<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1997
REGISTRATION NO. 333-4047
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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. / /
--------------------------
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 JANUARY 27, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
2,800,000 Shares
[LOGO]
VDI MEDIA
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. Upon completion of
this offering (the "Offering") R. Luke Stefanko, the Company's Chief Executive
Officer and co-founder, will own approximately 60.4% of the outstanding Common
Stock and the Company's current shareholders as a group will own approximately
69.8% of the outstanding Common Stock. See"Principal and Selling Shareholders."
Prior to this 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. Approximately $7.2 million of the net proceeds of this Offering will be
used to repay indebtedness and approximately $3.0 million will be distributed to
the Company's current shareholders with respect to the Company's previously
taxed and undistributed earnings. See "Use of Proceeds."
The Company has applied to The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") for quotation of the Common Stock 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 its current shareholders, including 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 February , 1997.
PRUDENTIAL SECURITIES INCORPORATED OPPENHEIMER & CO., INC.
February , 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.
2
<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 the Company's videotape duplication and
distribution services are those motion picture companies and advertising
agencies 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's advertising agency
customers include Saatchi & Saatchi, Young & Rubicam and Dailey & Associates.
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 of Woodholly Productions ("Woodholly") (the "Woodholly
Acquisition"). 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 of $7.2 million,
including acquisition indebtedness of $4.0
million, to pay an S Corp distribution to the
Company's current shareholders of
approximately $3.0 million and for general
corporate purposes, including the potential
acquisition of businesses complementary to the
Company's operations and capital expend-
itures. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol................ VDIM
</TABLE>
- --------------------------
(1) Excludes 900,000 shares of Common Stock reserved for issuance with respect
to 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 to the Company's employees (a majority of which will be
granted to members of the Company's senior management), 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 to the extent of taxable earnings for the period from
October 1, 1996 to the closing date of this Offering, (ii) the recording by the
Company of income taxes, including 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 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,
------------------------------------------------------- ---------------------------
PRO FORMA PRO FORMA
HISTORICAL AS HISTORICAL AS
-------------------------------------------- ADJUSTED ---------------- ADJUSTED
1991 1992 1993 1994 (1) 1995 1995 1995 1996 1996
------ ------- ------- -------- ------- --------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <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 $23,738
Cost of goods sold.................... 3,297 7,710 10,595 10,042 11,256 15,776 7,924 11,080 14,994
------ ------- ------- -------- ------- --------- ------- ------- ---------
Gross profit.......................... 3,300 3,836 6,449 4,426 7,282 9,885 5,284 7,102 8,744
Selling, general and administrative
expense.............................. 2,858 3,498 4,290 3,545 5,181 6,860 3,761 4,204 5,564
Costs related to establishing a new
facility............................. -- -- -- 981 -- -- -- -- --
Dispute settlement.................... -- -- -- 458 -- -- -- -- --
------ ------- ------- -------- ------- --------- ------- ------- ---------
Operating income (loss)............... 442 338 2,159 (558) 2,101 3,025 1,523 2,898 3,180
Interest expense, net................. 38 170 241 271 333 679 251 223 463
Provision for income taxes............ 17 -- 29 -- 26 938 19 45 1,087
------ ------- ------- -------- ------- --------- ------- ------- ---------
Net income (loss)..................... $ 387 $ 168 $ 1,889 $ (829) $ 1,742 $ 1,408 $ 1,253 $ 2,630 $ 1,630
------ ------- ------- -------- ------- --------- ------- ------- ---------
------ ------- ------- -------- ------- --------- ------- ------- ---------
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 $ 5,648 $ 2,692 $ 4,120 $ 5,309
Cash flows provided by operating
activities........................... 248 710 2,003 1,121 2,553 4,796 2,214 3,860 N/A(5)
Cash flows (used in) provided by
financing activities................. 491 971 (635) 977 (1,061) (1,535) (757) (2,959) N/A(5)
Capital expenditures.................. 765 1,672 1,379 2,071 1,137 2,905 722 1,043 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) The Company has been exempt from payment of federal income taxes and has
paid certain state income taxes at a reduced rate as a result of its S
Corporation election. Prior to the closing of this Offering, the Company's
shareholders will elect to terminate the Company's S Corporation status. 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, 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 quarter ending March 31, 1997. 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. Such non-recurring charges comprise
costs related to establishing a new facility and the settlement of a dispute
of $1.0 million and $0.5 million, respectively, both of which were recorded
during the year ended December 31, 1994. 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. While not all companies calculate EBITDA in the same fashion and
therefore EBITDA as presented may not be comparable to other similarly
titled measures of other companies, 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. The Company is
currently committed to use a portion of its cash flows to service existing
debt and, furthermore, anticipates making certain capital expenditures as
part of its business plan.
(5) Such amounts are not readily calculable and have therefore been omitted.
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
contains forward-looking statements. 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, results of operations 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 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, results of operations and prospects of the Company could
also be adversely affected by an adverse change in conditions which impact those
industries. See "Business -- Customers."
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, results of operations 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 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, results of operations and prospects or could
result in dilution to the Company's shareholders. In addition, to the extent
that consolidation becomes more prevalent in the industry, the prices for
attractive acquisition candidates could increase substantially. 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity" and "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,
results of operations 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, results of operations 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 demands 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, results of operations 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
8
<PAGE>
time periods requested by 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, results of operations 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 in part 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 may 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 possible 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
varied in the past, and may vary in the future, depending on factors such as the
volume of advertising in response to seasonal buying patterns, the timing of new
product and service introductions, 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--Seasonality."
9
<PAGE>
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 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."
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."
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 of 1933, as amended (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, officers and shareholders (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, 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
10
<PAGE>
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."
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
to the Company's employees (a majority of which will be granted to members of
the Company's senior management), each at an exercise price per share equal to
the initial public offering price. See "Management -- 1996 Stock Incentive
Plan."
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 the
Company's videotape duplication and distribution services are those motion
picture companies and advertising agencies 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's advertising agency customers include Saatchi &
Saatchi, Young & Rubicam and Dailey & Associates.
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 are
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 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 to
the extent of 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. Pending such uses,
the Company intends to invest the net proceeds in short-term investment grade,
interest-bearing securities and certificates of deposit. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has been a Subchapter S Corporation for federal and state income
tax purposes since its inception in 1990. As a result, the net income of the
Company for federal and state income tax purposes was reported by, and taxed
directly to, the Company's shareholders. The Company made payments to the
Internal Revenue Service (the "I.R.S.") on behalf of its current shareholders of
$0.3 million in 1995 and $1.2 million in 1996 to fund shareholder tax
liabilities resulting from the Company's status as a Subchapter S Corporation.
In connection with the termination of the Company's Subchapter S Corporation
status upon the consummation of this Offering, the Company estimates that
approximately $3.0 million will be distributed to the current shareholders.
Purchasers of Common Stock in this Offering will not participate in this
distribution.
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 to the extent of 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; 9,260,000 shares issued
and outstanding 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 to the Company's employees (a majority of which will be granted to
members of the Company's senior management), 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 to the extent of 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 distribution 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 to the Company's employees (a majority of which
will be granted to members of the Company's senior management), 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 to the extent of taxable earnings for the period from
October 1, 1996 to the closing date of this Offering, (ii) the recording by the
Company of income taxes, including 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 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 6,860 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 3,025 1,523 2,898
Interest expense, net.................. 38 170 241 271 333 679 251 223
Provision for income tax............... 17 -- 29 -- 26 938 19 45
--------- --------- --------- --------- --------- ----------- --------- ---------
Net income (loss)...................... $ 387 $ 168 $ 1,889 $ (829) $ 1,742 $ 1,408 $ 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 $ 5,648 $ 2,692 $ 4,120
Cash flows provided by operating
activities............................ 248 710 2,003 1,121 2,553 4,796 2,214 3,860
Cash flows (used in) provided by
financing activities.................. 491 971 (635) 977 (1,061) (1,535) (757) (2,959)
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............................... 5,564
Costs related to establishing a new
facility.............................. --
Dispute settlement..................... --
-----------
Operating income (loss)................ 3,180
Interest expense, net.................. 463
Provision for income tax............... 1,087
-----------
Net income (loss)...................... $ 1,630
-----------
-----------
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)............................. $ 5,309
Cash flows provided by operating
activities............................ N/A(5)
Cash flows (used in) provided by
financing activities.................. N/A(5)
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) The Company has been exempt from payment of federal income taxes and has
paid certain state income taxes at a reduced rate as a result of its S
Corporation election. Prior to the closing of this Offering the Company's
shareholders will elect to terminate the Company's S Corporation status. 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, 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 quarter ending March 31, 1997. 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. Such non-recurring charges comprise
costs related to establishing a new facility and the settlement of a dispute
of $1.0 million and $0.5 million, respectively, both of which were recorded
during the year ended December 31, 1994. EBITDA does not represent cash
generated from operating activities in accordance with 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. While not all companies calculate EBITDA
in the same fashion and therefore EBITDA as presented may not be comparable
to other similarly titled measures of other companies, 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. The
Company is currently committed to use a portion of its cash flows to service
existing debt and, furthermore, anticipates making certain capital
expenditures as part of its business plan.
(5) Such amounts are not readily calculable and have therefore been omitted.
17
<PAGE>
CERTAIN PRO FORMA COMBINED FINANCIAL STATEMENTS
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. In addition, the historical pro forma
weighted average number of shares presented for VDI is calculated after giving
effect to the number of shares of Common Stock whose proceeds are to be 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.
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 purchase price paid by the Company consists of an initial purchase price
of $4.0 million plus an as yet undetermined contingent purchase price. The
contingent purchase price, payable to the partners of Woodholly, is to be earned
and paid based on the total operating income (as defined) resulting from the
financial results of Woodholly as a separate division of the Company. The
contingent purchase price, in total, is limited to $4.0 million. The unaudited
pro forma combined financial statements reflect the Company's allocation of the
initial purchase price 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 contingent purchase
price, to the extent earned, will be treated as an increase in goodwill and will
be amortized coterminously with the original 20 year period. To the extent
additional contingent purchase price payments are made, amortization will
increase in future periods. If the full contingent purchase price were earned or
paid, goodwill would be increased by a total of $4.0 million, and annual
amortization expense associated with such additional goodwill would be $0.2
million (for an aggregate annual amortization expense of $0.4 million).
Management of the Company is in the process of reviewing the allocation of the
purchase price and, when completed, may modify its preliminary allocation. 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 Woodholly Acquisition
will be accounted for by the Company under the purchase method of accounting.
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 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 1,375 304(E) 6,860
----------- ----------- ----- -----------
Income from operations............................ 2,101 1,228 (304) 3,025
Interest expense, net............................. 375 355 -- 730
Other income...................................... 42 9 -- 51
----------- ----------- ----- -----------
Income before income taxes........................ 1,768 882 (304) 2,346
Pro forma provision for income taxes.............. 707 -- 231(F) 938
----------- ----------- ----- -----------
Pro forma net income.............................. $ 1,061 $ 882 $ (535) $ 1,408
----------- ----------- ----- -----------
----------- ----------- ----- -----------
Pro forma earnings per share...................... $ 0.16 $ 0.20
----------- -----------
----------- -----------
Pro forma weighted average number of shares....... 6,695(H) 376(G) 7,071
----------- ----- -----------
----------- ----- -----------
</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 1,144 216(E) 5,564
----------- ----------- ------------ -----------
Income from operations......................... 2,898 498 (216) 3,180
Interest expense, net.......................... 236 261 -- 497
Other income, net.............................. 13 21 -- 34
----------- ----------- ------------ -----------
Income before income taxes..................... 2,675 258 (216) 2,717
Pro forma provision for income taxes........... 1,070 -- 17(F) 1,087
----------- ----------- ------------ -----------
Pro forma net income........................... $ 1,605 $ 258 $ (233) $ 1,630
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Pro forma earnings per share................... $ 0.24 $ 0.23
----------- -----------
----------- -----------
Pro forma weighted average number of shares.... 6,695(H) 376(G) 7,071
----------- ------------ -----------
----------- ------------ -----------
</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 estimated
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 reductions in
selling, general and administrative expenses related to life insurance
premiums and other expenses paid by Woodholly on behalf of the former
owners, (ii) recognize compensation expense to be paid to the former owners
of Woodholly under the terms of the purchase agreement and (iii) 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) expenses paid on behalf of owners................................ $ (27) $ (32)
(ii) compensation expense............................................. 240 180
(iii) amortization of goodwill......................................... 91 68
----- -----
Total additional expense......................................... $ 304 $ 216
----- -----
----- -----
</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 375,618 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.
(H) Pro forma weighted average number of shares is calculated after
giving effect to the number of shares of Common Stock whose proceeds are to
be used to pay a distribution to the Company's shareholders in connection
with the termination of its S Corporation status.
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. The Company previously has 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. Prior to the closing of this Offering, the
Company's shareholders will elect to terminate the Company's S Corporation
24
<PAGE>
status. As a result of the change in tax status prior to the completion of this
Offering, the Company 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, both of 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 revenue 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 1995, 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 1994 results of
operations, as the settlement represented the culmination of events occurring
prior to that date.
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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<PAGE>
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.
On December 28, 1996 the Company entered into an agreement to acquire
substantially all of the assets and certain liabilities of Woodholly. In
connection with the Woodholly Acquisition the Company executed $1.0 million
promissory notes in favor of each partner of Woodholly. These promissory notes
bear interest at
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8% per annum and are due and payable on February 28, 1997. The Company has the
right to rescind the Woodholly Acquisition in the event it does not obtain
financing to fund payment of these notes for any reason. The Company has granted
a security interest in the Woodholly assets in favor of the Woodholly partners,
which interest may be foreclosed upon in the event the Company fails to pay
these promissory notes. The Company intends to use a portion of the net proceeds
of this Offering to repay this indebtedness.
The Company believes that, subsequent to this Offering, its current banking
relationship will be enhanced through the potential 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 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 upon 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, 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. In
addition, the Company intends to distribute $3.0 million of the net proceeds of
this Offering 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 to the extent of the Company's taxable earnings
for the period from October 1, 1996 to the closing date of this Offering.
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 financial condition, results of operations or prospects.
28
<PAGE>
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
29
<PAGE>
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 $36 billion was spent in the
United States in 1995 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 215% 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 1995:
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
1995.................... 36,246 11,600 9,119 9,985 2,016 3,526
</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.
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<PAGE>
SYNDICATED PROGRAMMING
Syndicated television and radio programming are 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.
RADIO ADVERTISING
According to industry sources, approximately $11.3 billion was spent in the
United States in 1995 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 1995:
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
1995.......................... 11,338 480 1,959 8,899
</TABLE>
- ------------------------
Source: Television Bureau of Advertising
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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 the
Company's videotape duplication and distribution services are those motion
picture companies and advertising agencies 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's advertising agency customers include Saatchi &
Saatchi, Young & Rubicam and Dailey & Associates.
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.
35
<PAGE>
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
<PAGE>
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 motion picture 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's advertising agency customers include
Saatchi & Saatchi, Young & Rubicam and Dailey & Associates.
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."
37
<PAGE>
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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<PAGE>
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 36
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
(1)(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 immediately after 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
May 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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<PAGE>
Steven J. Schoch has agreed to become a Director of the Company immediately
after 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 immediately
after the closing of this Offering. Mr. Philip is the Chief Operating 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.
The directors serve until the next annual meeting of shareholders and the
election and qualification of their successors. The officers are elected by the
directors and serve at the discretion of the Board of Directors.
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 years ended December 31, 1995 and 1996 by
the Company to (i) its Chief Executive Officer, (ii) each of the Company's four
other most highly compensated individuals who were serving as officers on
December 31, 1996 and whose salary plus bonus exceeded $100,000 for such year
and (iii) its former president who resigned during the year ending December 31,
1996 (the persons described in (i), (ii) and (iii) above, the "Named
Executives"). Except for Messrs. Stefanko, Semmer, Stine, and Bershon, no Named
Executives received salaries in excess of $100,000 in the year ended December
31, 1995. No bonuses or long term compensation awards were granted to any of the
foregoing persons for the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- -------------------------------------------------------------------- --------- ---------- --------- -------------
<S> <C> <C> <C> <C>
R. Luke Stefanko, Chief Executive Officer........................... 1995 $ 273,000 $ 0 $ 138,180(1)
1996 $ 270,000 $ 0 $ 842,495(2)
Robert C. Semmer, then President (3)................................ 1995 $ 200,000 $ 0 $ 0
1996 $ 200,000 $ 0 $ 0
Donald R. Stine, Chief Financial Officer............................ 1995 $ 120,000 $ 0 $ 0
1996 $ 120,000 $ 0 $ 34,000(4)
Steven W. Terry, Vice President and General Manager of Operations... 1996 $ 114,400 $ 0 $ 0
Russell R. Ruggieri, Vice President of Engineering.................. 1996 $ 104,000 $ 0 $ 0
Eric H. Bershon, Vice President and General Manager of Broadcast
One................................................................ 1995 $ 110,000 $ 0
1996 $ 119,808 $ 20,000 $ 0
</TABLE>
- ------------------------
(1) Includes $136,776 paid by the Company to the I.R.S. on behalf of Mr.
Stefanko to satisfy 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. Also includes $1,404 in premiums paid by the Company on life
insurance policy for the benefit of Mr. Stefanko.
(2) Includes $841,091 paid by the Company to the I.R.S. on behalf of Mr.
Stefanko to satisfy 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. Also includes $1,404 in premiums paid by the Company on life
insurance policy for the benefit of Mr. Stefanko.
(3) Mr. Semmer resigned as President effective May 15, 1996.
(4) Represents payments by the Company to the I.R.S. on behalf of Mr. Stine to
satisfy federal and state taxes owed by Mr. Stine by virtue of the Company's
status as a Subchapter S Corporation for federal and state tax purposes.
40
<PAGE>
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 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 the
greater of his full base salary for a period of two years or the full base
salary for the remainder of the term of his agreement, plus 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,
41
<PAGE>
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.
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, 1996.
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 September 30, 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 15,000 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 an aggregate of 300,000 shares of Common Stock under the
1996 Plan to the Company's employees (a majority of which will be granted to
members of the Company's senior management), each 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 15,000 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
42
<PAGE>
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, 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.
43
<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
16b-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 1996. As a result,
Messrs. Stefanko and Stine participated in deliberations concerning executive
officer compensation. The Board of Directors will establish a Compensation
Committee immediately after 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 $2.28 per share). Pursuant to the
Agreement, Mr. Stefanko paid Mr. Bajorek $1.1 million on April 1, 1996. The
Company extended Mr. Stefanko a $1.1 million 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 2005 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. Prior to the closing of this Offering, the Company's shareholders will
elect to terminate the Company's S Corporation status. 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 $3.0 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 C. Semmer......................... -- -- -- -- --
Steven W. Terry.......................... -- -- -- -- --
Russell R. Ruggieri...................... -- -- -- -- --
Eric H. Bershon.......................... -- -- -- -- --
Robert Bajorek........................... 399,600 6.0% 200,000 199,600 2.2%
All current directors and executive
officers as a group (6 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 January 24, 1997, 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 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 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 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, 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 its current shareholders, including 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 among 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 Productions 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:
Preferred stock -- no par value; 5,000,000 shares
authorized; none outstanding -- -- -- --
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) (5.7% at September 30, 1996) 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
In July 1995, the Company obtained a term loan in the original amount of
$2,825,000 with a bank. The term loan is secured by the assets of the Company
and is to be repaid in monthly installments of principal and interest through
July 2000. At September 30, 1996, $1,957,000 is outstanding pursuant to this
agreement and is reflected in notes payable. 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 7.0% and issued a note payable to the
co-founder in the amount of approximately $4 million. This note is to be repaid
in April 2005 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 predicated upon Woodholly attaining
certain operating income goals, as set forth in the purchase agreement, in each
quarter through December 31, 2001. The Company anticipates the transaction will
close in early 1997 and expects to account for this acquisition as a purchase.
The contingent purchase price, to the extent earned, will be recorded as an
increase to goodwill and will be amortized over the remaining useful life of
such intangible asset. Management has not yet finalized the allocation of the
preliminary purchase price; the final allocation will be calculated at the
conclusion of the earn-out period.
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 expired on August 31, 1996.
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.
February , 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>
<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
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>
<S> <C>
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
11 Calculation of Earnings Per Share
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
27* Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
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 2 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 27th day of January, 1997.
VDI MEDIA
By /s/ DONALD R. STINE
------------------------------------
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
- ----------------------------------- ------------------------- --------------
* Chief Executive Officer,
- ----------------------------------- President Chairman of January 27,
R. Luke Stefanko the Board and Director 1997
Chief Financial Officer,
/s/ DONALD R. STINE Secretary, Director January 27,
- ----------------------------------- (principal financial 1997
Donald R. Stine officer)
*
- ----------------------------------- Principal Accounting January 27,
Paul Rubel Officer 1997
*
- ----------------------------------- Director January 27,
Tom Ennis 1997
* By:/s/ DONALD R. STINE
-------------------
Donald R. Stine
Under Power of Attorney
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
11 Calculation of Earnings per Share
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.
<PAGE>
VDI MEDIA
2,800,000 Shares (1)
Common Stock
UNDERWRITING AGREEMENT
January __, 1997
PRUDENTIAL SECURITIES INCORPORATED
OPPENHEIMER & CO., INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
VDI MEDIA, a California corporation (the "Company") and Robert Bajorek (the
"Selling Shareholder"), hereby confirm their agreement with the several
underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have
been duly authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
1. SECURITIES. Subject to the terms and conditions herein contained, the
Company proposes to issue and sell to the several Underwriters an aggregate of
2,600,000 shares (the "Company Firm Securities") of the Company's Common Stock,
without par value ("Common Stock") and the Selling Shareholder proposes to sell
to the several Underwriters 200,000 shares of Common Stock (collectively with
the shares of Common Stock to be issued and sold by the Company, the "Firm
Securities"). The Company also proposes to issue and sell to the several
Underwriters not more than 420,000 additional shares of Common Stock if
requested by the Representatives as provided in Section 3 of this Agreement.
Any and all shares of Common Stock to be purchased by the Underwriters pursuant
to such option are referred to herein as the "Option Securities", the Company
Firm Securities and any Option Securities are collectively referred to herein as
the "Company Securities," and the Firm Securities and any Option Securities are
collectively referred to herein as the "Securities".
____________________
1. Plus an option to purchase from VDI Media up to 420,000 additional shares
to cover over-allotments.
<PAGE>
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDER.
(a) The Company represents and warrants to, and agrees with, each of
the several Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-4047)
with respect to the Securities, including a prospectus subject to completion,
has been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed. After
the execution of this Agreement, the Company will file with the Commission
either (a) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either, (i) if the
Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Securities, that shall identify the Preliminary Prospectus (as
hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (ii) if the
Company does not rely on Rule 434 under the Act, a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (a)(i) or (a)(ii) of
this sentence as have been provided to and approved by the Representatives prior
to the execution of this Agreement, or (b) if such registration statement, as it
may have been amended, has not been declared by the Commission to be effective
under the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by the
Representatives prior to the execution of this Agreement. The Company may also
file a related registration statement with the Commission pursuant to Rule
462(b) under the Act for the purpose of registering certain additional
Securities, which registration shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective); the term "Registration Statement"
includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b) under
the Act; or
-2-
<PAGE>
(C) if the Company does not rely on Rule 434 under the Act and
if no prospectus is required to be filed pursuant to Rule 424(b) under the
Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(ii) The Commission has not issued any order preventing or
suspending use of any Preliminary Prospectus. When any Preliminary Prospectus
was filed with the Commission it (a) contained all statements required to be
stated therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the Commission
thereunder and (b) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (a) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (b) did not or will not include any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein not misleading. When the Prospectus or any Term
Sheet that is a part thereof or any amendment or supplement to the Prospectus is
filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part
thereof or such amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the Firm
Closing Date and any Option Closing Date (both as hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (a) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements of, the
Act and the rules and regulations of the Commission thereunder and (b) did not
or will not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (ii) do not apply to statements or omissions made
in any Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b) and
the Rule 462(b) Registration Statement has not been declared effective (a) the
Company has filed a Rule 462(b) Registration Statement in compliance with and
that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt and (b) the Company has given irrevocable
instructions for transmission of the applicable filing fee in connection with
the filing of the Rule 462(b) Registration Statement, in compliance with Rule
111 promulgated under the Act or the Commission has received payment of such
filing fee.
(iv) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of California and
is duly qualified to transact business as a foreign corporation and is in good
standing under the laws of all other jurisdictions where the ownership or
leasing of its properties or the conduct of its business
-3-
<PAGE>
requires such qualification, except where the failure to be so qualified does
not amount to a material liability or disability to the Company. The Company
has no subsidiary or subsidiaries and does not control, directly or indirectly,
any corporation, partnership, joint venture, association or other business
organization.
(v) The Company has full power (corporate and other) to own or
lease its properties and conduct its business as described in the Registration
Statement and the Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus; and the Company has full power (corporate and
other) to enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it.
(vi) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. The Company's Firm Securities and the Option
Securities have been duly authorized and at the Firm Closing Date or the related
Option Closing Date (as the case may be), after payment therefor in accordance
herewith, will be validly issued, fully paid and nonassessable. No holders of
outstanding shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Securities, and no holder
of securities of the Company has any right which has not been fully exercised or
waived to require the Company to register the offer or sale of any securities
owned by such holder under the Act in the public offering contemplated by this
agreement.
(vii) The capital stock of the Company conforms to the
description thereof contained in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus.
(viii) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), there
are no outstanding (a) securities or obligations of the Company convertible into
or exchangeable for any capital stock of the Company, (b) warrants, rights or
options to subscribe for or purchase from the Company any such capital stock or
any such convertible or exchangeable securities or obligations, or (c)
obligations of the Company to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(ix) The financial statements and schedules of the Company
and Wood Holly Productions included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present the financial position of the Company
and Wood Holly Productions and the results of operations and changes in
financial condition as of the dates and periods therein specified. Such
financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein). The selected financial
data set forth under the caption "Selected Financial Data" in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present, on the basis stated in the Prospectus (or such
Preliminary Prospectus), the information included therein. The pro forma
financial statements and the related notes thereto included in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) present fairly the
information shown therein, have been prepared in
-4-
<PAGE>
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions and circumstances referred to therein.
(x) Price Waterhouse, LLP, who have certified certain financial
statements of the Company and Wood Holly Productions and delivered their report
with respect to the audited financial statements and schedules included in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), are independent public
accountants as required by the Act and the applicable rules and regulations
thereunder.
(xi) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to rights and
remedies of creditors.
(xii) No legal or governmental proceedings are pending to
which the Company is a party or to which the property of the Company is subject
that are required to be described in the Registration Statement or the
Prospectus and are not described therein (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and no such proceedings have
been threatened against the Company or with respect to any of its properties;
and no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) or filed as required.
(xiii) The issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the consummation of
the other transactions herein contemplated do not (a) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act, or (b) conflict
with or result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Company is a party or by which the
Company or any of its properties are bound, or the charter documents or by-laws
of the Company, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to the Company.
(xiv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus,
the Company has not sustained any material loss or interference with its
business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any legal or governmental
-5-
<PAGE>
proceeding and there has not been any material adverse change, or any
development involving a prospective material adverse change, in the condition
(financial or otherwise), management, business prospects, net worth, or results
of the operations of the Company, except in each case as described in or
contemplated by the Prospectus or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus.
(xv) The Company has not, directly or indirectly (except for the
sale of Securities under this Agreement), (i) taken any action designed to cause
or to result in, or that has constituted or which might reasonably be expected
to constitute, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or (ii) since the
filing of the Registration Statement (A) sold, bid for, purchased, or paid
anyone any compensation for soliciting purchases of, the Securities or (B) paid
or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(xvi) The Company has not distributed and, prior to the later
of (i) the Closing Date and (ii) the completion of the distribution of the
Securities, will not distribute any offering material in connection with the
offering and sale of the Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or Term Sheet or
any amendment or supplement thereto, or other materials, if any permitted by the
Act.
(xvii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), (a)
the Company has not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (b) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (c) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company, except in each
case as described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xviii) The Company has good and marketable title in fee simple
to all items of real property and marketable title to all personal property
owned by it, in each case free and clear of any security interests, liens,
encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not interfere
with the use made or proposed to be made of such property by the Company, and
any real property and buildings held under lease by the Company are held under
valid, subsisting and enforceable leases, with such exceptions as are not
material and do not interfere with the use made or proposed to be made of such
property and buildings by the Company, in each case except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(xix) No labor dispute with the employees of the Company
exists or is threatened or imminent that could result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company, except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
-6-
<PAGE>
(xx) The Company owns or possesses, or can acquire on reasonable
terms, all material patents, patent applications, trademarks, service marks,
trade names, licenses, copyrights and proprietary or other confidential
information currently employed by it in connection with its respective business,
and the Company has not received any notice of infringement of or conflict with
asserted rights of any third party with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a material adverse change in the condition (financial
or otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(xxi) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the business in which it is engaged; the Company
has not been refused any insurance coverage sought or applied for; and the
Company has no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business at a
cost that would not materially and adversely affect the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(xxii) The Company possesses all certificates, authorizations
and permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct its business, and the Company has not received
any notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xxiii) The Company will conduct its operations in a manner
that will not subject it to registration as an investment company under the
Investment Company Act of 1940, as amended, and this transaction will not cause
the Company to become an investment company subject to registration under such
Act.
(xxiv) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not have a
material adverse effect on the Company) and has paid all taxes required to be
paid by it and any other assessment, fine or penalty levied against it, to the
extent that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good faith or
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(xxv) The Company is not in violation of any federal or state
law or regulation relating to occupational safety and health or to the storage,
handling or transportation of hazardous or toxic materials and the Company has
received all permits, licenses or other approvals required of them under
applicable federal and state occupational safety and health and environmental
laws and regulations to conduct its business, and the Company is in compliance
with all terms and conditions of any such permit, license or approval, except
any such violation of law or regulation, failure to receive required permits,
licenses or other approvals or failure to
-7-
<PAGE>
comply with the terms and conditions of such permits, licenses or approvals
which would not, singly or in the aggregate, result in a material adverse change
in the condition (financial or otherwise), business prospects, net worth or
results of operations of the Company, except as described in or contemplated by
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxvi) Each certificate signed by any officer of the Company
and delivered to the Representatives or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each Underwriter as
to the matters covered thereby.
(xxvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (a) transactions are
executed in accordance with management's general or specific authorizations; (b)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (c) access to assets is permitted only in
accordance with management's general or specific authorization; and (d) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxviii) No default exists, and no event has occurred which,
with notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any indenture,
mortgage, deed of trust, lease or other agreement or instrument to which the
Company is a party or by which the Company or any of its properties is bound or
may be affected in any material adverse respect with regard to property,
business or operations of the Company.
(xxix) The Company has not directly or indirectly distributed
and, prior to the later of (a) the Firm Closing Date and (b) the completion of
the distribution of the Securities, will not distribute any offering material in
connection with the offering and sale of the Securities other than the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or other materials, if
any, permitted by the Act.
(b) The Selling Shareholder represents and warrants to, and agrees
with, each of the several Underwriters that:
(i) The Selling Shareholder has full power (corporate and other)
to enter into this Agreement and to sell, assign, transfer and deliver to
the Underwriters the Securities to be sold by the Selling Shareholder
hereunder in accordance with the terms of this Agreement; the execution and
delivery of this Agreement have been duly authorized by all necessary
corporate action of the Selling Shareholder; and this Agreement has been
duly executed and delivered by the Selling Shareholder.
(ii) The Selling Shareholder has duly executed and delivered a
power of attorney and custody agreement (with respect to such Selling
Shareholder, the "Power-of-Attorney" and the "Custody Agreement",
respectively), each in the form heretofore delivered to the
Representatives, appointing [INSERT NAME OF ATTORNEY-IN-FACT] as the
Selling Shareholder's attorney-in-fact (the "Attorney-in-Fact") with
authority to execute, deliver and perform this Agreement on behalf of such
Selling Shareholder and appointing American
-8-
<PAGE>
Stock Transfer and Trust Company as custodian thereunder (the "Custodian").
Certificates in negotiable form, endorsed in blank or accompanied by blank stock
powers duly executed, with signatures appropriately guaranteed, representing the
Securities to be sold by the Selling Shareholder hereunder have been deposited
with the Custodian pursuant to the Custody Agreement for the purpose of delivery
pursuant to this Agreement. The Selling Shareholder has full power (corporate
and other) to enter into the Custody Agreement and the Power-of-Attorney and to
perform its obligations under the Custody Agreement. The execution and delivery
of the Custody Agreement and the Power-of-Attorney have been duly authorized by
all necessary corporate action of the Selling Shareholder; the Custody Agreement
and the Power-of-Attorney have been duly executed and delivered by the Selling
Shareholder and, assuming due authorization, execution and delivery by the
Custodian, are the legal, valid, binding and enforceable instruments of the
Selling Shareholder. The Selling Shareholder agrees that each of the Securities
represented by the certificates on deposit with the Custodian is subject to the
interests of the Underwriters hereunder, that the arrangements made for such
custody, the appointment of the Attorney-in-Fact and the right, power and
authority of the Attorney-in-Fact to execute and deliver this Agreement, to
agree on the price at which the Securities (including the Selling Shareholder's
Securities) are to be sold to the Underwriters, and to carry out the terms of
this Agreement, are to that extent irrevocable and that the obligations of the
Selling Shareholder hereunder shall not be terminated, except as provided in
this Agreement or the Custody Agreement, by any act of the Selling Shareholder,
by operation of law or otherwise, whether by the death or incapacity of such
Selling Shareholder, or by the occurrence of any other event. If the Selling
Shareholder, should die or become incapacitated or if any other event should
occur, before the delivery of such Securities hereunder, the certificates for
such Securities deposited with the Custodian shall be delivered by the Custodian
in accordance with the respective terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether or
not the Custodian or the Attorney-in-Fact shall have received notice thereof.
(iii) The Selling Shareholder is the lawful owner of the
Securities to be sold by the Selling Shareholder hereunder and upon sale
and delivery of, and payment for, such Securities, as provided herein, the
Selling Shareholder will convey good and marketable title to such
Securities, free and clear of any security interests, liens, encumbrances,
equities, claims or other defects.
(iv) The Selling Shareholder has not, directly or indirectly
(except for the sale of Securities by the Selling Shareholder under this
Agreement), (a) taken any action designed to cause or result in, or that
has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities or (b) since the filing
of the Registration Statement (i) sold, bid for, purchased, or paid anyone
any compensation for soliciting purchases of, the Securities or (ii) paid
or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(v) The Selling Shareholder has not distributed and, prior to
the later of (a) the Closing Date and (b) the completion of the
distribution of the Securities, will not distribute any offering material
in connection with the offering and sale of the shares other than the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or
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<PAGE>
the Prospectus or any amendment or supplement thereto, or other materials,
if any, permitted by the Act.
(vi) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986,
as amended, with respect to the transactions herein contemplated, the
Selling Shareholder agrees to deliver to you prior to or on the Firm
Closing Date, as hereinafter defined, a properly completed and executed
United States Treasury Department Form W-8 or W-9 (or other applicable form
of statement specified by Treasury Department regulations in lieu thereof).
(vii) To the extent that any statements or omissions are made
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto (A) in reliance upon and in
conformity with written information furnished to the Company by the Selling
Shareholder specifically for use therein or (B) with respect to the period
of time the Selling Shareholder was an officer of the Company, such
Preliminary Prospectus did, and the Registration Statement and the
Prospectus and any amendments or supplements thereto, when they become
effective or are filed with the Commission, as the case may be, will
conform in all material respects to the requirements of the Act and the
respective rules and regulations of the Commission thereunder and will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they are
made, not misleading. The Selling Shareholder has reviewed the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and the Registration Statement, and the information
(i) covering the period of time the Selling Shareholder was an officer of
the Company and (ii) regarding the Selling Shareholder set forth therein
under the caption "Principal and Selling Shareholder" is complete and
accurate. For purposes of this Agreement, the Selling Shareholder was an
officer of the Company from its inception until March 9, 1996.
(viii) The sale by the Selling Shareholder of Securities
pursuant hereto is not prompted by any adverse information concerning the
Company.
(ix) The sale of the Securities to the Underwriters by the
Selling Shareholder pursuant to this Agreement, the compliance by the
Selling Shareholder with the other provisions of this Agreement, the
Custody Agreement and the consummation of the other transactions herein
contemplated do not (a) require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
such as have been obtained, such as may be required under state securities
or blue sky laws and, if the registration statement filed with respect to
the Securities (as amended) is not effective under the Act as of the time
of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act or (b) conflict with or result in
a breach or violation of any of the terms and provisions of, or constitute
a default under any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which the Selling Shareholder is a party or by
which the Selling Shareholder or any of the Selling Shareholder's
properties are bound, or any statute or any judgment, decree, order, rule
or regulation of any court or other governmental authority or any
arbitrator applicable to the Selling Shareholder.
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3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES. (a) On the basis of the
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, the Company and the
Selling Shareholder agree, severally and not jointly, to sell to each of the
Underwriters, and each of the Underwriters, severally and not jointly, agrees to
purchase from the Company and the Selling Shareholder, at a purchase price of
$________ per share, the number of Firm Securities set forth opposite the name
of such Underwriter in Schedule 1 hereto. One or more certificates in
definitive form for the Firm Securities that the several Underwriters have
agreed to purchase hereunder, and in such denomination or denominations and
registered in such name or names as the Representatives request upon notice to
the Company at least 48 hours prior to the Firm Closing Date, shall be delivered
by or on behalf of the Company and the Selling Shareholder to the
Representatives for the respective accounts of the Underwriters, against payment
by or on behalf of the Underwriters of the aggregate purchase price therefor by
wire transfer in same-day funds (the "Wired Funds") to the accounts of the
Company and the Selling Shareholder. Such delivery of and payment for the Firm
Securities shall be made at the offices of Schulte Roth & Zabel LLP, 900 Third
Avenue, New York, New York 10022 at 9:30 A.M., New York time, on __________,
1997, or at such other place, time or date as the Representatives and the
Company may agree upon or as the Representatives may determine pursuant to
Section 9 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date". The Company and the Selling Shareholder
will make such certificate or certificates for the Firm Securities available for
checking and packaging by the Representatives at the offices in New York, New
York of the Company's transfer agent or registrar or of Prudential Securities
Incorporated at least 24 hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The purchase price
to be paid for any Option Securities shall be the same price per share as the
price per share for the Firm Securities set forth above in paragraph (a) of this
Section 3. The option granted hereby may be exercised as to all or any part of
the Option Securities from time to time within (thirty) days after the date of
the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday,
on the next business day thereafter when the New York Stock Exchange is open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Securities prior to the exercise of such option. The Representatives
may from time to time exercise the option granted hereby by giving notice in
writing or by telephone (confirmed in writing) to the Company setting forth the
aggregate number of Option Securities as to which the several Underwriters are
then exercising the option and the date and time for delivery of and payment for
such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and Company
may agree upon or as the Representatives may determine pursuant to Section 9
hereof, is herein called the "Option Closing Date" with respect to such Option
Securities. Upon exercise of the option as provided herein, the Company shall
become obligated to sell to each of the several Underwriters, and, subject to
the terms and conditions herein set forth, each of the Underwriters (severally
and not jointly) shall become obligated to purchase from the Company, the same
percentage of the total number of the Option Securities as to which the several
Underwriters are then exercising the option as such Underwriter is obligated to
purchase of the aggregate number of Firm Securities, as adjusted by the
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Representatives in such manner as they deem advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (a) of this Section 3, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) Each of the Company and the Selling Shareholder hereby
acknowledges that the wire transfer by or on behalf of the Underwriters of the
purchase price for any Shares does not constitute closing of a purchase and sale
of the Shares. Only execution and delivery of a receipt for Shares by the
Underwriters indicates completion of the closing of a purchase of the Shares
from the Company or the Selling Shareholder, as the case may be. Furthermore,
in the event that the Underwriters wire funds to the Company or the Selling
Shareholder prior to the completion of the closing of a purchase of Shares, each
of the Company and the Selling Shareholder hereby acknowledges that until the
Underwriters execute and deliver a receipt for the Shares, by facsimile or
otherwise, the Company or the Selling Shareholder, as the case may be, will not
be entitled to the wired funds and shall return the wired funds to the
Underwriters as soon as practicable (by wire transfer of same-day funds) upon
demand. In the event that the closing of a purchase of Shares is not completed
and the wire funds are not returned by the Company or the Selling Shareholder,
as the case may, be to the Underwriters on the same day the wired funds were
received by the Company or the Selling Shareholder, each of the Company and the
Selling Shareholder agrees to pay to the Underwriters in respect of each day the
wire funds are not returned by it, in same-day funds, interest on the amount of
such wire funds in an amount representing the Underwriters' cost of financing as
reasonably determined by Prudential Securities Incorporated.
(d) It is understood that any of you, individually and not as one of
the Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
4. OFFERING BY THE UNDERWRITERS. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDER. The Company
(with respect only to paragraphs 5(a) through and including 5(m) below) and the
Selling Shareholder (with respect only to paragraphs 5(n) and 5(o) below)
covenant and agree with each of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as possible. If required,
the Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required
to be delivered under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and
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the rules and regulations of the Commission thereunder to the extent necessary
to permit the continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission the prospectus, Term
Sheet or the amendment referred to in the second sentence of Section 2(a)
hereof, any amendment or supplement to such Prospectus, Term Sheet or any
amendment to the Registration Statement or any Rule 462(b) Registration
Statement of which the Representatives previously have been advised and
furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Representatives shall not have given their
consent. The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon request by the
Representatives or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be necessary or advisable in connection with the distribution of the Securities
by the several Underwriters, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence satisfactory to the Representatives of each such
filing or effectiveness.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement or any amendment thereto or
any order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, (iii)
the institution, threatening or contemplation of any proceeding for any such
purpose or (iv) any request made by the Commission for amending the Original
Registration Statement or any Rule 462(b) Registration Statement, for amending
or supplementing the Prospectus or for additional information. The Company will
use its best efforts to prevent the issuance of any such stop order and, if any
such stop order is issued, to obtain the withdrawal thereof as promptly as
possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities, PROVIDED, HOWEVER, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 5(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
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<PAGE>
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) and any Rule 462(b)
Registration Statement, (ii) to each other Underwriter, a conformed copy of such
registration statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Representatives may reasonably request; without
limiting the application of clause (iii) of this sentence, the Company, not
later than (A) 6:00 PM, New York City time, on the date of determination of the
public offering price, if such determination occurred at or prior to 10:00 A.M.,
New York City time, on such date or (B) 2:00 PM, New York City time, on the
business day following the date of determination of the public offering price,
if such determination occurred after 10:00 A.M., New York City time, on such
date, will deliver to the Underwriters, without charge, as many copies of the
Prospectus and any amendment or supplement thereto as the Representatives may
reasonably request for purposes of confirming orders that are expected to settle
on the Firm Closing Date. The Company will provide or cause to be provided to
each of the Representatives, and to each Underwriter that so requests in
writing, a copy of each report on Form SR filed by the Company as required by
Rule 463 under the Act.
(f) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on the
date of this Agreement and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(g) The Company, as soon as practicable, will make generally
available to its securityholders and to the Representatives a consolidated
earnings statement of the Company and its subsidiaries that satisfies the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
(h) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will not, directly or indirectly, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, 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 any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock for
a period of 180 days after the date hereof, except (i) pursuant to this
Agreement, (ii) issuances pursuant to the exercise of employee stock options
outstanding on the date hereof and (iii) in connection with acquisitions of
publicly-held companies (in which case the Company's shares of Common Stock
issued in such acquisitions will be "locked-up" as contemplated by this
paragraph for a period of 120 days after the date of such issuance.
(j) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or
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<PAGE>
resale of the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of, the Securities or (B) pay or agree to
pay to any person any compensation for soliciting another to purchase any other
securities of the Company (except for the sale of Securities by the Selling
Shareholder under this Agreement).
(k) The Company will obtain the agreements described in Section 7(f)
hereof prior to the Firm Closing Date.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
(m) The Company will cause the Securities to be duly included for
quotation on the Nasdaq Stock Market's National Market (the "Nasdaq National
Market") prior to the Firm Closing Date. The Company will ensure that the
Securities remain included for quotation on the Nasdaq National Market following
the Firm Closing Date.
(n) The Selling Shareholder will not, directly or indirectly, without
the prior written consent of Prudential Securities Incorporated, on behalf of
the Underwriters, 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 Securities legally or beneficially owned by
such Selling Shareholder or any securities convertible into, or exchangeable to
exercisable for, Securities for a period of 180 days after the date hereof.
(o) The Selling Shareholder will not, directly or indirectly, (i)
take any action designed to cause or result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Selling Shareholder
under this Agreement).
6. EXPENSES. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the registration statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors
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<PAGE>
retained by the Company, (iv) preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (vi) the filing
fees of the Commission and the National Association of Securities Dealers, Inc.
relating to the Securities, (vii) any quotation of the Securities on the Nasdaq
National Market, (viii) any meetings with prospective investors in the
Securities (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters) and (ix) advertising
relating to the offering of the Securities (other than as shall have been
specifically approved by the Representatives to be paid for by the
Underwriters). If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11 hereof or because of any failure, refusal or inability on
the part of the Company to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company shall not in any
event be liable to any of the Underwriters for the loss of anticipated profits
from the transactions covered by this Agreement.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company contained herein as of the date
hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, to the performance by the Company of its covenants and
agreements hereunder and to the following additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Registration Statement or such amendment and, if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have been declared effective not later than the earlier of (i)
11:00 A.M., New York time, on the date on which the amendment to the
registration statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission in
the manner and within the time period required by Rules 434 and 424(b) under the
Act; no stop order suspending the effectiveness of the Registration Statement or
any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Representatives, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
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<PAGE>
(b) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel for
the Company, to the effect that:
(i) the Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of California
and is duly qualified to transact business as a foreign corporation and is
in good standing under the laws of all other jurisdictions where the
ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified
does not amount to a material liability or disability to the Company. The
Company has no subsidiary or subsidiaries and does not control, directly or
indirectly, any corporation, partnership, joint venture, association or
other business organization;
(ii) the Company has corporate power to own or lease its
properties and conduct its business as described in the Registration
Statement and the Prospectus, and the Company has corporate power to enter
into this Agreement and to carry out all the terms and provisions hereof to
be carried out by it;
(iii) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, have been issued in compliance with
all applicable federal and state securities laws and were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities; the Company Firm Securities have been
duly authorized by all necessary corporate action of the Company and, when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, will be validly issued, fully paid and nonassessable; the
Securities have been duly included for trading on the Nasdaq National
Market; no holders of outstanding shares of capital stock of the Company
are entitled as such to any preemptive or other rights to subscribe for any
of the Securities; and no holders of securities of the Company, other than
the Selling Shareholder, are entitled to have such securities registered
under the Registration Statement;
(iv) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company, provide a
fair summary of such provisions[; and the statements set forth under the
headings "Shares Eligible for Future Sale," "Management-Employment
Agreements," "Capitalization," and "Certain Transactions," in the
Prospectus, insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, provide a fair
summary of such legal matters, documents and proceedings;
(v) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company;
(vi) (A) no legal or governmental proceedings are pending to
which the Company is a party or to which the property of the Company is
subject that are required to be described in the Registration Statement or
the Prospectus and are not described
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<PAGE>
therein, and, to the best knowledge of such counsel, no such proceedings
have been threatened against the Company or with respect to any of its
properties and (B) no contract or other document is required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement that is not described therein or
filed as required;
(vii) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement, the compliance
by the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained
and such as may be required under state securities or blue sky laws, or (B)
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, lease or other agreement or instrument, known to such counsel, to
which the Company is a party or by which the Company or any of its
properties are bound, or the charter documents or by-laws of the Company,
or any statute or any judgment, decree, order, rule or regulation of any
court or other governmental authority or any arbitrator known to such
counsel and applicable to the Company;
(viii) the Registration Statement is effective under the Act;
any required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the manner
and within the time period required by Rules 434 and 424(b); and no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose have
been instituted or threatened or, to the best knowledge of such counsel,
are contemplated by the Commission;
(ix) the Registration Statement originally filed with respect to
the Securities and each amendment thereto, any Rule 462(b) Registration
Statement and the Prospectus (in each case, other than the financial
statements and other financial information contained therein, as to which
such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the rules and
regulations of the Commission thereunder;
(x) if the Company elects to rely on Rule 434, the Prospectus is
not "materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A);
(xi) the Company is not, and the transactions contemplated by
this Agreement will not cause the Company to become, an investment company
subject to registration under the Investment Company Act of 1940, as
amended; and
(xii) the specimen stock certificate of the Company filed as
an exhibit to the Registration Statement is in due and proper form to
evidence shares of Common Stock, has been duly authorized and approved by
the Board of Directors of the Company
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<PAGE>
and complies with all legal requirements applicable under the California
Corporations Code.
Such counsel shall also state that they have no reason to believe that
the Registration Statement, as of its effective date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that the Prospectus, as of its date or the date of such opinion, included or
includes any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem[s] proper, on certificates of responsible
officers of the Company and public officials. Such counsel shall also state
that, in rendering its opinion to the Underwriters pursuant to Section 7(d),
Schulte Roth & Zabel LLP may rely on the opinion of such counsel as to all
matters which are governed by California law.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Selling Shareholder shall have furnished to the
Representatives the opinion, dated the Firm Closing Date, from Schiffino &
Lineon, counsel for the Selling Shareholder, to the effect that:
(i) the Selling Shareholder has full corporate power to enter
into this Agreement, the Custody Agreement and the Power-of-Attorney and to
sell, transfer and deliver the Securities being sold by the Selling
Shareholder hereunder in the manner provided in this Agreement and to
perform its obligations under the Custody Agreement; the execution and
delivery of this Agreement, the Custody Agreement and the Power-of-Attorney
have been duly authorized by all necessary corporate action of the Selling
Shareholder; this Agreement, the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by the Selling
Shareholder; assuming due authorization, execution and delivery by the
Custodian, the Custody Agreement and the Power-of-Attorney are the legal,
valid, binding and enforceable instruments of the Selling Shareholder,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law);
(ii) the delivery by the Selling Shareholder to the several
Underwriters of certificates for the Securities being sold hereunder by the
Selling Shareholder against payment therefor as provided herein, will
convey good and marketable title to such Securities to the several
Underwriters, free and clear of all security interests, liens,
encumbrances, equities, claims or other defects;
(iii) the sale of the Securities to the Underwriters by the
Selling Shareholder pursuant to this Agreement, the compliance by the
Selling Shareholder with the other provisions of this Agreement, the
Custody Agreement and the consummation of the other transactions herein
contemplated do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
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such as have been obtained and such as may be required under state
securities or blue sky laws, or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default
under any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Selling Shareholder is a party or by which the
Selling Shareholder or any of its properties are bound, or any statute,
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Selling
Shareholder.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem(s) proper, on certificates of
responsible officers of the Company and public officials.
References to the Registration Statement and the Prospectus in
this paragraph (c) shall include any amendment or supplement thereto at the date
of such opinion.
(d) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Schulte Roth & Zabel LLP, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company and the Selling
Shareholder shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such matters.
In rendering such opinion, such counsel may rely as to all matters of law upon
the opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP, as to matters which
are governed by California law.
(e) The Representatives shall have received from Price Waterhouse LLP
a letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the effect
that:
(i) they are independent accountants with respect to the Company
and Wood Holly Productions and within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited financial statements and
schedules and pro forma financial statements examined by them and included
in the Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the Act
and the related published rules and regulations;
(iii) on the basis of carrying out certain specified
procedures (which do not constitute an examination made in accordance with
generally accepted auditing standards) that would not necessarily reveal
matters of significance with respect to the comments set forth in this
paragraph (iii), a reading of the minute books of the shareholders, the
board of directors and any committees thereof of the Company and Wood Holly
Productions, and inquiries of certain officials of the Company and Wood
Holly Productions who have responsibility for financial and accounting
matters, nothing came to their attention that caused them to believe that
at a specific date not more than five business days prior to the date of
such letter, there were any changes in the capital stock or long-term debt
of the Company or Wood Holly Productions or any decreases in not current
assets or shareholders' equity of the Company, compared with amounts shown
on the September 30, 1996 audited balance sheet included in the
Registration Statement and
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<PAGE>
the Prospectus, or for the period from October 1, 1996 to such specified
date there were any decreases, as compared with the same period in the
prior year in net revenues, or total or per share amounts of net income of
the Company and Wood Holly Productions, except in all instances for
changes, decreases or increases set forth in such letter;
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and Wood Holly Productions and are included in the
Registration Statement, the Prospectus and in Exhibit 11 to the
Registration Statement, and have compared such amounts, percentages and
financial information with such records of the Company and Wood Holly
Productions and with information derived from such records and have found
them to be in agreement, excluding any questions of legal interpretation;
and
(v) on the basis of a reading of the unaudited pro forma
financial statements included in the Registration Statement and the
Prospectus, carrying out certain specified procedures that would not
necessarily reveal matters of significance with respect to the comments set
forth in this paragraph (v), inquiries of certain officials of the Company
and Wood Holly Productions who have responsibility for financial and
accounting matters and proving the arithmetic accuracy of the application
of the pro forma adjustments to the historical amounts in the unaudited pro
forma financial statements, nothing came to their attention that caused
them to believe that the unaudited pro forma financial statements do not
comply in form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of such statements.
In the event that the letters referred to above set forth any such changes,
decreases or increases, it shall be a further condition to the obligations of
the Underwriters that (A) such letters shall be accompanied by a written
explanation of the Company and Wood Holly Productions as to the significance
thereof, unless the Representatives deem such explanation unnecessary, and (B)
such changes, decreases or increases do not, in the sole judgment of the
Representatives, make it impractical or inadvisable to proceed with the purchase
and delivery of the Securities as contemplated by the Registration Statement, as
amended as of the date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (e) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(f) The Representatives shall have received a certificate, dated the
Firm Closing Date, of R. Luke Stefanko and Donald R. Stine of the Company to the
effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
the Company has
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performed all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the
best of the Company's knowledge, are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident
or other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding, and there has not been any
material adverse change, or any development involving a prospective
material adverse change, in the condition (financial or otherwise),
management, business prospects, net worth or results of operations of the
Company, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto).
(g) The Representatives shall have received a certificate from the
Selling Shareholder, dated the Closing Date, to the effect:
(i) the representations and warranties of the Selling
Shareholder in this Agreement are true and correct as if made on and as of
the Closing Date;
(ii) to the extent that any statements or omissions are made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by such Selling Shareholder
specifically for use therein, the Registration Statement, as amended as of
the Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements therein
not misleading, and the Prospectus, as amended or supplemented as of the
Firm Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and
(iii) the Selling Shareholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior to the
Closing Date.
(h) The Representatives shall have received from each person who is a
director or officer of the Company or who owns outstanding shares of Common
Stock an agreement to the effect that such person will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, 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 an option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for a period of 180 days after the date of this
Agreement.
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<PAGE>
(i) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(j) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
8. INDEMNIFICATION AND CONTRIBUTION. (a) Each of the Company, R. Luke
Stefanko and Donald R. Stine (individually a "Principal Shareholder" and
together, the "Principal Shareholders") jointly and severally agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Securities Exchange Act of 1934 (the "Exchange Act"), against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company in Section 2(a) of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the securities or
blue sky laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to
make the statements therein not misleading or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in connection
with the marketing of the Securities, including without limitation, slides,
videos, films, tape recordings,
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<PAGE>
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Company and the
Principal Shareholders will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein; and PROVIDED, FURTHER, that the Company and the
Principal Shareholders will not be liable to any Underwriter or any person
controlling such Underwriter with respect to any such untrue statement or
omission made in any Preliminary Prospectus that is corrected in the Prospectus
(or any amendment or supplement thereto) if the person asserting any such loss,
claim, damage or liability purchased Securities from such Underwriter but was
not sent or given a copy of the Prospectus (as amended or supplemented) at or
prior to the written confirmation of the sale of such Securities to such person
in any case where such delivery of the Prospectus (as amended or supplemented)
is required by the Act, unless such failure to deliver the Prospectus (as
amended or supplemented) was a result of noncompliance by the Company with
Section 5(d) and (e) of this Agreement. This indemnity agreement will be in
addition to any liability which the Company and the Principal Shareholders may
otherwise have. Neither the Company nor the Principal Shareholders will,
without the prior written consent of the Underwriter or Underwriters purchasing,
in the aggregate, more than fifty percent (50%) of the Securities, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not any such Underwriter or any person who controls
any such Underwriter within the meaning of Section 15 of the Act or Section 20
of the Exchange Act is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional release
of all of the Underwriters and such controlling persons from all liability
arising out of such claim, action, suit or proceeding. Notwithstanding anything
to the contrary in this paragraph 8(a), each Underwriter and each person who
controls such Underwriter agrees that it shall not be entitled to payment under
this paragraph 8(a) against the Principal Shareholders unless such Underwriter
or controlling person has requested indemnification and reimbursement from the
Company for such losses, claims, damages or liabilities (including any legal or
other expenses reasonably incurred) and either (i) the Company does not within
45 days of such request irrevocably agree in writing to so indemnify such
Underwriter or controlling person or (ii) at any time the Company fails to
promptly reimburse in full such Underwriter or controlling person for any such
losses, damages or liabilities (including legal and other expenses) as incurred.
The liability of each of the Principal Shareholders under this Section 8(a)
shall not exceed the amount such Principal Shareholder receives in the S Corp
distribution (as more fully described in the Registration Statement).
(b) The Selling Shareholder agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who signs the Registration
Statement, each Underwriter and each person who controls the Company or any
Underwriter within the meaning of the Act or the Exchange Act against any
losses, claims, damages or liabilities to which the Company, any such director,
officer, such Underwriter or any such controlling person may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement made by the Selling
Shareholder in Section 2(b) of this
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<PAGE>
Agreement, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application or (iii) the omission or the alleged omission to state
therein a material fact required to be stated in the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by the Selling Shareholder for use therein;
PROVIDED, HOWEVER, that the Selling Shareholder will not be liable to any
Underwriter or any person controlling such Underwriter with respect to any such
untrue statement or omission made in any Preliminary Prospectus that is
corrected in the Prospectus (or any amendment or supplement thereto) if the
person asserting any such loss, claim, damage or liability purchased Securities
from such Underwriter but was not sent or given a copy of the Prospectus (as
amended or supplemented) at or prior to the written confirmation of the sale of
such Securities to such person in any case where such delivery of the Prospectus
(as amended or supplemented) is required by the Act, unless such failure to
deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 5(d) and (e) of this Agreement; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company, any such director, officer, such Underwriter or any such controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or any action in respect thereof. This indemnity agreement
will be in addition to any liability which the Selling Shareholder may otherwise
have. The Selling Shareholder will not, without the prior written consent of
the Underwriter or Underwriters purchasing, in the aggregate, more than fifty
percent (50%) of the Securities, settle or comprise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not any
such Underwriter or any person who controls any such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of all of the Underwriters and such
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
(c) Each Underwriter will, severally and not jointly, indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Selling Shareholder and each person, if
any, who controls the Company or the Selling Shareholder within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act against any losses,
claims, damages or liabilities to which the Company, any such director or
officer of the Company, the Selling Shareholder or any such controlling person
of the Company or the Selling Shareholder may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in
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reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein; and, subject to the limitation set forth immediately preceding this
clause, will reimburse, as incurred, any legal or other expenses reasonably
incurred by the Company, any such director, officer or controlling person or the
Selling Shareholder in connection with investigating or defending any such loss,
claim, damage, liability or any action in respect thereof. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
PROVIDED, HOWEVER, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(e) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the
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one hand and theindemnified party on the other from the offering of the
Securities or (ii) if the allocation provided by the foregoing clause (i) is
not permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions
or alleged statements or omissions that resulted in such losses, claims,
damages or liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholder on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Shareholder bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company, the
Selling Shareholder or the Underwriters, the parties' relative intents,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in
the circumstances. The Company, the Selling Shareholder and the Underwriters
agree that it would not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take into account the equitable considerations
referred to above in this paragraph (e). Notwithstanding any other provision
of this paragraph (e), no Underwriter shall be obligated to make
contributions hereunder that in the aggregate exceed the total public
offering price of the Securities purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim, and no person guilty of fraudulent misrepresentation (within
the meaning of Section II (f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute hereunder are several in proportion
to their respective underwriting obligations and not joint, and contributions
among Underwriters shall be governed by the provisions of the Prudential
Securities Incorporated Master Agreement Among Underwriters. For purposes of
this paragraph (e), each person, if any, who controls an Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall
have the same rights to contribution as such Underwriter, and each director
of the Company, each officer of the Company who signed the Registration
Statement and each person, if any, who controls the Company or the Selling
Shareholder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as the Company or
the Selling Shareholder, as the case may be.
9. DEFAULT OF UNDERWRITERS. If one or more Underwriters default in their
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate
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number of Firm Securities or Option Securities, as the case may be, to be
purchased by all of the Underwriters at such time hereunder, and if arrangements
satisfactory to the Representatives are not made within 36 hours after such
default for the purchase by other persons (who may include one or more of the
non-defaulting Underwriters, including the Representatives) of the Securities
with respect to which such default occurs, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company other
than as provided in Section 10 hereof. In the event of any default by one or
more Underwriters as described in this Section 9, the Representatives shall have
the right to postpone the Firm Closing Date or the Option Closing Date, as the
case may be, established as provided in Section 3 hereof for not more than seven
business days in order that any necessary changes may be made in the
arrangements or documents for the purchase and delivery of the Firm Securities
or Option Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. SURVIVAL. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, the
Principal Shareholders, the Selling Shareholder and the several Underwriters set
forth in this Agreement or made by or on behalf of them, respectively, pursuant
to this Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, the Principal Shareholders, the Selling Shareholder, any Underwriter
or any controlling person referred to in Section 8 hereof and (ii) delivery of
and payment for the Securities. The respective agreements, covenants,
indemnities and other statements set forth in Sections 6 and 8 hereof shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement.
11. TERMINATION. (a) This Agreement may be terminated with respect to the
Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company and the Selling Shareholder given prior
to the Firm Closing Date or the related Option Closing Date, respectively, in
the event that the Company or the Selling Shareholder shall have failed, refused
or been unable to perform all obligations and satisfy all conditions on its part
to be performed or satisfied hereunder at or prior thereto or, if at or prior to
the Firm Closing Date or such Option Closing Date, respectively,
(i) the Company shall have, in the sole judgment of the
Representatives, sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident
or other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding or there shall have been
any material adverse change, or any development involving a prospective
material adverse change (including without limitation a change in
management or control of the Company), in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally
on the New York Stock Exchange or Nasdaq National Market shall have been
suspended or minimum
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or maximum prices shall have been established on either such exchange or market
system;
(iii) a banking moratorium shall have been declared by New
York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the US financial markets that, in the sole judgment of
the Representatives, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Securities as contemplated by
the Registration Statement, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall
be without liability of any party to any other party except as provided in
Section 10 hereof.
12. INFORMATION SUPPLIED BY UNDERWRITERS. The statements set forth in the
last paragraph on the front cover page and under the heading "Underwriting" in
any Preliminary Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(ii) and 8 hereof. The Underwriters confirm that such statements (to
such extent) are correct.
13. NOTICES. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company, shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to the Company at
6920 Sunset Boulevard, Hollywood, California 90028, Attention: R. Luke
Stefanko; if to the Principal Shareholders, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to the Principal
Shareholder at ______________, Attention: R. Luke Stefanko and if to the
Selling Shareholder, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Selling Shareholder at
__________________, Attention: Robert Bajorek.
14. SUCCESSORS. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Company, the Principal Shareholders,
the Selling Shareholder and their respective successors and legal
representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company, the Principal Shareholders and the Selling Shareholder contained in
Section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in Section 8 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
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<PAGE>
Registration Statement, the Principal Shareholders, the Selling Shareholder and
any person or persons who control the Company the Principal Shareholders, or the
Selling Shareholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act. No purchaser of Securities from any Underwriter shall be
deemed a successor because of such purchase.
15. APPLICABLE LAW. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
16. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, the Company, the Principal
Shareholders and the Selling Shareholder each accepts for itself and in
connection with their respective properties, generally and unconditionally, the
nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. The Selling Shareholder designates
and appoints __________________, and the Company and the Principal Shareholders
designate and appoint Donald R. Stine and such other persons as may hereafter be
selected by the Company, the Principal Shareholders or the Selling Shareholder
irrevocably agreeing in writing to so serve, as their respective agents to
receive on its behalf service of all process in any such proceedings in any such
court, such service being hereby acknowledged by the Company, the Principal
Shareholders and the Selling Shareholder to be effective and binding service in
every respect. A copy of any such process so served shall be mailed by
registered mail to the Company, the Principal Shareholders and/or the Selling
Shareholders at their respective addresses provided in Section 13 hereof;
PROVIDED, HOWEVER, that, unless otherwise provided by applicable law, any
failure to mail such copy shall not affect the validity of service of such
process. If any agent appointed by the Company, the Principal Shareholders or
the Selling Shareholder refuses to accept service, the Company, the Principal
Shareholders and the Selling Shareholder each hereby agrees that service of
process sufficient for personal jurisdiction in any action against the Company,
the Principal Shareholders or the Selling Shareholder in the State of New York
may be made by registered or certified mail, return receipt requested, to the
Company and/or Selling Shareholder, as applicable, at their respective addresses
provided in Section 13 hereof, and the Company, the Principal Shareholders and
the Selling Shareholder each hereby acknowledge that such service shall be
effective and binding in every respect. Nothing herein shall affect the right
to serve process in any other manner permitted by law or shall limit the right
of any Underwriter to bring proceedings against the Company, the Principal
Shareholders and the Selling Shareholder in the courts of any other
jurisdiction.
17. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company, the Principal
Shareholders, the Selling Shareholder and each of the several Underwriters.
Very truly yours,VDI MEDIA
By __________________________
Name:
Title:
The foregoing Agreement is hereby PRINCIPAL SHAREHOLDERS
confirmed and accepted as of the date
first above written.
_____________________________
R. Luke Stefanko
_____________________________
Donald R. Stine
PRUDENTIAL SECURITIES INCORPORATED SELLING SHAREHOLDER:
OPPENHEIMER & CO., INC.
______________________________
Robert Bajorek
By PRUDENTIAL SECURITIES
INCORPORATED
By _______________________________
Name: Jean-Claude Canfin
Title: Director
For itself and on behalf of the Representatives.
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<PAGE>
SCHEDULE 1
UNDERWRITERS
Number of Firm
Securities to
Underwriter Be Purchased
- ----------- ------------
Prudential Securities Incorporated.......
Oppenheimer & Co., Inc.
_______________
Total ..............
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<PAGE>
EXHIBIT 11
VDI MEDIA
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<S> <C>
Weighted average number of shares outstanding.................................... 6,660,000
add: proceeds from common shares used to pay final S Corporation Distribution
(($2,976,000 - $2,630,000) DIVIDED BY $9.92 per share).................. 34,879
---------
Pro Forma weighted average number of shares outstanding.......................... 6,694,879
---------
add: proceeds from common shares used to repay outstanding debt
($3,552,000 DIVIDED BY $9.92 per share).................................. 358,063
---------
Supplemental weighted average number of shares outstanding................ 7,052,942
---------
---------
</TABLE>
<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
January 24, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF DIRECTOR NOMINEE
I, Edward M. Philip, do hereby consent to being named in the Prospectus
constituting part of this Registration Statement on Form S-1 (Number
333-4047) as a nominee for director of VDI Media.
/s/ Edward M. Philip
-----------------------------
Edward M. Philip
