 10% or more of the issued
and outstanding stock of Borrower or any guarantor, or (in the case of a
partnership borrower) there is a change in ownership or control of any
general partner's interest.
6. MISCELLANEOUS.
6.1 The rights, powers and remedies given to Bank hereunder shall be
cumulative and not alternative and shall be in addition to all rights,
powers, and remedies given to Bank by law against Borrower or any other
person, including but not limited to Bank's rights of set off or banker's
lien.
6.2 Any forbearance or failure or delay by Bank in exercising any right,
power or remedy hereunder shall not be deemed a waiver thereof and any
single or partial exercise of any right, power or remedy shall not
preclude the further exercise thereof. No waiver shall be effective unless
it is in writing and signed by an officer of Bank.
6.3 The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assignees of Borrower, and
any assignment by Borrower without Bank's consent shall be null and void.
6.4 This Agreement and all other agreements and instruments required by
Bank in connection therewith shall be governed by and construed according
to the laws of the State of California.
6.5 Should any one or more provisions of this Agreement be determined to be
illegal or unenforceable, all other provisions nevertheless shall be
effective.
6.6 Except for documents and instruments specifically referenced herein,
this Agreement constitutes the entire agreement between Bank and Borrower
regarding the Loan and all prior communications, verbal or written, between
Borrower and Bank shall be of no further effect or evidentiary value.
6.7 The section headings herein are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
6.8 This Agreement may be amended only in writing signed by all parties
hereto.
6.9 Borrower and Bank may execute one or more counterparts to this
Agreement, each of which shall be deemed an original.
6.10 Any notices or other communications provided for or allowed hereunder
shall be effective only when given by one of the following
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<PAGE>
methods and addressed to the respective party at its address given with the
signatures at the end of this Agreement and shall be considered to have
been validly given: (a) upon delivery, if delivered personally, (b) upon
receipt, if mailed, first class postage prepaid, with the United States
Postal Service, (c) on the next business day if sent by overnight courier
service of recognized standing; and (d) upon telephoned confirmation of
receipt, if telecopied.
7. ADDITIONAL PROVISIONS. The following additional provision, if any, are
hereby made part of this Agreement:
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
7/1/95.
UNION BANK ("BANK") ("BORROWER")
By: /s/ Gina Sweetman VDI
-------------------------------- -----------------------------------
Title: Vice President
-----------------------------
Printed Name: Gina Sweetman
---------------------- --------------------------------
By: By: /s/ Robert J. Bajorek
-------------------------------- -----------------------------
Title: Vice President Title: President
----------------------------- --------------------------
Printed Name: Gail Boyle Printed Name: Robert J. Bajorek
---------------------- -------------------
By: /s/ R. Luke Stefanko
-----------------------------
Title:
--------------------------
Printed Name: R. Luke Stefanko
-------------------
Address where notices to Bank are Address to where notices to Borrower
to be sent: are to be sent:
21515 Hawthorne Boulevard 6920 Sunset Boulevard
- ----------------------------------- --------------------------------
Torrance, CA 90503 Hollywood, CA 90028
- ----------------------------------- --------------------------------
- ----------------------------------- --------------------------------
Fax Number: (310) 540-3514 Fax Number: (213) 957-2164
----------------------- --------------------
6
<PAGE>
FIRST AMENDMENT
TO BUSINESS LOAN AGREEMENT
THIS FIRST AMENDMENT TO BUSINESS LOAN AGREEMENT (this "First Amendment")
dated as of April 1, 1996, is made and entered into by and between VDI, a
California corporation ("Borrower"), and UNION BANK, a California banking
corporation ("Bank").
RECITALS:
---------
A. Borrower and Bank are parties to that certain Business Loan Agreement dated
as of July 1, 1995 (the "Agreement"), pursuant to which Bank agreed to extend
credit to Borrower.
B. Borrower and Bank desire to amend the Agreement, but subject to the terms
and conditions of this First Amendment.
AGREEMENT:
----------
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the Agreement.
2. AMENDMENTS TO THE AGREEMENT.
(a) Section 1.7 of the Agreement is hereby amended by deleting the
reference to Robert J. Bajorek's guaranty of $2,750,000. Concurrently herewith,
such guaranty shall be released.
(b) Section 1.8 of the Agreement is hereby amended by adding the following
sentence at the end thereof:
"In addition, pursuant to a Subordination Agreement dated as of April 1,
1996, executed by Robert J. Bajorek on Bank's standard form therefor, all
obligations owing to Robert J. Bajorek by R. Luke Stefanko shall be subordinated
to the repayment of the obligations and liabilities owed by R. Luke Stefanko to
Bank, including without limitation R. Luke Stefanko's obligations to Bank under
that certain Continuing Guaranty dated as of June 28, 1995."
(c) Section 4.1(d) of the Agreement is hereby amended by substituting the
amount "Two Million Three Hundred Thousand Dollars ($2,300,000)" for the amount
"Two Million Five Hundred Thousand ($2,500,000)" appearing therein.
<PAGE>
(d) Section 4.1(e) of the Agreement is hereby amended by substituting the
ratio "3.5:1.0" for the ratio "2.5:1.0" appearing therein.
(e) Section 4.10 of the Agreement is hereby amended to read in full as
follows:
4.10 "Except (a) as provided in this Agreement, (b) in the ordinary course
of its business as currently conducted and (c) so long as no Event of Default
has occurred and is then continuing, for a loan by Borrower to R. Luke Stefanko
in a principal amount not to exceed $1,139,900 for the purpose of financing the
cash portion of the purchase price to be paid by R. Luke Stefanko to Robert J.
Bajorek in connection with R. Luke Stefanko's purchase of Robert J. Bajorek's
interest in the VDI Common Stock and the VDI Production Common Stock (the
"Acquisition") pursuant to that certain Stock Purchase Agreement dated March
9, 1996 (as in effect on the date hereof, the "Stock Purchase Agreement")
between Robert J. Bajorek and R. Luke Stefanko, together with additional
loans by Borrower to R. Luke Stefanko as contemplated by the Stock Purchase
Agreement not make any loans or advances, become a guarantor or surety,
pledge its credit or properties in any manner, or extend credit."
(f) Section 5.5 of the Agreement is hereby amended to read in full as
follows:
"After giving effect to the Acquisition pursuant to the Stock Purchase
Agreement, R. Luke Stefanko shall cease to own 100% of the issued and
outstanding stock of Borrower."
(g) Bank's address appearing at the end of the Agreement is hereby amended
to read in full as follows:
Union Bank
Attention: Jesus Serrano
Commercial Portfolio Administration, 16th Floor
445 South Figecroa Street
Los Angeles, Figecroa CA 90071
3. EFFECTIVENESS OF THIS FIRST AMENDMENT. This First Amendment shall become
effective as of the date hereof when, and only when, Bank shall have received
all of the following, in form and substance satisfactory to Bank:
(a) A counterpart of this First Amendment, duly executed by Borrower and
acknowledged by R. Luke Stefanko where indicated below;
(b) A Subordination Agreement, on Bank's standard form therefor, duly
executed by Robert J. Bajorek, pursuant to which Robert J. Bajorek shall
subordinate the obligations owing at any time to him by R. Luke Stefanko to the
obligations and liabilities owed by R. Luke Stefanko
2
<PAGE>
to Bank, including without limitation R. Luke Stefanko's obligations to Bank
under that certain Continuing Guaranty dated as of June 28, 1995; and
(c) A new Borrowing Resolution on Bank's standard form therefor, certified
by the secretary of Borrower;
(d) An Arbitration Agreement on Bank's standard form therefor, duly
executed by Robert J. Bajorek; and
(e) Such other documents, instruments and agreements as Bank reasonably
deem necessary in order to effect fully the purposes of this First Amendment.
4. RATIFICATION.
(a) Except as specifically amended hereinabove, the Agreement shall remain
in full force and effect and is hereby ratified and confirmed; and
(b) Upon the effectiveness of this First Amendment, each reference in the
Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like
import referring to the Agreement shall mean and be a reference to the
Agreement as amended by this First Amendment.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as
follows:
(a) Each of the representations and warranties contained in Section 3 of
the Agreement, as amended hereby, is hereby reaffirmed as of the date hereof,
each as if set forth herein;
(b) The execution, delivery and performance of this First Amendment are
within Borrower's corporate powers, have been duly authorized by all necessary
corporate action, have received all necessary approvals, if any, and do not
contravene any law or any contractual restriction binding on Borrower;
(c) This First Amendment is the legal, valid and binding obligation of
Borrower, enforceable against Borrower in accordance with its terms; and
(d) No event has occurred and is continuing or would result from this
First Amendment which constitutes an Event of Default under the Agreement, or
would constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
6. GOVERNING LAW. This First Amendment shall be deemed a contract under and
subject to, and shall be construed for all purposes and in accordance with, the
laws of the State of California.
3
<PAGE>
7. COUNTERPARTS. This First Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above written.
VDI
By: /s/ Robert Bajorek By: /s/ R. Luke Stefanko
-------------------------------- --------------------------------
Title: President Title: CEO
----------------------------- -----------------------------
UNION BANK
By: /s/ [ILLEGIBLE]
--------------------------------
Title: VP
-----------------------------
By:
--------------------------------
Title:
-----------------------------
Acknowledged and Continuing Guaranty dated June 28, 1995 confirmed as of this
1st day of April, 1996.
/s/ R. Luke Stefanko
- -----------------------------------
R. LUKE STEFANKO
4
<PAGE>
SECOND AMENDMENT
TO BUSINESS LOAN AGREEMENT
THIS SECOND AMENDMENT TO BUSINESS LOAN AGREEMENT (this "Second Amendment")
dated as of June ___, 1996, is made and entered into by and between VDI, a
California corporation ("Borrower"), and UNION BANK, a Division of Union Bank of
California, N.A. ("Bank").
RECITALS:
---------
A. Borrower and Bank are parties to that certain Business Loan Agreement dated
as of July 1, 1995 (the "Agreement"), pursuant to which Bank agreed to extend
credit to Borrower.
B. Borrower and Bank desire to amend the Agreement, but subject to the terms
and conditions of this Second Amendment.
AGREEMENT:
----------
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the Agreement.
2. AMENDMENTS TO THE AGREEMENT.
(a) The Borrower's name has been amended from "VDI" to "VDI Media".
(b) Section 1.8 of the Agreement is hereby amended by substituting the
date "June 18, 1996" for the date "June 28, 1995" appearing in the fifth line
thereof.
3. EFFECTIVENESS OF SECOND AMENDMENT. This Second Amendment shall become
effective as of the date hereof when, and only when, Bank shall have received
all of the following, in form and substance satisfactory to Bank:
(a) A counterpart of this Second Amendment, duly executed by Borrower;
(b) A replacement Revolving Note, duly executed by Borrower;
(c) Such other documents, instruments or agreements as Bank may reasonably
deem necessary.
<PAGE>
4. RATIFICATION.
(a) Except as specifically amended hereinabove, the Agreement shall remain
in full force and effect and is hereby ratified and confirmed; and
(b) Upon the effectiveness of this Second Amendment, each reference in the
Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of
like import referring to the Agreement shall mean and be a reference to the
Agreement as amended by this Second Amendment and each reference in the
Agreement to the "Revolving Note" or words of like import referring to the
Revolving Note shall mean and be a reference to the replacement Revolving
Note issued pursuant to this Second Amendment.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as
follows:
(a) Each of the representations and warranties contained in Section 3 of
the Agreement, as amended hereby, is hereby reaffirmed as of the date hereof,
each as if set forth herein;
(b) The execution, delivery and performance of this Second Amendment are
within Borrower's corporate powers, have been duly authorized by all necessary
corporate action, have received all necessary approvals, if any, and do not
contravene any law or any contractual restriction binding on Borrower;
(c) This Second Amendment is, and the replacement Revolving Note when
delivered for value received will be, the legal, valid and binding obligation of
Borrower, enforceable against Borrower in accordance with its terms; and
(d) No event has occurred and is continuing or would result from this
Second Amendment which constitutes an Event of Default under the Agreement, or
would constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
6. GOVERNING LAW. This Second Amendment shall be deemed a contract under and
subject to, and shall be construed for all purposes and in accordance with, the
laws of the State of California.
7. COUNTERPARTS. This Second Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
<PAGE>
WITNESS the due execution hereof as of the date first above written.
VDI MEDIA
By: /s/ Donald Stine By: /s/ R. Luke Stefanko
-------------------------------- --------------------------------
Title: CFO Title: CEO
----------------------------- -----------------------------
UNION BANK
By: /s/ [ILLEGIBLE]
--------------------------------
Title: VP
-----------------------------
By:
--------------------------------
Title:
-----------------------------
<PAGE>
EXHIBIT 10.6
JOINT OPERATING AGREEMENT
THIS JOINT OPERATING AGREEMENT ("Agreement"), effective as of March 1, 1994,
(the "Effective Date"), is made between VDI, a California corporation, with
principal offices at 6920 Sunset Boulevard, Hollywood, CA 90028 ("VDI") and
Vyvx, Inc., a Delaware corporation, with principal offices at Tulsa Union
Depot, 111 East 1st Street, Tulsa, Oklahoma 74103 ("Vyvx").
RECITALS
WHEREAS, Vyvx and VDI desire to enter into an agreement in order to
provide a joint product offering;
WHEREAS, such desired product offering shall consist of supplying to a
customer electronic delivery of spot advertisements with verification of
delivery to broadcast stations;
WHEREAS, Vyvx and VDI wish to set out the terms and conditions under
which the parties shall cooperate and share with respect to such product
offering.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, Vyvx and VDI hereby agree as follows:
1. TERM
1.1 The term of this Agreement shall extend from the date first set
forth above for a period of five (5) years (the "Term").
1.2 After the expiration of the Term, this Agreement shall be
automatically extended for one year periods, subject to termination upon
sixty (60) days written notice from either party prior to any anniversary date
of this Agreement.
2. PROVISION OF SERVICES
2.1 VDI and Vyvx shall cooperate to provide to customers the electronic
delivery of Spot Advertisements, with verification of delivery, to Broadcast
Stations ("Ad Placement"). For the purposes of this Agreement, "Spot
Advertisements" shall be defined as television commercials distributed to a
variety and any number of Broadcast Stations nationwide and "Broadcast
Stations" shall be defined as television stations providing an off-air,
antenna-delivered signal between the frequency ranges of 47 megahertz and
900 megahertz. Approximately 1,000 Broadcast Stations, consisting of a mix of
network, independent and public stations available to any consumer with an
off-air receiving antenna, exist throughout the United States.
2.2 Ad Placement shall be sold by both VDI and Vyvx.
2.3 VDI and Vyvx shall jointly establish the charge to customers for Ad
Placement and any retransmission thereof.
<PAGE>
2.4 Each party warrants that it will not order Ad Placement for a
customer until such customer has executed an agreement between customer, Vyvx
and VDI which contains appropriate indemnification and limitation of
liability provisions for the protection of VDI and Vyvx. The parties agree
that an agreement substantially in the form of Exhibit A shall be used with
respect to Ad Placement customers.
3. EXCLUSIVITY
3.1 VDI shall use Vyvx exclusively during the Term or any extension
thereof for all electronic transmission of advertising distributed by VDI.
3.2 Vyvx shall not during the Term or any extension thereof join in any
written agreement with any other entity to form a joint venture for the sole
purpose of distributing Spot Advertisements to Broadcast Stations. The
prohibitions of this Subsection 3.2 shall not apply with respect to an entity
in the business of selling Spot Advertisements to Broadcast Stations which is
merged with, acquired by or acquires Vyvx or its affiliates. Both parties
understand and agree that newly developed technologies may provide Vyvx with
opportunities to expand the parameters of delivery of Spot Advertisements
beyond what is contemplated by this Agreement. Vyvx grants to VDI the first
right to transfer all advertising traffic to the new technologies. However,
Vyvx shall not be liable under or prevented by this Agreement from proceeding
on its own or joining into agreements and working with other companies to
utilize such technologies in the distribution of any and all types of
advertisements to any or all types of television entities including, but not
limited to, Broadcast Stations. Further, VDI and Vyvx shall, separately and
together, use reasonable efforts to increase the availability of Ad Placement
by connecting the Vyvx network to an increasing number of Broadcast Stations.
Should either VDI or Vyvx fail to make such reasonable efforts as agreed per
the guidelines set forth below, neither party may restrict the other from
individually seeking continued Broadcast Station connectivity by entering
into agreements with other companies or utilizing or developing technologies
to create such connectivity nor shall either party incur any liability
hereunder for doing so. Table 1 of Exhibit B (attached hereto and
incorporated herein) shows the Broadcast Stations operating in markets served
by Vyvx as of September 1993 (the "Initial Market"). It is understood that
not all Broadcast Stations in these markets are connected to the Vyvx
network, and VDI shall make best practical marketing and sales efforts to
increase connectivity of Broadcast Stations in these markets to the Vyvx
network by July 1, 1994. In addition to the Initial Market, Table 2 of
Exhibit B lists twenty-eight (28) markets (the "Additional Market") in which
Vyvx shall establish availability to its network during a "Phase 2" roll-out by
July 1, 1995, if eighty percent of the Broadcast Stations have successfully
been connected to the Vyvx network in the Initial Market. VDI and Vyvx shall
make best practical marketing and sales efforts to connect each Broadcast
Station in the Additional Market within six
2
<PAGE>
(6) months thereafter. Table 1, Table 2 and the dates set forth in this
Subparagraph 3.2 may be amended from time to time by written agreement of
both parties. Additionally, VDI shall make best efforts to recruit Ad
Placement customers who are nationally prominent spot advertisers in addition
to those currently listed in Table 3 of Exhibit B. VDI and Vyvx agree to
jointly solicit and procure the companies listed in Table 3 as Ad Placement
customers. It shall be the collective responsibility of the designated sales
force to secure working relationships with no less than five (5) major
advertisers from Table 3, by January 1, 1995. The joint sales effort shall be
required to further increase its customer base from Table 3 by an additional
thirty percent (30%) or eight (8) new customers by January 1, 1996. From
January 1, 1996 forward, a sales management structure shall be implemented
and realistic goals and projections shall be established by no later than
November 1st of each subsequent year for the following year.
3.3 In consideration of this Joint Operating Agreement, Vyvx shall not
during the Term or any extension thereof join in any written agreement with
any other entity to form a joint venture for the sole purpose of distributing
syndicated programming for the customers listed in Exhibit C. Exhibit C is
attached hereto and made a part hereof. The prohibitions of this
Subsection 3.3 shall not apply with respect to an entity which distributes
syndicated programming to any customers listed in Exhibit C which is merged
with, acquired by or acquires Vyvx or its affiliates. Both parties understand
and agree that newly developed technologies may provide Vyvx with
opportunities to expand the parameters of delivery of syndicated programming
beyond what is contemplated by this Agreement. Vyvx grants to VDI the first
right to transfer all programming traffic to the new technologies. However,
Vyvx shall not be liable under or prevented by this Agreement from proceeding
on its own or joining into agreements and working with other companies to
utilize such technologies in the distribution of any and all types of
programming to any or all types of television entities including, but not
limited to, Broadcast Stations.
4. VDI'S RESPONSIBILITIES
4.1 VDI shall be responsible for all billing of customers with respect
to Ad Placement. VDI shall send appropriate invoices to customers within
ten (10) days after completion of any Ad Placement. There shall be no charge
to Vyvx for such billing responsibilities.
4.2 VDI shall be solely responsible for all Broadcast Station
coordination including, but not limited to, the following:
a. Contacting any Broadcast Stations prior to delivery of an Ad
Placement to notify them of the date and time of such delivery.
b. Provide an 800 number (operable twenty-four (24) hours a day,
seven (7) days a week) for customers and Broadcast
3
<PAGE>
Stations to call for coordination of Ad Placement or any other customer
service related inquiries.
c. Contact Broadcast Stations to verify delivery of the Ad Placement.
4.3 With respect to verification of the delivery of the Ad Placement,
such verification shall initially be done manually via telephone. However,
within six (6) months, VDI shall develop or have a third party develop
electronics and software which shall provide for the automatic verification
of receipt or non-receipt of the Ad Placements (the "Remote Video
Confirmation System"); the specifications for such are set forth in
Exhibit D, attached hereto and incorporated herein. VDI shall be solely
responsible for all costs and expenses with respect to the development and
implementation of the Remote Video Confirmation System. During the
development of Vyvx's management and control system, VDI shall provide the
supplier of Vyvx's management and control system with sufficient information
to enable such supplier to establish compatibility with the Remote Video
Confirmation System.
4.4 VDI shall be responsible for coordinating with Vyvx with respect to
any Ad Placement, e.g., list of Broadcast Stations to receive Ad Placement,
times of transmission, customer service problems, etc.
4.5 VDI shall designate five (5) personnel to interface with Vyvx for
making reservations for Ad Placement. Such personnel shall be set forth in
Exhibit E, attached hereto and incorporated herein. The five (5) personnel so
designated may be changed from time to time, as necessary, by submitting to
Vyvx a revised Exhibit E. Such revised Exhibit E shall be sent to the address
for Vyvx as set forth in Section 12 to the attention of the Director of
Operations.
4.6 VDI shall provide one (1) full time employee, who will spend
fifty percent (50%) of his/her time on continual development of the marketing
and business plans for Ad Placement and to sell Ad Placement.
5. VYVX'S RESPONSIBILITIES
5.1 Vyvx shall guarantee network availability for Ad Placement between
its Television Switching Centers ("TSC(s)") for one hour per day between
1:00 a.m. and 6 a.m. Eastern Standard Time.
5.2 Vyvx shall make available one-half (1/2) hour per day between
1:00 p.m. and 3:00 p.m. Eastern Standard Time for a secondary feed of any Ad
Placement, if necessary in the event that the initial transmission fails to
be received fit for broadcast.
5.3 Upon request by a Broadcast Station and upon receipt of an
appropriate letter of agency, Vyvx shall act as agent for such
4
<PAGE>
Broadcast Stations with full authority to arrange, administer and receive
billing from the local access service providers on behalf of such Broadcast
Stations. Such Broadcast Stations shall be billed for such local access
service by Vyvx (including, but not limited to, installation, recurring
charges, and/or cancellation charges); such charge shall include a
fifteen percent (15%) administrative charge. Such fifteen percent (15%)
administrative charge shall be for the benefit of Vyvx in order to offset
Vyvx's costs with respect to providing such service, and the
fifteen percent (15%) administrative charge shall not be considered revenue to
be divided between VDI and Vyvx pursuant to Section 8.1.
5.4 If feasible, Vyvx shall make any future improvements to its
transmission system available for the provision of Ad Placement.
5.5 The Vyvx video transmission specifications (from TSC to TSC) with
respect to Ad Placement shall comply with the ANSI T1.502-1988 Medium Haul
Parameters, as it may be limited by the published technical specifications of
the digital codecs used by Vyvx. Vyvx shall monitor and test the quality of
the video signal transmitted along its network with its centrally-located
Video Control Center in Tulsa, Oklahoma. The Vyvx backbone network shall be
linked to a central Network Control Center ("NCC") which shall automatically
monitor the activity along the entire Vyvx network. The NCC shall be manned
24 hours per day, 365 days per year.
5.6 Vyvx shall provide non-monetary support with respect to VDI's
selection of and negotiations with a vendor of the Remote Video Confirmation
System.
5.7 Vyvx shall provide one (1) full time employee, who will spend
twenty-five percent (25%) of his/her time on continual development of the
marketing and business plans for Ad Placement and to sell Ad Placement.
Further, Vyvx's regional sales managers shall sell Ad Placement (in addition
to their other Vyvx duties). Such regional sales managers are listed in
Exhibit F, attached hereto and made a part hereof. The regional sales
managers so designated in Exhibit F may be changed from time to time, as
necessary, by submitting to VDI a revised Exhibit F. Such revised Exhibit F
shall be sent to the address for VDI set forth in Section 12 to the attention
of Sandra C. Mays.
6. MARKETING
6.1 Ad Placement shall be marketed by both VDI and Vyvx under a common
trade name which shall be "Broadcast I."
6.2 All expenses related to trade marking and all other market material
costs shall be shared equally by Vyvx and VDI provided that such expenses are
presented in writing and the other party approves of such expenses prior to
their occurrence. Each party shall invoice the other for one-half (1/2) of
such actual costs. Accompanying such invoices shall be sufficient
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<PAGE>
documentation to show the invoicing party's actual costs with respect to
trade marking and market materials. Provided that such documentation is
provided, such invoices shall be paid within thirty (30) days of invoice date.
6.3 VDI and Vyvx agree to cooperate and work jointly to prepare the
succeeding year's market plan by November 1 of each year of the Term or any
extension thereof.
6.4 VDI and Vyvx agree to jointly sell and/or market to the potential
customer's listed in Exhibit G, attached hereto and made a part hereof ("Key
Customers").
7. EMPLOYEES
7.1 Each party shall be responsible for its own taxes and for its own
employees' compensation and benefits (including but not limited to worker's
compensation) and all expenses including travel and entertainment.
8. PROFITS
8.1 VDI shall collect the total charges due from Ad Placement customers.
VDI shall adjust customer's invoices to allow for billing credits and
allowances. Vyvx and VDI shall share equally in the total revenues actually
collected for Ad Placement after allowing for aforesaid credits and
allowances. However, VDI must obtain written approval from Vyvx's Manager of
Finance before issuing any credits and/or allowances to an Ad Placement
customer which aggregate to be more than $1,000 per month; Vyvx's share of
total revenues shall not be reduced by any credit or allowance for which VDI
has failed to obtain such approval. VDI shall remit to Vyvx one half (1/2) of
the total revenues collected (i.e. all collected revenues excluding
transaction taxes) for Ad Placement along with a summary of the accounts
billed by VDI within ten (10) days after receipt from customer. VDI shall
provide Vyvx with monthly gross revenue numbers by noon Central Standard Time
on the second to the last working day of each month. Vyvx shall record one
half (1/2) of this total as Vyvx's share of that month's revenue.
8.2 For a period of one year following the sale of any Ad Placement,
Vyvx shall have the right to review the relevant books and records of VDI to
the extent necessary to confirm the: (i) billing of Ad Placement and
(ii) revenues received with respect to any such sale of Ad Placement. VDI
shall retain the relevant records during such one year period.
8.3 For a period of one year following the provision of Ad Placement,
VDI shall have the right to review Vyvx's rated feed records to the extent
necessary to confirm the transmission of such service. Vyvx shall retain the
rated feed records during such one year period.
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<PAGE>
9. TAXES
9.1 Each party shall be responsible for its own income tax, ad valorem
taxes, property taxes and other similar taxes with respect to its portion of
assets involved with and its profits from Ad Placement.
10. INSURANCE
10.1 Each party shall (a) obtain pay for, and maintain insurance with
insurance companies reasonably acceptable to the other party, for the
coverage and amounts of coverage not less than those set forth below, and
(b) provide the other party with corresponding certificates of insurance:
a. Worker's Compensation insurance complying with the law of the state
or states of operation, whether or not such coverage is required by
law, and Employer's Liability insurance with the limits of $100,000
each accident, including occupational disease coverage with a limit
of $100,000 each employee and $100,000 disease policy limit;
b. Commercial General Liability insurance with a combined single limit
for bodily injury and property damage of $500,000 each occurrence and
general and products liability aggregates of $1,000,000 each,
covering all insurable obligations or operations of the insured
party; and
c. Business Automobile Liability insurance with a combined single limit
for bodily injury and property damage of $500,000 each occurrence to
include coverage for all owned, non-owned, and hired vehicles.
Neither the insurance required herein or the amount and type of insurance
maintained by the insured party shall limit or affect the extent of the
insured party's liability under this Agreement for injury, death, loss or
damage.
Neither party shall insure or be responsible for any loss or damage to
property of any kind owned or leased by the other party or its employees,
servants, and agents, except for loss or damage caused by the negligence or
intentional acts or omissions of the insured party (including its employees,
servants and agents).
Each party agrees to cause the other party to be listed as a Certificate
Holder in connection with the above listed insurance policies as follows:
In the case of VDI:
VDI
6920 Sunset Blvd.
Hollywood, CA 90028
Attention: Chief Financial Officer
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<PAGE>
In the case of Vyvx:
Vyvx, Inc.
Attn: Contract Administration
P.O. Box 21348
Tulsa, OK 74121
10.2 Certificates of insurance shall provide thirty (30) days prior
written notice of any cancellation, non-renewal or material change. In the
event of any failure by one party to comply with the provisions of this
Section 10, the other party, at its option, may purchase the required
insurance coverage and invoice such non-complying party for the amount of
such insurance.
11. DEFAULT
11.1 Failure of a party to comply with any of the terms and conditions of
this Agreement shall constitute a default hereunder. Such party shall have
ten (10) days to cure such default after receiving written notice from the
non-defaulting party. If such default is not cured within such ten (10) days
period, the non-defaulting party shall have the right to pursue any remedy it
may have in law or equity.
12. NOTICES
12.1 All notices, consents, and other communications required or
permitted hereunder ("Communications") shall be in writing and shall be
mailed or delivered as follows (or to other persons, at such other address or
addresses as may be designated by notice of the appropriate party.)
To VDI: VDI
6920 Sunset Blvd.
Hollywood, CA 90028
Attention: Chief Financial Officer
To VYVX: Vyvx, Inc.
111 East First Street
Tulsa, Oklahoma 74103-2807, or
P.O. Box 21348
Tulsa, Oklahoma 74121
Attention: President
Such Communications will be sent by U.S. certified or registered mail,
postage prepaid, or by a generally recognized overnight delivery system such
as Federal Express. Such communications shall be deemed effective upon
delivery to VDI or Vyvx, as the case may be, at their respective addresses
stated above.
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13. LIMITATION OF LIABILITY; INDEMNITY
13.1 Neither Vyvx nor VDI shall be liable to the other for any
incidental, indirect, special, consequential, punitive or reliance damages of
any nature whatsoever regardless of the foreseeability thereof arising under
or in connection with this Agreement, or the performance hereunder, or
arising out of any act or omission by either VDI or Vyvx, their respective
employees, servants or agents whether based on breach of contract, breach of
warranty, negligence or any other theory of liability.
13.2 VDI and Vyvx shall indemnify and hold harmless the other for any
physical property damage or physical injury or death to any person to the
extent arising from any negligent act of the indemnifying party with respect
to its performance under this Agreement.
13.3 VDI and Vyvx shall indemnify and hold harmless the other for claims
from third parties (including Ad Placement customers) to the extent arising
as a result of the indemnifying party's negligent acts or omissions in the
performance of its responsibilities hereunder or breach of this Agreement.
13.4 VDI and Vyvx shall indemnify the other against any claims for damages
arising or resulting from any defect in or failure to provide Ad Placement,
by customers to whom such indemnifying party has sold Ad Placement without
procuring an agreement as warranted in Section 2.4 hereof.
13.5 The indemnifying party agrees to defend the other against the claims
as set forth in this Section 13 and to pay all reasonable litigation costs,
attorneys' fees, court costs, settlements payments, and any damages awarded
or resulting from any such claims. The indemnified party shall promptly
notify the indemnifying party in writing of any such claims.
14. WARRANTY
14.1 No warranty shall be provided by either party to the other party.
14.2 EACH PARTY DISCLAIMS ANY WARRANTIES, WHETHER EXPRESS, IMPLIED OR
STATUTORY, INCLUDING WITHOUT LIMITATION, IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO ANY
EQUIPMENT AND SERVICES PROVIDED HEREUNDER.
15. CONFIDENTIALITY
15.1 This Agreement creates a relationship of confidence between Vyvx and
VDI with respect to certain Confidential Information of each party. The
parties may exchange information relating to customers, technology and
services and other compilation of information that relate to this Agreement
(collectively the "Confidential Information").
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15.2 All Confidential Information shall be designated as such in writing
by the disclosing party, whether by letter or by the use of an appropriate
proprietary stamp or legend, prior to or at the time any such Confidential
Information is disclosed to the other party. In the event Confidential
Information is orally disclosed by one party to the other, it shall also be
covered by this Agreement if the disclosing party notifies the other party of
its confidential nature and within ten (10) days after such disclosure,
delivers to the other party a written document or documents identifying such
Confidential information and referencing the place and date of such oral
disclosure and the names of the employees or officers of the other party to
whom such disclosure was made. In addition to the above, the following shall
be considered Confidential Information: (i) names, addresses, and telephone
numbers of Ad Placement customers, and (ii) the terms and conditions of this
Agreement.
15.3 The party providing Confidential Information in each case is called
the "PROVIDER"; the party receiving the Confidential Information is called
the "RECIPIENT". The RECIPIENT shall not disclose Confidential Information
received from the PROVIDER and shall not use that Confidential Information
except in performance of this Agreement. Except as may be otherwise provided
herein, upon the request of PROVIDER, RECIPIENT shall return any materials
received from PROVIDER containing Confidential Information of the PROVIDER,
and all copies thereof. The RECIPIENT shall use the same care to prevent
disclosure of Confidential Information of the PROVIDER which it uses to
safeguard its own valuable confidential information and/or trade secrets, but
in no event less than a reasonable degree of care for such information.
15.4 VDI and Vyvx acknowledge that in the event of an unauthorized
disclosure, the damages incurred by a PROVIDER may be difficult if not
impossible to ascertain, and that PROVIDER may seek injunctive relief as well
as monetary damages against RECIPIENT in case of a breach of this Section 15.
Vyvx and VDI shall render reasonable assistance to the other in connection
with the enforcement by the other party of its rights in and to Confidential
Information. Notwithstanding anything to the contrary contained herein,
however, the RECIPIENT shall not be liable for any inadvertent or
unauthorized disclosure of Confidential Information occurring, provided that
is exercises reasonable care to prevent disclosure and takes reasonable steps
to mitigate any damage and prevent further disclosure.
15.5 The obligations of a RECIPIENT hereunder shall not apply to any
Confidential Information which: (a) was in the public domain at the time it
was disclosed; (b) enters the public domain other than by breach of this
Agreement by RECIPIENT; (c) is known to RECIPIENT at the time of its
disclosure to RECIPIENT by the PROVIDER; (d) is disclosed to RECIPIENT by a
third party who to the RECIPIENT's knowledge has the right to do so; (e) is
developed by RECIPIENT independently of any disclosure by PROVIDER hereunder,
or (f) is
10
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required to be disclosed by law or by any governmental agency having
jurisdiction.
15.6 The obligations with respect to the Confidential Information under
this Agreement shall survive for three (3) years after the termination date
of this Agreement.
16. TERMINATION FOR CAUSE
16.1 This Agreement may be terminated by VDI or Vyvx immediately upon
the filing of any bankruptcy, arrangement for the benefit of creditors,
insolvency, liquidation or receivership proceedings by or against the other
party.
16.2 Either party may terminate this Agreement on not less than
ten (10) days' written notice if (a) the non-terminating party is in breach
of any material provision of this Agreement, and (b) the non-terminating
party does not cure said breach within such ten (10) day period.
16.3 Upon termination of this Agreement (a) VDI shall immediately remit
and pay to Vyvx any and all amounts due to Vyvx pursuant to Subsection 8.1
for Ad Placement provided prior to termination, and (b) both parties shall
upon request of the other party return all Confidential Information to the
other (or if directed by the other party, destroy such Confidential
Information) and shall certify to each other that, to the best of their
knowledge, information and belief, such information has been returned or
destroyed and both parties shall be bound by the provisions in this Agreement
relating to the nondisclosure of Confidential Information.
17. INFRINGEMENT INDEMNITY
17.1 Provided such infringement is not due to VDI's compliance with
Vyvx's instructions or specifications, VDI agrees to defend and indemnify
Vyvx against any and all actions based on a claim that VDI's performance of
its responsibilities hereunder infringe any U.S. patent, copyright, license
or other intellectual property right. If notified promptly in writing of any
such action brought against Vyvx, VDI will defend such action at its expense
and will pay the costs and damages awarded in any such action or the cost of
settling such action, provided VDI shall have the right to control the
defense of any such action and all negotiations for its settlement or
compromise.
17.2 Provided such infringement is not due to Vyvx's compliance with
VDI's instructions or specifications, Vyvx agrees to defend and indemnify VDI
against any and all actions based on a claim that Vyvx's performance of its
responsibilities hereunder infringe any U.S. patent, copyright, license or
other intellectual property right. If notified promptly in writing of any
such action brought against VDI, Vyvx will defend such action at its expense
and will pay the costs and damages awarded in any such action or
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<PAGE>
the cost of settling such action, provided Vyvx shall have the right to
control the defense of any such action and all negotiations for its
settlement or compromise.
18. DISPUTE RESOLUTION
18.1 The parties agree to use good faith efforts to resolve any disputes
through normal business discussions. In the event a dispute cannot be
resolved within thirty (30) days of written notice to the other party of such
dispute, prior to the instigation of any legal proceedings, the parties agree
to submit the dispute to their respective corporate officers (at the vice
presidential level or higher) to use their good faith efforts to resolve the
problem within thirty (30) additional days.
19. PUBLICITY
19.1 Use of a party's name by the other party in any announcements
concerning Ad Placement or for promotional or advertising purposes shall
require the other party's prior written approval, which approval shall not be
unreasonably withheld.
20. FORCE MAJEURE
20.1 Neither party shall be liable for any failure or delay in
performance of its obligations (except for VDI's payment to Vyvx pursuant to
Subsection 8.1) hereunder if such failure or delay is the result of fires,
casualties, accident, acts of God, transportation difficulties, manufacturing
difficulties, inability to obtain equipment, materials or qualified labor,
governmental regulations or other causes beyond such party's control and such
party takes reasonable and diligent action to cure any such failures or
delays and mitigate any associated damages. Notwithstanding the foregoing, if
such delay continues for fifteen (15) days, the non-affected party shall
have the right to terminate this Agreement.
21. GENERAL TERMS
21.1 Any amounts, pursuant to specific provisions of this Agreement, for
which one party pays for which the other party is equally liable or for which
one party is to be reimbursed shall be due and payable within
thirty (30) days of invoice by such party.
21.2 This Agreement consists of all the terms and conditions contained
herein and in documents incorporated herein specifically by reference. This
Agreement constitutes the complete and exclusive statement of the
understanding between the parties and supersedes all proposals and prior
agreements (oral or written) between the parties relating to the subject
matter hereof. Any addition, deletion or modification to the terms and
conditions contained in this Agreement shall not be binding on either party
except by written agreement executed by an authorized representative of both
parties.
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21.3 The failure of either party to enforce any provision hereof shall
not constitute the permanent waiver of such provision.
21.4 In the event any provision of this Agreement is subsequently held to
be void, the remainder of this Agreement shall remain effective.
21.5 Neither party shall assign or transfer its rights or obligations
under this Agreement without the prior written consent of the other. Any such
assignment or transfer of rights or obligations hereunder without such consent
shall be void. Sale of all or substantially all of the assets of a party
hereunder or a change in control of a party shall also be considered an
assignment or transfer of this Agreement. "Change in control" means that a
person, corporation, entity or affiliated group acquires, directly or
indirectly, the beneficial ownership of 50% or more of a party hereunder in a
single or series of transactions including, but not limited to, a merger or
consolidation. The foregoing notwithstanding, Vyvx's ownership may be
transferred to The Williams Companies or any of its subsidiaries without
being considered a change of control.
21.6 Each party shall comply with all applicable laws and regulations
relating to any performance hereunder and the provision of Ad Placement.
21.7 This Agreement shall be governed by the laws of the State of
California without regard to choice of law principles. Any legal action or
proceeding with respect to the collection of monies hereunder may be brought
in the state or federal courts in and for the State of California and
Oklahoma. By execution of this Agreement, both Vyvx and VDI shall be deemed
to have submitted to such jurisdictions, thereby expressly waiving whatever
rights may correspond to either of them by reason of their present or future
domicile.
21.8 No rule of construction requiring interpretation against the
draftsman hereof shall apply in the interpretation of this Agreement.
21.9 The headings used in this Agreement are for convenience only and
shall not affect the interpretation of any of the terms and conditions hereof.
21.10 The terms and conditions contained in this Agreement that by their
sense and context are intended to survive the performance thereof by either
or both parties hereunder shall so survive the completion of performance,
cancellation or termination of this Agreement.
21.11 Except as set forth to the contrary herein, any right or remedy
shall be cumulative and without prejudice to any other right or remedy,
whether contained herein or not.
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21.12 In the event suit is brought by either party to enforce the terms
of this Agreement or to collect any monies due hereunder or to collect money
damages for breach hereof, the prevailing party as determined by the
judiciary of the forum in which suit is brought, shall be entitled to
recover, in addition to any other remedy, reimbursement for reasonable
attorneys' fees and court costs incurred in connection therewith.
21.13 Neither party shall be deemed a partner of, or agent for, the other
or have the right to bind or obligate the other party except as specifically
set forth herein with respect to Ad Placement.
21.14 Neither this Agreement nor the actions taken by the parties
hereunder shall create any ownership rights to and interest in the other
party's equipment or assets used in the provision of Ad Placement. Each party
shall bear the risk of loss and damage to the portion of the equipment and
assets that it owns and shall be responsible for the maintenance thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year first above written.
VDI
By: /s/ Sandra C. Mays
-----------------------------
(Signature)
Sandra C. Mays
-----------------------------
(Print Name)
Chief Financial Officer
-----------------------------
(Title)
Vyvx, Inc.
By: /s/ Delwin L. Bothof [Seal]
-----------------------------
(Signature)
Delwin L. Bothof
-----------------------------
(Print Name)
President
-----------------------------
(Title)
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EXHIBIT A
MASTER AD PLACEMENT SERVICE AGREEMENT #_____________________
THIS AGREEMENT (the "Agreement") is entered into on the _____ day of
__________________, 199____, by and between Vyvx, Inc., a Delaware
corporation ("Vyvx"), VDI ("VDI"), a California corporation, and
_____________________________________________, a ______________________
corporation ("Customer") for the transmission of advertisements ("Ad
Placement Service"), subject to the provisions set forth in this Agreement.
Vyvx and VDI shall collectively be referred to herein as "Vendor," and each
individual advertisement shall hereinafter be referred to as a "Spot."
1.0 AD PLACEMENT SERVICE DESCRIPTION
1.1 Subject to the provisions of this Agreement, Vendor shall provide
Customer with Ad Placement Service utilizing the Vyvx network provided that
Vyvx's transmission circuits are available and Customer's selected
destination points are connected to Vyvx's network. Procurement of such
connectivity shall not be the responsibility of Vendor. Ad Placement Service
shall be available between 1:00 a.m. and 6 a.m. Eastern Standard Time (the
"Transmission Window"); the exact time during the Transmission Window shall
be at the sole discretion of Vendor. The length of any one Spot shall not
exceed __________ minutes. At the request of Customer and at the charge set
forth below, Vendor shall retransmit a Spot to all or any of the original
destination points set forth in the relevant Reservation Confirmation between
1:00 p.m. and 3:00 p.m. Eastern Standard Time ("Retransmit Window"); the
exact time during the Retransmit Window shall be at the sole discretion of
Vendor.
2.0 VENDOR RESPONSIBILITIES
2.1 Vendor shall promptly respond to any request for Ad Placement Service
("Reservation Request") placed by Customer which states the date of
transmission and destination points submitted at the number or address set
forth in Paragraph 5.1, Vendor shall notify Customer as to the availability
of Ad Placement Service as requested in the Customer Reservation Request by
return correspondence which may be faxed or delivered to Customer at the
number or address set forth in Paragraph 5.1. An affirmative response by
Vendor shall be a confirmed reservation ("Reservation Confirmation"). Vendor
reserves the right to decline to accept any Reservation Request without
incurring any liability.
2.2 The Ad Placement Service specifications (on the Vyvx network) shall
comply with the ANSI TI.502-1988 Medium Haul Parameters, as it may be limited
by the published technical specifications of the digital Codecs used
("Technical Parameters").
3.0 CUSTOMER RESPONSIBILITIES
3.1 Customer must submit to Vendor each Spot which shall be transmitted via
the Ad Placement Service in the following format: __________________________
____________________________________________________________________________.
Such Spot shall be submitted to VDI at the address set forth below
____________ hours prior to the intended transmission time.
3.2 Customer has sole responsibility for installation, procurement, testing
and operation of facilities, services and equipment other than those
specifically provided by Vendor pursuant to this Agreement ("Other
Facilities"). In no event shall the untimely installation or non-operation of
Other Facilities (including tape play-back equipment, if any) or failure of
Customer to timely transmit any Spot relieve Customer of its obligation to
pay for Ad Placement Service or cancellation charges as of the requested
transmission date.
4.0 CHARGES; CREDIT
4.1 Customer shall be charged per destination point and per Spot as follows:
DURING THE TRANSMISSION WINDOW, PER SPOT, PER DESTINATION POINT $____________
DURING THE RETRANSMIT WINDOW, PER SPOT, PER DESTINATION POINT $____________
The above pricing is subject to change by Vendor, at its sole discretion,
upon sixty (60) days prior notice to customer. If Customer does not dispute
the information in any Reservation Confirmation within the earlier of (i)
forty-eight (48) hours from the time Vendor sends the Reservation
Confirmation or (ii) 12:01 a.m. on the scheduled transmission date, the
Reservation Confirmation shall be deemed accurate, and Customer shall be
liable for all applicable charges under this Agreement. Customer agrees that
the time of transmissions shall be determined according to WWV Time as
established by the WWV ratio station located in Fort Collins, CO.
4.2 Failure of equipment, network or facilities of Vendor, including failure
due to force majeure events as set forth in Paragraph 6.5, or failure of
Vendor to provide Ad Placement Service for any reason to any or all
destination points ("Outage") shall result in a pro rata reduction of the
charges for the Ad Placement Service involved ("Credit"). The applicable
Credit shall be determined by ____________________________________________.
The foregoing remedy is exclusive and no other remedy is provided to Customer
pursuant to this Agreement. Notwithstanding the foregoing, Customer shall be
liable for all charges and shall not receive any Credit if failure to receive
the Ad Placement Service is due in whole or in part to Customer's or its
customer's equipment, facilities, employees or agents. In the event of an
occurrence causing transmission failure on the Vyvx network which is beyond
the control of Vendor, Ad Placement Service (not otherwise affected) may be
subject to interruption as Vyvx deems necessary in order to mitigate the
effect of such occurrence with respect to the Vyvx network; Vendor shall not
be liable for such interruption except in the form of a Credit.
5.0 NOTICES
5.1 Notices under this Agreement shall be in writing and delivered to the
person and address specified below:
Vendor: Customer:
______________________________________ ______________________________________
______________________________________ ______________________________________
______________________________________ ______________________________________
Attention: ___________________________ Attention: ___________________________
Telephone: 1-800-_____________________ Telephone 1-800-______________________
Fax: _________________________________ Fax: _________________________________
THIS AGREEMENT INCLUDES THE ADDITIONAL PROVISIONS STATED ON THE REVERSE SIDE.
IN WITNESS hereof, the parties have executed this Agreement on the date first
written above.
VYVX, INC. VDI _______________________
(CUSTOMER)
By: ___________________ By: ___________________ By: ___________________
(SIGNATURE) (SIGNATURE) (SIGNATURE)
_______________________ _______________________ _______________________
(PRINT) (PRINT) (PRINT)
_______________________ _______________________ _______________________
(TITLE) (TITLE) (TITLE)
<PAGE>
6.0 GENERAL TERMS AND CONDITIONS
6.1 PAYMENT: Customer agrees to remit payment to Vendor at the remittance
address and on the due date ("Due Date") indicated on Vendor's invoices to
Customer. In the event Customer fails to make full payment to the proper
address within thirty (30) days after the Due Date, Customer shall also pay a
late fee in the amount of the lesser of one and one-half percent (1-1/2%) of
the unpaid balance per month or the maximum lawful rate under applicable
state law. Customer acknowledges and understands that all charges are
computed exclusive of any applicable federal, state or local use, excise,
gross receipts, sales and privilege taxes, duties, fees or similar
liabilities (other than general income or property taxes), whether charged to
or against Vendor, its suppliers or affiliates, Customer or its customers for
the Ad Placement Service provided to Customer ("Additional Charges"). Such
Additional Charges shall be paid by Customer in addition to all other charges
provided for herein. Vendor shall invoice Customer monthly for Ad Placement
Service for the period between the first of the prior month to the end of
such prior month ("Billing Period"). The Billing Period shall be subject to
change at the sole option of Vendor.
6.2 SUSPENSION OF AD PLACEMENT SERVICE: In the event payment in full is not
received from Customer on or before thirty (30) days following the due date
of invoice, Vendor shall have the right to refuse to provide Ad Placement
Service to Customer and upon forty-eight (48) hours prior written notice to
suspend all or any portion of Ad Placement Service for which Customer has a
Reservation Confirmation. Vendor may continue suspension until such time as
Customer has paid in full all charges then due, including any late fees as
specified herein. If Customer fails to make such payment by a date determined
by and acceptable to Vendor, Customer shall be deemed to have canceled the Ad
Placement Service for which Customer received a Reservation Confirmation
effective on such date and shall remain liable for all cancellation charges
as set forth in Paragraph 6.4.
6.3 TERM AND APPLICATION: This Agreement shall be effective between the
parties as of the date first written above and shall extend through
______________________, 199___. The terms and conditions of this Agreement
shall apply to any Reservation Confirmation accepted by Vendor; any other
terms and conditions given verbally or contained in any purchase order or
similar document submitted as a request for Ad Placement Service shall be
void unless agreed to in writing and subscribed to by an authorized
representative of Vendor and Customer. Vendor reserves the right to refuse
any Reservation Request submitted pursuant to this Agreement.
6.4 CANCELLATION: Customer may cancel the Ad Placement Service without
incurring any cancellation liability, provided that the Ad Placement Service
in question is canceled at least seventy-two (72) hours prior to 1:00 a.m.
Eastern Standard Time on the date of the scheduled transmission. If Customer
cancels Ad Placement Service less than seventy-two (72) hours, but
twenty-four (24) hours or more prior to 1:00 a.m. Eastern Standard Time on
the date of the scheduled transmission, Customer shall pay a cancellation
charge of fifty percent (50%) of the amount that Customer would have
otherwise paid if such Ad Placement Service had not been canceled. If
Customer cancels less than twenty-four (24) hours prior to 1:00 a.m. Eastern
Standard Time on the date of the scheduled transmission, Customer shall pay
one hundred percent (100%) of the amount that Customer would have otherwise
paid is such canceled Ad Placement Service had not been canceled. It is
agreed that damages in the event Customer cancels Ad Placement Service would
be difficult or impossible to ascertain. The provision for a cancellation
charge in this Paragraph 6.4 is intended, therefore, to establish liquidated
damages in the event of a cancellation and is not intended as a penalty.
6.5 FORCE MAJEURE: If Vendor's performance of this Agreement or any
obligation hereunder is prevented, restricted or interfered with by causes
beyond its reasonable control including, but not limited to, acts of God,
fire, explosion, vandalism, cable cut, storm or other similar occurrence, any
law, order, regulation, direction, action or request of the United States
Government or state or local governments, or of any department, agency,
commission, court, bureau, corporation or other instrumentality of any one or
more said governments, or of any civil or military authority, or by national
emergencies, insurrections, riots, wars, strikes, lock-outs or work
stoppages, or other labor difficulties, supplier failures, shortages,
breaches or delays, then Vendor shall be excused from such performance on a
day to day basis to the extent of such prevention, restriction or
interference. Vendor shall use reasonable efforts under the circumstances to
avoid and remove such causes of non-performance and shall proceed to perform
with reasonable dispatch whenever such causes cease.
6.6 TRANSMISSION CONTENT; INDEMNITY: Customer shall make all arrangements
with copyright holders, music licensing organizations, performers'
representatives, or other parties for necessary authorizations, clearances or
consents with respect to the transmission contents ("Consents"). Customer
shall indemnify and hold harmless Vendor and any third party provider or
operator of facilities employed in the provision of the Ad Placement Service
(all of which shall be referred to as "Providers") against and from any
court, administrative or agency action, suit or similar proceeding brought
against Providers arising out of or related to the contents transmitted
hereunder including, but not limited to, claims, actual or alleged, relating
to any violation of copyright law, except control laws, failure to procure
Consents, failure to meet governmental or other technical broadcast
standards, or that such transmission contents are libelous, slanderous, an
invasion of privacy, pornographic, or otherwise unauthorized or illegal.
Vendor may terminate or restrict any programming transmitted over the Vyvx's
network if, in its judgment, (1) such actions are reasonably appropriate to
avoid violation of applicable law or (2) there is a reasonable risk that
criminal, civil or administrative proceedings or investigations based upon
the transmission contents shall be instituted against Providers. Customer and
Vendor shall indemnify and hold harmless the other against and from any and
all claims for physical property damage, physical personal injury or wrongful
death to the extent that such arises out of the negligence or willful
misconduct of the respective indemnifying party, its employees, agents, or
contractors in connection with the provision of services or other performance
pursuant to this Agreement. In the event third parties should use the Ad
Placement Service through Customer, Customer shall indemnify Providers
against any claims by any such third parties for damages arising or resulting
from any defect in or failure to provide the Ad Placement Service. The
indemnifying party agrees to defend the other against the claims as set forth
above and to pay all reasonable litigation costs, attorneys' fees, court
costs, settlement payments, and any damages awarded or resulting from any
such claims. The indemnified party shall promptly notify the indemnifying
party in writing of any such claims.
6.7 WARRANTY; LIMITATION: Vendor warrants that the Ad Placement Service
provided over the Vyvx network shall be provided to Customer in accordance
with the Technical Parameters and (except to the extent such standards
conflict with the Technical Parameters) prevailing television industry
standards for digital transmission of television in a DS-3 format. Vendor
shall use reasonable efforts under the circumstances to remedy any delays,
interruptions, omissions, mistakes, accidents or errors in the Ad Placement
Service and restore such Service to comply with the terms hereof. THE
FOREGOING WARRANTY AND THE REMEDY PROVIDED TO CUSTOMER WITH RESPECT TO OUTAGE
CREDITS ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES OR REMEDIES,
WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING WITHOUT LIMITATION, IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. IN THE
EVENT OF ANY BREACH OF THIS AGREEMENT OR ANY FAILURE OF THE AD PLACEMENT
SERVICE, WHATSOEVER, PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT,
CONSEQUENTIAL, SPECIAL, ACTUAL, INCIDENTAL, PUNITIVE OR ANY OTHER DAMAGES, OR
FOR ANY LOST PROFITS OF ANY KIND OR NATURE WHATSOEVER, AND IN THE EVENT
PARTIES OTHER THAN CUSTOMER SHALL HAVE USE OF THE AD PLACEMENT SERVICE
THROUGH CUSTOMER, CUSTOMER SHALL INDEMNIFY PROVIDERS AGAINST ANY CLAIMS FOR
SUCH DAMAGES BROUGHT AGAINST THEM BY THIRD PARTIES.
6.8 GENERAL PROVISIONS: This Agreement consists of all the terms and
conditions contained herein and in documents incorporated herein specifically
by reference. This Agreement constitutes the complete and exclusive statement
of the understanding between the parties and supersedes all proposals and
prior agreements (oral or written) between the parties relating to Ad
Placement Service provided hereunder. Customer agrees that any addition,
deletion or modification to the terms and conditions contained in this
Agreement shall not be binding on Vendor except by written agreement executed
by an authorized headquarters representative of Vendor. The provision of the
Ad Placement Service shall not create a partnership or joint venture between
the parties. The failure of either party to enforce any provision hereof
shall not constitute the permanent waiver of such provision. In the event any
provision of this Agreement conflicts with any statute, rule or order of any
governmental unit or regulatory body, or tariff then, if required by law,
such statute, rule, order or tariff shall control. Customer shall not assign
or transfer its rights or obligations under this Agreement without the prior
written consent of Vendor. Any such assignment or transfer of Customer's
rights or obligations without such consent shall entitle Vendor to terminate
the Ad Placement Service provided hereunder at its option upon ten (10) days
prior written notice to Customer. This Agreement shall be governed by the
laws of the State of California without regard to choice of law principles.
No rule of construction requiring interpretation against the draftsman hereof
shall apply in the interpretation of this Agreement.
<PAGE>
EXHIBIT B
TABLE 1
Broadcast Stations Operating in Vyvx Network markets as of September,
1993:
MARKET (ADI RANKING)
- --------------------
Atlanta (10)
Austin (66)
Baltimore (22)
Baton Rouge (95)
Beaumont (140)
Boston (6)
Buffalo (38)
Charlotte (30)
Chicago (3)
Cleveland (12)
Dallas-Fort Worth (8)
Denver (21)
Detroit (9)
Hartford-New Haven (24)
Houston (11)
Indianapolis (27)
Jacksonville (54)
Kansas City (28)
Las Vegas (77)
Los Angeles (2)
Miami-Ft. Lauderdale (15)
Milwaukee (29)
Minneapolis-St. Paul (13)
Nashville (33)
New Orleans (40)
New York (1)
Oklahoma City (45)
Omaha (73)
Orlando (23)
Philadelphia (4)
Phoenix (20)
Pittsburgh (17)
Portland, OR (26)
Raleigh-Durham (32)
Sacramento-Stockton (19)
Salt Lake City (41)
San Antonio-Victoria (36)
San Diego (25)
San Francisco (5)
Seattle-Tacoma (14)
South Bend-Elkhart (83)
St. Louis (18)
Tampa (16)
Toledo (64)
Tulsa (59)
Washington, D.C. (7)
<PAGE>
EXHIBIT B
TABLE 2
MARKET (ADI) RANKING
- --------------------
Albany-Schenectady-Troy (52)
Augusta (111)
Boise (133)
Cincinnati (31)
Columbus, OH (34)
Dayton (53)
Des Moines (70)
Flint-Saginaw-Bay City (57)
Fort Meyers-Naples (88)
Fresno-Visalia (56)
Grand Rapids-Kalamazoo-Battle Creek (37)
Greenville-Spartanburg Asheville (35)
Green Bay-Appleton (65)
Harrisburg-York-Lancaster-Lebannon (44)
Jackson, MS (87)
Knoxville (62)
Little Rock (58)
Louisville (47)
Madison (91)
Memphis (42)
Norfolk-Portsmouth-Newport News (39)
Providence-New Bedford (43)
Richmond (60)
Rochester (69)
Syracuse (68)
Tallahassee-Thomasville (115)
West Palm Beach-Fort Pierce (46)
Wichita-Hutchinson (61)
<PAGE>
EXHIBIT B
TABLE 3
Proctor & Gamble Co.
Philip Morris Companies
General Motors Corporation
Sears, Roebuck & Company
PepsiCo
Ford Motor Company
Warner-Lambert Company
Chrysler Corporation
McDonald's Corporation
Nestle SA
Eastman Kodak Company
Grand Metropolitan
Unilever NV
Johnson & Johnson
Toyota Motor Corporation
Time Warner
Kellogg Company
AT&T Company
General Mills
Anheuser - Busch Companies
Kmart Corporation
J.C. Penney Company
American Home Products, Corporation
RJR Nabisco
Ralston Purina Company
Coca Cola Company
<PAGE>
Exhibit C
Potential Syndicated Program Distribution Customers:
Buena Vista Domestic Television
Cannel Distribution Company
Carsey-Werner Distribution
Columbia Pictures Domestic Television
Columbia Pictures International Television
King World Productions
MCA Domestic Television
MCA Television International
MGM Domestic Television Distribution
MGM Television International
MG Perrin
MTM Television Distribution
Multimedia Entertainment
Orion Domestic Television
Orion Television International
Paramount Domestic Television Group
Samuel Goldwyn Domestic Television
SFM Entertainment
Twentieth Century TV International
Viacom Enterprises
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EXHIBIT 10.12
[LOGO] PROMISSORY NOTE
(BASE RATE)
Borrower Name VDI
Borrower Address 6920 SUNSET BLVD. Office 335 Loan Number 8428314106 @80.1
HOLLYWOOD, CA. 90028 Maturity Date JULY 3, 2000 $2,825,000.00
Hollywood, California $2,825,000.00 Date July 10, 1995
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FOR VALUE RECEIVED, on July 3, 2000, the undersigned ("Debtor") promises to
pay to the order of UNION BANK ("Bank"), as indicated below, the principal sum
of Two Million Eight Hundred Twenty Five Thousand and No/100ths Dollars
($2,825,000.00), or so much thereof as is disbursed, together with interest
on the balance of such principal from time to time outstanding, at the per
annum rates and at the times set forth below; provided, however, Debtor shall
pay total interest over the term of this note of not less than $500.
1. PAYMENTS
PRINCIPAL PAYMENTS. Debtor shall pay principal on the 3rd day of each
month, commencing August 3, 1995 in the following amounts:
1. Commencing August 3, 1995 through November 3, 1997; Fifty Seven
Thousand Eight Hundred Fifty Seven Dollars ($57,857.00) per month;
2. Commencing December 3, 1997 through August 3, 1998; Forty Eight
Thousand Three Hundred Thirty Four Dollars ($48,334.00) per month;
3. Commencing September 3, 1998 through October 3, 1999; Forty Thousand
Dollars ($40,000.00) per month;
4. Commencing November 3, 1999 through June 3, 2000; Twenty Three Thousand
Three Hundred Thirty Three Dollars ($23,333.00) per month;
and in a final installment of Twenty Three Thousand Three Hundred Thirty
Three Dollars ($23,333.00) (or such other amounts as shall be necessary to pay
all remaining unpaid principal) on the maturity date of this Note.
The availability under this Note shall be reduced on the same day and in the
same amount as each scheduled principal payment.
INTEREST PAYMENTS. Debtor shall pay interest on the 3rd day of each month
(commencing August 3, 1995). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year
of 360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding
hereunder in increments of at least $10,000 shall bear interest at a
rate to be selected by Debtor which is 2.50% per annum in excess of
Bank's Adjusted LIBOR-Rate for the Interest Period so selected by
Debtor.
Any Base Interest Rate selected by Debtor may not be changed, altered
or otherwise modified until the expiration of the Interest Period for
which it was selected. The exercise of interest options by Debtor
shall be as recorded in Bank's records, which records shall be prima
facie evidence of the amount borrowed under either interest option and
the interest rate; provided, however, that failure of Bank to make any
such notation in its records shall not discharge Debtor from its
obligations to repay in full with interest all amounts borrowed, in no
event shall any Interest Period extend beyond the maturity date of this
note.
To select a Base Interest Rate, Debtor may, from time to time with
respect to principal outstanding on which a Base Interest Rate has not
been selected and on the expiration of any Interest Period with respect
to principal outstanding on which a Base Interest Rate has been
selected. Select a Base Interest Rate by telephoning an authorized
tending officer of Bank located at the banking office identified below
prior to 10:00 a.m., California time, on any Business Day and advising
that officer of the Base Interest Rate, the Interest Period and the
Origination Date selected (which Origination Date, for a Base Interest
Rate Loan based on the Adjusted LIBOR-Rate, shall follow the date of
such election by no more than two (2) Business Days).
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Bank will confirm the terms of the election in writing by mail to
Debtor promptly after the election is made. Failure to send such
confirmation shall not effect Bank's rights to collect interest at the
rate selected. If, on the date of the election, the Base Interest Rate
selected is unavailable for any reason, the selection shall be void.
Bank reserves the right to fund the principal from any source of funds
notwithstanding any Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which
is not bearing interest at a Base Interest Rate shall bear interest at
a rate per annum of 0.75% in excess of the Reference Rate, which rate
shall vary as and when the Reference Rate changes.
Debtor shall pay all amounts due under this note in lawful money of the
United States at Bank's Harbor Gateway Office, or such other office as
may be designated by Bank, from time to time.
2. LATE PAYMENTS. If any payment required by the terms of this note shall
remain unpaid ten days after same is due, at the option of Bank, Debtor shall
pay a fee of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
(5%) in excess of the interest rate specified in paragraph 1.b above, of this
note, calculated from the date of default until all amounts payable under this
note are paid in full.
4. PREPAYMENT
a. Amounts outstanding under this note bearing interest at a rate based
on the Reference Rate may be prepaid in whole or in part at any time,
without penalty or premium. Amounts outstanding at a Base Interest
Rate under this note may only be prepaid, in whole or in part provided
Bank has received not less than five (5) Business Days prior written
notice of an intention to make such prepayment and Debtor pays a
prepayment fee to Bank in an amount equal to: (i) the difference
between (a) the Base Interest Rate applicable to the principal amount
which Debtor intends to prepay, and (b) the return which Bank could
obtain if it used the amount of such prepayment of principal to
purchase at bid price regularly quoted securities issued by the United
States having a maturity date most closely coinciding with the relevant
Base Rate Maturity Date and such securities were held by Bank until the
relevant Base Rate Maturity Date ("Yield Rate"); (ii) the above
difference, if greater than zero, is multiplied by a fraction, the
numerator of which is the number of days in the period between the date
of prepayment and the relevant Base Rate Maturity Date and the
denominator of which is 360 days; (iii) the above product is multiplied
by the amount of the principal as prepaid (except in the event that
principal payments are required and have been made as scheduled under
the terms of the Base Interest Rate Loan being prepaid, then the amount
multiplied in this section shall be the lesser of the amount prepaid or
50% of the total of the amount prepaid and the amount of principal
scheduled under the terms of the Base Interest Rate Loan being prepaid
to be outstanding at the relevant Base Rate Maturity Date); and (iv)
the above product is then discounted to present value using the Yield
Rate as the annual discount factor.
b. In no event shall Bank be obligated to make any payment or refund to
Debtor, nor shall Debtor be entitled to any setoff or other claim
against Bank, should the return which Bank could obtain under the above
prepayment formula exceed the interest that Bank would have received
if no prepayment had occurred. All prepayments shall include payment of
accrued interest on the principal amount as prepaid and shall be
applied to payment of interest before application to principal. A
determination by Bank as to the prepayment fee amount, if any, shall be
conclusive. In the event of partial prepayment, such prepayments shall
be applied to principal payments in the inverse order of their
maturity.
c. Such prepayment fee, if any, shall also be payable if prepayment
occurs as the result of the acceleration of the principal of this note
by Bank because of any default hereunder. If, following such
acceleration, all or any portion of a Base Interest Rate Loan is
satisfied, whether through sale of property encumbered by a security
agreement or other agreement securing this note, if any, at a
foreclosure sale held thereunder or through the tender of payment any
time following such acceleration, but prior to such a foreclosure sale,
then such satisfaction shall be deemed an evasion of the prepayment
conditions set forth above, and Bank shall, automatically and without
notice or demand, be entitled to receive, concurrently with such
satisfaction the prepayment fee set forth above, and the obligation to
pay such prepayment fee shall be added to the principal. DEBTOR HEREBY
ACKNOWLEDGES AND AGREES THAT BANK WOULD NOT LEND TO DEBTOR THE LOAN
EVIDENCED BY THIS NOTE WITHOUT DEBTOR'S AGREEMENT, AS SET FORTH ABOVE,
TO PAY BANK A PREPAYMENT FEE UPON THE SATISFACTION OF ALL OR ANY
PORTION OF THE PRINCIPAL BEARING INTEREST AT A BASE INTEREST RATE
FOLLOWING THE ACCELERATION OF THE MATURITY DATE HEREOF BY REASON OF A
DEFAULT. DEBTOR HAS CAUSED THOSE PERSONS SIGNING THIS NOTE ON ITS
BEHALF TO SEPARATELY INITIAL THE AGREEMENT CONTAINED IN THIS
PARAGRAPH BY PLACING THEIR INITIALS BELOW:
INITIALS: __________ __________
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation
or other default by Debtor, any guarantor, co-maker, endorser, or any person
or entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any
security agreement, guaranty or other agreement between Bank an any Obligor,
(c) the insolvency of any Obligor or the failure of any Obligor generally to
pay such Obligor's debts as such debts become due; (d) the commencement as to
any Obligor of any voluntary or involuntary proceeding under any laws
relating to bankruptcy, insolvency, reorganization, arrangement, debt
adjustment or debtor relief; (e) the assignment by any Obligor for the benefit
of such Obligor's creditors;
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(f) the appointment, or commencement of any proceeding for the appointment of
a receiver, trustee, custodian or similar official for all or substantially
all of any Obligor's property; (g) the commencement of any proceeding for the
dissolution or liquidation of any Obligor; (h) the termination of existence
or death of any Obligor; (i) the failure of any Obligor to comply with any
order, judgement, injunction, decree, writ or demand of any court or other
public authority; (j) the filing or recording against any Obligor, or the
property of any Obligor, of any notice of levy, notice to withhold, or other
legal process for taxes other than property taxes; (k) the default by any
Obligor personally liable for amounts owed hereunder on any obligation
concerning the borrowing of money; (l) the issuance against any Obligor,
or the property of any Obligor, of any writ of attachment, execution, or
other judicial lien; or (m) the deterioration of the financial condition of
any Obligor which results in Bank deeming itself, in good faith, insecure.
Upon the occurrence of any such default, Bank, in its discretion, may cease
to advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of
default under d, e, f, or g, all principal and interest shall automatically
become immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement
of this note. Debtor and any endorsers of this note, for the maximum period of
time and the full extent permitted by law, (a) waive diligence, presentment,
demand, notice of nonpayment, protest, notice of protest, and notice of every
kind; (b) waive the right to assert the defense of any statute of limitations
to any debt or obligation hereunder; and (c) consent to renewals and
extentions of time for the payment of any amounts due under this note. If
this note is signed by more than one party, the term "Debtor" includes each of
the undersigned and any successors in interest thereof; all of whose
liability shall be joint and several. Any married person who signs this note
agrees that recourse may be had against the separate property of that person
for any obligations hereunder. The receipt of any check or other item of
payment by Bank, at its option, shall not be considered a payment on account
until such check or other item of payment is honored when presented for
payment at the drawee bank. Bank may delay the credit of such payment based
upon Bank's schedule of funds availability, and interest under this note shall
accrue until the funds are deemed collected. In any action brought under or
arising out of this note, Debtor and any Obligor, including their successors
or assigns, hereby consent to the jurisdiction of any competent court within
the State of California, as provided in any addendum attached hereto, and
consent to service of process by any means authorized by California law. The
term "Bank" includes, without limitation, any holder of this note. This note
shall be construed in accordance with and governed by the laws of the State of
California. The definitions listed below and the attached Arbitration
Agreement are hereby made a part of this note.
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "ADJUSTED LIBOR-RATE" shall mean the LIBOR Base
Rate as adjusted for reserve requirements imposed on Bank from time to time.
"BASE INTEREST RATE" shall mean a rate of interest based on the Adjusted
LIBOR-Rate. "BASE INTEREST RATE LOAN" shall mean amounts outstanding under
this note that bear interest at a Base Interest Rate. "BASE RATE MATURITY
DATE" shall mean the last day of the Interest Period with respect to
principal outstanding on which a Base Interest Rate has been selected by
Debtor. "BUSINESS DAY" shall mean a day which is not a Saturday or Sunday on
which Bank is open for business in California and on which dealings in U.S.
dollar deposits outside of the United States may be carried on by Bank.
"INTEREST PERIOD" shall mean any calendar period of one, three, six, nine, or
twelve months. In determining an Interest Period, a month means a period that
starts on one Business Day in a month and ends on and includes the day
preceding the numerically corresponding day in the next month. For any month
in which there is no such numerically corresponding day, then as to that
month, such day shall be deemed to be the last calendar day of such month.
Any Interest Period which would otherwise end on a non-Business Day shall end
on the next succeeding Business Day unless that is the first day of a month.
In which event such Interest Period shall end on the next preceding Business
Day. "LIBOR BASE RATE" shall mean for each Interest Period the rate per annum
(rounded upward, if necessary, to the nearest 1/100 of 1%) at which dollar
deposits, in immediately available funds and in lawful money of the United
States would be offered to Bank, outside of the United States, for a term
coinciding with such Interest Period and for an amount equal to the amount of
principal covered by Debtor's interest rate election. "ORIGINATION DATE" shall
mean the Business Day on which funds are made available to Debtor relating to
Debtor's selection of a Base Interest Rate, "REFERENCE RATE" shall mean the
rate announced by Bank from time to time at its corporate headquarters at its
"Reference Rate." The Reference Rate is an index rate determined by Bank from
time to time as a means of pricing certain extensions of credit and is
neither directly tied to any external rate of interest or index nor
necessarily the lowest rate of interest charged by Bank at any given time.
VDI
By /s/ R. Luke Stefanko
__________________________________
Title Vice President
_______________________________
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Execution Copy
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of December __, 1996, by and among VDI Media, a California corporation
("Purchaser"), Woodholly Productions, a California general partnership ("WHP" or
the "Partnership") and Yvonne Parker, Rodger Parker, Jim Watt and Kim Watt, the
partners and sole owners of all of the partnership and ownership interests of
WHP (each a "Partner" and collectively, the "Partners") (the Partners and the
Partnership each a "Seller" and collectively, the "Sellers").
R E C I T A L S
A. The Partners are the only partners of WHP and, together with the
Partnership, own all of the interests, assets and any other rights therein.
B. Purchaser desires to purchase from Sellers, and Sellers desire to
sell, convey, transfer, assign and deliver to Purchaser, the assets of WHP upon
the terms and subject to the conditions of this Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing and the provisions set
forth below, and subject to the terms and conditions set forth herein, the
parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
indicated below:
"ACCOUNTS RECEIVABLE" shall have the meaning set forth in Section 5.11.
"ACTION" shall mean any action, claim, suit, litigation, proceeding, labor
dispute, arbitral action, governmental audit, inquiry, criminal prosecution,
investigation or unfair labor practice charge or complaint.
"AFFILIATE" shall mean, in respect of any specified Person, any other
Person that, directly or indirectly, controls, is controlled by, or is under
common control with, such specified Person or if such specified Person bears a
familial relationship with such other Person.
"AFFILIATED PARTIES" shall have the meaning set forth in Section 11.2.
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"AGREEMENT" shall have the meaning set forth in the Preamble.
"AGREEMENTS NOT TO COMPETE" shall mean the covenants set forth in
Section 7.9.
"ANCILLARY AGREEMENTS" shall mean each Purchase Note, the Hollywood Lease
and the Employment Agreements, substantially in the forms attached hereto as
Exhibits A, B, and C, respectively.
"ASSETS" shall mean all of the right, title and interest in and to all of
the business, properties, assets and rights of any kind, whether tangible or
intangible, real or personal, owned by any of the Sellers in connection with the
Business or in which any Seller has any interest (to the extent related to the
Business), including without limitation all of each Seller's right, title and
interest in the following:
(i) all accounts and notes receivable and contingent rights relating
thereto (whether current or noncurrent), refunds, deposits, advances, all
advance payments, prepaid expense items and credits relating to the
Business, prepayments or prepaid expenses and all other receivables arising
out of the Business;
(ii) all Contract Rights;
(iii) all Leases and Leasehold Estates and Personal Property
Leases;
(iv) all Leasehold Improvements;
(v) all Fixtures and Equipment (except the personal property
identified on Schedule 1A);
(vi) all Inventory;
(vii) all Books and Records;
(viii) all Proprietary Rights;
(ix) all Permits;
(x) all computers and software;
(xi) all Insurance Policies and all rights to insurance proceeds
relating to the Assets and/or the Business;
(xii) all supplies, sales literature, promotional literature,
customer, supplier and distributor lists, art work, display units,
telephone and fax numbers and purchasing records related to the Business;
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(xiii) all rights under or pursuant to all warranties,
representations and guarantees made by suppliers in connection with the
Assets or services furnished to each such Seller pertaining to the Business
or affecting the Assets;
(xiv) all claims, causes of action, choses in action, rights of
recovery and rights of set-off of any kind related to the Assets or the
Assumed Liabilities, against any person or entity, including without
limitation any liens, security interests, pledges or other rights to
payment or to enforce payment in connection with products delivered by the
Partnership on or prior to the Closing Date except to the extent that any
of the foregoing relate to any of the Excluded Liabilities; and
(xv) all of the Business as a going concern and the goodwill
pertaining thereto.
"AUDIT" shall have the meaning set forth in Section 9.16.
"BALANCE SHEET" or "BALANCE SHEETS" shall have the meaning set forth in
Section 5.7(a).
"BOOKS AND RECORDS" shall mean (a) all records, files and lists of each
Seller pertaining to the Assets, (b) all records and lists pertaining to the
Business, customers, suppliers, vendors, clients or personnel of the
Partnership, (c) all product, business and marketing plans of the Partnership,
(d) all books, ledgers, files, reports, plans, drawings, merchandise and sales
promotion literature and promotional and advertising materials, all catalogues,
research material, management information systems, software, technology and
specifications and operating records of every kind maintained by the Partnership
and (e) true and correct copies of the Partnership's minute books, stock books,
books of account and tax returns.
"BONUS PAYMENT" shall have the meaning set forth in Section 3.3.
"BUSINESS" shall mean the business of WHP, including video and audio tape
storage, post-production, duplication, distribution, editing and ancillary
services.
"BUSINESS DAY" means any day that is not a Saturday, a Sunday or other day
on which banks are required or authorized by law to be closed in the City of Los
Angeles.
"CLOSING" shall have the meaning set forth in Section 4.1.
"CLOSING BALANCE SHEET" shall have the meaning set forth in
Section 3.1(a)(i).
"CLOSING DATE" shall mean (a) December 31, 1996 or (b) such other date as
Purchaser and the Partnership shall mutually agree upon.
"CLOSING DATE NET ASSET VALUE" shall have the meaning set forth in
Section 3.1(a)(i).
"COBRA" shall have the meaning set forth in Section 5.16(e).
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"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"CONTRACT" shall mean, other than any Lease, any agreement, contract, note,
loan, evidence of indebtedness, purchase order, undertaking, obligation or
commitment to which the Partnership and/or any Seller is a party or is bound and
which relates to the Business or the Assets, whether oral or written, including,
without limitation, purchase commitments for materials and other services,
whether or not entered into in the ordinary course of business, relating to the
Business, any Seller's rights under any confidentiality agreements relating to
the Business (if and to the extent assignable), all unfilled sales orders,
invoices, contracts and commitments with customers relating to the Business, all
unfilled purchase orders, invoices, contracts and commitments with suppliers
relating to the Business, all as set forth on Schedule 1B attached hereto.
"CONTRACT RIGHTS" shall mean all of each Seller's rights and obligations
under the Contracts, excluding any such Contracts evidencing Financing
Obligations.
"COPYRIGHTS" shall mean registered copyrights, copyright applications and
unregistered copyrights.
"COURT ORDER" shall mean any judgment, decision, consent decree,
injunction, ruling or order of any federal, state or local court or governmental
agency, department or authority that is binding on any person or its property
under applicable law.
"CPI" shall mean the Consumer Price Index for Los Angeles-Anaheim-Riverside
as prepared and released by the United States Labor Department's Bureau of Labor
Statistics.
"DEFAULT" shall mean (a) a breach of or default under any Contract, Lease
or Permit, (b) the occurrence of an event that with the passage of time or the
giving of notice or both would constitute a breach of or default under any
Contract, Lease or Permit, or (c) the occurrence of an event that with or
without the passage of time or the giving of notice or both would give rise to a
right of termination, renegotiation or acceleration under any Contract, Lease or
Permit.
"DISCLOSURE SCHEDULE" shall mean a schedule executed and delivered by the
Sellers and the Partnership to Purchaser as of the date hereof which sets forth
the exceptions to the representations and warranties contained in Article V
hereof and certain other information called for by this Agreement. Unless
otherwise specified, each reference in this Agreement to any numbered schedule
is a reference to that numbered schedule which is included in the Disclosure
Schedule.
"DISCONTINUED OPERATIONS" shall mean any businesses or operations
previously sold or otherwise disposed of by any of the Sellers and any ongoing
indemnification obligations in connection therewith.
"EARN-OUT"shall have the meaning set forth in Section 2.4(a)(ii).
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"EARN-OUT DEFAULT" shall have the meaning set forth in Section 2.4 (e).
"EARN-OUT INSTALLMENT PAYMENT" shall have the meaning set forth in
Section 2.4(a)(ii).
"EARN-OUT PAYMENT DATE" shall have the meaning set forth in
Section 2.4(a)(ii).
"EARN-OUT REFERENCE DATE" shall have the meaning set forth in
Section 2.4(a)(ii).
"EARN-OUT TERMINATION DATE" shall have the meaning set forth in
Section 2.4(a)(ii).
"EMPLOYMENT AGREEMENTS" shall mean collectively, the employment agreements
between Purchaser and each of the Partners, each dated the Closing Date, and
each substantially in the form of attached hereto as Exhibit C.
"ENCUMBRANCE" shall mean any claim, lien, pledge, option, charge, easement,
security interest, deed of trust, mortgage, right-of-way, encroachment, building
or use restriction, conditional sales agreement, encumbrance or other right of
third parties, whether voluntarily incurred or arising by operation of law, and
includes, without limitation, any agreement to give any of the foregoing in the
future, and any contingent sale or other title retention agreement or lease in
the nature thereof.
"ENVIRONMENTAL LIABILITIES FOR PRE-CLOSING MATTERS" shall mean any and all
liabilities, damages, losses, costs and expenses arising from any Pre-Closing
Environmental Matters, including, without limitation, costs of investigation,
cleanup, removal, remedial, corrective or response action, the costs associated
with posting financial assurances for the completion of investigation, cleanup,
removal, remedial, corrective or response actions, attorneys' fees, the
preparation of any closure or other necessary or required plans or analyses, or
other necessary reports or analyses submitted to or prepared for regulating
agencies.
"ENVIRONMENTAL PROTECTION LAWS" shall mean all federal, state, local and
foreign laws, statutes, regulations having the force and effect of law, permits,
court decrees, judgments, injunctions and written orders concerning (i) public
health and safety relating to exposure of humans to toxic or hazardous
substances or otherwise relating to Regulated Substances or (ii) pollution or
protection of the environment or natural resources, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") (42 U.S.C. Section 9601 ET SEQ.); the Hazardous
Materials Transportation Act (49 U.S.C. Section 1801 ET SEQ. ); the Resource
Conservation and Recovery Act ("RCRA") (42 U.S.C. Section 6901 ET SEQ.); the
Clean Water Act (33 U.S.C. Section 1251 ET SEQ.); the Safe Drinking Water Act
(14 U.S.C. Section 1401 ET SEQ.); the Toxic Substances Control Act (15 U.S.C.
Section 2601 ET SEQ.), the Federal Insecticide, Fungicide, and Rodenticide Act
(7 U.S.C. Section 136 ET SEQ.), the Clean Air Act (42 U.S.C. Section 7401 ET
SEQ.); the Emergency Planning and Community Right-to-Know Act (42 U.S.C.
Sections 11001-11005, 11021-11023, and 11041-11050); the Porter-Cologne Water
Quality Act (California Water Code Sections 13000-13999.19); the Hazardous Waste
Control Law (California Health & Safety Code Sections 25100-25250.25); the Safe
Drinking Water and Toxic Enforcement Act (California Health &
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Safety Code Sections 25249.5-25249.13); California Health & Safety Code Sections
25280-25299.81 (regarding Underground Storage of Hazardous Substances) and
Sections 25500-25545 (regarding Hazardous Materials Inventories and Emergency
Plans); the Hazardous Substance Account Act (California Health & Safety Code
Sections 25300-25393); and California Health & Safety Code Sections 39000-44384
regarding Air Resources; in each case including the regulations promulgated
thereunder, including, without limitation, the regulations promulgated by the
South Coast Air Quality Management District; each as supplemented or amended
from time to time.
"EPA" shall mean the United States Environmental Protection Agency, or any
successor United States governmental agency.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
the same may be amended from time to time.
"ERISA AFFILIATE" shall mean with respect to any person (a) any corporation
that is a member of a controlled group of corporations, within the meaning of
Section 414(b) of the Code, of which that person is a member, (b) any trade or
business (whether or not incorporated) that is a member of a group of trades or
businesses under common control, within the meaning of Section 414(c) of the
Code, of which that person is a member, and (c) any member of an affiliated
service group, within the meaning of Section 414(m) and (o) of the Code, of
which that person or any entity described in clause (a) or (b) is a member.
"EXCLUDED LIABILITIES" shall have the meaning set forth in Section 2.3.
"FACILITIES" shall mean all plants, offices, manufacturing facilities,
stores, warehouses, improvements, administration buildings, and all real
property and related facilities which are used or held for use in connection
with the Business.
"FINANCIALS" shall have the meaning set forth in Section 5.7(a).
"FINANCING OBLIGATIONS" shall mean (a) indebtedness of any Seller for
borrowed money, (b) obligations of any Seller evidenced by bonds, notes,
debentures, letters of credit or similar instruments, (c) obligations under
capitalized leases, (d) obligations under conditional sale, title retention or
similar agreements or arrangements creating an obligation of any Seller with
respect to the deferred purchase price of property (other than customary trade
credit), (e) interest rate and currency obligation swaps, hedges and similar
arrangements and (f) all obligations of any Seller to guaranty any of the
foregoing types of obligations on behalf of others, in each case as related to
the Business.
"FIXTURES AND EQUIPMENT" shall mean all of the (i) all audiovisual, audio
and visual recordings and other materials produced by any technology, manner or
means relating to the Business, including, without limitation, prints,
negatives, duplicating negatives, fine grains, music and sound effects tracks,
master tapes and other duplicating materials of any kind, all various language
dubbed and titled versions, prints and negatives of stills, trailers and
television
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spots, all promos and other advertising and publicity materials, stock footage,
trims, tabs, outtakes, cells, drawings , (ii) all physical properties relating
to the Business, including, without limitation, all editing and duplication
equipment, in each case, including, without limitation, any of the foregoing in
the possession, custody or control of Sellers, or in the possession of its
assigns, or any film laboratories, storage facilities or other Persons,
(iii) any and all revisionary rights Sellers have to the master and duplicate
masters of any original negative or master tape or elements plus (iv) furniture,
fixtures, furnishings, machinery, automobiles, trucks, spare parts, supplies,
equipment, tooling, molds, patterns, dies and other tangible personal property
owned by any Seller and used, held for use or useful in connection with the
Business, wherever located, and including any such Fixtures and Equipment in the
possession of any of the Sellers' suppliers, together with all warranty rights
with respect thereto.
"FORMER FACILITY" shall mean each plant, office, manufacturing facility,
store, warehouse, improvement, administrative building and all real property and
related facilities that were owned, leased or operated by any Seller at any time
prior to the date hereof, but excluding any Facilities.
"GAAP" shall mean generally accepted accounting principles consistently
applied as in effect at the time in question.
"HOLLYWOOD LEASE" shall mean a lease, dated as of the Closing Date, between
Sellers, as lessor, and Purchaser, as lessee, with respect to that real property
located at 712 North Seward, Hollywood, California 90038, in the form attached
hereto as Exhibit B, as modified on or prior to the Closing by mutual agreement
of Purchaser and the Partnership.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section 11.7.
"INDEMNIFYING PARTY" shall have the meaning set forth in Section 11.7.
"INDEPENDENT ACCOUNTING FIRM" shall have the meaning set forth in
Section 3.1(a)(iv).
"INSURANCE POLICIES" shall mean the insurance policies related to the
Assets and/or the Business listed in Section 5.23 of the Disclosure Schedule.
"INTANGIBLE PERSONAL PROPERTY" shall have the meaning set forth in
Section 5.14(a).
"INTERIM BALANCE SHEET" shall have the meaning set forth in Section 5.7(b).
"INTERIM FINANCIALS" shall have the meaning set forth in Section 5.7(b).
"INVENTORY" shall have the meaning set forth in Section 5.18.
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"IRS" shall mean the Internal Revenue Service.
"JUNE 1996 BALANCE SHEET" shall have the meaning set forth in
Section 5.7(b).
"LEASE" shall have the meaning set forth in Section 5.12.
"LEASED PERSONAL PROPERTY" shall mean all leased property described in the
Personal Property Leases.
"LEASED REAL PROPERTY" shall mean all leased property described in the
Leases.
"LEASEHOLD ESTATES" shall mean all of each Seller's rights and obligations
as lessee under the Leases.
"LEASEHOLD IMPROVEMENTS" shall mean all leasehold improvements situated in
or on the Leased Real Property and owned by any Seller.
"LIABILITIES" shall mean any liability of WHP or any other Seller,
including, without limitation, any direct or indirect liability, indebtedness,
obligation, commitment, expense, claim, deficiency, guaranty or endorsement of
or by any person of any type, whether accrued, absolute, contingent, matured,
unmatured, known, unknown or other, in each case as related to the Business.
"LICENSES" shall have the meaning set forth in Section 5.14(a).
"MARCH 1996 BALANCE SHEET" shall have the meaning set forth in
Section 5.7(b).
"MATERIAL CONTRACTS" shall have the meaning set forth in Section 5.17.
"MULTI-EMPLOYER PLANS" shall have the meaning set forth in Section 5.15(a).
"ORDINARY COURSE OF BUSINESS" or "ORDINARY COURSE" or any similar phrase
shall mean the ordinary course of the Business and consistent with WHP's past
practices.
"PARTNER" or "PARTNERS"shall have the meaning set forth in the Preamble.
"PARTNERSHIP" shall have the meaning set forth in the Preamble.
"PATENTS" shall mean all patents and patent applications and registered
designs and registered design applications.
"PERMITS" shall mean all licenses, permits, franchises, approvals,
authorizations, consents or orders of, or filings with, any governmental
authority, whether foreign, federal, state or local, or any other person,
necessary or desirable for the past, present or anticipated conduct of, or
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relating to the operation of, the Business.
"PERSON" shall mean any natural person or any corporation, partnership,
joint venture, limited liability company or other entity.
"PERSONAL PROPERTY" shall have the meaning set forth in Section 5.27.
"PERSONAL PROPERTY LEASES" shall have the meaning set forth in
Section 5.27.
"PLANS" shall have the meaning set forth in Section 5.16(a).
"PRE-CLOSING ENVIRONMENTAL MATTERS" shall mean (a) the production, use,
generation, storage, treatment, recycling, disposal or other handling or
disposition at any time on or prior to the Closing Date (collectively
"Handling") of any Regulated Substance, either in, on, under or from any
Facility or Former Facility, including, without limitation, the effects of such
Handling of Regulated Substances on resources, persons or property within or
outside the boundaries of any Facility or Former Facility, (b) any release of
Regulated Substances at any time on or prior to the Closing Date occurring in,
on or under any Facility or Former Facility regardless of how the Regulated
Substances came to rest in, on or under the Facility or Former Facility, (c) the
failure on or prior to the Closing Date of any Facility or Former Facility or
any operation of Sellers to be in compliance with any Environmental Laws, and
(d) any other act or omission occurring, or condition existing, with respect to
the Assets or the Business on or prior to the Closing Date which gives rise to
liability under any Environmental Protection Law.
"PRIME RATE" shall mean the prime rate as reported from time to time by THE
WALL STREET JOURNAL.
"PROPRIETARY RIGHTS" shall mean all of Sellers' Copyrights, Patents,
Trademarks, technology rights and licenses, computer software (including without
limitation any source or object codes therefor or documentation relating
thereto), trade secrets, franchises, know-how, inventions, designs,
specifications, plans, drawings and intellectual property rights, in each case
as relates to the Business.
"PURCHASE NOTE" or "PURCHASE NOTES" shall have the meaning set forth in
Section 2.4(a)(i)
"PURCHASE NOTE DEFAULT" shall have the meaning set forth in Section 2.4
(a).
"PURCHASE PRICE DECREASE" shall have the meaning set forth in
Section 3.1(b).
"PURCHASE PRICE INCREASE" shall have the meaning set forth in
Section 3.1(b).
"PURCHASER" shall have the meaning set forth in the Preamble.
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"REAL PROPERTY" shall have the meaning set forth in Section 5.12.
"REGULATED SUBSTANCE" shall mean any chemical or substance subject to or
regulated under any Environmental Protection Law including, without limitation,
any "pollutant or contaminant" or "hazardous substance" as those terms are
defined in CERCLA, any "hazardous waste" as that term is defined in RCRA, and
any other hazardous or toxic wastes, substances, or materials, petroleum
(including crude oil and refined and unrefined fractions thereof),
polychlorinated biphenyls ("PCBs"), infectious waste, special waste, pesticides,
fungicides, solvents, herbicides, flammables, explosives, asbestos and asbestos
containing material, and radioactive materials, whether injurious by themselves
or in combination with other materials.
"REGULATIONS" shall mean any laws, statutes, ordinances, regulations,
rules, notice requirements, court decisions and orders of any foreign, federal,
state or local government and any other governmental department or agency.
"RELEASE DOCUMENTS" shall have the meaning set forth in Section 4.2(a)(vi).
"REPRESENTATIVE" shall mean any officer, director, principal, attorney,
agent, employee or other representative.
"SELLER" or "SELLERS" shall have the meaning set forth in the Preamble.
"SEPTEMBER 1996 BALANCE SHEET" shall have the meaning set forth in
Section 5.7(b).
"SUBSIDIARY" shall mean (a) with respect to any Seller, any corporation,
association or other business entity of which more than fifty percent (50%) of
the total voting power of shares of stock (or equivalent ownership or
controlling interest) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Seller or
one or more of the other Subsidiaries of that Person or a combination thereof,
(b) any partnership in which any Seller is a general partner and any limited
liability company in which any Seller is the managing member, or (c) any
partnership or limited liability company in which any Seller possesses a 50% or
greater interest in the total capital or total income of such partnership or
limited liability company.
"TAX" or "TAXES" shall mean any and all taxes imposed or required to be
collected by any federal, state or local taxing authority in the United States,
or by any foreign taxing authority under any statute or regulation, including,
without limitation, all income, gross receipts, sales, use, personal property,
use and occupancy, business occupation, mercantile, ad valorem, transfer,
license, withholding, payroll, employment, excise, real estate, environmental,
capital stock, franchise, alternative or add-on minimum, estimated or other tax
of any kind whatsoever, including any interest, penalties and other additions
thereto.
"TOTAL OPERATING INCOME" shall have the meaning set forth in Section 3.2.
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"TRADEMARKS" shall mean registered trademarks, registered service marks,
trademark and service mark applications and unregistered trademarks and service
marks.
"TRANSACTIONS" shall mean, in respect of any party, all transactions
contemplated by this Agreement that involve, relate to or affect such party.
"TRANSFERRED EMPLOYEES" shall have the meaning set forth in Section 7.6(a).
"UNITED STATES GOVERNMENT" shall mean the government of the United States,
including any agencies, commissions, branches, instrumentalities and departments
thereof.
ARTICLE II
PURCHASE AND SALE OF ASSETS
SECTION 2.1 TRANSFER OF ASSETS. Upon the terms and subject to the
conditions contained herein, at the Closing, Sellers shall sell, convey,
transfer, assign and deliver to Purchaser, and Purchaser shall acquire from
Sellers, the Assets (including, without limitation, those assets of the
Partnership listed on Schedule 2.1 hereto), free and clear of all Encumbrances.
SECTION 2.2 ASSUMPTION OF LIABILITIES. Upon the terms and subject to
the conditions contained herein, at the Closing, Purchaser shall assume the
Liabilities under the Contracts and Leases which are listed on Schedule 2.2
attached hereto (collectively, "Assumed Liabilities").
SECTION 2.3 EXCLUDED LIABILITIES. Notwithstanding any other provision
of this Agreement, except for the Assumed Liabilities expressly specified in
Section 2.2, Purchaser shall not assume, or otherwise be responsible for, any
Liabilities of any Seller, whether liquidated or unliquidated, or known or
unknown, whether arising out of occurrences prior to, at or after the date
hereof (the "Excluded Liabilities"), which Excluded Liabilities include, without
limitation, the following:
(a) except as otherwise expressly provided in Section 7.6, any Liability
to or in respect of any employees or former employees of any Seller including
without limitation (i) any employment agreement, whether or not written, between
any Seller and any person, (ii) any Liability under any Employee Benefit Plan at
any time maintained, contributed to or required to be contributed to by or with
respect to any Seller or under which any Seller may incur Liability, or any
contributions, benefits or Liabilities therefor, or any Liability with respect
to any Seller's withdrawal or partial withdrawal from or termination of any
Employee Benefit Plan, (iii) any claim of an unfair labor practice, or any claim
under any state unemployment compensation or worker's compensation law or
regulation or under any federal or state employment discrimination law or
regulation, which shall have been asserted on or prior to the Closing Date or is
based on acts or omissions which occurred on or prior to the Closing Date and
(iv) any liabilities or obligations under the Worker Adjustment and Retraining
Notification Act of 1988, as amended, including the rules and regulations
promulgated thereunder;
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(b) any Liability of any Seller in respect of (i) any income tax or any
interest, penalties or additions pertaining thereto, (ii) any other Tax relating
to any period or portion thereof prior to the date of the Interim Balance Sheet
and not reflected on the Interim Balance Sheet or (iii) any other Tax relating
to any period or portion thereof from the date of the Interim Balance Sheet
unless such Tax is incurred (A) in the ordinary course of business consistent
with past practice and (B) in compliance with the terms of this Agreement;
(c) any warranty claims and any Liability arising from any injury to or
death of any person or damage to or destruction of any property, whether based
on negligence, breach of warranty, express or implied representation, strict
liability, enterprise liability or any other legal or equitable theory arising
from defects in products manufactured or from services performed by or on behalf
of any Seller or any other person or entity on or prior to the Closing Date;
(d) any Liability of any Seller arising out of or related to any Action
against any Seller or any Action which adversely affects the Assets and which
shall have been asserted on or prior to the Closing Date or the basis of which
shall have arisen on or prior to the Closing Date;
(e) any Liability of any Seller resulting from entering into, performing
its obligations pursuant to or consummating the transactions contemplated by,
this Agreement (including without limitation any Liability of any Seller for
fees or expenses incurred in connection with such transactions and any Liability
of any Seller pursuant to Article XI hereof);
(f) any Liability related to any Former Facility or any of the
Discontinued Operations;
(g) any Financing Obligation
(h) any Environmental Liabilities for Pre-Closing Matters, whether or not
disclosed in the Disclosure Schedule;
(i) any Liability of any Seller for fees or expenses incurred in
connection with the review by Gill & Kim of the financial statements of Sellers;
(j) any Liability of any Seller not directly related or incurred with
respect to the conduct of the Business;
(k) except to the extent provided for herein, any indebtedness for
borrowed money;
(l) any amounts payable to any Affiliate of any Seller;
(m) any cash overdraft liability; and
(n) any liabilities accruing prior to the Closing Date.
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SECTION 2.4 PURCHASE PRICE.
(a) PURCHASE PRICE. The purchase price for the Assets and the Agreements
Not To Compete (the "Purchase Price") shall consist of:
(i) Four subordinated promissory notes of Purchaser, one made payable
to each Partner, each in a principal amount of One Million Dollars ($1,000,000)
and in the aggregate Four Million Dollars ($4,000,000), with interest, each such
note due and payable on February 28, 1997 and each in substantially the form
attached hereto as Exhibit A (each a "Purchase Note" and collectively, the
"Purchase Notes").
(ii) A series of earn-out installment payments, described below, up to
an aggregate amount of Four Million Eight Hundred Ninety-Eight Thousand Eight
Hundred Forty-Nine Dollars and Eighty Cents ($4,898,849.80) (as adjusted, the
"Earn-Out"), subject to adjustment as set forth herein, due and payable in the
amounts and on the dates set forth herein. The Purchaser shall pay to the
Partners the aggregate principal amount of the Earn-Out in 20 installments,
within 15 Business Days of the dates (each an "Earn-Out Reference Date") and in
the amounts (each an "Earn-Out Installment Payment") set forth below, subject
to the adjustments and limitations set forth in Section 3.2:
EARN-OUT REFERENCE DATE: EARN-OUT INSTALLMENT PAYMENT:
March 31, 1997 $244,942.44
June 30, 1997 $244,942.44
September 30, 1997 $244,942.44
December 31, 1997 $244,942.44
March 31, 1998 $244,942.44
June 30, 1998 $244,942.44
September 30, 1998 $244,942.44
December 31, 1998 $244,942.44
March 31, 1999 $244,942.44
June 30, 1999 $244,942.44
September 30, 1999 $244,942.44
December 31, 1999 $244,942.44
March 31, 2000 $244,942.44
June 30, 2000 $244,942.44
September 30, 2000 $244,942.44
December 31, 2000 $244,942.44
March 31, 2001 $244,942.44
June 30, 2001 $244,942.44
September 30, 2001 $244,942.44
December 31, 2001 $244,942.44; and
(iii) The Bonus Payment, if any.
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The Purchase Notes will be subordinate to all indebtedness of Purchaser
existing on the Closig Date, including any refinanacings thereof. The Purchase
Notes shall state the following: "THIS NOTE IS SUBORDINATED PURSUANT TO THE
TERMS OF A SUBORDINATION AGREEMENT IN FAVOR OF [BANK] AND ANY AMENDMENTS OR
MODIFICATIONS THERETO."
Purchaser hereby grants to the Sellers jointly, a security interest in the
Assets, subject only to liens in effect on the Closing Date. In the event
Purchaser commits a "Purchase Note Default" then Sellers execute upon such
security interest by foreclosing on the Assets, up to the aggregate amount due
under the Purchase Notes. A "Purchase Note Default" shall mean failure to pay
the full amount due under any Purchase Note within thirty (30) days of the date
such note becomes due and payable. Purchaser agrees to cooperate with the
Sellers for the purpose of realizing upon the security interest herein,
including signing necessary documents reasonably requested by Sellers such as
Financing Statements on Form UCC-1.
The Partnership and each Partner hereby acknowledge on behalf of itself,
its successors and assigns, that the execution of the Purchase Notes and payment
of the Earn-Out in favor of the Partners as contemplated hereby shall constitute
payment in full for the Assets.
(b) INTEREST ON PURCHASE NOTES. The Purchase Notes shall bear interest,
compounded on a monthly basis, from January 3, 1997 to the date paid at the rate
of eight percent (8%) per annum on the unpaid principal amount of such Purchase
Notes outstanding from time to time. Interest on the Purchase Notes shall be
computed on the principal balance thereof on the basis of a 360-day year for the
actual number of days elapsed in the period during which it accrues. Purchaser
shall pay interest accrued on each Purchase Note on the date upon which the
payment of principal thereof is due and payable. Notwithstanding any provision
to the contrary contained in this Agreement, Purchaser shall not be required to
pay any amount of interest in excess of the maximum amount of interest permitted
by law.
(c) CLOSING PAYMENT. At the Closing, upon the terms and subject to the
conditions set forth herein, Purchaser shall deliver to the Partners the
Purchase Notes.
(d) ALLOCATION OF PURCHASE PRICE. Purchaser shall prepare IRS Form 8594
allocating the Purchase Price in accordance with Section 1060 of the Code and
shall forward it within 120 days after the Closing to Sellers for their
approval, which approval shall not be unreasonably withheld. The parties agree
that Three Hundred Thousand Dollars ($300,000) of the aggregate Purchase Price
will be allocable to the Agreements Not to Compete. Purchaser and Sellers shall
each file with their respective federal income tax return for the tax year in
which the Closing occurs, IRS Form 8594 containing the information agreed upon
by the parties pursuant to the immediately preceding sentence. Purchaser agrees
to report the purchase of the Assets, and Sellers agree to report the sale of
such Assets for income tax purposes (including but not limited to, on their
respective income tax returns, before any governmental agency charged with the
collection of income tax or in any judicial proceeding concerning the income tax
consequences of Purchaser's purchase or Sellers' sale of the Assets hereunder)
in a manner consistent with the
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information agreed upon by the parties pursuant to this Section 2.4(d) and
contained in its IRS Form 8594.
(e) EARN-OUT DEFAULT. In the event Purchaser commits an "Earn-Out
Default" with respect to an Earn-Out Installment Payment, the Partners shall
notify the Chief Executive Officer of Purchaser in writing of such alleged
Default. If Purchaser has not cured such Earn-Out Default within 15 Business
Days of receipt of such notice, then Purchaser shall be deemed to have
automatically licensed and assigned the name "WOODHOLLY PRODUCTIONS" to the
Partnership, effective on such 15th day, and the Sellers shall be released from
the Agreements Not to Compete set forth in Section 7.8 hereof. In the event an
Earn-Out Default is subsequently cured by payment thereof, waived or rescinded,
the rights to the name "WOODHOLLY PRODUCTIONS" shall revert to Purchaser and the
Sellers shall become subject to the Agreements Not to Compete. An "Earn-Out
Default" shall mean failure to make an Earn-Out Installment Payment on an Earn-
Out Payment Date (unless Purchaser shall in good faith believe it has a right to
adjustment or off-set with respect to such Earn-Out Installment Payment), in
each case subject to the terms and conditions of this Agreement.
SECTION 2.5 CLOSING COSTS; TRANSFER TAXES AND FEES. The Partnership
shall be responsible for any documentary and transfer taxes and any sales, use
or other taxes imposed by reason of the transfer of Assets provided hereunder
and any deficiency, interest or penalty asserted with respect thereto. The
Partnership shall pay the fees and costs of recording or filing all applicable
conveyancing instruments described in Section 4.2(a).
SECTION 2.6 RESCISSION. Purchaser shall have the right, in its sole
discretion, to rescind the transactions contemplated by this Agreement in the
event (AND ONLY IN THE EVENT) that Purchaser does not obtain financing to fund
payment of the Purchase Notes for any reason. In the event Purchaser exercises
its rights under this Section 2.6, it shall notify each Seller in writing and
upon such notification, the Assets and Assumed Liabilities shall immediately
revert to the Partnership or the Sellers, as the case may be, and Purchaser
shall be relieved of its obligation to pay the Purchase Notes. In connection
with such reversion, Purchaser shall pay to the Partnership an amount equal to
the net income of the Business, determined in accordance with GAAP, earned from
the Closing Date to the date of such notice. In the event Purchaser so
exercises its rescission rights (i) Sellers shall be released from their
Agreements Not to Compete, (ii) Purchaser and each Partner shall negotiate in
good faith the status of their respective employment agreements, (iii) the
Sellers shall be released from their indemnification obligations hereunder,
except with respect to Damages actually incurred by Purchaser prior to the date
of rescission, (iv) Purchaser shall be released from its indemnification
obligations hereunder, except with respect to Damages actually incurred by the
Sellers prior to the date of rescission, and (v) Purchaser shall have no
obligation with respect to unearned Earn-Out Installment Payments. The parties
agree to use all reasonable efforts to take, or cause to be taken, all actions
and to do or cause to be done, all things necessary, proper or advisable to
cause the reconveyance of the Assets and the Assumed Liabilities in the manner
contemplated by this Section 2.6, including the execution of documents, and to
cooperate with each other in connection with the foregoing.
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ARTICLE III
POST-CLOSING ADJUSTMENTS TO EARN-OUT
AND BONUS PAYMENT
SECTION 3.1 ADJUSTMENT TO EARN-OUT.
(a) CLOSING DATE BALANCE SHEET.
(i) Within 10 days after Closing, the Partnership shall cause to be
prepared and delivered to Purchaser an unaudited balance sheet of the
Partnership as of the Closing Date (the "Closing Balance Sheet"), which shall be
(x) prepared from the books and records of the Partnership in accordance with
GAAP consistently applied with prior periods, (y) complete and correct and
fairly present, in each case in all material respects, the financial condition
and results of operations of the Partnership as of the Closing Date and for the
periods indicated thereon and (z) set forth the "Closing Date Net Asset Value",
which shall mean (i) the sum of the amount of all accounts receivable,
inventories, other current assets and prepaid expenses of the Business as of the
Closing Date, minus (ii) (a) to the extent that the items in this clause (a)
constitute Assumed Liabilities, current liabilities of the Business as of the
Closing Date, (b) Taxes as of the Closing Date, and (c) outstanding long-term
debt, if any, of the Partnership assumed by Purchaser hereunder.
(ii) During the preparation of such Closing Balance Sheet, Purchaser
shall provide the Partnership and the Partnership's Representatives during
normal business hours with reasonable access to the books, records, facilities
and employees of the Business.
(iii) Following delivery of the Closing Balance Sheet to
Purchaser, Purchaser shall have a period of 80 days thereafter to present in
writing to the Partnership any objections or disagreement with respect to the
calculation of the Closing Date Net Asset Value. Such notice shall specify, in
reasonable detail, the nature and extent of such disagreement.
(iv) If the Partnership and Purchaser are unable to resolve any such
disagreement with respect to the calculation of the Closing Date Net Asset Value
within ten (10) days after delivery by Purchaser of the notice referred to in
Section 3.l(a)(iii), the disagreement shall be submitted for final determination
to a "Big Six" accounting firm mutually acceptable to the Partnership and
Purchaser (the "Independent Accounting Firm"). The Independent Accounting Firm
shall follow such procedures as it deems appropriate for obtaining the necessary
information in considering the positions of the Partnership and Purchaser but
shall not conduct an independent audit. The Independent Accounting Firm shall
render its determination on the matter within 30 days of its submission by the
Partnership and Purchaser, and such determination shall be final, conclusive and
binding upon Purchaser and Sellers.
(v) The fees and expenses of the Independent Accounting Firm (A)
shall be
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paid by the Partnership if the Closing Date Net Asset Value, as determined by
the Independent Accounting Firm, is less thatn 90% of the Closing Date Net Asset
Value as calculated by the Partnership, or (B) shall be paid by Purchaser if the
Closing Date Net Asset Value, as calculated by the Partnership is 90% or more of
the Closing Date Net Asset Value as calculated by the Independent Accounting
Firm.
(b) The Purchase Price shall be:(i) increased by the amount, if any, by
which the Closing Date Net Asset Value, as determined pursuant to
Section 3.1(a), is greater than zero; and (ii) decreased by the amount, if any,
by which the Closing Date Net Asset Value, as determined pursuant to
Section 3.1(a), is less than zero. The amount of the decrease in the Purchase
Price, if any, shall hereinafter be referred to as the "Purchase Price
Decrease." The amount of the increase in the Purchase Price, if any, shall
hereinafter be referred to as the "Purchase Price Increase."
(c) Promptly following the date upon which a Purchase Price Decrease, if
any, is mutually agreed upon by the Partnership and Purchaser or determined
pursuant to Section 3.1(a), such Purchase Price Decrease shall be deducted from
the Earn-Out (I.E., the amount of such Purchase Price Decrease shall be
amortized over the 20 Earn-Out Installment Payments.). Promptly following the
date upon which a Purchase Price Increase, if any, is mutually agreed upon by
the Partnership and Purchaser or determined pursuant to Section 3.1(a), but not
later than ten (10) business days after such date, Purchasers shall deliver to
the Partners additional subordinated promissory notes, made by Purchaser,
payable to each different Partner, each in a principal amount of one-quarter of
the amount of such Purchase Price Increase, and each on substantially the same
terms and conditions as the form of the Purchase Note attached hereto as Exhibit
A.
SECTION 3.2 ADJUSTMENT TO EARN-OUT. (a) Within 15 Business Days of each
Earn-Out Reference Date, Purchaser shall cause its auditors to calculate the
Total Operating Income (as defined herein) as of such Earn-Out Reference Date
for the three month period prior thereto. If the Total Operating Income for
such period is equal to or greater than Two Hundred Forty-Five Thousand Six
Hundred Dollars ($245,600), then on the 15th Business Day following such Earn-
Out Reference Date (each, an "Earn-Out Payment Date"), Purchaser shall pay to
the Partners the Earn-Out Installment Payment. If the Total Operating Income
for such period is less than Two Hundred Forty-Five Thousand Six Hundred Dollars
($245,600), then the applicable Earn-Out Installment Payment shall be withheld
until, and paid on, the next successive Earn-Out Payment Date on which the Total
Operating Income with respect to the related Earn-Out Reference Date is equal to
or greater than Two Hundred Forty-Five Thousand Six Hundred Dollars ($245,600).
Subject to similar withholding on subsequent Earn-Out Payment Dates, Earn-Out
Installment Payments shall resume thereafter until the Earn-Out Termination Date
(which shall be December 31, 2003). If on the Earn-Out Termination Date, the
Total Operating Income for the three month period prior thereto is less than Two
Hundred Forty-Five Thousand Six Hundred Dollars ($245,600), then no Earn-Out
Installment Payment shall be due on such date and the unpaid amount of the Earn-
Out shall be deemed waived by the Sellers and Purchaser's obligations with
respect to the Earn-Out shall terminate.
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(b) If any Earn-Out Installment Payment required to be paid hereunder
is not received within 10 days after such payment is due, then, in addition to
such payment, Purchaser shall pay an additional sum of one and one-half percent
(1 1/2 %) of the payment then due as a late charge. The parties agree that this
late charge represents a reasonable sum considering all of the circumstances
existing on the date of this Agreement and represents a fair and reasonable
estimate of the costs that the Partners will incur by reason of late payment.
The parties further agree that proof of actual damages would be costly or
inconvenient. Acceptance of any late charge shall not constitute a waiver of
the default with respect to the overdue amount, and shall not prevent the
Partners from exercising any of the other rights and remedies available to them.
In the event of a default in payment due hereunder, Purchaser agrees to pay
reasonable costs, expenses and attorney's fees paid or incurred by the Partners
in connection with the collection of such payment, whether or not suit is filed.
(c) "Total Operating Income" means, for any three month period, the
aggregate revenues arising from the conduct of the Business, minus the sum of
(x) the aggregate amount of costs incurred in connection with such sales,
including, without limitation, production, packaging and shipping costs, salary
and wages, equipment rental and depreciation and miscellaneous equipment costs,
contracting fees, rental and other occupancy costs and any other costs related
to the Business and (y) selling, general and administrative expenses, in each
case as determined in accordance with GAAP, subject to the following: the
amounts represented in (x and (y) shall not include (i) any allocation from
Purchaser for overhead or other indirect charges, (ii) amortization of goodwill,
(iii) any allocation of the Agreements Not to Compete, (iv) any increased
depreciation due to a step-up in basis resulting from the Transaction or (v) any
other acquisition cost from the Transaction. Attached as Schedule 3.2 is a
sample calculation of Total Operating Income as determined pursuant to the
foregoing definition. The parties hereto acknowledge and agree that Schedule
3.2 has been prepared for illustrative purposes only and shall not be
determinative of the calculation of Total Operating Income in any future period.
Such calculations shall be made only pursuant to the definition set forth above.
(d) Subject to the occurrence of the Closing, Purchaser and the
Partners (as employees of Purchaser) will use their best efforts to increase the
revenues generated by the Assets from and after the Closing Date.
(e) Purchaser shall maintain accurate books, records and documents
reasonably necessary for the calculation of Total Operating Income. The
Partners shall, upon request received by Purchaser in writing, have reasonable
access during normal business hours to inspect such books and records.
SECTION 3.3 BONUS PAYMENT. Subject to the conditions set forth herein,
Purchaser shall make three cash payments to Sellers (each a "Bonus Payment"),
each in an aggregate amount equal to $333,333 to be divided equally among the
Partners, and due and payable on January 31, 1998, January 31, 1999 and January
31, 2000, respectively; PROVIDED, HOWEVER:
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(a) Purchaser shall have no obligation to make the Bonus Payment of
$333,333 otherwise due and payable on January 31, 1998, if on such date, (i) the
aggregate sales of the Business as set forth on an unaudited income statement of
the Business (prepared by Purchaser or caused by Purchaser to be prepared) for
the prior four quarters then ended is less than $9,850,500 or (ii) the Total
Operating Income for the prior four quarters then ended as set forth on such
income statement is less than $1,191,911;
(b) Purchaser shall have no obligation to make the Bonus Payment of
$333,333 otherwise due and payable on January 31, 1999, if on such date, (i) the
aggregate sales of the Business as set forth on an unaudited income statement of
the Business (prepared by Purchaser or caused by Purchaser to be prepared) for
the prior four quarters then ended is less than $11,583,000 or (ii) the Total
Operating Income for the prior four quarters then ended as set forth on such
income statement is less than $1,633,203; and
(c) Purchaser shall have no obligation to make the Bonus Payment of
$333,333 otherwise due and payable on January 31, 2000, if on such date, (i) the
aggregate sales of the Business as set forth on an unaudited income statement of
the Business (prepared by Purchaser or caused by Purchaser to be prepared) for
the prior four quarters then ended is less than $13,612,500 or (ii) the Total
Operating Income for the prior four quarters then ended as set forth on such
income statement is less than $2,191,613.
ARTICLE IV
CLOSING
SECTION 4.1 CLOSING. The Closing of the transactions contemplated
herein (the "Closing") shall be held at 9:00 a.m. local time on the Closing Date
at the offices of Kaye, Scholer, Fierman, Hays & Handler, LLP, 1999 Avenue of
the Stars, Los Angeles, California, unless the parties hereto otherwise agree.
SECTION 4.2 CONVEYANCES AT CLOSING.
(a) DOCUMENTS DELIVERED BY SELLERS. To effect the sale of the Assets and
assumption of the Assumed Liabilities referred to in Article II hereof, in
addition to the conditions set forth in Article VIII, each Seller shall, at the
Closing, execute (as applicable) and deliver to Purchaser:
(i) one or more bills of sale, each in the form attached hereto as
Exhibit D, conveying in the aggregate all of such Seller's owned personal
property included in the Assets;
(ii) Assignments of Lease, each in the form attached hereto as Exhibit
E, with respect to the Leases;
(iii) Assignments of Personal Property Leases, each in the form
attached hereto as Exhibit F, with respect to the Personal Property Leases;
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(iv) Assignments of Contracts, each in the form attached hereto as
Exhibit G, with respect to the Contract Rights;
(v) Assignments of all Sellers' rights, title and interest to the
name "WOODHOLLY" and all variations thereof);
(vi) the Ancillary Agreements;
(vii) releases of any Encumbrances on the Assets (the "Release
Documents");
(viii) such other instruments as shall be requested by Purchaser to
vest in Purchaser title in and to the Assets in accordance with the provisions
hereof.
(b) DOCUMENTS DELIVERED BY PURCHASER. To effect the sale of the Assets
and assumption of the Assumed Liabilities referred to in Article II hereof, in
addition to the conditions set forth in Article IX herein, Purchaser shall at
the Closing execute and deliver to Sellers (i) an instrument or instruments of
assumption substantially in the form attached as an Exhibit, evidencing
Purchaser's assumption, pursuant to Section 2.2, of the Assumed Liabilities (the
"Assumption Document"); and (ii) the Ancillary Agreements.
(c) FORM OF INSTRUMENTS. To the extent that a form of any document to be
delivered hereunder is not attached as an exhibit hereto, such documents shall
be in form and substance, and shall be executed and delivered in a manner,
reasonably satisfactory to Purchaser and Sellers.
(d) CERTIFICATES; OPINIONS. Purchaser and Sellers shall deliver the
certificates, opinions of counsel and other matters described in Articles VIII
and IX.
(e) CONSENTS. Sellers shall deliver all Permits that are transferrable
and any other third party consents required for the valid transfer of the Assets
as contemplated by this Agreement, including the consents specified on Schedule
5.4.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Seller, jointly and severally, hereby represents and warrants to
Purchaser that:
SECTION 5.1 ORGANIZATION AND GOOD STANDING. The legal name of the
Partnership is "WOODHOLLY PRODUCTIONS". The Partnership is a partnership, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, and the Partnership is duly qualified or
authorized to do business in each jurisdiction in which it does business, or
owns property, or where such qualification or authorization is otherwise
required by virtue of its presence or activities. Schedule 5.l sets forth the
jurisdiction where the Partnership is organized and a complete and correct list
of all jurisdictions in which the Partnership does
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business or are otherwise required to be qualified or authorized to transact
business or own property.
SECTION 5.2 ASSETS. Excluding the Leased Real Property and the Leased
Personal Property, the Partnership owns, and will transfer good and marketable
title to, the Assets and upon the consummation of the transactions contemplated
hereby, Purchaser will acquire good and marketable title to all of the Assets,
free and clear of any Encumbrances. The Assets include without limitation all
assets used in the conduct of the Business or located at the Facilities.
Section 5.2 contains accurate lists and summary descriptions of all tangible
Assets where the value of an individual item exceeds $100.00 or where an
aggregate of similar items exceeds $100.00. All tangible assets and properties
which are part of the Assets are in good operating condition and repair and are
usable in the ordinary course of business and conform in all material respects
to all applicable Regulations (including Environmental Laws) relating to their
construction, use and operation.
SECTION 5.3 LICENSES AND PERMITS. The Partnership is duly licensed,
with all requisite permits and qualifications, as required by applicable law for
the purpose of conducting its business or owning its properties or both, in each
jurisdiction in which it does business or owns property or in which such
license, permit or qualification is otherwise required and where the failure to
have such license, permit or qualification would have a material adverse effect
on the assets, liabilities (whether absolute, accrued contingent or otherwise),
condition (financial or otherwise), results of operations or business of the
Partnership. The Partnership is in compliance in all material respects with all
such licenses, permits and qualifications. Schedule 5.3 sets forth a list of
all such licenses, permits and qualifications, and the expiration dates thereof.
There are no proceedings pending or, to the best of Sellers' knowledge,
threatened, to revoke or terminate any such presently existing license, permit
or qualification, and each such presently existing license, permit or
qualification can be renewed in the ordinary course of business.
SECTION 5.4 NO BREACH. Neither the execution and delivery of this
Agreement nor the consummation of the Transactions will (A) violate, result in a
breach of any of the terms or provisions of, constitute a default (or any event
that, with the giving of notice or the passage of time or both, would constitute
a default) under, result in the acceleration of any indebtedness under or
performance required by, result in any right of termination of, increase any
amounts payable under, decrease any amounts receivable under, change any other
rights pursuant to, or conflict with, the partnership agreement or certificate
of partnership of the Partnership, any material agreement, indenture or other
instrument to which any of the Sellers is a party or by which any of its
properties are bound, or any judgment, decree, order or award of any court,
governmental body or arbitrator (domestic or foreign) applicable to any of the
Sellers, or (B) require any Seller to obtain any authorization, consent,
approval or waiver from, or make any filing with, any Person, court or public
body or authority, except such consents as are set forth on Schedule 5.4.
SECTION 5.5 THE PARTNERSHIP; AUTHORITY. The general partners of the
Partnership are Yvonne Parker, Rodger Parker, Jim Watt and Kim Watt. Each
Seller has the right to sell,
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convey, transfer, assign and deliver the Assets to Purchaser hereunder. This
Agreement and all agreements and instruments herein contemplated to be executed
by any Seller have been duly authorized, executed and delivered by each such
Seller and constitutes the valid and binding obligation of each Seller,
enforceable in accordance with its terms. There exist no (a) outstanding
options, warrants or rights to purchase any partnership interests in, or other
ownership interests of, the Partnership, (b) outstanding options or rights to
sell to the Partnership any equity securities or other ownership interests of
any other business entity, (c) obligations of any of the Sellers, whether
absolute or contingent, to sell any partnership interest in, or any other
ownership interests of, the Partnership or to share or make any payments based
on its revenues, profits or net income, or (d) indebtedness or securities
directly or indirectly convertible into any partnership interest in, or any
other ownership interest of, the Partnership.
SECTION 5.6 SUBSIDIARIES. The Partnership has no equity interest in any
corporation, partnership, limited liability company or similar entity.
SECTION 5.7 FINANCIAL STATEMENTS.
(a) The balance sheets of the Partnership at December 31, 1995, December
31, 1994 and December 31, 1993 (individually, a "Balance Sheet" and
collectively, the "Balance Sheets") and the statements of operations and
retained earnings and the statements of cash flows of the Partnership for each
of the 12 month periods then ended and notes thereto (collectively, the
"Financials"), true and correct copies of which are attached hereto as
Schedule 5.7(a), (i) have been prepared from the books and records of the
Partnership in accordance with GAAP consistently applied with prior periods, and
(ii) are complete and correct and fairly present, in each case in all material
respects, the financial condition and results of operations of the Partnership
as of the dates and for the periods indicated thereon. The statements of
operations included in the Financials do not contain any items of extraordinary
income or any other income not earned in the ordinary course of business.
(b) The unaudited balance sheets at March 31, 1996 (the "March 1996
Balance Sheet"), June 30, 1996 (the "June 1996 Balance Sheet") and September 30,
1996 (the "September 1996 Balance Sheet"; and together with the March 1996
Balance Sheet and the June 1996 Balance Sheet, the "Interim Balance Sheet"), and
the unaudited statements of operations and retained earnings and statements of
cash flows for the Partnership for the three, six and nine month periods then
ended and notes thereto (collectively, the "Interim Financials"), true and
correct copies of which are attached hereto as Schedule 5.7(b), (i) have been
prepared from the books and records of the Partnership in accordance with GAAP
consistently applied with prior periods, and (ii) are complete and correct and
fairly present, in each case in all material respects, the financial condition
and results of operations of the Partnership as of the dates and for the periods
indicated thereon.
(c) The Financials have been reviewed by the independent accounting firm
of Gill & Kim whose reports thereon are part of Schedule 5.7. The books of
accounts of the Partnership have been maintained in all material respects in
accordance with sound business practices, and
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there have been no transactions involving the Partnership that properly should
have been set forth therein in accordance with generally accepted accounting
principles that have not been accurately so set forth.
SECTION 5.8 PROJECTIONS. The projected financial statements of the
Partnership attached hereto as Schedule 5.8 set forth the best estimates by the
Partners of the financial positions and results of operations of the Partnership
at the dates and for the periods set forth therein and neither the Partnership
nor any Partner knows of any reason that any of the assumptions upon which such
projected consolidated financial statements are based is not reasonable.
SECTION 5.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed on Schedule
5.9, since December 31, 1995, there has not occurred:
(a) Any adverse change in the assets, liabilities (whether absolute,
accrued, contingent or otherwise), condition (financial or otherwise), results
of operations or business of Sellers not reflected in the Financials or the
Interim Financials and that has resulted in or reasonably could result in a loss
to Sellers of more than $100,000 in the aggregate;
(b) Any increase in indebtedness over the level reflected on the Interim
Balance Sheet, any guarantee by any of the Sellers of any obligation, or any
mortgage, pledge or encumbrance on any of the properties or assets of the
Partnership;
(c) Any amendment or modification of any Material Contract (as defined
below), or any termination of any agreement that would have been a Material
Contract were such agreement in existence on the date hereof;
(d) Any entering into of any written or oral agreements, contracts,
commitments or transactions that extend beyond the first anniversary hereof or
have obligations thereunder in excess of $25,000, including any purchase or sale
of any assets.
(e) Any increase in the compensation (including, without limitation, the
rate of commissions) payable to, or any payment of a cash bonus to, any employee
or agent of, or consultant to, any of the Sellers;
(f) Any alteration in the manner of keeping the books, accounts or records
of any of the Sellers, or in the accounting practices therein reflected;
(g) Any declaration or payment of any dividends or distributions by the
Partnership, any acquisition or redemption by the Partnership of any of its
equity securities or any loan by any Seller to any other Seller;
(h) Any loss or threatened loss of a customer or customers to which the
Partnership had annual sales in excess of $20,000 during the past two years or
to which Sellers expects the
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Partnership to have annual sales in excess of $20,000 during calendar years
1996-1999;
(i) Any material damage or destruction to, or loss of, any assets or
property owned, leased or used by the Partnership (whether or not covered by
insurance); or
(k) Any agreement to do any of the things described in the preceding
clauses (a) - (h) of this Section 5.9.
SECTION 5.10 ABSENCE OF UNDISCLOSED LIABILITIES. There are no
liabilities of the Partnership whether absolute, accrued, contingent or
otherwise, and whether due or to become due, not reflected on or reserved for on
the Interim Balance Sheet, except as set forth in Schedule 5.10 and except for
executory obligations under Material Contracts (as defined below) and immaterial
contracts for the purchase of supplies or the sale of products incurred in the
ordinary course of business. There are no commitments, contracts or
undertakings covering the purchases of items of inventory in excess of the
Partnership's normal operating requirements or covering the purchases of items
of machinery and equipment in excess of the requirements of the Partnership.
None of the Sellers is a party to, is bound by, or has bid upon any contract or
agreement that is adverse to the assets, condition (financial or otherwise),
business or prospects of the Partnership, that will require future expenditures
(including incurred costs and allocated overhead and selling, general and
administrative expense) in excess of reasonably anticipated receipts by more
than $10,000 in the aggregate, or on which the Partnership expects to lose in
excess of $10,000 in the aggregate.
SECTION 5.11 ACCOUNTS RECEIVABLE. Schedule 5.11 is an accurate aging of
the accounts, notes and other receivables of the Partnership (the "Accounts
Receivable") at the Closing Date. The Accounts Receivable as of such date and
any Accounts Receivable arising since such date are fully collectible, net of
the reserves set forth in the Interim Balance Sheet, all of which reserves are
adequate in accordance with GAAP.
SECTION 5.12 REAL PROPERTY; REAL PROPERTY LEASES. Schedule 5.12(a) sets
forth a complete and correct summary description of each parcel of real property
(collectively, the "Real Property") owned by or leased to any of the Sellers or
otherwise used by any of the Sellers in connection with the Business, which
description consists of a legal description for each such parcel owned by any of
the Sellers and an identification of each lease (a "Lease") of real property
under which any of the Sellers is either a lessee, sublessee, lessor or
sublessor. Except as set forth in Schedule 5.12(a):
(a) The Partnership does not own any Real Property;
(b) Each Lease is a valid and binding obligation of the Seller that is a
party thereto, and each such Lease is a valid and binding obligation of each of
the other parties thereto;
(c) None of the Sellers nor any other party to a Lease is in default with
respect to any material term or condition thereof, and no event has occurred
that, with the passage of time or
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the giving of notice or both, would constitute a default thereunder or would
cause the acceleration of any obligation of any party thereto or the creation of
a lien or encumbrance upon any asset of any of the Sellers;
(d) All of the buildings, fixtures and other improvements located on the
Real Property are in good operating condition and repair, and the operation
thereof as presently conducted does not violate any applicable code, zoning
ordinance or other applicable law or regulation;
(e) The Partnership holds valid and effective certificates of occupancy,
underwriters' certificates relating to electrical work, zoning, building,
housing, safety, fire and health approvals and all other permits and licenses
required by applicable law relating to the operation of the Real Property; and
(f) The Partnership has not experienced during the two years preceding the
date hereof any material interruption in the delivery of adequate quantities of
any utilities (including, without limitation, electricity, natural gas, potable
water, and fuel oil) or other public services (including, without limitation,
sanitary and industrial sewer service) required by it in the operation of its
business during such period.
SECTION 5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule
5.13, to the best knowledge of Sellers:
(a) The Partnership is, and at all times has been, in all material
respects in full compliance with all Environmental Protection Laws;
(b) The Partnership has obtained or has timely applied for all permits,
licenses and other authorizations under Environmental Protection Laws which are
required in connection with its business and operations, all of which are in
full force and effect. The Partnership is in material compliance with all terms
and conditions of such permits, licenses and authorizations, no action or
proceeding which reasonably could be expected to result in the revocation or
suspension of any such permits, licenses and authorizations is pending or
threatened, and the Partnership has not engaged in any conduct which reasonably
could be expected to cause revocation or suspension of any of its permits,
licenses or authorizations under Environmental Protection Laws;
(c) During the period of the Partnership's ownership, lease, occupation
and operation of the Real Property or any other property previously owned,
leased, occupied or operated by the Partnership, no portion of the Real Property
or such other property (i) has been or is being used in any manner for the
storage, disposal, or treatment of any Regulated Substance, except for the
temporary storage of Regulated Substances in material compliance with
Environmental Protection Laws; (ii) contained or contains underground tanks of
any type, or any materials containing PCBs or any asbestos; or (iii) contained
or contains any surface or sub-surface conditions that constitute, or that
through the physical effects of the passage of time may constitute, a public or
private nuisance or otherwise caused any liability under Environmental
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Protection Laws;
(d) There is not now nor has there been any contamination of soil,
groundwater or other environmental media by or with any Regulated Substance on,
in, under or about the Real Property or any other property previously owned,
leased, occupied or operated by any of the Sellers which could create liability
under the Environmental Protection Laws;
(e) Except for air emissions in material compliance with Environmental
Protection Laws, during the period of the Partnership's ownership, lease,
occupation and operation of the Real Property or any other property previously
owned, leased, occupied or operated by any of the Sellers, there has been no
spill, discharge, disposal, leak, emission, injection, escape, dumping or
release of any Regulated Substance on, in, under or about the Real Property or
such other property by any of the Sellers or for which any of the Sellers has
any liability;
(f) To best of Sellers' knowledge, no portion of the Real Property or any
other property previously owned, leased, occupied or operated by any of the
Sellers has been designated, listed, or identified in any manner by the EPA, or
any other federal, state, local or other governmental agency or instrumentality,
or under and pursuant to any Environmental Protection Law as a hazardous waste
or hazardous substance disposal or removal site, Superfund or clean-up site, or
candidate for clean-up, investigation, removal or closure pursuant to any
Environmental Protection Law;
(g) None of the Sellers has received at any time prior to the date hereof
a summons, citation, notice, directive, letter or other communication, written
or oral, from the EPA or any other federal, state, local or other governmental
agency or instrumentality, authorized pursuant to an Environmental Protection
Law, concerning any intentional or unintentional action or omission (except any
pertaining to emissions of fugitive dust and other non-hazardous particulates
that are routinely corrected) by any of the Sellers constituting a violation or
potential violation of any Environmental Protection Law, including, without
limitation, violations relating to the releasing, spilling, leaking, pumping,
pouring, emitting, emptying, dumping or otherwise disposing of any
Regulated Substance into the environment resulting in damage thereto or to the
wildlife, biota and other natural resources, and there exist no facts that would
form the basis for a finding of such a violation; and
(h) None of the Sellers has received at any time prior to the date hereof
any summons, citation, notice, directive, letter or other communication, written
or oral, of any potential claim or liability under any Environmental Protection
Law, including, without limitation, any notification as a potentially
responsible party with respect to any Superfund or other clean-up site. There
are no events, conditions, circumstances, activities, practices, incidents,
actions or plans at or concerning the Real Property or the operations of any of
the Sellers which may (i) interfere with or prevent continued compliance by any
of the Sellers with any Environmental Protection Law, (ii) give rise to any
claim or liability under any Environmental Protection Law, or (iii) form the
basis for any claim, action, suit, proceeding, hearing or investigation under
any Environmental Protection Law.
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(i) Except as set forth on Schedule 5.13(i) , no Seller has received any
notice from a governmental authority or otherwise of any health problem of any
current or former employee which in any way is or is alleged to be related to
the operation of the Business.
SECTION 5.14 INTANGIBLE PERSONAL PROPERTY.
(a) There are no (i) patent, patent applications, copyright, copyright
applications, trademark, trademark applications (in any such case, whether
registered or required to be registered in the United States of America or
elsewhere), process, invention, trade secret, trade name, computer program,
formula and customer list (collectively, the "Intangible Personal Property") of
Sellers related to, or necessary to contintue the operation of, the Business, or
(ii) licenses or similar agreements or arrangements ("Licenses") to which any of
the Sellers is a party either as licensee or licensor for each such item of
Intangible Personal Property.
(b) There are no pending actions or other judicial or adversary
proceedings involving any of the Sellers concerning any item of Intangible
Personal Property, and, to the best of Sellers' knowledge, no such action or
proceeding is threatened and no claim or other demand has been made or, to the
best of Sellers' knowledge, threatened by any Person relating to any item of
Intangible Personal Property;
(c) Sellers have the right and authority to use each item of Intangible
Personal Property in connection with the conduct of its business in the manner
presently conducted and to convey such right and authority, and such use does
not conflict with, infringe upon or violate any patent, trademark or
registration of any other person or entity;
(d) There are no outstanding or, to the best of Sellers' knowledge,
threatened disputes or disagreements with respect to any License; and
(e) The conduct by each of the Sellers of its business does not conflict
with the valid patents, trademarks, trade secrets or trade names of others.
SECTION 5.15 LABOR AND EMPLOYMENT AGREEMENTS.
(a) Schedule 5.15 sets forth a complete and correct list of the following:
(i) Each employment, consulting, collective bargaining and similar
agreement, whether written or oral, to which any of the Sellers is a party or by
which it is bound; and
(ii) The name of (A) each employee of the Partnership who since
January 1, 1995, was or is being paid $50,000 or more per year, and (B) each
agent of or consultant to the Partnership who since January 1, 1995 was or is
being paid $50,000 or more per year.
As used in this Section 5.15, the word "agreement" includes both oral
and written
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contracts, understandings, arrangements and other agreements.
(b) Each of the Sellers has complied in all material respects with all
applicable laws, rules and regulations relating to the employment of labor,
including, without limitation, those related to wages, hours, collective
bargaining and the payment and withholding of taxes and other sums as required
by appropriate governmental authorities and has withheld and paid to the
appropriate authorities, or is holding for payment not yet due to such
authorities, all amounts required to be withheld from such employees and is not
liable for any arrears of wages, taxes, penalties or other sums for failure to
comply with any of the foregoing.
(c) To the best of Sellers' knowledge, no unfair labor practice complaint
is pending against any of the Sellers before the National Labor Relations Board
or any federal, state or local agency and, to the best of Sellers' knowledge, no
labor strike, grievance or other labor dispute affecting any of the Sellers is
pending or threatened.
(d) Except as set forth in Schedule 5.15, no material organization effort,
and no sex discrimination, racial discrimination, age discrimination or other
employment-related allegation, claim, suit or proceeding, has been made or is
pending or, to the best of Sellers' knowledge, threatened with respect to the
employees of any of the Sellers and no such effort, allegation, claim, suit or
proceeding has been made, raised, brought or threatened within the three-year
period prior to the date of this Agreement.
(e) No arbitration proceeding arising out of or under any collective
bargaining agreement applicable to any of the Sellers is pending and, to the
best of Sellers' knowledge, no basis for any such proceeding exists.
(f) All reasonably anticipated obligations of Sellers, whether arising by
operation of law, contract, past custom or otherwise, for unemployment
compensation benefits, pension benefits, advances, salaries, bonuses, vacation
and holiday pay, sick leave and other forms of compensation payable to the
employees or agents of any of the Sellers in respect of the services rendered by
any of them on or prior to the date of the Financials have been paid or adequate
accruals therefor have been made in the books and records of Sellers and in the
Financials. All such obligations in respect of services rendered on or prior to
the date hereof have been paid as of the date hereof, or adequate accruals
therefor have been made on the Interim Balance Sheet, in accordance with GAAP.
All accrued obligations of Sellers applicable to its employees, whether arising
by operation of law, contract, past custom or otherwise, for payments to trusts
or other funds or to any governmental agency, with respect to unemployment
compensation benefits, social security benefits or any other benefits for
employees, with respect to employment of said employees through the date of the
Financials have been paid or adequate accruals therefor have been made on the
books and records of Sellers and in the Financials in accordance with GAAP. All
such obligations with respect to employment of employees through the date hereof
have been paid as of the date hereof, or adequate accruals therefor have been
made on the Interim Balance Sheet, in accordance with GAAP.
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SECTION 5.16 EMPLOYEE BENEFIT PLANS: ERISA.
(a) Except as set forth in Section 5.16(a) of the Disclosure Schedule,
none of the Sellers (i) maintains, contributes to or has any obligation with
respect to, and none of the employees of the Business is covered by, any bonus,
deferred compensation, severance pay, pension, profit-sharing, retirement,
insurance, or other fringe benefit plan, arrangement or practice, written or
otherwise, or any other "employee benefit plan," as defined in Section 3(3) of
ERISA, whether formal or informal (collectively, the "Plans"), (ii) is a party
to a contract for the employment of any employee of the Business or any other
person who renders services to the Business, or (iii) has any ERISA Affiliates
other than another Seller. None of the Plans is, and none of the Sellers or any
of their ERISA Affiliates has ever maintained or had an obligation to contribute
to, (i) a plan subject to Section 412 of the Code or Title I, Subtitle B, Part 3
of ERISA, (ii) a "multi employer plan," as defined in Section 3(37) of ERISA (a
"Multi employer Plan"), (iii) a "multiple employer plan," as defined in ERISA or
the Code, or (iv) a funded welfare benefit plan, as defined in Section 419 of
the Code. None of the Sellers has any agreement or commitment to create or
contribute to any additional Plan, enter into any additional employment
agreement or to modify or change any existing Plan or employment agreement.
Section 5.16(a) of the Disclosure Schedule contains a complete and accurate list
of the following information for each employee of the Business (including each
employee who is on a leave of absence or on layoff status): name, employer, job
title(s), date of hire, current salary and benefit arrangements, years of
service for purposes of eligibility, vesting, and benefit determination under
any of the Plans, and current status (E.G., active employee, on leave, etc.).
None of the employees of the Business is a "leased employee," as defined in
Section 414(n) of the Code.
(b) With respect to each Plan, Sellers have heretofore delivered or caused
to be delivered to Purchaser true, correct and complete copies of (i) all
documents that comprise the most current version of such Plan, including any
related trust agreements, insurance contracts, or other funding or investment
agreements and any amendments thereto, and (ii) with respect to each Plan that
is an "employee benefit plan," as defined in Section 3(3) of ERISA, (A) the
three most recent Annual Reports (Form 5500 Series) and accompanying schedules
for each of the Plans for which such a report is required, (B) the most current
summary plan description (and any summary of material modifications), (C) the
three most recent certified financial statements for each of the Plans for which
such a statement is required or was prepared, and (D) for each Plan intended to
be "qualified" within the meaning of Section 401(a) of the Code, all Internal
Revenue Service determination letters issued with respect to such Plan. Except
as set forth in Section 5.16(b) of the Disclosure Schedule, since the date of
the foregoing documents, there has not been any material change in the assets
or liabilities of any of the Plans or any change in their terms and operations
that could reasonably be expected to affect or alter the tax status or
materially affect the cost of maintaining such Plan, and none of the Plans has
been or will be amended prior to the Closing Date. Each of the Plans can be
amended, modified or terminated by a Seller within a period of thirty (30)
days, without payment of any additional compensation or amount or the additional
vesting or acceleration of any such benefits, except to the extent that such
vesting is required under the Code upon the complete or partial termination of
any Plan intended to be qualified within the meaning of Section 401(a) of the
Code.
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(c) Each Seller has performed and complied in all respects with all of its
obligations under and with respect to the Plans, and each of the Plans has, at
all times, in form, operation and administration complied in all material
respects with its terms, and, where applicable, the requirements of all
applicable laws. Each Plan that is intended to be "qualified" within the
meaning of Section 401(a) of the Code has been determined by the Internal
Revenue Service to be so qualified and nothing has occurred that reasonably
could be expected to adversely affect such qualified status.
(d) Each Seller has made all contributions with respect to a Plan that are
required to have been made as of the date hereof under the terms thereof, or
under the terms of any related insurance contract, or any applicable law.
(e) All Plans that are group health plans have been operated in compliance
with the continuation coverage requirements of Section 4980B of the Code (and
any predecessor provisions) and Part 6 of Title I of ERISA ("COBRA"). None of
the Sellers has any obligation to provide health benefits or other non-pension
benefits to any retired or other former employees, except as specifically
required by COBRA.
(f) None of the Sellers nor any other "disqualified person" or "party in
interest," as defined in Section 4975 of the Code and Section 3(14) of ERISA,
respectively, has engaged in any "prohibited transaction," as defined in
Section 4975 of the Code or Section 406 of ERISA, with respect to any Plan , and
none of the Sellers is aware of any fiduciary violations under ERISA with
respect to any Plan, that could subject a Seller (or any employee thereof) to
any material penalty or tax under Section 502(i) of ERISA or Sections 4971 and
4975 of the Code.
(g) Except as set forth in Section 5.16(g) of the Disclosure Schedule,
with respect to any Plan: (i) no filing, application or other matter is pending
with the Internal Revenue Service, the Pension Benefit Guaranty Corporation, the
United States Department of Labor or any other governmental body, (ii) there is
no action, suit or claim pending (and none of the Sellers is aware of any basis
for such a claim), other than routine claims for benefits, and (iii) there are
no outstanding liabilities for taxes, penalties or fees.
(h) None of the Sellers has incurred any liability or taken any action,
and is not aware of any event that has occurred or is likely to occur, that
could cause any one of them to incur any liability (i) under Section 412 of the
Code or Title IV of ERISA with respect to any "single-employer plan" (as defined
in Section 4001(a)(15) of ERISA), (ii) on account of a partial or complete
withdrawal (as defined in Sections 4203 and 4205 of ERISA, respectively) with
respect to any Multi employer Plan, (iii) on account of unpaid contributions to
any Multi employer Plan, or (iv) on account of any reorganization, insolvency or
termination of any Multi employer Plan.
(i) Neither the execution and delivery of this Agreement nor the
consummation of any or all of the Transactions will: (i) entitle any current or
former employee of the Business to severance pay, unemployment compensation or
any similar payment, (ii) accelerate the time of
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payment or vesting or increase the amount of any compensation due to any such
employee or former employee, or (iii) directly or indirectly result in any
payment made or to be made to or on behalf of any person to constitute a
"parachute payment" within the meaning of Section 280G of the Code.
SECTION 5.17 MATERIAL CONTRACTS AND RELATIONSHIPS.
(a) Except for agreements specifically identified on other schedules
hereto, Schedule 5.17(a) sets forth a complete and correct list of the
following, in each case to the extent related to the Business:
(i) All agreements (or groups of agreements with one or more related
entities) between the Partnership and any customer or supplier in excess of
$10,000 and all agreements and purchase orders extending beyond 12 months;
(ii) In each case to the extent related to the Partnership, all
agreements that relate to the borrowing or lending by any of the Sellers of
any money or that create or continue any material claim, lien, charge or
encumbrance against, or right of any third party with respect to, any
material asset of the Partnership;
(iii) All agreements by which the Partnership leases any real
property, has the right to lease any real property or leases capital
equipment or leases any other personal property, and all other leases
involving the Partnership as lessee or lessor;
(iv) All agreements to which the Partnership is a party not in the
ordinary course of business;
(v) All contracts or commitments relating to commission arrangements
with others;
(vi) All license agreements, whether as licensor or licensee;
(vii) All agreements between the Partnership and its sales
representatives;
(viii) All agreements between the Partnership and its customers
relating to volume rebates or price reductions;
(ix) All other agreements to which the Partnership is a party or by
which it is bound and that involve $20,000 or more or that extend for a
period of one year or more;
(x) All other agreements to which the Partnership is a party or by
which it is bound and that are or may be material to the assets,
liabilities (whether absolute, accrued, contingent or otherwise), condition
(financial or otherwise), results of operations, business or prospects of
the Partnership; and
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(xi) A current list of the Partnership's active customers.
As used in this Section 5.17, the word "agreement" includes both oral and
written contracts, leases, understandings, arrangements and all other
agreements. The term "Material Contracts" means the agreements of any of the
Sellers required to be disclosed on Schedule 5.17(a), including agreements
specifically identified in other schedules hereto.
(b) All of the Material Contracts are in full force and effect, are valid
and binding and are enforceable in accordance with their terms in favor of the
Partnership. There are no material liabilities of any party to any Material
Contract arising from any breach or default of any provision thereof and no
event has occurred that, with the passage of time or the giving of notice or
both, would constitute a breach or default by any party thereto.
(c) Each of the Sellers (i) has fulfilled all material obligations
required pursuant to each Material Contract to have been performed by it prior
to the date hereof, and (ii) as far as reasonably foreseeable based on current
conditions, will be able to fulfill all of its obligations under the Material
Contracts that remain to be performed after the date hereof.
(d) Schedules 5.17(b), (c) and (d) set forth a complete and correct list
of each (i) customer (or related group of customers) with whom the Partnership
did $50,000 or more of business during the last fiscal year or the current
fiscal year, (ii) supplier (or related group of suppliers) with whom the
Partnership did $50,000 or more of business during the last fiscal year or the
current fiscal year, and (iii) agent (or related group of agents) or
Representative (or related group of Representatives) who was paid $25,000 or
more by the Partnership during the last fiscal year or the current fiscal year,
respectively.
(e) Each Seller has maintained and continues to maintain good relations
with the Partnership's customers, suppliers and agents and, except as set forth
in Schedule 5.17(e), Sellers do not reasonably expect that any customer (to
which the Partnership had annual sales in excess of $50,000 during the past two
years), supplier or agent will stop doing business with the Partnership or will
materially change the terms on which such customer, supplier or agent has done
business with the Partnership in the past.
SECTION 5.18 INVENTORY. Except for inventory that is excess, damaged,
obsolete, or outdated or requires rework, for which the Partnership has
established an adequate reserve in the September 30, 1996 Balance Sheet in
accordance with GAAP, or inventory on consignment on the date hereof not to
exceed $100.00, the inventory (the "Inventory") reflected in the September 30,
1996 Balance Sheet and acquired since the date of such Balance Sheet (and not
sold prior to the date hereof or reserved for in the Interim Balance Sheet is
good and merchantable material, of a quantity and quality saleable in the
ordinary course of business of the Partnership at normal profit margins, and
carried on the books and records of the Partnership on the lower of cost (on a
first in, first-out basis) or market basis consistent with the past practices of
the Partnership.
SECTION 5.19 ABSENCE OF CERTAIN BUSINESS PRACTICES. None of the Sellers
nor any
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employee, agent or other person acting on behalf of the Partnership has,
directly or indirectly, given or agreed to give any gift or similar benefit to
any customer, supplier, competitor or governmental employee or official
(domestic or foreign) (a) that would subject the Partnership to any damage or
penalty in any civil, criminal or governmental litigation or proceeding or (b)
that, if not given in the past, would have had a material adverse effect on the
assets, liabilities (whether absolute, accrued, contingent or otherwise),
condition (financial or otherwise), results or operations or business of the
Partnership.
SECTION 5.20 COMPLIANCE WITH LAWS. Except as set forth on Schedule 5.20,
the operation, conduct and ownership of the property or business of the
Partnership are being, and at all times have been, conducted, in all material
respects, in full compliance with all federal, state, local and other (domestic
and foreign) laws, rules, regulations and ordinances (including without
limitation, those relating to employment discrimination, occupational safety,
conservation or corrupt practices) and all judgments and orders of any court,
arbitrator or governmental authority applicable to it. Except as set forth on
Schedule 5.20, to the best of Sellers' knowledge, there are no proposed federal,
state, local and other (domestic or foreign) law, rule, regulation, ordinance,
order, judgment, decree, governmental taking, condemnation or other proceeding
that would be applicable to the business, operations or properties of the
Partnership and that could have a material adverse effect on the assets,
liabilities (whether absolute, accrued, contingent or otherwise), condition
(financial or otherwise), results of operations, business or prospects of the
Partnership.
SECTION 5.21 LITIGATION. Schedule 5.21 sets forth a complete and correct
list, together with a status report, of each legal, administrative, arbitration
or other proceeding, or governmental investigation, to which any of the Sellers
is a party (or by which any of the Partnership's properties are affected), or
was a party or was otherwise affected (or by which any of its properties were
affected) during the past three years. Except as set forth on Schedule 5.21,
there is no legal, administrative, arbitration or other proceeding, or any
governmental investigation, pending or, to the best of Sellers' knowledge,
threatened against or otherwise affecting the Partnership or any of its assets.
The Partnership has given in a timely manner to its insurers all notices
required to be given under each of its insurance policies, if any, with respect
to all of the claims and actions disclosed on Schedule 5.21, and no insurer has
denied coverage of any of such claims or actions or rejected any of the claims
with respect thereto.
SECTION 5.22 TAXES. Except as set forth on Schedule 5.22:
(a) Each of the Partnership, and in connection with their Partnership
interests, the Partners, has timely filed all Tax returns and reports
required to have been filed by it for all taxable periods ending on or prior
to the date hereof;
(b) All Taxes of the Partnership and of the Partners in connection with
their Partnership interests for all taxable periods ending on or prior to the
date hereof have been paid or have been adequately reserved for on the Interim
Balance Sheet. The Tax returns and reports filed are true and correct in all
material respects;
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(c) None of such returns contains, or will contain, a disclosure statement
under Section 6662 of the Code (or any predecessor statute) or any similar
provision of state, local or foreign law;
(d) None of the Sellers has received notice that the IRS or any other
taxing authority has asserted against such Seller any deficiency or claim for
additional Taxes in connection with the Partnership or the Partners in
connection with their Partnership interests;
(e) All Tax deficiencies asserted or assessed against any of the
Partnership or the Partners in connection with their Partnership interests, have
been paid or finally settled;
(f) There is no pending or, to the best of Sellers' knowledge, threatened
action, audit, proceeding, or investigation with respect to (i) the assessment
or collection of Taxes of the Partnership or the Partners in connection with
their Partnership interests, in connection with the Partnership or (ii) a claim
for refund made by any of the Sellers with respect to Taxes previously paid in
connection therewith;
(g) All amounts that are required to be collected or withheld by the
Partnership or the Partners in connection with their Partnership interests, or
with respect to Taxes of any of the Partnership or the Partners in connection
with their Partnership interests, have been duly collected or withheld; all such
amounts that are required to be remitted to any taxing authority have been duly
remitted;
(h) Neither the IRS nor any state, foreign or local taxing authority has
examined any income tax return of any of the Partnership or the Partners in
connection with their Partnership interests;
(i) None of the Partnership and the Partners in connection with their
Partnership interests has waived any statute of limitations (that have not
expired as of the date hereof) with respect to the assessment of any Tax;
(j) None of the Sellers has taken any action not in accordance with past
practice that would have the effect of deferring any Tax liability of the
Partnership or the Partners in connection with their Partnership interests, from
any taxable period ending on or before the date hereof to any taxable period
ending after such date;
(k) No consent has been filed under Section 341(f) of the Code with
respect to any of the Sellers;
(l) There are no liens for Taxes due and payable upon any assets of any of
the Sellers;
(m) None of the Sellers has participated in, or cooperated with, an
international boycott within the meaning of Section 999 of the Code;
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(n) None of the Partnership and the Partners in connection with their
Partnership interests is currently required to include in income any adjustment
pursuant to Section 481(a) of the Code (or similar provisions of other law or
regulations) by reason of a change in accounting method nor do any of the
Sellers have any knowledge that the IRS (or other taxing authority) has
proposed, or is considering, any such change in accounting method;
(o) None of the Sellers is a party to any agreement, contract, arrangement
or plan that would result in the payment of any "excess parachute payment"
within the meaning of Section 280G of the Code;
(p) None of the assets of any Seller is property that is required to be
treated as owned by any other person pursuant to the "safe harbor lease"
provisions of former Section 168(f)(8) of the Internal Revenue Code of 1954 as
amended and in effect immediately prior to the enactment of the Tax Reform Act
of 1986 and none of the assets of the Partnership is "tax exempt use property"
within the meaning of Section 168(h) of the Code; and
(q) None of the assets of any Seller secures any debt the interest on
which is tax exempt under Section 103 of the Code.
SECTION 5.23 INSURANCE MATTERS.
(a) Schedule 5.23 sets forth a complete and correct list of:
(i) All insurance policies and of all claims made by the Partnership
on any liability or other insurance policies during the past three
years (other than worker's compensation claims);
(ii) All insurance currently in place and accurately sets forth the
coverages, deductible amounts, carriers and expiration dates thereof;
and
(iii) All insurance with respect to which the policy period has
expired, but for which certain of the coverage years are still subject
to audit or retrospective adjustment by the carrier, and accurately
sets forth such coverage years and the coverages, deductible amounts,
carriers and expiration dates hereof.
(b) There are no outstanding requirements or recommendations by any
insurance company that issued any policy of insurance to the Partnership or by
any board of underwriters or other similar body exercising similar functions or
by any governmental authority exercising similar functions that require or
recommend any changes in the conduct of the Business or any repairs or other
work to be done on or with respect to any of the Partnership's assets.
(c) Except as set forth on Schedule 5.23, no notice or other communication
has been received by any of the Sellers from any insurance company within the
two years preceding the date hereof canceling or materially amending or
materially increasing the annual or other
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premiums payable under any of its insurance policies, and, to the best of
Sellers' knowledge, no such cancellation, amendment or increase of premiums is
threatened.
(d) During the past five years, the Partnership has maintained occurrence-
based comprehensive general liability and completed operations insurance
(including product liability insurance) with a single combined annual limit of
at least $1,000,000, and no claims have been made or paid, and no claims are
currently pending, under any of such comprehensive general liability insurance
policies.
(e) No lawsuits have been filed and no claims have been made or, to the
best of Sellers' knowledge, threatened against the Partnership as a result of
accidents which occurred during the one-year period prior to the date hereof
that would give rise to a claim with respect to any services provided by or
products designed, manufactured, or sold by any of the Sellers or the operations
of the Partnership.
SECTION 5.24 NO POWERS OF ATTORNEY OR SURETYSHIPS. Except as set forth
on Schedule 5.24, (i) none of the Sellers has granted any general or special
powers of attorney and (ii) none of the Sellers has any obligation or liability
(whether actual, contingent or otherwise) as guarantor, surety, co-signer,
endorser, co-maker, indemnitor, obligor on an asset or income maintenance
agreement or otherwise in respect of the obligation of any person, corporation,
partnership, joint venture, association, organization or other entity.
SECTION 5.25 BROKERAGE FEES. No Person is entitled to any brokerage or
finder's fee or other commission from any of the Sellers in respect of this
Agreement or the Transactions.
SECTION 5.26 BANKING FACILITIES. Schedule 5.26 sets forth a complete and
correct list of:
(a) Each bank, savings and loan or similar financial institution in which
the Partnership has an account or safety deposit box and the numbers of such
accounts or safety deposit boxes maintained thereat; and
(b) The names of all persons authorized to draw on each such account or to
have access to any such safety deposit box, together with a description of the
authority (and conditions thereto, if any) of each person with respect thereto.
SECTION 5.27 MACHINERY, EQUIPMENT AND OTHER PERSONAL PROPERTY; PERSONAL
PROPERTY LEASES. Except as set forth in Schedule 5.27, the Partnership owns all
of the machinery, equipment, vehicles, furniture, fixtures, leasehold
improvements, repair parts, tools and other property (collectively, the
"Personal Property") used by or relating to the Partnership. All such Personal
Property is in good operating condition and sufficient to carry on the business
of the Partnership in the normal course as it is presently conducted and is free
from material defects, whether patent or latent. Schedule 5.27 sets forth a
complete and correct summary description and identification of each lease (a
"Personal Property Lease") of personal property
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under which the Partnership is either a lessee, sublessee, lessor or sublessor.
Except as set forth in Schedule 5.27:
(a) Each Personal Property Lease is a valid and binding obligation of the
Partnership that is a party thereto, and each such Personal Property Lease is a
valid and binding obligation of each of the other parties thereto; and
(b) Neither the Partnership nor any other party to a Personal Property
Lease is in default with respect to any material term or condition thereof, and
no event has occurred that, with the passage of time or the giving of notice or
both, would constitute a default thereunder or would cause the acceleration of
any obligation of any party thereto or the creation of a lien or encumbrance
upon any asset of the Partnership.
SECTION 5.28 PRODUCT WARRANTY AND LIABILITY. Each product designed,
manufactured, or sold by the Partnership and all services performed by the
Partnership have been in conformity in all material respects with all applicable
contractual commitments and all express and implied warranties. None of the
Sellers has any liability, and there is no basis for any present or future
action, suit or other proceeding giving rise to any liability, (i) for
replacement or repair of any such product or other damages in connection
therewith, or (ii) arising out of any injury to persons or property as a result
of any such product or any services performed by the Partnership. None of the
Sellers has received any notice that an action, suit or proceeding has been, or
in the future may be, made alleging that products or services of the Partnership
are or were defective in any material respect.
SECTION 5.29 STANDARDS AND CERTIFICATIONS. Products previously designed,
manufactured, sold and leased by all Sellers met and had received at the time of
their design, manufacture and sale, and products currently designed,
manufactured, sold and leased by all Sellers meet and have received, all
material standards established by relevant standard-setting organizations and
all certifications from all relevant safety and standards testing and certifying
organizations, if any, as were or are, as the case may be, necessary for such
products to comply with all applicable fire, safety and similar codes and
regulations.
SECTION 5.30 DISCLOSURE. The information provided by Sellers in this
Agreement, including, without limitation, the schedules hereto, and in any other
writing delivered pursuant hereto does not and will not contain any untrue
statement of a material fact or, omit to state a material fact required to be
stated herein or therein or necessary to make the statements and facts contained
herein or therein, in light of the circumstances under which they are made, not
false or misleading. Copies of all documents heretofore or hereafter delivered
or made available by Sellers to Purchaser pursuant hereto were or will be
complete and accurate records of such documents.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser hereby represents and warrants to the Partnership that:
SECTION 6.1 ORGANIZATION AND CORPORATE AUTHORITY. Purchaser is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California. Purchaser has all requisite corporate power
and authority to enter into this Agreement and to consummate the Transactions.
This Agreement and all agreements and instruments herein contemplated to be
executed by Purchaser are the valid and binding agreements of Purchaser,
enforceable against Purchaser in accordance with their respective terms subject
to bankruptcy, insolvency, reorganization, moratorium and other laws of general
applicability relating to or affecting creditors' rights and to general
equitable principles (whether considered in a proceeding at law or otherwise).
A true and correct copy of the balance sheet of the Purchaser as of September
30, 1996 is attached hereto as Schedule 6.1, which balance sheet (i) has been
prepared from the books and records of the Purchaser in accordance with GAAP
consistently applied with prior periods, and (ii) is complete and correct and
fairly present, in all material respects, the financial condition and results of
operations of the Purchaser as of the date and for the period indicated thereon.
SECTION 6.2 NO BREACH; CONSENTS AND APPROVALS. Neither the execution
and delivery of this Agreement or the related agreements and instruments
contemplated hereby nor the consummation of the Transactions will violate,
result in a breach of any of the terms or provisions of, constitute a default
(or any event that, with the giving of notice or the passage of time or both,
would constitute a default) under, result in the acceleration of any
indebtedness under or performance required by, result in any right of
termination of, increase any amounts payable under, decrease any amounts
receivable under, change any other rights pursuant to, or conflict with, any
material agreement, indenture or other instrument to which Purchaser is a party
or by which any of its property is bound, its charter documents, or any
judgment, decree, order or award of any court, governmental body or arbitrator
(domestic or foreign) applicable to Purchaser. Subject to Section 9, all
consents, approvals and authorizations of, and declarations, filings and
registrations with, any governmental or regulatory authority (domestic or
foreign) or any other person (either governmental or private) required in
connection with the execution and delivery by Purchaser of this Agreement and
the related agreements and instruments contemplated hereby or the consummation
of the Transactions have been obtained, made and satisfied.
SECTION 6.3 BROKERAGE FEES. No Person is entitled to any brokerage or
finder's fee or other commission from Purchaser in respect of this Agreement or
the Transactions.
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ARTICLE VII
COVENANTS OF SELLERS AND PURCHASER
Sellers and Purchaser each covenant with the other as follows:
SECTION 7.1 FURTHER ASSURANCES. Upon the terms and subject to the
conditions contained herein, the parties agree, both before and after the
Closing, (i) to use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, (ii) to execute any documents, instruments or conveyances of any kind
which may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder, and (iii) to cooperate with each other in
connection with the foregoing. Without limiting the foregoing, the parties
agree to use their respective reasonable efforts (A) to obtain all necessary
waivers, consents and approvals from other parties to the Contracts and Leases
to be assumed by Purchaser; PROVIDED, HOWEVER, that neither Purchaser nor
Sellers shall be required to make any payments, commence litigation or agree to
modifications of the terms thereof in order to obtain any such waivers, consents
or approvals, (B) to obtain all necessary Permits as are required to be obtained
under any Regulations, (C) to give all notices to, and make all registrations
and filings with third parties, including without limitation submissions of
information requested by governmental authorities, and (D) to fulfill all
conditions to this Agreement.
SECTION 7.2 NO SOLICITATION.
(a) NO SOLICITATION. From the date hereof through the Closing or the
earlier termination of this Agreement, each of the Sellers and their
Representatives shall not, and shall cause each of their respective
Representatives (including, without limitation, investment bankers, attorneys
and accountants), not to, directly or indirectly, enter into, solicit, initiate
or continue any discussions or negotiations with, or encourage or respond to any
inquiries or proposals by, or participate in any negotiations with, or provide
any information to, or otherwise cooperate in any other way with, any
corporation, partnership, person or other entity or group, other than Purchaser
and its Representatives concerning, any sale of all or a portion of the Assets
or the Business, or of any partnership interests in, or any other ownership
interests of, the Partnership, or any merger, consolidation, liquidation,
dissolution or similar transaction involving any Seller (each such transaction
being referred to herein as a "Proposed Acquisition Transaction"); PROVIDED,
HOWEVER, that Sellers may disclose the transactions contemplated by this
Agreement to customers of Sellers in connection with Sellers' efforts to obtain
the benefit of any Contract, Lease or Permit for Purchaser. The parties agree
that in the event the Partnership, Sellers or any individual Seller breaches its
obligation under this Section 7.2, Sellers shall immediately pay to Purchaser
the lesser of (a) Purchaser's expenses incurred in connection with the
Transactions, or (b) $200,000. Each Seller hereby represents that it is not now
engaged in discussions or negotiations with any party other than Purchaser with
respect to any of the foregoing. Each Seller agrees not to release any third
party from, or waive any provision of, any confidentiality or
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standstill agreement to which such Seller is a party.
(b) NOTIFICATION. Sellers shall immediately notify Purchaser (orally and
in writing) if any discussions or negotiations are sought to be initiated, any
inquiry or proposal is made, or any information is requested with respect to any
Proposed Acquisition Transaction.
SECTION 7.3 NOTIFICATION OF CERTAIN MATTERS. From the date hereof
through the Closing, Sellers and Purchaser shall give prompt notice to the other
of (a) the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty contained in
this Agreement or in any exhibit or schedule hereto to be untrue or inaccurate
in any respect and (b) any failure by it to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement or any exhibit or schedule hereto; PROVIDED, HOWEVER, that such
disclosure shall not be deemed to cure any breach of a representation, warranty,
covenant or agreement or to satisfy any condition.
SECTION 7.4 INVESTIGATION BY PURCHASER. From the date hereof through
the Closing Date each Seller shall, and shall cause any and all of its
respective employees and agents to, afford the Representatives of Purchaser and
its Affiliates complete access at all reasonable times to the Assets for the
purpose of inspecting the same, and to the employees, agents, attorneys,
accountants, properties, Books and Records, Contracts and Leases of each Seller,
and shall furnish Purchaser and its Representatives all financial, operating and
other data and information as Purchaser or its Affiliates, through their
respective Representatives, may reasonably request, including unaudited
individual and consolidated balance sheets and the related statements of income,
retained earnings and cash flow for each month from the date of the Interim
Balance Sheet through the Closing Date within ten (10) calendar days after the
end of each month which financial statements shall (i) be true, correct and
complete, (ii) be in accordance with the books and records of each Seller, and
(iii) accurately set forth the assets, Liabilities and financial condition,
results of operations and other information purported to be set forth therein in
accordance with generally accepted accounting principles consistently applied.
SECTION 7.5 CONDUCT OF BUSINESS. From the date hereof through the
Closing, each Seller shall, except as contemplated by this Agreement, or as
consented to by Purchaser in writing, operate the Business in the ordinary
course of business and in accordance with past practice and use its best efforts
to preserve intact the Business and its goodwill, and preserve the goodwill and
business relationships with suppliers, distributors, customers and others having
business relationships with the Partnership, and shall not take any action
inconsistent with this Agreement or with the consummation of the Closing.
Without limiting the generality of the foregoing, no Seller shall, except as
specifically contemplated by this Agreement or as consented to by Purchaser in
writing:
(a) enter into, extend, materially modify, terminate or renew any Contract
or Lease, except in the ordinary course of business;
(b) sell, assign, transfer, convey, lease, mortgage, pledge or otherwise
dispose of or
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encumber any of the Assets, or any interests therein, except in the ordinary
course of business, and without limiting the generality of the foregoing, each
Seller shall continue to operate the Business consistent with its past
practices;
(c) incur any indebtedness for borrowed money or commitment to borrow
money, other than Financing Obligations, guarantee the obligations of others,
indemnify others or, except in the ordinary course of business, incur any other
Liability;
(d) (i) take any action with respect to the grant of any bonus, severance
or termination pay or with respect to any increase of benefits payable under the
Partnership's severance or termination pay policies or agreements in effect on
the date hereof or increase in any manner the compensation or fringe benefits of
any employee or pay any benefit not required by any existing Employee Benefit
Plan or policy;
(ii) make any change in the key management structure of the
Partnership, including without limitation the hiring of additional management
personnel or the termination of existing management personnel;
(iii) adopt, enter into or amend any Employee Benefit Plan,
agreement (including without limitation any collective bargaining or employment
agreement), trust, fund or other arrangement for the benefit or welfare of any
employee, except for any such amendment as may be required or, in Sellers'
reasonable determination, desirable to comply with applicable Regulations; or
(iv) fail to maintain all Employee Benefit Plans in accordance with
applicable Regulations in any material respect;
(e) cause the Partnership to acquire by merger or consolidation with, or
merge or consolidate with, or purchase all or substantially all of the assets
of, or otherwise acquire any material assets or business of any corporation,
partnership, association or other business organization or division thereof;
(f) declare, set aside, make or pay any distribution in respect of any
Seller's partnership interest;
(g) expend funds for budgeted capital expenditures or commitments for or
on behalf of the Partnership otherwise than in accordance with the capital
budget agreed to by Purchaser and the Partnership;
(h) willingly allow or permit to be done, any act by which any of the
Insurance Policies may be suspended, impaired or canceled;
(i) (A) fail to pay its accounts payable and any debts owed or
obligations due to it, or pay or discharge when due any Liabilities, in the
ordinary course of business; or
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(B) fail to collect its accounts receivable in the ordinary course of
business;
(j) fail to maintain the Assets in substantially their current state of
repair, excepting normal wear and tear or fail to replace consistent with each
Seller's past practice inoperable, worn-out or obsolete or destroyed Assets;
(k) make any loans or advances on behalf of the Partnership to any
partnership, firm or corporation, or, except for expenses incurred in the
ordinary course of business, any individual;
(l) make any income tax election or settlement or compromise with tax
authorities on behalf of the Partnership;
(m) fail to comply with all Regulations applicable to it, the Assets and
the Business;
(n) intentionally do any other act which would cause any representation or
warranty of any Seller in this Agreement to be or become untrue in any material
respect;
(o) sell, transfer, assign, pledge or encumber any partnership interests
in, or any other ownership interests of, the Partnership or repurchase or commit
to repurchase, partnership interests in, or any other ownership interests of,
the Partnership held by any of the Partners;
(p) fail to use its best efforts to (i) retain the Partnership's employees
and (ii) maintain the Business so that such employees will remain available to
the Partnership on and after the Closing Date, (iii) maintain existing
relationships with suppliers, customers and others having business dealings with
any Seller and (iv) otherwise to preserve the goodwill of the Business so that
such relationships and goodwill will be preserved on and after the Closing Date;
(q) enter into any agreement, or otherwise become obligated, to do any
action prohibited hereunder;
(r) make or change any tax election affecting the Assets in the hands of
Purchaser; or
(s) fail to pay, or cause to be paid, when due all Taxes for which the
Partnership or any of the Partners (directly or indirectly through the
Partnership) are or may become liable or that are or may become payable with
respect to any taxable period ending on or prior to the Closing Date.
SECTION 7.6 EMPLOYMENT AGREEMENTS.
(a) Purchaser and each Partner shall enter into an Employment Agreement,
to be effective as of the Closing in substantially the form of Exhibit D hereto.
The Employment Agreements shall each provide (i) for a term of up to three
years, subject to Purchaser's Board of Director's right to terminate a Partner
for performance-related matters, (ii) for a base salary for
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the Partner party thereto as set forth on such person's Employment Agreement,
(iii) for coverage under the Purchaser's hospitalization, medical, surgical,
dental, life insurance and other welfare plans and programs, and (iv) for four
weeks' vacation with pay. Purchaser shall not be required to hire or offer
employment to any other employee of the Partnership. In the event Purchaser
determines to hire such persons, however, all employees of the Business who
become employed by Purchaser as of the Closing (or upon expiration of an
approved leave of absence) are hereinafter referred to individually as a
"Transferred Employee" and collectively as the "Transferred Employees."
(b) Effective as of the Closing (or the date an employee becomes a
Transferred Employee, if later), all Transferred Employees shall cease to
participate in, or accrue benefits under, any of the Partnerships' Plans, and
the Partnership shall be solely responsible for all of its Plans and all
obligations and liabilities thereunder. Purchaser shall not assume any Plan of
the Partnership or any obligation or liability thereunder. Sellers shall be
responsible for (i) terminating all employees of the Partnership who are not
employed by Purchaser, and shall be responsible for any and all obligations and
liabilities arising in connection with such terminations, including without
limitation, any severance or other termination pay, retirement and welfare
benefits, (ii) providing the appropriate notices to the employees of the
Business pursuant to Section 4980B of the Code and Part 6 of Title I of ERISA,
(iii) all liabilities, including without limitation, the cost of extended
insurance coverage, for any employee of the Partnership not actively employed by
the Partnership on the Closing Date until such time, if ever, that such employee
returns to active employment and is employed by Purchaser.
(c) Nothing contained in this Agreement shall confer upon any Transferred
Employee that is not a Partner any right with respect to continuance of
employment by Purchaser, nor shall anything herein interfere with the right of
Purchaser to terminate the employment of any (i) Transferred Employee that is
not a Partner at any time, with or without cause, and (ii) any
Transferred Employee that is a Partner, at any time, with cause, or restrict
Purchaser in the exercise of its independent business judgment in modifying any
of the terms and conditions of the employment of the Transferred Employees that
are not Partners after the Closing Date.
(d) No provision of this Agreement shall create any third party
beneficiary rights in any Transferred Employee, any beneficiary or dependents
thereof, or any collective bargaining representative thereof, with respect to
the compensation, terms and conditions of employment and benefits that may be
provided to any Transferred Employee by Purchaser or under any benefit plan
which Purchaser may maintain.
(e) Prior to and until Closing, each Partner, as an employee of the
Partnership, shall receive his salary and hospitalization, medical, surgical,
dental, life insurance and any other welfare and benefits plans and programs,
comparable to what such Partner, as an employee of the Partnership, is receiving
as of the date of this Agreement.
SECTION 7.7 HOLLYWOOD LEASE. At the Closing, the Hollywood Lease
between Purchaser and Sellers shall be executed and delivered to Purchaser.
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SECTION 7.8 AGREEMENTS NOT TO COMPETE.
(a) As additional consideration for the payments made or to be made by
Purchaser hereunder, from the date hereof to and including the third anniversary
of the date hereof, each Seller hereby agrees that he, she or it shall not, for
any reason, directly or indirectly, engage or be interested in any business that
Competes with Purchaser, and shall not, directly or indirectly, have any
interest in, own, manage, operate, control, be connected with as a stockholder
(other than as a stockholder of less than five percent (5%) of the issued and
outstanding stock of a publicly-held corporation), joint venturer, officer,
partner, employee or consultant, or otherwise engage or invest or participate
in, any business that Competes with Purchase; PROVIDED HOWEVER, that the
Partners may engage in the production business (defined to mean the creation of
media content) without violating this agreement not to compete, PROVIDED
FURTHER, HOWEVER, that the Partners may not engage in the production business at
Purchaser's facilities or while employed by Purchaser without Purchaser's prior
written consent. As used herein, the term "Competes" with Purchaser shall mean
competing with any of the businesses conducted by the Partnership at any time
during the three year period preceding the date hereof in any county or any
other political subdivision of any state of the United States of America or any
of its possessions or territories where Sellers conducted or contemplated
conducting such businesses at any time during the three year period preceding
the date hereof. All of the parties agree that the duration and area for which
the covenant not to compete set forth in this Section 7.8 is to be effective are
reasonable. In the event that any court determines that the time period or the
geographical areas provided for in this Section 7.8, or both of them, are
unreasonable and that such covenant is to that extent unenforceable, such
covenant shall remain in full force and effect for the greatest time period and
in the greatest geographical area that would not render it unenforceable. The
parties intend that this covenant shall be deemed to be a series of separate
covenants, one for each and every county of each and every state of the United
States of America and for any other territory or possession of the United States
of America where this covenant is intended to be effective.
(b) The parties agree that damages would be an inadequate remedy for
Purchaser in the event of a breach or threatened breach of this Agreement and
thus, in any such event, Purchaser may, either with or without pursuing any
potential damage remedies and in addition to such remedies, immediately obtain
and enforce an injunction, and/or a temporary restraining order, prohibiting any
Seller from violating this Agreement, without having to prove actual damages or
post bond. The parties agree that this Section 7.8 shall be enforceable
regardless of whether or not any Partner is employed by Purchaser hereunder.
SECTION 7.9 COLLECTION OF ACCOUNTS RECEIVABLE AND LETTERS OF CREDIT. At
the Closing, Purchaser shall acquire hereunder, and thereafter Purchaser or its
designee shall have the right and authority to collect for Purchaser's or its
designee's account, all receivables, letters of credit and other items which
constitute a part of the Assets, and each Seller shall within 48 hours after
receipt of any payment in respect of any of the foregoing, properly endorse and
deliver to Purchaser any letters of credit, documents, cash or checks received
on account of or otherwise relating to any such receivables, letters of credit
or other items related to the Partnership or the Business. Each Seller shall
promptly transfer or deliver to Purchaser or its
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designee any cash or other property that such Seller may receive in respect of
any deposit, prepaid expense, claim, contract, license, lease, commitment, sales
order, purchase order, letter of credit or receivable of any character, or any
other item, constituting a part of the Assets.
SECTION 7.10 BOOKS AND RECORDS; TAX MATTERS.
(a) BOOKS AND RECORDS. Purchaser shall retain all Books and Records in
the possession of Purchaser after the Closing Date relating to the operation of
the Facilities and the Business prior to the Closing in accordance with all
applicable records retention Regulations, including without limitation, all
Environment Laws and occupational health and safety laws and regulations. Each
party agrees that it shall cooperate with and make available to the other party,
during normal business hours, all Books and Records, information and employees
(without substantial disruption of employment) retained and remaining in
existence after the Closing which are necessary or useful in connection with any
tax, environmental or occupational health and safety inquiry, audit,
investigation or dispute, any litigation or investigation or any other matter
requiring any such Books and Records, information or employees for any
reasonable business purpose. The party requesting any such Books and Records,
information or employees shall bear all of the out-of-pocket costs and expenses
(including without limitation attorneys' fees) reasonably incurred in connection
with providing such Books and Records, information or employees. All
information received pursuant to this Section 7.10(a) shall be treated as
confidential and not disclosed to any person or entity other than the
Representatives of Sellers or Purchaser, as the case may be, who need to know
such information in connection with the proceedings contemplated by this
Section 7.10(a).
(b) COOPERATION AND RECORDS RETENTION. Sellers and Purchaser shall (i)
each provide the other with such assistance as may reasonably be requested by
any of them in connection with the preparation of any return, audit, or other
examination by any taxing authority or judicial or administrative proceedings
relating to Liability for Taxes, (ii) each retain and provide the other with any
records or other information that may be relevant to such return, audit or
examination, proceeding or determination, and (iii) each provide the other with
any final determination of any such audit or examination, proceeding, or
determination that affects any amount required to be shown on any tax return of
the other for any period. Without limiting the generality of the foregoing,
Purchaser and each Seller shall each retain, until the applicable statutes of
limitations (including any extensions) have expired, copies of all tax returns,
supporting work schedules, and other records or information that may be relevant
to such returns for all tax periods or portions thereof ending on or before the
Closing Date and shall not destroy or otherwise dispose of any such records
without first providing the other party with a reasonable opportunity to review
and copy the same.
SECTION 7.11 BULK SALES. It may not be practicable to comply or attempt
to comply with the procedures of the "Bulk Sales Act" or similar law of any or
all of the states in which the Assets are situated or of any other state which
may be asserted to be applicable to the transactions contemplated hereby.
Accordingly, to induce Purchaser to waive any requirements for compliance with
any or all of such laws, each Seller hereby agrees that the indemnity
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provisions of Section 11.2 hereof shall apply to any Damages of Purchaser or any
institution providing financing to Purchaser arising out of or resulting from
the failure of any Seller or Purchaser to comply with any such laws.
SECTION 7.12 OPERATION OF BUSINESS AFTER CLOSING. From and after the
Closing Date until payment in full of each of the Earn-Out Notes is made,
Purchaser agrees to (a) operate, or cause to be operated, the Assets as a
separate division unconsolidated with and apart from Purchaser's other
businesses and assets or (b) to account on the books and records of Purchaser
for all such Assets as a separate division unconsolidated with and apart from
Purchaser's other businesses and assets.
SECTION 7.13 CONFIDENTIALITY. Unless and until the Closing has been
consummated, Purchaser and its officers, directors and other representatives
will hold in strict confidence, and will not use to the detriment of the
Partnership, all data and information with respect to the Business obtained in
connection with this transaction, subject to the requirements of law. In the
event of the termination or rescission of this Agreement for any reason or the
return of the Assets pursuant to Section 2 hereof, Purchaser will return to the
Partnership all documents, work papers, and other materials (including copies)
relating to the Transactions, whether obtained before or after execution of this
Agreement and the confidentiality requirements of this Section 7.13 shall
terminate.
ARTICLE VIII
CONDITIONS TO THE PARTNERSHIP'S OBLIGATIONS
The obligations of the Partnership to consummate the transactions provided
for hereby are subject, in the discretion of the Partnership, to the
satisfaction, on or prior to the Closing Date, of each of the following
conditions, any of which may be waived by the Partnership by written notice to
Purchaser:
SECTION 8.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations and warranties of Purchaser contained in this Agreement shall be
true and correct in all material respects at and as of the date of this
Agreement and at and as of the Closing Date, except as and to the extent that
the facts and conditions upon which such representations and warranties are
based are expressly required or permitted to be changed by the terms hereof, and
Purchaser shall have performed and satisfied in all material respects all
agreements and covenants required hereby to be performed by it prior to or on
the Closing Date.
SECTION 8.2 CONSENTS; REGULATORY COMPLIANCE AND APPROVAL. All consents,
approvals and waivers set forth on Schedule 4.2 shall have been obtained.
SECTION 8.3 NO ACTIONS OR COURT ORDERS. No Action by any governmental
authority or other person shall have been instituted or threatened which
questions the validity or legality of
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the transactions contemplated hereby and which could reasonably be expected to
damage the Partnership materially if the transactions contemplated hereby are
consummated. There shall not be any Regulation or Court Order that makes the
purchase and sale of the Business or the Assets contemplated hereby illegal or
otherwise prohibited.
SECTION 8.4 ASSUMPTION DOCUMENT. Purchaser shall have executed the
Assumption Document.
SECTION 8.5 ANCILLARY AGREEMENTS. Purchaser shall have executed and
delivered the Ancillary Agreements to which it is a party.
ARTICLE IX
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of Purchaser to consummate the transactions provided for
hereby are subject, in the discretion of Purchaser, to the satisfaction, on or
prior to the Closing Date, of each of the following conditions, any of which may
be waived by Purchaser by written notice to the Partnership:
SECTION 9.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations and warranties of Sellers contained in this Agreement shall be
true and correct in all respects at and as of the date of this Agreement and at
and as of the Closing Date, except as and to the extent that the facts and
conditions upon which such representations and warranties are based are
expressly required or permitted to be changed by the terms hereof, and Sellers
shall have performed and satisfied all agreements and covenants required hereby
to be performed by them prior to or on the Closing Date.
SECTION 9.2 CONSENTS; REGULATORY COMPLIANCE AND APPROVAL. Any necessary
consents to the assignment of all Contracts and Leases shall have been
obtained. All Permits, consents, approvals and waivers from governmental
authorities necessary to the consummation of the transactions contemplated
hereby by Purchaser shall have been obtained. Purchaser shall be satisfied
that all approvals required under any Regulations to carry out the transactions
contemplated by this Agreement shall have been obtained and that the parties
shall have complied with all Regulations applicable to such transactions.
SECTION 9.3 NO ACTIONS OR COURT ORDERS. No Action by any governmental
authority or other person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby and
which could reasonably be expected to damage Purchaser, the Assets or the
Business materially if the transactions contemplated hereby are consummated,
including without limitation any material adverse effect on the right or ability
of Purchaser to own, operate, possess or transfer the Assets after the Closing.
There shall not be any Regulation or Court Order that makes the purchase and
sale of the Business or the Assets
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contemplated hereby illegal or otherwise prohibited.
SECTION 9.4 OPINION OF COUNSEL. The Partnership shall have delivered to
Purchaser an opinion of Edwards, Edwards & Ashton, counsel to the Partnership,
dated as of the Closing Date, in form and substance reasonably satisfactory to
Purchaser, to the effect that:
(a) The Partnership is a general partnership duly organized, validly
existing and in good standing under the laws of the State of California;
(b) The Partnership has the necessary partnership power and authority to
enter into this Agreement and the Ancillary Agreements to which it is a party
and to consummate the transactions contemplated hereby and thereby;
(c) The execution, delivery and performance of this Agreement and the
Ancillary Agreements by the Partnership has been duly authorized by all
necessary action of the Partnership and the Partners, and this Agreement and
each of the Ancillary Agreements to which it is a party constitute legally valid
and binding obligations of the Partnership and the Partners, enforceable against
each of the Partnership and the Partners, in accordance with their terms, except
as limited by (i) bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights generally or by equitable principles
(whether considered in an action at law or in equity) and (ii) limitations
imposed by federal or state law or equitable principles upon the availability of
specific performance, injunctive relief or other equitable remedies;
(d) The documents to be delivered by Sellers at the Closing to effect the
transfer and assignment to Purchaser of all right, title and interest in and to
the Assets are effective to do so, subject to (i) the effects of bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
creditors' rights generally and equitable principles (whether considered in an
action at law or in equity) and, (ii) limitations imposed by federal or state
law or equitable principles upon the availability of specific performance,
injunctive relief or other equitable remedies.
SECTION 9.5 CERTIFICATES. Sellers shall furnish Purchaser with such
certificates to evidence compliance with the conditions set forth in this
Article IX as may be requested by Purchaser.
SECTION 9.6 MATERIAL CHANGES. As of the Closing Date, since December
31, 1995, there shall not have been any actual or threatened adverse change in
the Business or the Assets or the liabilities, earnings, results of operations,
condition (financial or otherwise) or prospects of the Partnership.
SECTION 9.7 CONVEYANCING DOCUMENTS; RELEASE OF ENCUMBRANCES. Sellers
shall have executed and delivered each of the documents described in Section 4.2
hereof so as to effect the transfer and assignment to Purchaser of all right,
title and interest in and to the Assets, and Sellers shall have filed (where
necessary) and delivered to Purchaser all documents necessary to
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release the Assets from all Encumbrances, which documents shall be in a form
reasonably satisfactory to Purchaser's counsel.
SECTION 9.8 PERMITS. Purchaser shall have obtained or been granted the
right to use all Permits.
SECTION 9.9 OTHER AGREEMENTS. Sellers shall have executed and delivered
the Ancillary Agreements in the forms attached as exhibits hereto.
SECTION 9.10 TAX CLEARANCE CERTIFICATE. Sellers shall provide Purchaser
with a clearance certificate or similar document(s) that may be required by any
state taxing authority in order to relieve Purchaser of any obligation to
withhold any portion of the Purchase Price for tax purposes.
SECTION 9.11 NONFOREIGN AFFIDAVIT. Each Seller shall furnish Purchaser
with an affidavit, stating, under penalty of perjury, such Seller's United
States taxpayer identification number (or social security number) and that such
Seller is not a foreign person, pursuant to Section 1445(b)(2) of the Code.
SECTION 9.12 CUSTOMER RELATIONS. Purchaser shall be satisfied with the
business relationship of any Seller with any customer named in
Section 5.17(a)(i) of the Disclosure Schedule.
SECTION 9.13 DUE DILIGENCE. Purchaser shall be satisfied, in its sole
discretion, with the results of its due diligence investigation.
SECTION 9.14 CERTAIN FINANCIAL ARRANGEMENTS. Purchaser shall have
obtained financing and other credit arrangements with a third party satisfactory
to Purchaser, in its sole discretion, in connection with the Purchase Price
payments and any other costs, fees and expenses of Purchaser hereunder or in
connection with any other document or instrument required to be executed and
delivered by Purchaser in connection herewith, and the transactions contemplated
hereby or thereby.
ARTICLE X
RISK OF LOSS
SECTION 10.1 RISK OF LOSS. From the date hereof through and including
the Closing Date, all risk of loss or damage to the Assets shall be borne by
Sellers, and thereafter shall be borne by Purchaser. If any material portion of
the Assets is destroyed or damaged by fire or any other cause on or prior to the
Closing Date, other than use, wear or loss in the ordinary course of business,
Sellers shall give written notice to Purchaser as soon as practicable after, but
in any event within five (5) calendar days of, discovery of such damage or
destruction, which notice shall set forth in detail the nature of such damage or
destruction, the amount of insurance, if any,
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covering such Assets and the amount, if any, which Sellers are otherwise
entitled to receive as a consequence. Prior to the Closing, Purchaser shall
have the option, which shall be exercised by written notice to Sellers within
ten (10) calendar days after receipt of Sellers' notice or if there is not ten
(10) calendar days prior to the Closing Date, as soon as practicable prior to
the Closing Date, of (a) accepting such Assets in their destroyed or damaged
condition in which event Purchaser shall be entitled to the proceeds of any
insurance or other proceeds payable with respect to such loss and the Purchase
Price shall be reduced by the amount, if any, mutually agreed upon between the
parties, (b) excluding such Assets from this Agreement, in which event the
Purchase Price shall be reduced by the amount allocated to such Assets, as
mutually agreed between the parties or (c) terminating this Agreement in
accordance with Section 12.1. If Purchaser accepts such Assets, then after the
Closing, any insurance or other proceeds shall belong, and shall be assigned to,
Purchaser without any reduction in the Purchase Price; otherwise, such insurance
proceeds shall belong to the Partnership.
ARTICLE XI
INDEMNIFICATION
SECTION 11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF SELLERS. The
representations and warranties made by Sellers in Article V of this Agreement
and any document, schedule, exhibit or other instrument relating hereto,
respectively, shall survive the date hereof for the following stated periods:
(a) With respect to all representations and warranties other than those
made in Sections 5.1, 5.2, 5.5, 5.12, 5.13, 5.14 and 5.20, for a period of two
(2) years;
(b) With respect to the representations and warranties made in
Sections 5.1, 5.2, 5.5, 5.12, 5.13 and 5.16 for a period of ten (10) years; and
(c) With respect to the representations and warranties made in Sections
5.14 and 5.20 for a period equal to the relevant statute of limitations.
Notwithstanding anything contained in this Agreement, including, without
limitation, this Section 11.1, any claims with respect to representations and
warranties made by Sellers in this Agreement or in any document or other
instrument relating hereto shall survive and continue following the expiration
of the respective survival periods stated above (i) if such claim is submitted
in writing to Sellers prior to the end of the respective survival periods stated
in this Section 11.1 or otherwise and identified as a claim for indemnification
pursuant to this Agreement or (ii) if such claim is based upon fraud or willful
breach or misrepresentation by any Seller. In either event, such claims shall
survive indefinitely.
SECTION 11.2 INDEMNIFICATION BY SELLERS. Each Seller shall, jointly and
severally, indemnify and hold harmless Purchaser and each of Purchaser's
Affiliates, directors, officers, employees, attorneys, agents and
Representatives (collectively, the "Affiliated Parties") in
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respect of any and all claims, losses, damages, liabilities, declines in value
of the assets, penalties, interest, costs and expenses, including, without
limitation, reasonable attorneys', accountants' and consultants' fees and other
expenses (collectively, "Damages"), incurred by Purchaser or Purchaser's
Affiliated Parties, together with interest on cash disbursements in connection
therewith, at an annual rate equal to the Prime Rate then in effect, from the
date such cash disbursements were made by Purchaser or any of their respective
Affiliated Parties until paid by such Seller, in connection with, or resulting
from, any or all of the following:
(a) Any breach or inaccuracy of any representation or warranty made by
such Seller in Article V of this Agreement or in any document, schedule, exhibit
or other instrument relating hereto;
(b) Any misrepresentation contained in any written statement or
certificate furnished by such Seller pursuant to this Agreement or the
Transactions;
(c) Any failure to perform or comply with any covenant, agreement or
obligation of such Seller contained in this Agreement or any document or other
instrument contemplated by this Agreement;
(d) Any injury to persons or death or property damage resulting from or
contributed to by any products designed, manufactured, sold or leased by any of
the Sellers or any services performed by any of the Sellers if the accident,
incident or occurrence giving rise to such claim, action, lawsuit or proceeding
occurred prior to the Closing Date; and
(e) With respect to any claim arising out of the failure of any Seller to
comply with the bulk transfer or bulk sales laws of any jurisdiction in
accordance with Section 7.11.
SECTION 11.3 INDEMNIFICATION BY SELLERS FOR TAX LIABILITIES. In addition
to, and not by way of limitation on, the indemnities set forth in Section 11.2,
Sellers shall, jointly and severally, indemnify and hold harmless on an
after-tax basis Purchaser against all unpaid Taxes of the Partnership for all
taxable periods ending on or before the Closing Date or otherwise attributable
to the operations, transactions, assets, or income of the Partnership or its
predecessors prior to the Closing Date or otherwise arising from the
consummation of the Transactions as of the date hereof, together with any
expenses (including, without limitation, reasonable attorneys', accountants' and
consultants' fees and other expenses) incurred in connection with the
contesting, collection or assessment of such Taxes, and together with interest
at an annual rate equal to the Prime Rate then in effect.
SECTION 11.4 INDEMNIFICATION BY SELLERS FOR ENVIRONMENTAL MATTERS. For a
period of five (5) years, in addition to, and not by way of limitation on, the
indemnities set forth in Section 11.2, Sellers shall, jointly and severally,
indemnify and hold harmless Purchaser and Purchaser's Affiliated Parties in
respect of any and all claims, losses, damages, liabilities, declines in value
of the Assets or the Business, penalties, interest, costs and expenses
(including, without limitation, reasonable attorneys', accountants', and
consultants' fees and other expenses)
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incurred by Purchaser or Purchaser's Affiliated Parties, together with interest
on cash disbursements in connection therewith, at an annual rate equal to the
Prime Rate then in effect, from the date such cash disbursements were made by
Purchaser or any of Purchaser's Affiliated Parties until paid by Sellers, in
connection with, or resulting from, any Environmental Liabilities for Pre-
Closing Matters including, without limitation, any of the matters described on
Schedule 5.13, regardless of the diligence performed or investigation made by
Purchaser or its Representatives with respect thereto.
SECTION 11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF PURCHASER.
The representations and warranties made by Purchaser in Article VI of this
Agreement and any document or other instrument relating hereto shall survive the
date hereof for a period of two (2) years. Notwithstanding anything contained
in this Agreement, including, without limitation, this Section 11.5, any claims
with respect to representations and warranties made by Purchaser in this
Agreement or in any document or other instrument relating hereto shall survive
and continue following the expiration of the survival period stated above (i) if
such claim is submitted in writing to Purchaser prior to the end of the survival
period stated in this Section 11.5 or otherwise and identified as a claim for
indemnification pursuant to this Agreement or (ii) if such claim is based upon
fraud by Purchaser. In either event, such claims shall survive until they are
resolved.
SECTION 11.6 INDEMNIFICATION BY PURCHASER. Purchaser shall indemnify and
hold harmless the Partnership in respect of any and all Damages reasonably
incurred by the Partnership, together with interest on cash disbursements in
connection therewith, at an annual rate equal to the Prime Rate then in effect,
from the date that such cash disbursements were made by the Partnership until
paid by Purchaser, in connection with, or resulting from, any or all of the
following:
(a) Any breach of any representation or warranty made by Purchaser in
Article VI of this Agreement or in any document or other instrument relating
hereto;
(b) Any misrepresentation contained in any written statement or
certificate furnished by Purchaser to such Seller pursuant to this Agreement or
the Transactions;
(c) Any breach of any covenant, agreement or obligation of Purchaser
contained in this Agreement or any document or other instrument contemplated by
this Agreement; and
(d) Liabilities of the Business to parties other than Sellers arising in
relation to the Assets or the Assumed Liabilities resulting from events
occurring after the Closing Date.
PROVIDED, HOWEVER, that Purchaser's obligations set forth in this Section shall
not apply to any. Damages that arise from or are related to any willful
misconduct or gross negligence by any Seller.
SECTION 11.7 CLAIMS FOR INDEMNIFICATION. Whenever any claim shall arise
for
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indemnification under this Agreement, the party entitled to indemnification (the
"Indemnified Party") shall promptly notify the party obligated to provide
indemnification (the "Indemnifying Party") of the claim and, when known, the
facts constituting the basis for such claim; PROVIDED, HOWEVER, that the failure
to so notify the Indemnifying Party shall not relieve the Indemnifying Party of
its obligation hereunder to the extent such failure does not materially
prejudice the Indemnifying Party. In the event of any claim for indemnification
hereunder resulting from or in connection with any claim or legal proceedings by
a third party, the notice to the Indemnifying Party shall specify, if known, the
amount or an estimate of the amount of the liability arising therefrom.
SECTION 11.8 DEFENSE OF CLAIMS. In connection with any claim giving rise
to indemnity under this Agreement resulting from or arising out of any claim or
legal proceeding by a person who is not a party to this Agreement, the
Indemnifying Party at its sole cost and expense and with counsel reasonably
satisfactory to the Indemnified Party may, upon written notice to the
Indemnified Party, assume the defense of any such claim or legal proceeding if
(a) the Indemnifying Party acknowledges to the Indemnified Party in writing,
within fifteen (15) days after receipt of notice from the Indemnified Party, its
obligations to indemnify the Indemnified Party with respect to all elements of
such claim based upon the facts then reasonably known to such Indemnifying
Party, (b) the Indemnifying Party provides the Indemnified Party with evidence
reasonably acceptable to the Indemnified Party that the Indemnifying Party will
have the financial resources to defend against such third-party claims and
fulfill its indemnification obligations hereunder, (c) the third-party claim
involves only money damages and does not seek an injunction or other equitable
relief, and (d) settlement or an adverse judgment of the third-party claim is
not, in the good faith judgment of the Indemnified Party, likely to establish a
pattern or practice adverse to the continuing business interests of the
Indemnified Party. The Indemnified Party shall be entitled to participate in
(but not control) the defense of any such action, with its counsel and at its
own expense; PROVIDED, HOWEVER, that if there are one or more legal defenses
available to the Indemnified Party that conflict with those available to the
Indemnifying Party, or if the Indemnifying Party fails to take reasonable steps
necessary to defend diligently the claim after receiving notice from the
Indemnified Party that it believes the Indemnifying Party has failed to do so,
the Indemnified Party may assume the defense of such claim; PROVIDED, FURTHER,
that the Indemnified Party may not settle such claim without the prior written
consent of the Indemnifying Party, which consent may not be unreasonably
withheld. If the Indemnified Party assumes the defense of the claim, the
Indemnifying Party shall reimburse the Indemnified Party for the reasonable fees
and expenses of counsel retained by the Indemnified Party and the Indemnifying
Party shall be entitled to participate in (but not control) the defense of such
claim, with its counsel and at its own expense. If the Indemnifying Party
thereafter seeks to question the manner in which the Indemnified Party defended
such third party claim or the amount or nature of any such settlement, the
Indemnifying Party shall have the burden to prove by a preponderance of the
evidence that the Indemnified Party did not defend or settle such third party
claim in a reasonably prudent manner. The parties agree to render, without
compensation, to each other such assistance as they may reasonably require of
each other in order to insure the proper and adequate defense of any action,
suit or proceeding, whether or not subject to indemnification hereunder. If the
indemnification provided for in this Article XI is for
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any reason unenforceable, the party against whom indemnification was sought
agrees to contribute to the claims for which such indemnification is
unenforceable in such proportion as is appropriate to reflect the relative fault
of such party, on the one hand, and the Indemnified Party, on the other hand, as
well as any other relevant equitable considerations.
SECTION 11.9 MANNER OF INDEMNIFICATION. All indemnification payments
hereunder shall be effected by payment of cash or delivery of a certified or
official bank check in the amount of the indemnification liability.
SECTION 11.10 SET OFF. To the extent that Purchaser or Purchaser's
Affiliated Parties suffer any Damages for which Sellers are liable to Purchaser
or Purchaser's Affiliated Parties under the provisions of Section 11.2,
Purchaser shall have the right to reduce the amount of the Earn-Out by the
amount of such Damages. The parties acknowledge that such reduction shall not
be the exclusive method of receiving indemnification from Sellers pursuant to
this Article XI. If the Partners dispute Purchaser's claim of setoff under this
Section 11.10, they shall so notify the Chief Executive Officer of Purchaser in
writing. Within 15 days Purchaser shall inform the Partnership of the grounds
for such setoff. If the Partner's still dispute Purchaser's claim of setoff,
they shall so notify the Chief Executive Officer of Purchaser in writing. Upon
receipt of such second notice, Purchaser shall deposit or allocate the disputed
amount into a segregated account maintained by Purchaser, pending resolution of
the dispute (which dispute shall be submitted to binding arbitration if the
amount in controversy is less thatn $25,000 and to judicial process if the
amount is $25,000 or more). Unless the Partners timely dispute Purchaser's
setoff in accordance with the foregoing, Sellers shall be deemed to have
irrevocably waived any objection to such setoff.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 TERMINATION.
(a) TERMINATION. This Agreement may be terminated at any time prior to
Closing:
(i) By mutual written consent of Purchaser and the Partnership;
(ii) By Purchaser or Sellers if the Closing shall not have occurred on
or before February 28, 1997; PROVIDED, HOWEVER, that this provision shall not be
available to Purchaser if Sellers have the right to terminate this Agreement
under clause (iv) of this Section 12.1, and this provision shall not be
available to Sellers if Purchaser has the right to terminate this Agreement
under clause (iii) of this Section 12.1;
(iii) By Purchaser if there is a material breach of any
representation or warranty set forth in Article V hereof or any covenant or
agreement to be complied with or performed by any Seller pursuant to the terms
of this Agreement or the failure of a condition set
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forth in Article IX to be satisfied (and such condition is not waived in writing
by Purchaser) on or prior to the Closing Date, or the occurrence of any event
which results or would result in the failure of a condition set forth in Article
IX to be satisfied on or prior to the Closing Date;
(iv) By the Partnership if there is a material breach of any
representation or warranty set forth in Article VI hereof or of any covenant or
agreement to be complied with or performed by Purchaser pursuant to the terms of
this Agreement or the failure of a condition set forth in Article VIII to be
satisfied (and such condition is not waived in writing by the Partnership) on or
prior to the Closing Date, or the occurrence of any event which results or would
result in the failure of a condition set forth in Article VIII to be satisfied
on or prior to the Closing Date, PROVIDED that, the Partnership may not
terminate this Agreement prior to the Closing Date if Purchaser has not had an
adequate opportunity (in any event, not to exceed twenty (20) calendar days) to
cure such failure.
(b) IN THE EVENT OF TERMINATION. In the event of termination of this
Agreement:
(i) Each party shall redeliver all documents, work papers and other
material of any other party relating to the transactions contemplated hereby,
whether so obtained before or after the execution hereof, to the party
furnishing the same (and shall destroy all copies in their possession); and
(ii) No party hereto shall have any Liability to any other party to
this Agreement, except as stated in subsections (i) and (ii) of this
Section 12.1(b) and Sellers' obligations under Section 7.2, except for any
willful breach of this Agreement occurring prior to the termination of this
Agreement.
SECTION 12.2 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or by facsimile transmission (with subsequent letter
confirmation by mail) or three days after being mailed by certified or
registered mail, postage prepaid, return receipt requested, to the parties,
their successors in interest or their assignees at the following addresses, or
at such other addresses as the parties may designate by written notice in the
manner aforesaid:
If to Purchaser: VDI Media
6920 Sunset Boulevard
Los Angeles, California 90028
Telecopy: (213) 957-2164
Attention: Donald R. Stine
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With a concurrent copy to: Kaye, Scholer, Fierman, Hays & Handler, LLP
1999 Avenue of the Stars, Suite 1600
Los Angeles, California 90067
Telecopy: (310) 788-1200
Attention: Sheri Jeffrey, Esq.
Barry L. Dastin, Esq.
If to any Seller: Woodholly Productions
712 Seward Street
Los Angeles, California
Telecopy: (213) 466-8469
Attention: Ms. Yvonne Parker
With a concurrent copy to: Edwards, Edwards & Ashton
420 North Brand Boulevard, Suite 500
Glendale, California 91203
Telecopy: (818) 247-7025
Attention: Wilbur Gin, Esq.
Eric A. Ashton, Jr., Esq.
SECTION 12.3 ASSIGNABILITY AND PARTIES IN INTEREST. This Agreement shall
not be assignable by any of the parties, except that Purchaser may assign its
rights hereunder to, and have its obligations hereunder assumed by a
wholly-owned subsidiary of Purchaser. This Agreement shall inure to the benefit
of and be binding upon the parties and their respective permitted successors and
assigns.
SECTION 12.4 GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of California.
SECTION 12.5 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
SECTION 12.6 COMPLETE AGREEMENT. This Agreement, the exhibits and
schedules hereto and the documents delivered or to be delivered pursuant to this
Agreement contain or will contain the entire agreement among the parties with
respect to the Transactions and shall supersede all previous oral and written
and all contemporaneous oral negotiations, commitments and understandings.
SECTION 12.7 MODIFICATIONS, AMENDMENTS AND WAIVERS. This Agreement may
be modified, amended or otherwise supplemented only by a writing signed by
Purchaser and the Partnership. No waiver of any right or power hereunder shall
be deemed effective unless and until a writing waiving such right or power is
executed by the party waiving such right or power.
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SECTION 12.8 EXPENSES. Except as otherwise expressly provided elsewhere
in this Agreement, each party shall pay all fees and expenses incurred by it in
connection with the transactions contemplated by this Agreement.
SECTION 12.9 INVALIDITY. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
SECTION 12.10 PUBLICITY. Neither Purchaser, on the one hand, nor any
Seller, including Representatives or Affiliates thereof, on the other hand,
shall issue any press release or make any public statement regarding the
transactions contemplated hereby, without prior written approval of the other
parties, provided that Purchaser may describe the Transactions and the
Partnership, and include the Financial Statements, in any document filed in
connection with the offer and sale of its securities under applicable law.
SECTION 12.11 LIMIT ON INTEREST. Notwithstanding anything in this
Agreement to the contrary, no party shall be obligated to pay interest at a rate
higher than the maximum rate permitted by applicable law. In the event that at
any time an interest rate provided in this Agreement exceeds the maximum rate
permitted by applicable law, such interest rate shall be deemed to be reduced to
such maximum permissible rate.
SECTION 12.12 ATTORNEYS' FEES AND COSTS. Each party shall bear its own
expenses arising from the preparation, negotiation and delivery of this
Agreement and any other document required to be delivered in connection
herewith; PROVIDED, HOWEVER, that Purchaser shall solely bear the costs of the
Audit, unless this Agreement is terminated prior to Closing for any reason other
than the bad faith or willful misconduct by Purchaser, in which event the
Partnership, on the one hand, and Purchaser, on the other hand, shall bear one-
half of the costs of such Audit; and PROVIDED, FURTHER, should any party
institute any arbitration, action, suit or other proceeding arising out of or
relating to this Agreement, the prevailing party shall be entitled to receive
from the losing party reasonable attorneys' fees and costs incurred in
connection therewith.
SECTION 12.13 JURISDICTION; SERVICE OF PROCESS. Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of California, County of Los Angeles, and the parties hereto irrevocably submit
to the jurisdiction of such courts and waive any objection to venue laid
therein. Process in any action or proceeding referred to in the preceding
sentence may be served on any party anywhere in the world.
SECTION 12.14 CONTRACT INTERPRETATION; CONSTRUCTION OF AGREEMENT.
(a) The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Article, section,
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exhibit, schedule, preamble, recital and party references are to this Agreement
unless otherwise stated. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation".
(b) No party, nor its respective counsel, shall be deemed the drafter of
this Agreement for purposes of construing the provisions of this Agreement, and
all language in all parts of this Agreement shall be construed in accordance
with its fair meaning, and not strictly for or against any party.
(c) Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms.
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IN WITNESS WHEREOF, each of the parties has executed this Agreement as of
the date first above written.
WOODHOLLY PRODUCTIONS, as a Seller
By:
Name:
Title:
Yvonne Parker, as a Seller
Rodger Parker, as a Seller
Jim Watt, as a Seller
Kim Watt, as a Seller
VDI MEDIA, as Purchaser
By:
Name:
Title:
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TABLE OF CONTENTS
PAGE
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ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II PURCHASE AND SALE OF ASSETS. . . . . . . . . . . . . . . .11
Section 2.1 Transfer of Assets . . . . . . . . . . . . . . . . . . . .11
Section 2.2 Assumption of Liabilities. . . . . . . . . . . . . . . . .11
Section 2.3 Excluded Liabilities . . . . . . . . . . . . . . . . . . .11
Section 2.4 Purchase Price . . . . . . . . . . . . . . . . . . . . . .13
Section 2.5 Closing Costs; Transfer Taxes and Fees . . . . . . . . . .15
Section 2.6 Rescission . . . . . . . . . . . . . . . . . . . . . . . .15
ARTICLE III POST-CLOSING ADJUSTMENTS TO EARN-OUTAND BONUS PAYMENT. . .16
Section 3.1 Adjustment to Purchase Notes . . . . . . . . . . . . . . .16
Section 3.2 Adjustment to Earn-Out . . . . . . . . . . . . . . . . . .17
Section 3.3 Bonus Payment. . . . . . . . . . . . . . . . . . . . . . .18
ARTICLE IV CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . .19
Section 4.1 Closing. . . . . . . . . . . . . . . . . . . . . . . . . .19
Section 4.2 Conveyances at Closing . . . . . . . . . . . . . . . . . .19
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLERS . . . . . . . . 20
Section 5.1 Organization and Good Standing . . . . . . . . . . . . . .20
Section 5.2 Assets . . . . . . . . . . . . . . . . . . . . . . . . . .21
Section 5.3 Licenses and Permits . . . . . . . . . . . . . . . . . . .21
Section 5.4 No Breach. . . . . . . . . . . . . . . . . . . . . . . . .21
Section 5.5 The Partnership; Authority . . . . . . . . . . . . . . . .21
Section 5.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . .22
Section 5.7 Financial Statements . . . . . . . . . . . . . . . . . . .22
Section 5.8 Projections. . . . . . . . . . . . . . . . . . . . . . . .23
Section 5.9 Absence of Certain Changes . . . . . . . . . . . . . . . .23
Section 5.10 Absence of Undisclosed Liabilities . . . . . . . . . . . .24
Section 5.11 Accounts Receivable. . . . . . . . . . . . . . . . . . . .24
Section 5.12 Real Property; Real Property Leases. . . . . . . . . . . .24
Section 5.13 Environmental Matters. . . . . . . . . . . . . . . . . . .25
Section 5.14 Intangible Personal Property . . . . . . . . . . . . . . .27
Section 5.15 Labor and Employment Agreements. . . . . . . . . . . . . .27
Section 5.16 Employee Benefit Plans: ERISA. . . . . . . . . . . . . . .29
Section 5.17 Material Contracts and Relationships . . . . . . . . . . 31
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Section 5.18 Inventory. . . . . . . . . . . . . . . . . . . . . . . . .32
Section 5.19 Absence of Certain Business Practices. . . . . . . . . . .32
Section 5.20 Compliance with Laws . . . . . . . . . . . . . . . . . . .33
Section 5.21 Litigation . . . . . . . . . . . . . . . . . . . . . . . .33
Section 5.22 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .33
Section 5.23 Insurance Matters. . . . . . . . . . . . . . . . . . . . .35
Section 5.24 No Powers of Attorney or Suretyships . . . . . . . . . . .36
Section 5.25 Brokerage Fees . . . . . . . . . . . . . . . . . . . . . .36
Section 5.26 Banking Facilities . . . . . . . . . . . . . . . . . . . .36
Section 5.27 Machinery, Equipment and Other Personal Property; Personal
Property Leases. . . . . . . . . . . . . . . . . . . . . .36
Section 5.28 Product Warranty and Liability . . . . . . . . . . . . . .37
Section 5.29 Standards and Certifications . . . . . . . . . . . . . . .37
Section 5.30 Disclosure . . . . . . . . . . . . . . . . . . . . . . . .37
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER. . . . . . . .38
Section 6.1 Organization and Corporate Authority . . . . . . . . . . .38
Section 6.2 No Breach; Consents and Approvals. . . . . . . . . . . . .38
Section 6.3 Brokerage Fees . . . . . . . . . . . . . . . . . . . . . .38
ARTICLE VII COVENANTS OF SELLERS AND PURCHASER. . . . . . . . . . . . . . .39
Section 7.1 Further Assurances . . . . . . . . . . . . . . . . . . . .39
Section 7.2 No Solicitation. . . . . . . . . . . . . . . . . . . . . .39
Section 7.3 Notification of Certain Matters. . . . . . . . . . . . . .40
Section 7.4 Investigation by Purchaser . . . . . . . . . . . . . . . .40
Section 7.5 Conduct of Business. . . . . . . . . . . . . . . . . . . .40
Section 7.6 Employment Agreements. . . . . . . . . . . . . . . . . . .42
Section 7.7 Hollywood Lease. . . . . . . . . . . . . . . . . . . . . .43
Section 7.8 Agreements Not to Compete. . . . . . . . . . . . . . . . .44
Section 7.9 Collection of Accounts Receivable and Letters of Credit. .44
Section 7.10 Books and Records; Tax Matters . . . . . . . . . . . . . .45
Section 7.11 Bulk Sales . . . . . . . . . . . . . . . . . . . . . . . .45
Section 7.12 Operation of Business After Closing. . . . . . . . . . . .46
Section 7.13 Confidentiality. . . . . . . . . . . . . . . . . . . . . .46
ARTICLE VIII CONDITIONS TO THE PARTNERSHIP'S OBLIGATIONS . . . . . . . . . .46
Section 8.1 Representations, Warranties and Covenants. . . . . . . . .46
Section 8.2 Consents; Regulatory Compliance and Approval . . . . . . .46
Section 8.3 No Actions or Court Orders . . . . . . . . . . . . . . . .46
Section 8.4 Assumption Document. . . . . . . . . . . . . . . . . . . .47
Section 8.5 Ancillary Agreements . . . . . . . . . . . . . . . . . . .47
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ARTICLE IX CONDITIONS TO PURCHASER'S OBLIGATIONS. . . . . . . . . . .47
Section 9.1 Representations, Warranties and Covenants. . . . . . . . .47
Section 9.2 Consents; Regulatory Compliance and Approval . . . . . . .47
Section 9.3 No Actions or Court Orders . . . . . . . . . . . . . . . .47
Section 9.4 Opinion of Counsel . . . . . . . . . . . . . . . . . . . .48
Section 9.5 Certificates . . . . . . . . . . . . . . . . . . . . . . .48
Section 9.6 Material Changes . . . . . . . . . . . . . . . . . . . . .48
Section 9.7 Conveyancing Documents; Release of Encumbrances. . . . . .48
Section 9.8 Permits. . . . . . . . . . . . . . . . . . . . . . . . . .49
Section 9.9 Other Agreements . . . . . . . . . . . . . . . . . . . . .49
Section 9.10 Tax Clearance Certificate. . . . . . . . . . . . . . . . .49
Section 9.11 Nonforeign Affidavit . . . . . . . . . . . . . . . . . . .49
Section 9.12 Customer Relations . . . . . . . . . . . . . . . . . . . .49
Section 9.13 Due Diligence. . . . . . . . . . . . . . . . . . . . . . .49
Section 9.14 Certain Financial Arrangements . . . . . . . . . . . . . .49
ARTICLE X RISK OF LOSS. . . . . . . . . . . . . . . . . . . . . . . . . .49
Section 10.1 Risk of Loss . . . . . . . . . . . . . . . . . . . . . . .49
ARTICLE XI INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . .50
Section 11.1 Survival of Representations and Warranties of Sellers. . .50
Section 11.2 Indemnification by Sellers . . . . . . . . . . . . . . . .50
Section 11.3 Indemnification by Sellers for Tax Liabilities . . . . . .51
Section 11.4 Indemnification by Sellers for Environmental Matters . . .51
Section 11.5 Survival of Representations and Warranties of Purchaser. .52
Section 11.6 Indemnification by Purchaser . . . . . . . . . . . . . . .52
Section 11.7 Claims for Indemnification . . . . . . . . . . . . . . . .52
Section 11.8 Defense of Claims. . . . . . . . . . . . . . . . . . . . .53
Section 11.9 Manner of Indemnification. . . . . . . . . . . . . . . . .54
Section 11.10 Set off. . . . . . . . . . . . . . . . . . . . . . . . . .54
ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . .54
Section 12.1 Termination. . . . . . . . . . . . . . . . . . . . . . . .54
Section 12.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . .55
Section 12.3 Assignability and Parties In Interest. . . . . . . . . . .56
Section 12.4 Governing Law. . . . . . . . . . . . . . . . . . . . . . .56
Section 12.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . .56
Section 12.6 Complete Agreement . . . . . . . . . . . . . . . . . . . .56
Section 12.7 Modifications, Amendments and Waivers. . . . . . . . . . .56
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Section 12.8 Expenses . . . . . . . . . . . . . . . . . . . . . . . . .57
Section 12.9 Invalidity . . . . . . . . . . . . . . . . . . . . . . . .57
Section 12.10 Publicity. . . . . . . . . . . . . . . . . . . . . . . . .57
Section 12.11 Limit on Interest. . . . . . . . . . . . . . . . . . . . .57
Section 12.12 Attorneys' Fees and Costs. . . . . . . . . . . . . . . . .57
Section 12.13 Jurisdiction; Service of Process . . . . . . . . . . . . .57
Section 12.14 Contract Interpretation; Construction of Agreement . . . .57
EXHIBITS
- --------
Exhibit A - Form of Purchase Note
Exhibit B - Form of Hollywood Lease
Exhibit C - Form of Employment Agreement
Exhibit D - Form of Bill of Sale
Exhibit E - Form of Assignment of Lease
Exhibit F - Form of Assignment of Personal Property Lease
Exhibit G - Form of Assignment of Contracts
Exhibit H - Form of Assumption
SCHEDULES
- ---------
Schedule 1A - Excluded Personal Property
Schedule 1B - Contracts
Schedule 2.1 - Assets
Schedule 2.2 - Assumed Liabilities
Schedule 3.1 - Sample Total Operating Income Calculation
Schedule 5.1 - Jurisdiction of organized; foreign jurisdictions where
transacts business
Schedule 5.4 - Required Consents
Schedule 5.3 - Licenses, permits and qualifications
Schedule 5.7(a) - Financials and accountants reports
Schedule 5.7(b) - Interim Financials
Schedule 5.8 - Projected financial statements
Schedule 5.9 - Adverse Changes
Schedule 5.10 - Material Liabilities
Schedule 5.11 - Accounts Receivable
Schedule 5.12(a) - Real property owned by or leased
Schedule 5.13 - Environmental Matters
Schedule 5.15 - Employment, consulting, collective bargaining and
similar agreements; Names of certain employee of any of
the Sellers and certain agents and consultants to the
Partnership; employment-related allegation, claim, suit
or proceeding
iv
<PAGE>
Schedule 5.16 - Employee Benefit Plans; ERISA Matters
Schedule 5.17 - Material Contracts and Relationships
Schedule 5.18 - Material returns, or claims or demands for material
returns, of Inventory
Schedule 5.20 - Compliance
Schedule 5.21 - Litigation
Schedule 5.22 - Taxes
Schedule 5.23 - Insurance Matters
Schedule 5.24 - Powers of Attorney
Schedule 5.26 - Banking Facilities
Schedule 5.27 - Leased Personal Property
Schedule 6.1 - Purchaser's Financial Statements
v
<PAGE>
ASSET PURCHASE AGREEMENT
Dated as of December __, 1996
by and among
VDI MEDIA,
as Purchaser
and
WOODHOLLY PRODUCTIONS, YVONNE PARKER, RODGER PARKER,
JIM WATT AND KIM WATT,
as Sellers
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 (333-4047) of our reports dated October 25,
1996 and November 22, 1996 relating to the financial statements of VDI Media and
Woodholly Productions, respectively, which appear in such Prospectus. We also
consent to the application of such report to the Financial Statement Schedule of
VDI Media for the three years ended December 31, 1995 listed under Item 16(b) of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Costa Mesa, California
December 31, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF DIRECTOR NOMINEE
I, Steven J. Schoch, do hereby consent to being named in the Prospectus
constituting part of this Amendment No. 1 on Form S-1 as a nominee for director
of VDI Media.
/s/ STEVEN J. SCHOCH
----------------------------------
Steven J. Schoch
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 415,000 246,000
<SECURITIES> 0 0
<RECEIVABLES> 4,682,000 4,915,000
<ALLOWANCES> (284,000) (357,000)
<INVENTORY> 178,000 117,000
<CURRENT-ASSETS> 52,000 17,000
<PP&E> 8,891,000 10,515,000
<DEPRECIATION> (4,899,000) (5,350,000)
<TOTAL-ASSETS> 9,340,000 9,153,000
<CURRENT-LIABILITIES> 4,171,000 3,493,000
<BONDS> 2,150,000 1,963,000
0 0
0 0
<COMMON> 500,000 500,000
<OTHER-SE> 2,519,000 3,197,000
<TOTAL-LIABILITY-AND-EQUITY> 9,340,000 3,697,000
<SALES> 18,538,000 5,837,000
<TOTAL-REVENUES> 18,538,000 5,837,000
<CGS> 11,256,000 3,688,000
<TOTAL-COSTS> 11,256,000 3,688,000
<OTHER-EXPENSES> 5,181,000 1,373,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 375,000 70,000
<INCOME-PRETAX> 1,768,000 706,000
<INCOME-TAX> 26,000 18,000
<INCOME-CONTINUING> 1,742,000 688,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,742,000 688,000
<EPS-PRIMARY> 0.16 0.06
<EPS-DILUTED> 0.16 0.06
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