<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1997
REGISTRATION NO. 333-13721
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
FOUR MEDIA COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7819 95-4599440
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2813 WEST ALAMEDA AVENUE
BURBANK, CA 91505-4455
(818) 840-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROBERT T. WALSTON
FOUR MEDIA COMPANY
2813 WEST ALAMEDA AVENUE
BURBANK, CA 91505-4455
TEL: (818) 840-7000
FAX: (818) 846-5197
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
YVONNE E. CHESTER, ESQ. SCOTT T. SMITH, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION PILLSBURY MADISON & SUTRO LLP
1801 CENTURY PARK EAST, SUITE 1600 2700 SAND HILL ROAD
LOS ANGELES, CALIFORNIA 90067 MENLO PARK, CALIFORNIA 94025-7111
TEL: (310) 553-4441 TEL: (415) 233-4500
FAX: (310) 201-4746 FAX: (415) 233-4545
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after 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, as amended ("Securities Act"), 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
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM
SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value........... $97,750,000 $29,622(2)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
FOUR MEDIA COMPANY
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
-------------------------------- ------------------
<S> <C> <C>
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page; Back Cover Page;
Pages of Prospectus Additional Information
3. Summary Information, Risk Factors and Risk Factors; Selected Financial Data
Ratio of Earnings to Fixed Charges
4. Use of Proceeds Prospectus Summary; Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Underwriting;
Risk Factors
6. Dilution Dilution
7. Selling Security Holders Principal and Selling Stockholders
8. Plan of Distribution Outside Front Cover Pages; Underwriting
9. Description of Securities to Be Outside Front Cover Page; Prospectus
Registered Summary; Description of Capital Stock
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Outside Front Cover Page; Prospectus
Registrant Summary; The Company; Risk Factors;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling
Stockholders; Description of Capital Stock;
Shares Eligible for Future Sale; Additional
Information; Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
<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 STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1997
PROSPECTUS
5,700,000 SHARES
[LOGO OF FOUR MEDIA COMPANY]
COMMON STOCK
---------------
Of the 5,700,000 shares of Common Stock, $.01 par value per share ("Common
Stock"), of Four Media Company (the "Company"), offered hereby, 3,491,784
shares are being offered by the Company and 2,208,216 shares are being offered
by the sole stockholder of the Company (the "Selling Stockholder"). See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholder.
Prior to this offering there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $12.00 and $14.00 per share. See "Underwriting" for
factors which will be considered in determining the initial public offering
price. The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "FOUR."
---------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
---------------
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
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
- --------------------------------------------------------------------------------------------
Total(3)......................... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deduction of expenses estimated at $2,100,000, of which $1,257,631
is payable by the Company and $842,369 is payable by the Selling
Stockholder.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
855,000 additional shares of Common Stock, on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares are being offered by the Underwriters, subject to prior sale,
when, as, and if delivered to and accepted by the Underwriters, and subject to
various prior conditions, including the right to reject orders in whole or in
part. It is expected that delivery of share certificates will be made against
payment therefor at the offices of Furman Selz LLC in New York, New York, on or
about February , 1997.
FURMAN SELZ PAINEWEBBER INCORPORATED
---------------
The date of this Prospectus is February , 1997
<PAGE>
[PICTURES]
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements (and
related notes thereto) included elsewhere in this Prospectus. The discussion in
this Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section entitled
"Risk Factors" and elsewhere in this Prospectus. Unless otherwise indicated,
all information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option or any outstanding stock options, and (ii) reflects the
Company's reorganization effected in 1996. See "Certain Transactions--
Reorganization."
THE COMPANY
Four Media Company is a leading provider of technical and creative services
to owners, producers and distributors of television programming, feature films
and other entertainment content in the United States and Asia. The name Four
Media Company is derived from the Company's core competencies in film, video,
sound and data. The Company's services integrate and apply a variety of systems
and processes to enhance the creation and distribution of entertainment
content. The Company seeks to capitalize on growth in domestic and
international demand for original entertainment content and for existing
television and film libraries without taking production or ownership risk with
respect to any specific television program, feature film or other content.
Since its formation in 1993 through the first quarter of fiscal 1997, the
Company has invested $72.6 million in infrastructure, primarily for new digital
systems and equipment. In addition, the Company has successfully identified,
acquired and integrated four complementary businesses. The Company acquired the
assets of three companies in connection with its formation in 1993, acquired
the assets of a fourth company in 1994, and capitalized and commenced its
Singapore broadcast operations in 1995. As a result of its investments and
acquisitions, the Company is one of the largest and most diversified
independent (not affiliated with or related to a content owner) providers of
technical and creative services to the entertainment industry, and therefore is
able to offer its customers a single source for such services.
The Company has organized its activities into four divisions through which it
provides services to a diverse base of customers, including all of the major
domestic studios (and their international divisions), as well as independent
producers and owners of television and film libraries, and broadcast networks.
Studio Services. The studio services division, located in Burbank,
California, provides owners of television and film libraries with the
facilities and technical services necessary to manage, format and distribute
content worldwide. These technical services include duplicating videotape for
professional applications, restoring and preserving film, transferring film to
videotape and transforming videotape to film.
Broadcast Services. The broadcast services division, located in Burbank and
the Republic of Singapore, provides domestic and international programmers with
the facilities and services necessary to assemble and distribute programming
via satellite to viewers in the United States, Canada and Asia. These services
include assembling programming into a 24-hour "network" format, creating
promotional graphics, providing production support and facilities for the
creation of programming, and providing automated systems to deliver the
programming via satellite.
Television Services. The television services division, located in Burbank and
Santa Monica, California, provides producers of original television programming
with technical and creative services necessary to convert original film or
video to a final product suitable for airing on network, syndicated, cable or
foreign television. These services include developing film, converting film to
videotape and/or digital formats, creating music, sound and visual effects, and
assembling a program master for broadcast.
Visual Effects Services. The visual effects services division, located in
Burbank and Santa Monica, commenced operations in January 1995 and provides
creators of special visual effects with certain services required to digitally
create or manipulate images in high resolution formats for integration into
feature films.
3
<PAGE>
These services include pre-production consulting, the design and creation of
visual effects, scanning film to a digital format, and recording the digital
information on film.
The Company believes that several trends in the entertainment industry will
have a positive impact on the Company's business. These trends include growth
in worldwide demand for original entertainment content, the development of new
markets for existing content libraries, increased demand for innovation and
creative quality in entertainment markets and wider application of digital
technologies to content manipulation and distribution, including the emergence
of new distribution channels. The Company believes that its current and
prospective customers increasingly will outsource services and "buy" rather
than "make" technical and creative services as the creation and distribution of
content becomes more technology driven and capital intensive. Also, the Company
anticipates that as entertainment companies continue to consolidate, they
increasingly will seek services from full-service providers such as the
Company.
The Company intends to pursue the following growth strategies:
. Seek Consolidation Opportunities. The Company believes that its industry
is highly fragmented and presents numerous consolidation opportunities.
The Company plans to pursue acquisitions that complement existing
operations, increase market share and diversify product lines.
. Offer Complete Outsourcing Solutions. The Company offers complete
outsourcing solutions by bundling services, which reduces the capital
costs and certain financial and operating risks of customers.
. Deploy Leading Technologies. The Company plans to continue its
investment in component digital equipment, information systems and other
leading technologies in order to enhance its reputation for
technological leadership in its industry.
. Expand Internationally. The Company intends to expand internationally in
response to specific customer demand, particularly where the Company's
technical expertise, financial strength and the ability to execute
quickly are competitive advantages.
. Establish Strategic Alliances. The Company seeks to generate additional
revenue from its technological resources and facilities by establishing
strategic alliances with content creators and others.
. Capitalize on Increasing Application of Digital Technology. The Company
intends to capitalize on new methods of applying digital technology for
storing, retrieving and manipulating content, as well as increased
demand for digital technology for use in high quality motion video,
multimedia applications and new content distribution channels.
The executive officers and directors of the Company and their affiliates, as
a group, will beneficially own approximately 45% of the outstanding shares of
Common Stock and are subject to three year lockup agreements. See "Risk
Factors--Concentration of Ownership" and "Underwriting."
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company.............. 3,491,784 shares
Common Stock offered by the Selling Stockholder.. 2,208,216 shares
Common Stock outstanding after the offering...... 9,966,784 shares(1)
Use of proceeds to the Company................... For repayment of certain
indebtedness (including
approximately $9.0 million
plus accrued interest
outstanding to the Selling
Stockholder), capital
expenditures, working
capital and other general
corporate purposes,
including potential
acquisitions.
See "Use of Proceeds."
Nasdaq National Market symbol.................... FOUR
</TABLE>
- -------------------
(1) Excludes 1,415,125 shares of Common Stock issuable upon exercise of stock
options to be outstanding upon completion of the offering.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
------------------------------------------ ---------------------------------
JULY 31, 1994 JULY 30, 1995 AUGUST 4, 1996 OCTOBER 29, 1995 NOVEMBER 3, 1996
------------- ------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $42,261 $61,004 $70,028 $17,632 $18,947
Income from
operations........... 2,488 5,149 5,336 1,030 1,338
Net income............ 1,235 3,220 2,424 313 124
Net income per share.. .19 .50 .37 .05 .02
Weighted average
number
of common shares
outstanding(1)....... 6,475 6,475 6,475 6,475 6,475
OTHER DATA:
EBITDA(2)............. $ 5,772 $11,390 $15,501 $ 3,527 $ 4,133
Net cash provided by
operations........... 3,047 4,588 9,387 1,585 796
Net cash used in
investing
activities........... 7,877 30,902 10,318 3,071 8,753
Net cash provided by
(used in) financing
activities........... 8,972 28,102 (410) 332 8,135
</TABLE>
<TABLE>
<CAPTION>
AS OF NOVEMBER 3, 1996
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, including restricted cash........................ $ 6,199 $ 11,603
Working capital........................................ 3,549 11,680
Total assets........................................... 99,301 105,414
Total debt(4).......................................... 62,970 27,970
Total stockholder's equity............................. 22,264 63,376
</TABLE>
- -------------------
(1) Weighted average number of common shares outstanding has been presented to
reflect retroactively the Company's reorganization and related stock
exchange with and stock dividend to its sole stockholder in October and
November 1996. See notes to the financial statements.
(2) "EBITDA" is defined herein as earnings before interest, taxes, depreciation
and amortization, excluding gains and losses on asset sales and
nonrecurring charges. EBITDA does not take into account normal capital
expenditures and 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
indicative of cash available to fund all cash needs. The Company's
definition of EBITDA may not be identical to similarly titled measures of
other companies. The Company believes that in addition to cash flows and
net income, EBITDA is a useful financial performance measurement for
assessing the operating performance of the Company because, together with
net income and cash flows, EBITDA widely is used to provide investors with
an additional basis to evaluate the ability of the Company to incur and
service debt and to fund acquisitions or invest in new technologies. To
evaluate EBITDA and the trends it depicts, the components of EBITDA, such
as net revenues, cost of services, and sales, general and administrative
expenses, should be considered. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." A reconciliation of net
income to EBITDA is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
------------------------------------------ ---------------------------------
JULY 31, 1994 JULY 30, 1995 AUGUST 4, 1996 OCTOBER 29, 1995 NOVEMBER 3, 1996
------------- ------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net income.............. $1,235 $ 3,220 $ 2,424 $ 313 $ 124
Add (deduct):
Interest expense,
net................. 1,253 2,917 3,906 921 1,214
Income tax benefits.. -- (988) (994) (204) --
Depreciation and
amortization........ 3,284 6,241 10,165 2,497 2,795
------ ------- ------- ------ ------
EBITDA.................. $5,772 $11,390 $15,501 $3,527 $4,133
====== ======= ======= ====== ======
</TABLE>
(3) Adjusted to give effect to the sale of 3,491,784 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $13.00 per share, after deducting underwriting discounts and commissions
and estimated offering expenses, and the application of the estimated net
proceeds therefrom as described in "Use of Proceeds."
(4) Includes a revolving line of credit, current and long term portions of term
loan facilities, short and long term notes payable, capital lease
obligations and a subordinated note due to the Company's sole stockholder.
5
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following matters,
together with the other information contained in this Prospectus, in
evaluating the Company and its business before making an investment decision
with respect to the shares of Common Stock offered hereby.
LOSS OF RELATIONSHIPS WITH KEY CUSTOMERS
Revenue Concentration. A significant portion of the Company's revenues is
derived from a small number of customers. Nine customers, MTV Asia LDC ("MTV
Asia"), Sony Pictures Corporation, TVN Entertainment Corporation ("TVN"),
Warner Bros., Paramount Pictures (a subsidiary of Viacom, Inc.), The Walt
Disney Company, Twentieth Century Fox, Universal Pictures and Hallmark
Entertainment, Inc., accounted for 55% of the Company's revenues in fiscal
1996. The Company expects that these customers will continue to account for a
significant portion of the Company's revenues in future periods. Except for
MTV Asia and TVN, none of these customers has a long-term contractual
relationship with the Company whereby the customer is obligated to purchase
any specified level of services from the Company. Accordingly, there can be no
assurance that revenues generated from these customers, individually or in the
aggregate, will reach or exceed historical levels in any future period. Any
substantial decrease in services provided to one or more of these customers
would have a material adverse effect on the Company's results of operations
and financial condition.
Relationship with MTV Asia. MTV Asia, partially owned by Viacom Inc.,
accounted for 15% of the Company's consolidated revenues in fiscal 1996 and
97% of the revenues of 4MC Asia, the Company's Singapore subsidiary, during
such period. 4MC Asia provides broadcast services to MTV Asia under a contract
which expires in April 2002 and provides for certain minimum performance
standards including, among other things, maintenance by 4MC Asia of specified
staffing levels and on-air reliability. MTV Asia has the right to terminate
the contract at any time if, among other things, 4MC Asia fails to meet the
performance standards or certain key employees cease to be employed by the
Company. See "Risk Factors--Dependence on Key Personnel." MTV Asia also has
the right to terminate the contract any time after April 14, 2000 upon payment
of specified amounts to 4MC Asia. Termination of the MTV Asia contract would
have a material adverse effect on the Company's results of operations and
financial condition. Further, there can be no assurance that the MTV Asia
contract will be renewed upon expiration. Any such failure to renew could have
a material adverse effect on the Company's business.
Relationship with TVN. TVN, a pay-per-view service that provides movies,
sporting events and concerts to satellite dish owners and certain cable
systems, accounted for 7% of the Company's revenues during fiscal 1996. The
Company provides broadcast services to TVN under a contract which expires in
January 1998. In early 1996, the Company and TVN agreed to renew and extend
their long-term contractual relationship (which had lapsed, but continued on a
month-to-month basis through mid-1995) to provide for, among other things, the
repayment by TVN of an aggregate of $3.3 million in outstanding accounts
receivable for broadcast services over three years in monthly installments of
principal and interest at 8%, a reduction in the monthly payments under the
contract, and the potential performance of additional services by the Company.
The Company agreed to these terms in view of: (i) the revenues historically
collected by the Company from the TVN relationship; (ii) the prospect of new
services based upon TVN's expansion; and (iii) the complementary nature of
TVN's requirements with the Company's anticipated conversion of its broadcast
infrastructure from analog to digital technology. TVN is current with respect
to its payment obligations under the contract. There can be no assurance,
however, that TVN will ultimately repay all outstanding amounts due to the
Company, fulfill its obligations under the contract or reach agreement with
the Company with respect to additional services.
Minimum Performance Standards; Possible Termination of Contracts or
Liquidated Damages. Most of the Company's customer contracts, including those
with MTV Asia and TVN, contain provisions that require the Company to meet
specified performance standards. Failure to meet specified performance
standards could result in the termination of the contract or payment of
liquidated damages, the amount of which depends on the nature and duration of
the nonperformance.
6
<PAGE>
Conversion to In-House Operations. Many of the major studios and other
customers of the Company have substantial capabilities to perform several or
all of the services offered by the Company, and evaluate from time-to-time
whether to perform those services in-house. For example, in 1995, The Disney
Channel, a subsidiary of The Walt Disney Company, changed its operating
strategy and moved its network origination and uplink operations in-house. The
Disney Channel accounted for 6%, 4%, and 1% of the Company's revenues in
fiscal 1994, 1995 and 1996, respectively. A decision by other major customers
to move in-house services they currently purchase from the Company could have
a material adverse effect on the Company's results of operations.
INCURRENCE OF SUBSTANTIAL INCREMENTAL COSTS AND CAPITAL EXPENDITURES PRIOR TO
GENERATION OF REVENUES
The Company incurs substantial incremental costs (primarily labor) and makes
significant capital expenditures prior to generating revenues. For example,
the Company has expanded its television services operations, which has
increased labor and depreciation expense significantly, through the addition
of new personnel at increased compensation levels and through the purchase of
new equipment and the construction of infrastructure. The Company incurs such
costs before the equipment and infrastructure generate revenues or achieve
capacity utilization and before the new services gain market acceptance. The
incurrence of incremental costs prior to the generation of revenues will have
an immediate adverse effect on the Company's net income. In addition, the
Company may elect to discontinue services that fail to generate sufficient
levels of revenue and write off the net book value of the assets related to
such services. Failure of the Company to generate anticipated levels of
revenue or the write-off of assets will have an immediate and adverse effect
on the Company's results of operations and financial condition.
RISK OF IMPLEMENTING NEW TECHNOLOGY; TECHNOLOGICAL OBSOLESCENCE
A key growth strategy of the Company is to integrate new systems and
equipment in its facilities and offer new services to customers. The Company
may experience difficulties in deploying new technologies that could delay or
prevent the successful introduction of new services. There can be no assurance
that the deployment of new technology or introduction of new services by the
Company will achieve market acceptance. Failure of the Company to implement
new technology and develop new services successfully or the failure of new
technology and services to achieve market acceptance could have a material
adverse effect on the Company's results of operations.
The systems and equipment utilized by the Company in providing certain
services to customers are subject to rapid technological change and
obsolescence, as well as evolving customer needs and industry standards. In
addition, the Company's competitors may introduce services embodying new
technology which could render the Company's existing services obsolete or
unmarketable. The Company thus may be required to undertake significant
capital expenditures to maintain its technological and competitive position in
the industry. There can be no assurance that the Company will have sufficient
capital or be able to obtain sufficient financing to fund such capital
expenditures, or that subsequent technological change will not make acquired
infrastructure obsolete before the Company recovers its investment.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its executive officers (see "Management"), its key creative artists and
skilled technicians, and other key personnel. A significant percentage of the
Company's revenues can be attributed to services requiring highly compensated
creative technicians. In some instances, certain of the Company's customers
specify by name the personnel that are to work on their projects. Competition
for highly qualified employees is intense and the process of locating key
technical, creative and management personnel with the combination of skills
and attributes required to execute the Company's strategy is often lengthy.
There can be no assurance that the Company will continue to attract, motivate
and retain key personnel. Failure by the Company to retain and attract
qualified key personnel could have a material adverse effect on the Company's
business and results of operations.
7
<PAGE>
4MC Asia's contract with MTV Asia permits MTV Asia to terminate the contract
if both Robert T. Walston, Chairman and Chief Executive Officer, and Gavin W.
Schutz, Vice President and Chief Technology Officer, cease to be employed by
the Company and replacements acceptable to MTV Asia are not found. Termination
of this agreement would have a material adverse effect on the Company's
results of operations and financial condition. In addition, certain of the
Company's loan agreements provide that the cessation of Mr. Walston's
employment (or tenure as a director) and/or Mr. Schutz's employment would
constitute an event of default and, at the option of the lenders, result in
the acceleration of outstanding loans. One of the Company's loans further
provides that through April 15, 2000, a decrease in the aggregate beneficial
shareholdings of Messrs. Walston, Donlon, Sabin, Schutz and Bailey below 15%
of the Company's shares outstanding would constitute an event of default. Any
such default and resulting acceleration of the outstanding loans could have a
material adverse effect on the Company's financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RISKS OF ACQUISITION GROWTH STRATEGY
Ability to Implement Strategy. An important element of the Company's growth
strategy is the acquisition of complementary businesses which may enhance the
Company's operations and profitability. Execution of its growth strategy
requires the Company's existing management to, among other things:
(i) identify acquisition candidates for sale at reasonable prices; (ii) obtain
financing for acquisitions; (iii) consummate identified acquisitions; (iv)
hire, train and assimilate new personnel; and (v) in some instances, invest
substantial funds to enhance the capabilities of the acquired business. There
can be no assurance that the Company will successfully identify, finance,
consummate or assimilate acquisitions. Further, the Company's focus on
acquisition opportunities could lessen the effectiveness of management with
respect to existing operations, which could have a material adverse effect on
the Company's results of operations. In addition, certain of the Company's
larger, better capitalized competitors may seek to acquire some of the same
types of companies that the Company seeks to acquire. Such competition for
acquisitions may increase acquisition prices and related costs and result in
fewer acquisition opportunities, which could have a material adverse effect on
the Company's growth. The Company has entered into an agreement that provides
for an exclusive negotiating period for a potential acquisition. The Company
has not reached agreement on price or completed its due diligence with respect
to such potential acquisition and there can be no assurance that the Company
will be successful in consummating the transaction if it continues to pursue
this opportunity.
Potential Adverse Financial Impacts of Acquisitions. With respect to certain
of the Company's past acquisitions, it generally has taken two years before
the necessary balance sheet restructuring, consolidation with the Company's
existing operations and/or repositioning of marketing strategies, personnel or
equipment has been achieved and the acquisition has been successful from a
financial and operational perspective. The Company expects that certain of its
future acquisitions will take an equal or longer period of time to become
successful, if they ever are successful. Accordingly, the Company expects that
certain future acquisitions will have a material adverse effect on the
business, results of operations and financial condition of the Company for a
minimum period of two years. The Company expects that its future acquisitions
often will involve the recording of a significant amount of goodwill and
deferred charges on its balance sheet. In addition, the Company also might
record deferred charges related to noncompetition agreements. Amortization of
goodwill and deferred charges will reduce net income. The Company may issue
equity securities to finance all or a portion of future acquisitions, which
may have a dilutive effect on the Company's earnings and net tangible book
value per share.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and anticipates that these fluctuations will continue. These
fluctuations have been caused by a number of factors, including: (i) with
respect to the Company's studio services division, seasonal and sometimes
fluctuating demand for programming by international broadcasters and other
content buyers, increased labor costs and uneven capacity utilization due to
delays caused by factors outside the Company's control (for example, changes
in customers' production schedules), and unanticipated production downtime due
to equipment failure, work stoppages or the absence of
8
<PAGE>
key personnel; (ii) with respect to the Company's broadcast services division,
the expiration of month-to-month service contracts, the unpredictable use of
the Company's facilities for the broadcast of news stories and special events,
and the inability of the Company to remarket its unused transponder capacity
consistently; (iii) with respect to the Company's television services
division, the unpredictability of television production schedules; and (iv)
with respect to the Company's visual effects services division, the absorption
by the Company of cost overruns in fixed price contracts and delays in meeting
completion deadlines (for reasons other than the fault of the Company). The
Company therefore believes that quarter-to-quarter comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
COMPETITION
The Company experiences intense competition in each of its business
segments. Although the Company believes no one competitor offers a comparable
range of services, some of the Company's current and potential competitors,
particularly those who perform services in-house, have substantially greater
financial, technical, creative, marketing and other resources than the
Company. The Company's competitors may devote substantially greater resources
to the development and marketing of new competitive services. The Company
expects that competition will increase substantially as a result of industry
consolidations and alliances, as well as the emergence of new competitors.
Increased competition could result in price reductions, reduced profit margins
or loss of market share, all of which would have a material adverse effect on
the Company's results of operations. See "Business--Competition."
DEPENDENCE ON ENTERTAINMENT INDUSTRY
The Company's business is dependent on the success of the motion picture and
television industries, which success in turn is highly dependent upon a number
of factors, including the quality of content produced, the availability of
alternative forms of entertainment and leisure activities, general economic
conditions and international demand for content originated in the United
States. The Company's business also is subject to downturns in the event of a
strike by any creative or other personnel integral to the production of motion
pictures or television programming.
RISKS ASSOCIATED WITH SINGAPORE OPERATIONS
Foreign Exchange Rate Fluctuations. The Company provides certain of its
broadcast services in Singapore through its Singapore subsidiary, 4MC Asia.
Substantially all of 4MC Asia's transactions are denominated in Singapore
dollars, including its bank borrowings. Although 4MC Asia is not subject to
foreign exchange transaction gains or losses, its financial statements are
translated into United States dollars as part of the Company's consolidated
financial reporting. Fluctuations in the exchange rate therefore will affect
the Company's consolidated balance sheets and may, upon repatriation of funds
from 4MC Asia to the Company and payment of related income taxes, affect the
Company's net income. Over the past two years the Singapore dollar has been
stable relative to the United States dollar. However, the continued stability
of the exchange rate is subject to numerous factors, all of which are beyond
the Company's control. There can be no assurance that the Company will not
experience material losses as a result of changes in the relative value of the
Singapore dollar as compared to the United States dollar. The Company
currently does not engage in any hedging activities to mitigate its exchange
rate risk. In the event the Company engages in hedging activities in the
future, there can be no assurance that the Company will not experience losses
as a result of such hedging activities.
Foreign Country Operating Risks. In addition to exchange rate risks, the
Company's Singapore operations are subject to a number of risks inherent in
international operations, including unexpected changes in regulatory
requirements, the costs and burdens of complying with a variety of complex
foreign laws, tariffs and other trade barriers, and political and economic
instability. There can be no assurance that the foregoing factors will not
have a material adverse effect on the Company's future results of operations.
9
<PAGE>
Loss of Tax Exemption. In 1995, the government of the Republic of Singapore
granted 4MC Asia a seven-year tax exemption as a "pioneer status" company. The
tax exemption is conditioned upon 4MC Asia meeting certain investment
requirements. Although the Company believes that it will meet these
requirements, there can be no assurance that it will do so. The termination or
expiration of the tax exemption would have a material adverse effect on the
Company's results of operations. The Company is subject to taxation in the
United States to the extent that 4MC Asia's income (in excess of intercompany
debt) is repatriated from Singapore, less applicable taxes paid in Singapore,
if any.
NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
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
will be determined by negotiation among the Company, the Selling Stockholder
and the representative of the Underwriters based on several factors and may
not be indicative of the market price of the Common Stock after this offering.
See "Underwriting." The market price of the shares of Common Stock is likely
to be highly volatile and may be affected significantly by factors such as
fluctuations in the Company's quarterly or annual results of operations; a
shortfall in revenues, EBITDA or earnings compared to public securities market
analysts' expectations; changes in analysts' recommendations or projections;
announcements by the Company or by its competitors; delays in or cancellations
of projects; general market conditions or other factors. In addition, the
stock market is subject to significant price and volume fluctuations, some of
which may be unrelated or disproportionate to the operating performance of the
companies affected. Broad market and industry sector fluctuations may
adversely affect the market price of the Common Stock.
CONCENTRATION OF OWNERSHIP
Upon completion of this offering, Robert T. Walston, Chairman and Chief
Executive Officer, will beneficially own approximately 23% of the outstanding
shares of Common Stock (approximately 20% if the Underwriters' over-allotment
option is exercised in full), and the present executive officers and directors
of the Company and their affiliates, as a group, will beneficially own
approximately 45% of the outstanding shares of Common Stock (approximately 41%
if the Underwriters' over-allotment option is exercised in full). Accordingly,
these stockholders will have the ability to control or significantly influence
all matters requiring approval by the stockholders of the Company, including
the election of directors and approval of significant corporate transactions.
Such a level of ownership may have the effect of delaying, deferring or
preventing a change in the control of the Company. See "Principal and Selling
Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and lock-up agreements executed by all of the officers
and directors and the sole stockholder of the Company under which such
security holders have agreed not to sell or otherwise dispose of any of their
shares for a period of 270 days after the date of this Prospectus, in the case
of the sole stockholder, and three years after the date of this Prospectus, in
the case of the officers and directors, without the prior written consent of
Furman Selz LLC. Furman Selz LLC may, however, in its sole discretion and at
any time without notice, release all or any portion of the shares subject to
lock-up agreements. In addition to the 5,700,000 shares of Common Stock
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), there will be 4,266,784 shares of Common Stock outstanding as of the
date of this Prospectus, all of which are "restricted" shares under the
Securities Act. As a result of the lock-up agreements described above and the
provisions of Rules 144(k), 144 and 701, the restricted shares will be
available for sale in the public market as follows: (i) none of such shares
will be eligible for immediate sale on the date of this Prospectus; (ii)
1,798,925 shares will be eligible for sale 270 days after the date of this
Prospectus, upon expiration of lock-up agreements; and (iii) 2,467,859 shares
will be eligible for sale three years after the date of this Prospectus, upon
expiration of lock-up agreements. See "Shares Eligible for Future Sale."
10
<PAGE>
RISK OF LOSS FROM EARTHQUAKES, FIRE OR OTHER CATASTROPHIC EVENTS
The Company is subject to the risk of loss arising from earthquakes, fires
and other catastrophic events due to the concentration of its business
activities and operations in specific structures. The structures housing the
Company's business activities consist of commercial office buildings subject
to vibration and movement that, in such a catastrophic event, could cause the
dislocation of various pieces of equipment, potentially creating downtime in
the Company's operations. The Company's operations, other than its Singapore
operations, are located in Southern California which may expose the Company to
greater risk from earthquakes and fires. For example, the Northridge,
California earthquake in January 1994 damaged certain of the Company's
facilities and equipment and temporarily interrupted the Company's operations.
Because of the large amount of specialized equipment combined with customized
listening and viewing environments, the Company's operations cannot
temporarily be relocated to mitigate the occurrence of a catastrophic event.
The Company also may be unable to broadcast signals for an extended period of
time. Consequently, the Company carries insurance for property loss and
business interruption resulting from such events, subject to deductibles.
Although the Company believes that it possesses adequate insurance coverage
for damage to its property and the disruption of its business from
earthquakes, fire and other casualties, there can be no assurance that such
insurance would be sufficient to cover all of the Company's potential losses
or that it will continue to be available at rates acceptable to the Company,
if at all.
RENEWAL OF FCC LICENSES; CHANGE IN CONTROL FILINGS
Pursuant to the Communications Act of 1934, as amended (the "Communications
Act"), transmissions from the Company's domestic broadcast division's earth
station to satellites must be made pursuant to license granted by the Federal
Communications Commission ("FCC"). See "Business--Government Regulation."
Catalina Transmission Corp. ("Catalina"), a wholly owned subsidiary of the
Company, holds three licenses for satellite earth stations. One such license
(for a transportable earth station) is granted for a period of one year and
has been routinely renewed. The two other licenses (for fixed earth stations)
were granted for a period of ten years with one expiring in 2001 and the other
expiring in 2004. While the FCC generally renews licenses for satellite earth
stations routinely, there can be no assurance that the Company's licenses will
be renewed at their expiration dates, and failure to obtain such renewal could
have a material adverse effect on the Company.
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing Common Stock in this
offering will, therefore, incur immediate dilution of $6.96 in net tangible
book value per share of Common Stock (based upon an assumed initial public
offering price of $13.00 per share and after deducting estimated underwriting
discounts and commissions and offering expenses) from the initial public
offering price and will incur additional dilution upon the exercise of
outstanding stock options. There are currently outstanding and exercisable
options to purchase 308,179 shares of Common Stock. See "Dilution."
11
<PAGE>
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK
Certain provisions of the Company's Certificate of Incorporation and By-Laws
may be deemed to have anti-takeover effects and may delay, defer or prevent a
tender offer, proxy contest or takeover attempt that a stockholder might
consider to be in such stockholder's best interest, including those attempts
that might result in a premium over the market price for the shares held by
such stockholder. See "Description of Capital Stock." In addition, the Board
of Directors, without further stockholder approval, may issue preferred stock
that could have the effect of delaying, deterring or preventing a change in
control of the Company. The issuance of preferred stock could also adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. The Company has no present plans to issue any
preferred stock. See "Description of Capital Stock--Preferred Stock."
12
<PAGE>
THE COMPANY
Four Media Company was incorporated in Delaware in September 1996 as a
holding company to acquire the capital stock of three operating companies:
4MC-Burbank, Inc. ("4MC Burbank"); Four Media Company Asia PTE Ltd. ("4MC
Asia"); and Digital Magic Company ("DMC"). 4MC Burbank was formed in July 1993
to acquire substantially all of the assets of Compact Video Group, Inc.,
Compact Video Services, Inc., Image Transform, Inc. and Meridian Studios, Inc.
DMC was formed in October 1994 to acquire substantially all of the assets of
Digital Magic & Transfer Company ("DM&T"). 4MC Asia was formed in January 1995
to build and operate the Company's Singapore broadcast facilities. Unless the
context otherwise requires, all references herein to the "Company" refer to
Four Media Company and its direct and indirect subsidiaries. The Company's
principal executive offices are located at 2813 West Alameda Avenue, Burbank,
California 91505, and its telephone number is (818) 840-7000.
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered by the
Company hereby, after deducting underwriting discounts and commissions and
estimated offering expenses, are estimated to be $41.1 million ($51.4 million
if the Underwriters' over-allotment option is exercised in full). From these
net proceeds, the Company intends to use approximately $35.0 million to repay
outstanding debt, consisting of: (i) approximately $16.0 million outstanding
under a senior term loan which is payable in 84 monthly principal payments
commencing November 1997 and bears interest at a rate of LIBOR plus 2.75% or
the prime rate quoted by Chase Manhattan Bank ("Prime") plus .75%, at the
Company's option, and was incurred to repay amounts outstanding under the
Company's previous credit facility; (ii) approximately $10.0 million of notes
payable and capital leases which are due at various times through 2001 and
bear interest at fixed rates ranging between 9.0% and 12.0% per year; and
(iii) approximately $9.0 million plus accrued interest outstanding under a
note payable to Technical Services Partners, L.P. ("TSP"), the Company's sole
stockholder, which is due in August 1998 and bears interest at 10% per annum
(see "Certain Transactions"). The Company intends to apply the remaining net
proceeds of the offering to fund planned capital expenditures, for working
capital, to fund potential acquisitions and for general corporate purposes.
The Company expects to spend an estimated $15.0 million over the next two
years to upgrade its domestic broadcast and television sound facilities and
plans to fund this amount from the net proceeds of the offering, together with
cash flow from operations and amounts available under existing credit
facilities.
A significant element of the Company's strategy is to pursue acquisitions
that complement its existing business. The Company regularly engages in
discussions with potential acquisition candidates. Although the Company
currently has no definitive commitment or agreement to effect any acquisition,
it has entered into an agreement that provides for an exclusive negotiating
period for a potential acquisition of a studio and television services
business. The Company anticipates that it would fund the potential acquisition
currently under consideration from the assumption of indebtedness of the
acquired entity and, if necessary, from the remaining proceeds of the
offering. Discussions with the seller and its creditors are ongoing regarding
the potential acquisition and possible terms thereof. However, the Company has
not reached agreement on price or completed its due diligence with respect to
such potential acquisition, and there can be no assurance that the Company
will be successful in consumating the transaction if it continues to pursue
this opportunity.
Pending such uses, the net proceeds will be placed in interest bearing bank
accounts or invested in United States government securities, certificates of
deposit of major banks, high grade commercial paper or investment grade
securities determined to be appropriate by the Company. The Company will not
receive any of the proceeds from the sale of Common Stock by the Selling
Stockholder. See "Principal and Selling Stockholders."
13
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock
and does not anticipate paying any cash dividends or other distributions on
its Common Stock in the foreseeable future. The Company's credit facilities
prohibit the payment of dividends or other distributions (i) by the Company
and (ii) to the Company from its subsidiaries, without lender approval, and
would thus limit the ability of the Company to pay dividends. The current
policy of the Company's Board of Directors is to reinvest earnings to finance
the expansion of the Company's business.
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) on an
actual basis as of November 3, 1996 and (ii) as adjusted to reflect the sale
by the Company of 3,491,784 shares of Common Stock offered hereby at an
assumed initial public offering price of $13.00 per share, after the deduction
of the estimated expenses of the offering and the application of the net
proceeds therefrom as described under "Use of Proceeds." The information 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 the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NOVEMBER 3, 1996
-------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt and capital lease obligations,
including current portion........................... $ 62,970 $ 27,970
Stockholder's equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding....... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 6,475,000 shares issued and outstanding
as of November 3, 1996; 9,966,784 shares issued and
outstanding, as adjusted(1)........................ 65 100
Additional paid-in capital.......................... 14,946 56,023
Foreign currency translation adjustment............. 250 250
Retained earnings................................... 7,003 7,003
----------- -----------
Total stockholder's equity......................... 22,264 63,376
----------- -----------
Total capitalization.............................. $ 85,234 $ 91,376
=========== ===========
</TABLE>
- --------------------
(1) Excludes 1,415,125 shares of Common Stock issuable upon exercise of stock
options which are currently outstanding or will be outstanding upon
completion of the offering.
14
<PAGE>
DILUTION
The net tangible book value of the Company as of November 3, 1996 was
$19.0 million or $2.94 per share of Common Stock. Net tangible book value per
share represents the amount of the Company's tangible assets less total
liabilities, divided by 6,475,000 shares of Common Stock outstanding.
After giving effect to the sale of 3,491,784 shares of Common Stock offered
by the Company hereby and after deduction of underwriting discounts and
commissions and a pro rata allocation of estimated offering expenses payable
by the Company and the Selling Stockholder, the Company's pro forma net
tangible book value as of November 3, 1996 would have been $60.2 million, or
$6.04 per share of Common Stock. This represents an immediate increase in net
tangible book value of $3.10 per share to the Company's existing stockholder
and an immediate dilution of $6.96 per share to new investors. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $13.00
Net tangible book value per share as of November 3, 1996.......... $2.94
Increase per share attributable to new investors.................. 3.10
-----
Pro forma net tangible book value per share after the offering..... 6.04
------
Dilution per share to new investors................................ $ 6.96
======
</TABLE>
The following table sets forth, on a pro forma basis as of November 3, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid (at an assumed initial public offering price of $13.00 per
share) and the average price per share paid by the existing stockholder and by
purchasers of Common Stock in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder(1)(2)................ 6,475,000 65.0% $15,011,000 24.9% $ 2.32
New investors(1).......................... 3,491,784 35.0% 45,393,192 75.1% 13.00
--------- ----- ----------- -----
Total.................................... 9,966,784 100.0% $60,404,192 100.0%
========= ===== =========== =====
</TABLE>
- --------------------
(1) The sale of Common Stock by TSP, the Selling Stockholder, will reduce the
number of shares of Common Stock held by it to 4,266,784, or approximately
42.8% (or approximately 39.4% if the Underwriters' over-allotment option
is exercised in full), and will increase the number of shares held by new
investors to 5,700,000, or approximately 57.2% (6,555,000 shares, or
approximately 60.6% if the Underwriters' over-allotment option is
exercised in full), of the total number of shares of Common Stock
outstanding after this offering. Robert T. Walston, the Company's chief
executive officer, has a profit participation in TSP and as a result
beneficially owns 1,798,925 of the 4,266,784 shares held of record by TSP.
See "Principal and Selling Stockholders."
(2) Does not include (i) 615,125 shares of Common Stock issuable upon exercise
of stock options outstanding with an exercise price of $.34 per share,
(ii) 100,000 shares of Common Stock issuable upon exercise of stock
options outstanding with an exercise price of $11.70 per share or (iii)
700,000 shares of Common Stock issuable upon exercise of stock options to
be outstanding upon completion of the offering with an exercise price
equal to the initial public offering price. See "Management--Stock Plans."
To the extent outstanding stock options are exercised, there will be
further dilution to new investors.
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data," "Other Data" and "Balance Sheet Data" for, and as of the end
of, each of the fiscal years ended July 31, 1994, July 30, 1995 and August 4,
1996 and the accountants report thereon, are derived from the financial
statements of the Company, which financial statements have been audited by
Coopers & Lybrand, L.L.P., independent accountants. The financial statements
as of July 31, 1994, July 30, 1995 and August 4, 1996 are included elsewhere
in this Prospectus. The Company had no operations prior to August 4, 1993. The
consolidated financial data for the three months ended October 29, 1995 and
November 3, 1996, are derived from unaudited consolidated financial statements
of the Company included elsewhere in this prospectus. All of the unaudited
financial statement data referred to above, in the opinion of the Company's
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations. The operating results for the three months ended
November 3, 1996 are not necessarily indicative of the operating results for
the full year.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
--------------------------- -----------------------
JULY 31, JULY 30, AUGUST 4, OCTOBER 29, NOVEMBER 3,
1994 1995 1996 1995 1996
-------- -------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Studio................... $15,746 $20,677 $23,468 $ 5,746 $ 5,957
Broadcast................ 10,876 16,163 20,901 5,489 5,512
Television............... 15,639 22,712 23,343 5,631 7,084
Visual effects........... -- 1,452 2,316 766 394
------- ------- ------- ------- -------
Total revenues........ 42,261 61,004 70,028 17,632 18,947
------- ------- ------- ------- -------
Cost of services:
Personnel................ 17,096 22,795 25,344 6,527 6,779
Material................. 4,240 6,424 7,354 1,920 1,853
Facilities............... 3,774 3,917 4,692 1,124 1,328
Other.................... 3,752 5,560 6,021 1,504 1,745
------- ------- ------- ------- -------
Total cost of
services.............. 28,862 38,696 43,411 11,075 11,705
------- ------- ------- ------- -------
Gross profit.......... 13,399 22,308 26,617 6,557 7,242
------- ------- ------- ------- -------
Operating expenses:
Sales, general and
administrative.......... 7,627 10,918 11,116 3,030 3,109
Depreciation and
amortization............ 3,284 6,241 10,165 2,497 2,795
------- ------- ------- ------- -------
Total operating
expenses.............. 10,911 17,159 21,281 5,527 5,904
------- ------- ------- ------- -------
Income from
operations........... 2,488 5,149 5,336 1,030 1,338
Interest expense, net..... 1,253 2,917 3,906 921 1,214
------- ------- ------- ------- -------
Income before income
tax benefits......... 1,235 2,232 1,430 109 124
Income tax benefits....... -- 988 994 204 --
------- ------- ------- ------- -------
Net income............ $ 1,235 $ 3,220 $ 2,424 $ 313 $ 124
======= ======= ======= ======= =======
Net income per share...... $ .19 $ .50 $ .37 $ .05 $ .02
======= ======= ======= ======= =======
Weighted average number of
common shares
outstanding(1)........... 6,475 6,475 6,475 6,475 6,475
======= ======= ======= ======= =======
OTHER DATA:
EBITDA(2)................. $ 5,772 $11,390 $15,501 $ 3,527 $ 4,133
Net cash provided by
operations............... 3,047 4,588 9,387 1,585 796
Net cash used in investing
activities............... 7,877 30,902 10,318 3,071 8,753
Net cash provided by (used
in) financing
activities............... 8,972 28,102 (410) 332 8,135
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AS OF
-------------------------------------------
JULY 31, JULY 30, AUGUST 4, NOVEMBER 3,
1994 1995 1996 1996
-------- -------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, including restricted cash.... $ 4,691 $ 7,368 $ 6,021 $ 6,199
Working capital.................... 4,674 5,665 1,642 3,549
Total assets....................... 32,982 71,780 81,827 99,301
Long-term debt..................... 20,924 38,472 42,978 56,610
Total debt(3)...................... 21,556 41,942 49,131 62,970
Total stockholder's equity......... 6,245 19,617 22,143 22,263
</TABLE>
- --------------------
(1) Weighted average number of common shares outstanding has been presented to
reflect retroactively the Company's reorganization and related stock
exchange with and stock dividend to its sole stockholder in October and
November 1996. See notes to the financial statements.
(2) EBITDA does not take into account normal capital expenditures and 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
indicative of cash available to fund all cash needs. The Company's
definition of EBITDA may not be identical to similarly titled measures of
other companies. The Company believes that in addition to cash flows and
net income, EBITDA is a useful financial performance measurement for
assessing the operating performance of the Company because, together with
net income and cash flows, EBITDA widely is used to provide investors with
an additional basis to evaluate the ability of the Company to incur and
service debt and to fund acquisitions or invest in new technologies. To
evaluate EBITDA and the trends it depicts, the components of EBITDA, such
as net revenues, cost of services, and sales, general and administrative
expenses, should be considered. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." A reconciliation of net
income to EBITDA is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
---------------------------- -----------------------
JULY 31, JULY 30, AUGUST 4, OCTOBER 29, NOVEMBER 3,
1994 1995 1996 1995 1996
-------- -------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income.............. $1,235 $ 3,220 $ 2,424 $ 313 $ 124
Add (deduct):
Interest expense, net... 1,253 2,917 3,906 921 1,214
Income tax benefits..... -- (988) (994) (204) --
Depreciation and
amortization........... 3,284 6,241 10,165 2,497 2,795
------ ------- ------- ------ ------
EBITDA.................. $5,772 $11,390 $15,501 $3,527 $4,133
====== ======= ======= ====== ======
</TABLE>
(3) Includes current and long-term portions of (i) term loan facilities and a
revolving line of credit; (ii) equipment notes payable; (iii) capital
lease obligations; and (iv) a subordinated note due to the Company's sole
stockholder, TSP.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. When used
in the following discussion, the words "believes," "anticipates," "intends,"
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected,
including, but not limited to, those set forth in "Risk Factors." Readers are
cautioned not to place undue reliance on forward-looking statements, which
speak only as of the date hereof.
OVERVIEW
The Company is a leading provider of technical and creative services to
owners, producers and distributors of television programming, feature films
and other entertainment content. The Company's services integrate and apply a
variety of systems and processes to enhance the creation and distribution of
entertainment content. The Company seeks to capitalize on domestic and
international growth in demand for original entertainment content as well as
from the exploitation of existing television and film libraries without taking
production or ownership risk with respect to any specific television program,
feature film or other content.
The Company's business is divided into studio, broadcast, television and
visual effects services. In each of its four business divisions, the Company
offers most of the systems and technical solutions that constitute the
processes that are integral to the creation, enhancement and distribution of
entertainment content. The studio services division, located in Burbank,
California manages, formats and distributes existing content libraries to end
users in the United States and internationally. The broadcast services
division, located in Burbank and the Republic of Singapore, assembles and
distributes cable television channels and programming via satellite to viewers
in the United States, Canada and Asia. The television services division,
located in Burbank and Santa Monica, California assembles film or video
principal photography into a form suitable for domestic network, syndicated,
cable or foreign television. The visual effects services division, located in
Santa Monica, digitally creates and manipulates images in high resolution
formats for use in feature films. The following table sets forth revenues by
business division and as a percentage of consolidated revenues for the periods
indicated.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
-------------------------------------------------------- -------------------------------------
JULY 31, 1994 JULY 30, 1995 AUGUST 4, 1996 OCTOBER 29, 1995 NOVEMBER 3, 1996
------------------ ------------------ ------------------ ------------------ ------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues by division:
Studio................ $15,746 37.3% $20,677 33.9% $23,468 33.5% $ 5,746 32.6% $ 5,957 31.4%
Broadcast............. 10,876 25.7 16,163 26.5 20,901 29.9 5,489 31.1 5,512 29.1
Television............ 15,639 37.0 22,712 37.2 23,343 33.3 5,631 31.9 7,084 37.4
Visual effects........ -- -- 1,452 2.4 2,316 3.3 766 4.4 394 2.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total revenues...... $42,261 100.0% $61,004 100.0% $70,028 100.0% $17,632 100.0% $18,947 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
Revenues increased from $42.3 million in fiscal 1994 to $70.0 million in
fiscal 1996. The Company attributes this growth to several factors including:
(i) an increase in demand for the Company's services resulting from the growth
in worldwide demand for entertainment content; (ii) an expansion of capacity
resulting from its extensive investment in new digital infrastructure; (iii)
successful acquisitions and international expansion; (iv) the diversification
of its service offerings; and (v) the increasing acceptance of its bundled
service outsourcing solutions.
EBITDA increased from $5.8 million in fiscal 1994 to $15.5 million in fiscal
1996. The Company attributes this growth to several factors including: (i)
growth in revenues from fiscal 1994 to fiscal 1996; (ii) improvement in the
Company's gross profit resulting from the efficiency of its new Singapore
operations and new domestic
18
<PAGE>
infrastructure; and (iii) decrease in the ratio of overhead and fixed costs to
revenues, as the Company has generally increased capacity utilization and
decreased the cost of adding new capacity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes thereto included elsewhere in this
Prospectus.
The Company believes that EBITDA is an important measure of its financial
performance. "EBITDA" is defined as earnings before interest, taxes,
depreciation and amortization, excluding gains and losses on asset sales and
nonrecurring charges. The Company's investments in new infrastructure, machine
capacity and technology have produced a relatively high depreciation expense
and will remain a significant non-cash charge to earnings. It is the Company's
policy to depreciate equipment and other capitalized items over a period of
three to seven years. EBITDA is calculated before depreciation and
amortization charges and, in businesses with significant non-cash expenses,
widely is used as a measure of cash flow available to pay interest, repay
debt, make acquisitions or invest in capital equipment and new technologies.
As a result, the Company intends to report EBITDA as a measure of financial
performance. EBITDA does not represent cash generated from operating
activities in accordance with generally accepted accounting principles
("GAAP") and should not be considered in isolation or as a substitute for
other measures of performance prepared in accordance with GAAP. EBITDA does
not reflect that portion of the Company's capital expenditures which may be
required to maintain the Company's market share, revenues and leadership
position in its industry. Moreover, not all EBITDA will be available to pay
interest or repay debt. The Company's presentation of EBITDA may not be
comparable to similarly titled measures reported by other companies. See
footnote 3 of "Selected Financial Data".
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in the Company's statement of operations and EBITDA.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
--------------------------- -----------------------
JULY 31, JULY 30, AUGUST 4, OCTOBER 29, NOVEMBER 3,
1994 1995 1996 1995 1996
-------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services:
Personnel................ 40.5 37.4 36.2 37.0 35.8
Material................. 10.0 10.5 10.5 10.9 9.8
Facilities............... 8.9 6.4 6.7 6.4 7.0
Other.................... 8.9 9.1 8.6 8.5 9.2
----- ----- ----- ----- -----
Total cost of
services.............. 68.3 63.4 62.0 62.8 61.8
----- ----- ----- ----- -----
Gross profit......... 31.7 36.6 38.0 37.2 38.2
----- ----- ----- ----- -----
Operating expenses:
Sales, general and
administrative.......... 18.0 17.9 15.9 17.2 16.4
Depreciation and
amortization............ 7.8 10.2 14.5 14.2 14.8
----- ----- ----- ----- -----
Total operating
expenses.............. 25.8 28.1 30.4 31.4 31.2
----- ----- ----- ----- -----
Income from
operations.......... 5.9 8.5 7.6 5.8 7.0
Interest expense, net...... 3.0 4.8 5.5 5.2 6.4
----- ----- ----- ----- -----
Income before income
tax benefits........ 2.9 3.7 2.1 0.6 0.6
Income tax benefits........ -- 1.6 1.4 1.2 --
----- ----- ----- ----- -----
Net income........... 2.9% 5.3% 3.5% 1.8% 0.6%
===== ===== ===== ===== =====
EBITDA..................... 13.7% 18.7% 22.1% 20.0% 21.8%
</TABLE>
19
<PAGE>
THREE MONTHS ENDED NOVEMBER 3, 1996 COMPARED TO THREE MONTHS ENDED OCTOBER 29,
1995
Revenues. Total revenues for the three months ended November 3, 1996
increased 7.5% to $18.9 million compared to $17.6 million for the three months
ended October 29, 1995. The revenue increase was attributable primarily to the
factors set forth below.
Studio services revenues for the three months ended November 3, 1996
increased 3.7% to $6.0 million compared to $5.7 million for the three months
ended October 29, 1995. Professional duplication led the growth in the studio
services division during the first quarter of fiscal 1997, increasing 26.9%.
The growth in professional duplication was partially offset by a 31.0%
reduction in film-to-tape transfer services revenues. This reduction was the
result of the utilization of film-to-tape transfer capacity to service, on an
interim basis, an increase in the Company's seasonal film-to-tape transfer
commitments in television services. The Company intends to add additional
film-to-tape transfer capacity in its television services division during the
third quarter of fiscal 1997, which is expected to accommodate such seasonal
fluctuations in television services film-to-tape transfer work in the future.
Broadcast services revenues for the three months ended November 3, 1996
increased 0.4% to $5.5 million compared to $5.5 million in the three months
ended October 29, 1995. Revenues from the Company's Singapore operations
increased 35.0% during the first quarter of fiscal 1997. This increase was
attributable to the addition of a six month contract with MGM Gold, increased
utilization of the facility by both MTV Asia and other clients, and the
scheduled annual increase in the fees paid by MTV Asia under its contract with
the Company. The increase in revenues from the Singapore operations was
substantially offset by a reduction in revenues from the Company's domestic
broadcast operations. This reduction in revenues was the result of the
expiration of a service agreement with the Disney Channel in the second
quarter of fiscal 1996, together with a negotiated reduction of the monthly
payments under a service agreement with TVN during the third quarter of fiscal
1996. The Company believes that the deployment of digital compression
technology for broadcast applications and the expansion of cable channel
capacity resulting from the anticipated introduction of digital set-top boxes
will increase demand for its broadcast services. To enhance the efficiency and
competitiveness of its domestic broadcast operations, the Company expects to
commence construction of a new digital broadcast facility during fiscal 1997.
Television services revenues for the three months ended November 3, 1996
increased 25.8% to $7.1 million compared to $5.6 million for the three months
ended October 29, 1995. The revenue increase was the result of the completion
of a portion of a new digital television facility in Burbank, that is designed
to replace existing analog infrastructure and equipment, thereby enhancing the
competitiveness of the Company's Burbank-based television operations. The
Company expects to complete construction of that facility by the end of the
third quarter of fiscal 1997.
Visual effects services revenues for the three months ended November 3, 1996
decreased 48.6% to $394,000 compared to $766,000 for the three months ended
October 29, 1995. This decrease was the result of a delay in a major customer
project that has been rescheduled to commence in the second quarter of fiscal
1997. The Company has begun work on this project and does not anticipate any
further delays.
Gross Profit. Gross profit for the three months ended November 3, 1996
increased 10.4% to $7.2 million (38.2% of revenues) compared to $6.6 million
(37.2% of revenues) in the three months ended October 29, 1995. The
improvement of 1.0% in the Company's gross profit was attributable primarily
to the increase in revenues, but was partially offset by increases in
personnel, facility and satellite transponder costs. To meet demand for
television services anticipated for the third quarter of fiscal 1997, the
Company significantly increased personnel levels during the three months ended
November 3, 1996. Because of the normal lag between an increase in capacity
and the generation of revenues from utilization of such capacity, the Company
anticipates that gross profit will be significantly reduced in the second
quarter of fiscal 1997.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses for the three months ended November 3, 1996 increased
2.6% to $3.1 million (16.4% of revenues) compared to $3.0 million (17.2% of
revenues) for the three months ended October 29, 1995. The improvement of 0.8%
in sales, general
20
<PAGE>
and administrative expenses as a percentage of revenues was the result of the
Company's ability to leverage existing overhead to manage the expanded revenue
base. Expenses incurred in the three months endedOctober 29, 1995 were offset
by $225,000 of insurance proceeds.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the three months ended November 3, 1996 increased 11.9% to
$2.8 million compared to $2.5 million in the three months ended October 29,
1995, primarily due to the $18.9 of capital expenditures made during fiscal
1996.
Interest Expense. Interest expense for the three months ended November 3,
1996 increased 31.8% to $1.2 million compared to $921,000 in the three months
ended October 29, 1995. The increase was attributable to additional long term
borrowings incurred by the Company to fund capital expenditures in fiscal 1996
and the first quarter of fiscal 1997.
Income Tax Benefits. Income taxes for the three months ended November 3,
1996 reflect the recognition, for financial accounting purposes, of the use of
net operating loss carryforwards that fully offset the Company's tax provision
for the period. Recognition of this tax benefit accounted for 40.3% of the
Company's net income for the three months ended November 3, 1996. Income taxes
for the three months ended October 29, 1995 reflect the recognition, for
financial accounting purposes, of the use of net operating loss carryforwards
and an increase in net deferred tax assets. Recognition of these tax benefits
accounted for 65.2% of the Company's net income for the three months ended
October 29, 1995.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for
the three months ended November 3, 1996 increased 17.1% to $4.1 million
compared to $3.5 million in the three months ended October 29, 1995. The
increase was a result of increased revenues, improvement in gross profit and a
reduction in sales, general and administrative expenses as a percentage of
revenues. See "Liquidity and Capital Resources" for a discussion of net cash
provided by operating activities for the period. See footnote 3 to "Selected
Financial Data" for a discussion of EBITDA generally.
FISCAL YEAR ENDED AUGUST 4, 1996 COMPARED TO FISCAL YEAR ENDED JULY 30, 1995
Revenues. Total revenues for fiscal 1996 increased 14.8% to $70.0 million
compared to $61.0 million in fiscal 1995. The revenue increase was
attributable primarily to the factors set forth below.
Studio services revenues for fiscal 1996 increased 13.5% to $23.5 million
compared to $20.7 million in fiscal 1995. Professional duplication led the
growth in the studio services division during fiscal 1996, increasing 35.0%.
The Company responded to increased demand for its services by adding machine
capacity, upgrading technology, improving service reliability and completing a
new archive during the period. The archive provides capacity to store, manage
and distribute up to 400,000 master videotapes and film elements and the
Company estimates that approximately 50.0% of this capacity is already being
utilized. The Company intends to continue to develop infrastructure and add
machine capacity in response to market demand and opportunities to fill unused
archive capacity.
Broadcast services revenues for fiscal 1996 increased 29.3% to $20.9 million
compared to $16.2 million in fiscal 1995. The increase reflects the inclusion
of a full year of operating results of the Company's Singapore operations and
the expansion of such operations (fiscal 1996 revenues of $11.0 million
compared to fiscal 1995 revenues of $4.0 million). The results of the
Singapore operations consist almost entirely of revenues under a long-term
contract with MTV Asia. Under the contract, the Company's revenues from MTV
Asia are scheduled to increase 4.0% per year over the remaining term of the
contract. The increase in Singapore partially was offset by a decline in
domestic broadcast revenues due to the expiration of a service agreement with
the Disney Channel in the second quarter of fiscal 1996, resulting in a
decline in revenues from this source of $1.8 million over the prior fiscal
year.
Television services revenues for fiscal 1996 increased 2.8% to $23.3 million
compared to $22.7 million in fiscal 1995. The increase was a result of the
inclusion of a full year of operating results of the Company's Santa Monica
operations (1996 revenues of $10.6 million compared to 1995 revenues of $8.9
million). This increase partially was offset by a reduction in revenues due to
the loss of key creative talent in sound mixing and editing and reduced
capacity utilization resulting from the inefficiencies associated with the
continued operation of analog equipment.
21
<PAGE>
Visual effects services revenues for fiscal 1996 increased 59.5% to $2.3
million compared to $1.5 million in fiscal 1995. The revenue increase was the
result of an increase in the Company's high resolution digital image
processing capacity and increased sales and marketing activity. During fiscal
1996, the visual effects services division completed projects for a number of
prominent customers including New Line Cinema (18%), Sony Pictures Corporation
(15%), Twentieth Century Fox (13%) and Paramount (5%).
Gross Profit. Gross profit for fiscal 1996 increased 19.3% to $26.6 million
(38.0% of revenues) compared to $22.3 million (36.6% of revenues) in fiscal
1995. The improvement of 1.4% in the Company's gross profit was attributable
primarily to the inclusion of a full year of operating results of the
Company's Singapore operations. This improvement partially was offset by a
reduction in the gross profit in the Company's television operations, and
costs associated with the start-up and operation of the Company's new archive
facility.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses for fiscal 1996 increased 1.8% to $11.1 million (15.9%
of revenues) compared to $10.9 million (17.9% of revenues) in fiscal 1995. The
improvement of 2.0% in sales, general and administrative expenses as a
percentage of revenues is a result of relatively low sales, general and
administrative expenses associated with the Singapore operations and the
Company's ability to leverage its existing corporate overhead to manage
expanded domestic and international operations. In addition, insurance
proceeds received, which offset expenses incurred of $900,000, further reduced
sales, general and administrative expenses.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for fiscal 1996 increased 62.9% to $10.2 million compared to $6.2
million in fiscal 1995. The increase was primarily the result of $18.9 million
in capital expenditures made during fiscal 1996.
Interest Expense. Interest expense for fiscal 1996 increased 33.9% to
$3.9 million compared to $2.9 million in fiscal 1995. The increase was
attributable to additional long term borrowings incurred by the Company to
fund capital expenditures in fiscal 1995 and fiscal 1996, including the
construction of its Singapore broadcast facility.
Income Tax Benefits. Income taxes for fiscal 1996 reflected the recognition,
for financial accounting purposes, of a $1.0 million tax benefit. Recognition
of this tax benefit accounted for 41% of the Company's net income in fiscal
1996. Recognition of tax benefits in fiscal 1996 resulted from the Company's
profitability in its third year of operations which made recognition of future
tax deductions (arising from, among other things, net operating loss
carryforwards) more certain. Continued profitability in future fiscal years
will result in the Company recognizing income tax expense as it exhausts its
existing tax credits and net operating loss carryforwards.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for
fiscal 1996 increased 35.9% to $15.5 million compared to $11.4 million in
fiscal 1995. The increase in EBITDA was a result of an increase in revenues,
an improvement in gross profit and a reduction in sales, general and
administrative expenses as a percentage of revenues. See "Liquidity and
Capital Resources" for a discussion of net cash provided by operating
activities for the period. See footnote 3 to "Selected Financial Data" for a
discussion of EBITDA generally.
FISCAL YEAR ENDED JULY 30, 1995 COMPARED TO FISCAL YEAR ENDED JULY 31, 1994
Revenues. Total revenues for fiscal 1995 increased 44.2% to $61.0 million
compared to $42.3 million in fiscal 1994. The revenue increase was
attributable primarily to the factors set forth below.
Studio services revenues for fiscal 1995 increased 31.8% to $20.7 million
compared to $15.7 million in fiscal 1994. This increase was primarily
attributable to the integration of its various studio service operations into
a single new facility during the second quarter of 1995, which increased
capacity, quality and service reliability. In response to customer demand and
inadequate internal storage capacity, the Company commenced construction of a
new archive facility during fiscal 1995 to support future revenue growth in
studio services.
22
<PAGE>
Broadcast services revenues for fiscal 1995 increased 48.6% to $16.2 million
compared to $10.9 million in fiscal 1994. The revenue increase was primarily
the result of the initiation of operations in Singapore, which generated
$4.0 million of revenues in fiscal 1995. In addition, the domestic broadcast
operation added two long-term contract customers and one short-term customer.
Television services revenues for fiscal 1995 increased 45.2% to $22.7
million compared to $15.6 million in fiscal 1994. The revenue increase was
primarily the result of the acquisition of the assets of DM&T in October 1994,
which generated revenues of $7.5 million in fiscal 1995. The increase in
revenues provided by the Company's Santa Monica operations was partially
offset by a decline in revenues generated by the Burbank television operations
resulting from the loss of key creative talent in sound mixing and reduced
capacity utilization due to the inefficiencies associated with the continued
operation of analog equipment.
Visual effects services revenues were $1.5 million in fiscal 1995,
representing approximately seven months of operations. These revenues
primarily were attributable to visual effects services for eight feature
films. In June 1995, the Company expanded its high resolution processing
capacity.
Gross Profit. Gross profit for fiscal 1995 increased 66.5% to $22.3 million
(36.6% of revenues) compared to $13.4 million (31.7% of revenues) in fiscal
1994. The improvement of 4.9% in the Company's gross profit was attributable
primarily to the efficiencies of the new Singapore broadcast facility
experienced during fiscal 1995 (approximately three and one-half months of
operations) and the contribution of higher margin services resulting from the
acquisition of the DM&T assets (approximately nine months of operations).
Sales, General and Administrative Expenses. Sales, general and
administrative expenses for fiscal 1995 increased 43.1% to $10.9 million
(17.9% of revenues) compared to $7.6 million (18.0% of revenues) in fiscal
1994. The improvement in sales, general and administrative expenses as a
percentage of total revenues was primarily the result of efficiencies gained
in the elimination of duplicative staff positions and expenses resulting from
the acquisition of the DM&T assets in October 1995.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for fiscal 1995 increased 90.0% to $6.2 million compared to $3.3
million in fiscal 1994. The increase was primarily the result of $30.3 million
in capital expenditures made during fiscal 1995.
Interest Expense. Interest expense for fiscal 1995 increased 132.8% to
$2.9 million compared to $1.3 million in fiscal 1994. The increase was
attributable to additional long term borrowings incurred by the Company to
fund capital expenditures in fiscal 1994 and fiscal 1995.
Income Tax Benefits. Income taxes for fiscal 1995 reflected the recognition,
for financial accounting purposes, of a $1.0 million tax benefit. Recognition
of this tax benefit in 1995 accounted for 30.7% of the Company's net income in
fiscal 1995. Recognition of these tax benefits resulted from the Company's
profitability in its second year of operations which made recognition of
future tax deductions (arising from, among other things, net operating loss
carryforwards) more certain.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for
fiscal 1995 increased 97.3% to $11.4 million compared to $5.8 million in
fiscal 1994. The increase in EBITDA was a result of an increase in revenues,
improvement in gross profit, and a reduction in sales, general and
administrative expenses as a percentage of revenues. See "Liquidity and
Capital Resources" for a discussion of net cash provided by operating
activities for the period. See footnote 3 to "Selected Financial Data" for a
discussion of EBITDA generally.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Provided by Operating Activities. The Company's net cash provided
by operating activities was $9.4 million, $4.6 million, $3.0 million in fiscal
1996, 1995, 1994, respectively. The increases for fiscal 1996 compared to
fiscal 1995 and for fiscal 1995 compared to fiscal 1994 primarily reflect
year-to-year increases in
23
<PAGE>
revenues and improvements in gross profit, offset in part by year-to-year
increases in depreciation and amortization included in net income and changes
in the components of operating assets and liabilities. The Company's net cash
provided by operating activities was $1.6 million and $796,000 in the three
months ended October 29, 1995 and November 3, 1996, respectively. The decrease
was attributable to changes in the components of operating assets and
liabilities, primarily an increase in accounts receivable.
Net Cash Provided by Financing Activities. The Company's net cash provided
by financing activities was $400,000, $28.1 million and $9.0 million in fiscal
1996, 1995 and 1994, respectively. The Company obtained third-party financing
in the form of term debt, equipment notes, and capital leases of $11.5
million, $21.6 million and $2.2 million in fiscal 1996, 1995 and 1994,
respectively. In fiscal 1994 and 1995, the Company also issued subordinated
notes of $10.0 million and $9.0 million to its sole stockholder. The Company's
net cash provided by financing activities was $322,000 and $8.1 million in the
three months ended October 29, 1995 and November 3, 1996, respectively. In the
three months ended November 3, 1996 the Company obtained $9.1 million of
third-party financing in the form of equipment notes and capital leases
compared to $1.1 million in the three months ended October 29, 1995. In
October, 1996 the Company entered into a $34 million loan agreement. At
November 3, 1996, $17.6 million was borrowed under this agreement of which
$11.7 million was used to repay then existing debt.
Capital Expenditures. Since its formation in 1993 through the first quarter
of fiscal 1997, the Company has invested $72.6 million to convert its
infrastructure from analog to component digital, develop management
information systems, consolidate various operations, expand into the Asian
market and create new businesses. The Company's capital expenditures
illustrate a systematic concentration of infrastructure and equipment
investment across each business division, with 69.8% of total capital
expenditures in studio services in fiscal 1994, 57.9% of total capital
expenditures in broadcast services in fiscal 1995 and 62.6% of total capital
expenditures in television services in fiscal 1996 and 72.2% of total capital
expenditures in television services for the three months ended November 3,
1996. For a description of these capital expenditures, see "Business--
Strategic Accomplishments." The following table sets forth capital
expenditures in each business division as well as capital expenditures
associated with new management information systems by amount and percentage of
total capital expenditures for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEARS ENDED ENDED
------------------------------------------------------- ------------------
JULY 31, 1994 JULY 30, 1995(1) AUGUST 4, 1996 NOVEMBER 3, 1996
----------------- ------------------ ------------------ ------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ ---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital expenditures(2):
Studio................ $6,167 69.8% $ 5,072 16.7% $ 3,175 16.8% $ 2,704 18.7%
Broadcast............. 518 5.9 17,521 57.9 2,411 12.7 785 5.4
Television............ 1,499 16.9 3,291 10.9 11,853 62.6 10,436 72.2
Visual effects........ -- -- 2,525 8.3 413 2.2 -- --
Management information
systems.............. 656 7.4 1,878 6.2 1,084 5.7 532 3.7
------ ----- ------- ----- ------- ----- ------- -----
Total capital
expenditures....... $8,840 100.0% $30,287 100.0% $18,936 100.0% $14,457 100.0%
====== ===== ======= ===== ======= ===== ======= =====
</TABLE>
- --------------------
(1) Reflects $1.1 million of organization costs for 4MC Asia.
(2) Does not include the net assets written off pertaining to the January 1994
earthquake of $1.9 million and $567,000 for the fiscal years ended
July 30, 1995 and August 4, 1996, respectively.
The Company expects to complete its new television services facility by the
end of the third quarter of fiscal 1997. The Company believes that, upon
completion of that facility, it will have accomplished substantially all of
the major infrastructure upgrades required to convert its existing facilities
from analog to digital, except for an estimated $15.0 million in
infrastructure upgrades to be completed over the next two years for domestic
broadcast and television sound facilities. Nevertheless, the Company could
seek to exploit business opportunities in
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<PAGE>
existing or new markets, new technologies could be developed which would
render some or a substantial portion of the Company's infrastructure or
equipment obsolete, or the pressure of competition or customer demands could
require the Company to further rebuild or upgrade its infrastructure and
equipment. In addition, the Company could acquire businesses requiring
significant capital investment or purchase real property. In any such case,
the Company may incur significant additional capital expenditures. The Company
has no definitive commitment or agreement to make any such acquisition or
purchase except for the purchase of certain real property located in Burbank
as described below.
Credit Agreements and Other Indebtedness. In October 1996, the Company
entered into a loan agreement with The CIT Group/Business Credit, Inc. and The
CIT Group/Equipment Financing, Inc. (the "CIT Facility") which provides for
secured revolving and term loan facilities of up to $34.0 million to 4MC
Burbank and DMC guaranteed by the Company. The agreement provides for three
separate loan facilities: (i) a $16.0 million term loan, which bears interest
at a rate of LIBOR plus 2.75% or Prime plus .75%, at the Company's option and
is payable in 84 monthly principal payments commencing November 1997; (ii) an
$11.0 million revolving line of credit which bears interest at a rate of LIBOR
plus 2.5% or Prime plus .50%, at the Company's option; and (iii) a $7.0
million capital expenditure line of credit which bears interest at a rate of
LIBOR plus 2.75% or Prime plus .75%, at the Company's option and is payable in
60 equal monthly installments commencing the month after funding. The Company
may, at its option, elect a fixed interest rate for the term loan at the
treasury rate (applicable for the remaining term of the loan) plus 3.35%.
Total availability under the revolving line of credit is subject to certain
limitations related to the amount of 4MC Burbank's and DMC's accounts
receivable and inventory.
The obligations of 4MC Burbank and DMC under the CIT Facility are secured by
substantially all of the assets of 4MC Burbank and DMC. The obligations are
also guaranteed by the Company and secured by a pledge of the capital stock of
4MC Burbank and DMC. The CIT Facility contains restrictive covenants that,
among other things, and with certain exceptions, limit the ability of 4MC
Burbank and DMC to pay dividends or make other distributions to the Company or
to incur additional indebtedness. 4MC Burbank and DMC also are required to
satisfy certain financial covenants and tests, including the maintenance of
minimum net worth, working capital, fixed charge coverage ratios and leverage
ratios. As of November 3, 1996, the Company's total obligations outstanding
under the CIT Facility were $17.6 million. The Company intends to repay the
$16.0 million term loan portion of the CIT Facility with a portion of the
proceeds of this offering.
In February 1995, 4MC Asia borrowed $16.9 million Singapore dollars ($11.8
million U.S. dollars as of November 3, 1996) under a term loan facility with
the Hong Kong and Shanghai Banking Corporation Limited ("HKSB") to fund the
construction of its Singapore broadcast facility. The term loan bears interest
at an annual rate equal to the HKSB prime rate plus 1.25% and is payable in 60
monthly installments commencing April 1997. The term loan is secured by
substantially all of the assets of 4MC Asia and is guaranteed by the Company.
The term loan facility contains restrictive covenants that, among other
things, will prohibit 4MC Asia from incurring additional indebtedness or
paying any dividend or making any other distribution to the Company, other
than under certain conditions the repayment of intercompany debt in an amount
not to exceed $3.0 million Singapore dollars in each of the first two years of
the loan. The term loan also provides that, through April 15, 2000, any
decrease in the aggregate beneficial shareholdings of Messrs. Walston, Donlon,
Sabin, Schutz and Bailey below 15% of the Company's shares outstanding shall
constitute an event of default and may result in acceleration of any
outstanding amounts. The term loan will become due and payable, at the option
of HKSB, upon the termination of 4MC Asia's contract with MTV Asia or the
occurrence of certain other events of default.
The Company has entered into various capital lease and equipment notes
related to the purchase of equipment. As of August 4, 1996 and November 3,
1996, the Company's total obligations under capital leases and outstanding
equipment notes were $18.5 million and $24.6 million, respectively. These
notes are due at various times through 2001 and bear interest at rates of 8.0%
to 11.9%. The capital lease and equipment notes are secured by the assets
acquired under such leases and notes. The Company intends to repay
$10.0 million of these notes (with proceeds from the offering) over the next
12 to 18 months as prepayment penalties diminish or lapse.
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<PAGE>
In December 1996, the Company purchased a 90,000 square foot building in
Burbank. Prior to the purchase, the Company subleased 45,000 square feet for
use as its archive facility. The additional 45,000 square feet is subleased by
an outside tenant through 1999. The purchase price was $11.3 million, of which
$8.4 million was borrowed under a term loan agreement with the Tokai Bank of
California and the balance was paid from cash. The term loan provides for
monthly principal payments over a period of 84 months and a final payment at
maturity in December 2003. The term loan is secured by the building and any
improvements thereon and is guaranteed by 4MC Burbank and DMC. The term loan
bears interest at the lender's prime rate plus 1% or LIBOR plus 2.25%, at the
Company's option.
The Company believes that the remaining proceeds of this offering (after
repayment of certain outstanding debt, see "Use of Proceeds"), combined with
cash flow from operations and amounts available under the CIT Facility, will
be sufficient to meet its anticipated working capital and capital expenditure
requirements through the end of 1997. The Company may, however, be required to
seek additional debt and/or equity financing to support a more rapid than
planned expansion, respond to competitive pressures or customer demands, or
meet unanticipated requirements.
In addition, the Company regularly engages in discussions regarding the
acquisition of complementary businesses. Although the Company has no
definitive commitment or agreement to effect any acquisition, it has entered
into an agreement that provides for an exclusive negotiating period for a
potential acquisition of a studio and television services business. The
Company anticipates that it would fund the potential acquisition currently
under consideration from the assumption of indebtedness of the acquired entity
and, if necessary, from the remaining proceeds of this offering. Discussions
with the seller and its creditors are ongoing regarding the potential
acquisition and possible terms thereof. However, the Company has not reached
agreement on price or completed its due diligence with respect to such
potential acquisition, and there can be no assurance that the Company will be
successful in consummating the transaction if it continues to pursue this
opportunity. In addition, if the Company were to make other acquisitions, it
may be required to obtain additional debt and/or equity capital.
FOREIGN EXCHANGE
Substantially all of 4MC Asia's transactions are denominated in Singapore
dollars, including its bank borrowings. Although 4MC Asia is not subject to
foreign exchange transaction gains or losses, its financial statements are
translated into United States dollars as part of the Company's consolidated
financial reporting. Fluctuations in the exchange rate therefore will affect
the Company's consolidated balance sheets and may, upon repatriation of funds
from 4MC Asia to the Company and payment of related income taxes, affect the
Company's net income. Over the past two years the Singapore dollar has been
stable relative to the United States dollar. However, the continued stability
of the exchange rate is subject to numerous factors, all of which are beyond
the Company's control.
QUARTERLY REVENUE FLUCTUATIONS
The Company's results from operations are dependent upon several market
factors that are beyond its control, including: (i) the size of the domestic
and international markets for the exploitation of content libraries; (ii) the
ability of specialty programmers to find, acquire and market domestic capacity
for new channels and pay-per-view services; (iii) the ability of the major
entertainment companies to launch their domestic cable channels in
international markets (e.g., Asia); (iv) the demand for original programming
for airing on network and/or cable channels; (v) the acceptance of digital
methods of image production and manipulation by producers of feature films and
television programming; and (vi) the viewing audience's demand for higher
levels of production value in film and television programming.
Revenues derived from the Company's television division are seasonal in
nature, generally beginning in September and ending in May. As a result, the
Company has experienced its lowest operating results in the fourth quarter,
and the first and second quarter results generally are lower than third
quarter results. In addition, the Company's television division can experience
fluctuations in quarterly financial results for reasons beyond the Company's
control including a work stoppage or other event resulting in delays in
production schedules; changes
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in or extensions of vacation time around holidays; network cancellations of
projects at mid-season; and changes in staffing, location or budgets of
production companies. These factors result in idle capacity until replacement
work can be found. The expansion of the Company's studio and broadcast
services businesses have mitigated, to a certain extent, the seasonality of
the Company's revenues, EBITDA and net income in prior periods. However, the
completion of a portion of the Company's new television facility in Burbank,
increased revenues generated by the Company's Santa Monica facility, and
future expansion of television operations would likely create more seasonal
variation in the Company's revenues, EBITDA and net income in current and
future fiscal years. See "Risk Factors--Potential Fluctuations in Operating
Results; Seasonality."
The Company generally experiences a lag between the time that it incurs
expenditures to increase capacity (for both labor and equipment) and the
generation of revenues from utilization of such capacity. The duration of this
lag and the severity of its impact are unpredictable and could result in
significant fluctuations in the Company's quarterly operating results. See
"Risk Factors--Incurrence of Substantial Incremental Costs and Capital
Expenditures Prior to Generation of Revenues."
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<PAGE>
The following table presents (in thousands, except per share data), by
fiscal quarter, unaudited information derived from the Company's Consolidated
Statements of Operations and Statements of Cash Flows for the two fiscal years
ended August 4, 1996 and for the three months ended November 3, 1996.
<TABLE>
<CAPTION>
FISCAL QUARTERS ENDED
-----------------------------------------------------------------------------------
FISCAL
FISCAL 1995 FISCAL 1996 1997
------------------------------------- ------------------------------------ -------
OCT. 30, JAN. 29, APRIL 30, JULY 30, OCT. 29, JAN. 28, APRIL 28, AUG. 4, NOV. 3,
1994 1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- --------- -------- -------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Studio................. $ 4,269 $ 5,134 $ 5,727 $ 5,547 $ 5,746 $ 6,008 $ 5,840 $ 5,874 $5,957
Broadcast.............. 2,838 2,973 4,530 5,822 5,489 5,088 5,065 5,259 5,512
Television............. 3,532 6,705 7,315 5,160 5,631 5,684 7,058 4,970 7,084
Visual effects......... 0 510 313 629 766 305 515 730 394
------- ------- ------- ------- ------- ------- ------- ------- ------
Total revenues....... 10,639 15,322 17,885 17,158 17,632 17,085 18,478 16,833 18,947
------- ------- ------- ------- ------- ------- ------- ------- ------
Cost of services:
Personnel.............. 4,427 5,768 6,362 6,238 6,527 6,280 6,286 6,251 6,779
Material............... 1,204 1,637 1,903 1,680 1,920 1,809 1,816 1,809 1,853
Facilities............. 749 936 1,018 1,214 1,124 1,181 1,144 1,243 1,328
Other.................. 965 1,491 1,579 1,525 1,504 1,707 1,437 1,373 1,745
------- ------- ------- ------- ------- ------- ------- ------- ------
Total cost of
services............ 7,345 9,832 10,862 10,657 11,075 10,977 10,683 10,676 11,705
------- ------- ------- ------- ------- ------- ------- ------- ------
Gross profit........ 3,294 5,490 7,023 6,501 6,557 6,108 7,795 6,157 7,242
------- ------- ------- ------- ------- ------- ------- ------- ------
Operating expenses:
Sales, general and
administrative........ 1,997 2,654 2,898 3,369 3,030 2,871 2,646 2,569 3,109
Depreciation and
amortization.......... 883 1,176 1,931 2,251 2,497 2,508 2,561 2,599 2,795
------- ------- ------- ------- ------- ------- ------- ------- ------
Total operating
expenses............ 2,880 3,830 4,829 5,620 5,527 5,379 5,207 5,168 5,904
------- ------- ------- ------- ------- ------- ------- ------- ------
Income from
operations......... 414 1,660 2,194 881 1,030 729 2,588 989 1,338
Interest expense, net... 391 640 772 1,114 921 1,073 993 919 1,214
------- ------- ------- ------- ------- ------- ------- ------- ------
Income (loss) before
income tax
benefits........... 23 1,020 1,422 (233) 109 (344) 1,595 70 124
Income tax benefits..... 250 204 284 250 204 250 317 223 --
------- ------- ------- ------- ------- ------- ------- ------- ------
Net income (loss)... $ 273 $ 1,224 $ 1,706 $ 17 $ 313 $ (94) $ 1,912 $ 293 $ 124
======= ======= ======= ======= ======= ======= ======= ======= ======
Net income (loss) per
share.................. $ .04 $ .19 $ .26 $ -- $ .05 $ (.02) $ .30 $ .05 $ .02
======= ======= ======= ======= ======= ======= ======= ======= ======
Weighted average number
of common shares
outstanding............ 6,475 6,475 6,475 6,475 6,475 6,475 6,475 6,475 6,475
======= ======= ======= ======= ======= ======= ======= ======= ======
OTHER DATA:
EBITDA.................. $ 1,297 $ 2,836 $ 4,125 $ 3,132 $ 3,527 $ 3,237 $ 5,149 $ 3,588 $4,133
Net cash provided/(used)
by operations.......... (1,613) 862 100 5,239 1,585 2,603 896 4,303 796
Net cash used in
investing activities... 2,883 6,001 15,491 6,527 3,071 3,010 80 4,157 8,753
Net cash provided/(used
in) financing
activities............. 743 4,611 18,446 4,302 332 (527) (1,090) 875 8,135
</TABLE>
28
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading provider of technical and creative services to
owners, producers and distributors of television programming, feature films
and other entertainment content in the United States and Asia. The name Four
Media Company is derived from the Company's core competencies in film, video,
sound and data. The Company's services integrate and apply a variety of
systems and processes to enhance the creation and distribution of
entertainment content. The Company seeks to capitalize on growth in domestic
and international demand for original entertainment content and for existing
television and film libraries without taking production or ownership risk with
respect to any specific television program, feature film or other content.
Since its formation in 1993 through the first quarter of fiscal 1997, the
Company has invested $72.6 million in infrastructure, primarily for new
digital systems and equipment. In addition, the Company has successfully
identified, acquired and integrated four complementary businesses. The Company
acquired the assets of three companies in connection with its formation in
1993, acquired the assets of a fourth company in 1994, and capitalized and
commenced its Singapore broadcast operations in 1995. As a result of its
investments and acquisitions, the Company is one of the largest and most
diversified independent (not affiliated with or related to a content owner)
providers of technical and creative services to the entertainment industry,
and therefore is able to offer its customers a single source for such
services.
The Company has organized its activities into four divisions, each of which
offers services that are integral to the creation, enhancement and/or
distribution of entertainment content.
Studio Services. The studio services division provides owners of television
and film libraries with all of the facilities and services necessary to
manage, format and distribute content worldwide. These services include
restoring and preserving damaged content, archiving original elements and
working masters, creating working masters from original elements, duplicating
masters for professional applications and formatting masters to meet specific
end-user standards and requirements. The studio services division seeks to
offer customers lower operating costs, improved response time and reliability,
access to new technology, and adherence to quality standards that are
recognized by the international technical community. The division's customer
base includes the major domestic studios (and their international divisions)
as well as independent owners of television and film libraries. Studio
services operations are conducted in Burbank.
Broadcast Services. The broadcast services division provides domestic and
international programmers with the facilities and services necessary to
assemble and distribute programming via satellite to viewers in the United
States, Canada and Asia. These services include assembly of programming
provided by the customer into a 24-hour "network" format; creating
interstitial and promotional graphics and other material that support the
brand identity of the programming; providing production support and facilities
for the timely creation of original programming, such as announce and news
segments; and providing automated systems to broadcast the programming via
playback and uplink facilities. In addition, the broadcast services division
provides facilities and services for the delivery of syndicated television
programming in the United States and Canada and also transmits special events,
sports or news stories for insertion in a network, cable system or direct-to-
home broadcast. The division's customer base includes major entertainment
companies offering worldwide network programming, independent content owners
offering niche market programming, and pay-per-view channels marketing movies
and special events to the cable industry and direct-to-home viewers. Broadcast
services operations are conducted in Burbank and the Republic of Singapore.
Television Services. The television services division provides producers of
original television programming with the technical and certain of the creative
services that are necessary to conform original film or video principal
photography to a final product suitable for airing on network, syndicated,
cable or foreign television. These services include developing negative in the
Company's film laboratory; converting developed negative to videotape and/or
digital formats; creating music and sound effects; mixing sound elements for
laydown to the final program master; creating visual effects; integrating
visual effects in the final program master;
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<PAGE>
correcting color; removing artifacts and scratches from the program master;
formatting for commercial integration; and delivering (via tape or satellite)
the program master for broadcast. The division's customer base includes most
of the major domestic studios and broadcast networks that are engaged in the
production of original programming as well as a large number of independent
production companies. Television services operations are conducted in Burbank
and Santa Monica.
Visual Effects Services. The visual effects services division commenced
operations in January 1995 and provides creators of special visual effects
with certain services required to digitally create or manipulate images in
high resolution formats for integration in feature films. These services
include developing negative and correcting color in the Company's film
laboratory; digitally scanning film; and digitally compositing multiple layers
of effects and recording the result on film. The division's customer base
includes most of the major domestic studios as well as independent visual
effects supervisors. Visual effects operations are conducted in Burbank and
Santa Monica.
MARKETS
The entertainment industry creates motion pictures, television programming,
and interactive multimedia content for distribution through theatrical
exhibition, home video, pay and basic cable television, direct-to-home,
private cable, broadcast television, on-line services and video games. Content
is released into a "first-run" distribution channel, and later into one or
more additional channels or media. In addition to newly-produced content, film
and television libraries may be released repeatedly into distribution.
Entertainment content produced in the United States is exported, and is in
increasingly high demand internationally. The Company believes that several
trends in the entertainment industry will have a positive impact on the
Company's business. These trends include growth in worldwide demand for
original entertainment content, the development of new markets for existing
content libraries, increased demand for innovation and creative quality in
entertainment markets and wider application of digital technologies to content
manipulation and distribution, including the emergence of new distribution
channels.
The Motion Picture Industry. The motion picture industry encompasses the
production, distribution and domestic exhibition of feature-length motion
pictures, including their distribution in home video, television and other
ancillary markets. While the domestic motion picture industry is dominated by
the major studios, including Paramount Pictures, Sony Pictures Corporation,
Twentieth Century Fox, Universal Pictures, The Walt Disney Company and Warner
Bros., independent production companies also play an important role in the
production of motion pictures for domestic and international feature film
markets. The major studios release as many as 200 new feature films a year and
domestic independent producers and distributors account for an estimated 180
films a year.
In 1995, the worldwide revenue of United States motion picture distributors
totaled $18.3 billion, an increase of 6.2% over 1994. Recent growth in
international revenue has far exceeded growth in North American revenues, with
international revenue now accounting for nearly half of total revenue.
According to an August 1996 communications industry forecast, it is expected
that by the year 2000, international revenue from motion pictures produced in
the United States will surpass North American revenue. The Company's studio
services division provides services that support the preparation and delivery
of feature films for distribution in domestic and international home video,
television and other ancillary markets.
The Television Production Industry. The North American (United States and
Canada) television production and distribution industry serves the largest
broadcast market in the world, with a population of approximately 290 million
and more than 95 million homes. In North America, programming is delivered to
the end user via conventional broadcast networks, cable channels, individual
television stations and satellite delivery systems. The number of broadcast
television networks in the United States continues to increase, with United
Paramount Network and the Warner Bros. Network recently joining the
established networks, ABC, NBC, CBS and Fox. The established networks
penetrate nearly 100% of domestic television households and provide the most
effective access to a broad-based mass audience for television advertisers.
Spending for television
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<PAGE>
advertising, which drives the production of new programming and the sale of
existing content libraries, reached a record level of $37.5 billion in 1995,
compared to $29.0 billion in 1990.
The demand for entertainment content has increased significantly as a result
of the introduction of new broadcast networks, direct broadcast satellite
systems, pay television, increased cable penetration and the growth of home
video. The new television networks have created the need for more hours of
original programming and competition for viewers has increased the demand for
innovation and creative quality resulting in higher levels of spending. In
1995, United States television broadcasters (including cable) spent
approximately $8.9 billion for programming, compared to $7.2 billion in 1990.
The Company's television services division supports the creation of television
programming for domestic distribution and the Company's broadcast services
division supports the delivery of programming through various channels of
distribution including cable and satellite delivery systems.
In the last decade, the privatization of broadcasting systems outside the
United States, the proliferation of broadcast licenses, and the introduction
of sophisticated delivery technologies, such as cable and satellite
transmission systems, have led to significant growth of broadcasting and cable
television markets outside North America. European television is the most
visible example of the growth in programming outlets. Over the last 15 years,
European governments have encouraged a major expansion of the public and
private broadcasting sectors. For example, Germany and France each have added
six broadcast networks and the United Kingdom has added four. The introduction
of new television broadcast systems is just beginning in Asia and Eastern
Europe. Most foreign broadcasters require a mix of both indigenous programming
to satisfy the local content requirements of their broadcast licenses and
popular international programming, largely produced in the United States. The
substantial growth of broadcast markets outside North America has also
increased the demand for entertainment content produced in the United States.
The Company's television services division supports the creation of
programming for international distribution, the Company's studio services
division supports the preparation of content to be viewed in international
markets, and the Company's broadcast division supports the distribution of
cable channels in Asia and is seeking to establish a presence in other
developing international markets.
The Multimedia Industry. The interactive multimedia industry encompasses
video games, and on-line and interactive services. While certain segments of
the industry such as video games are well established, the multimedia industry
is an emerging business with significant growth potential. According to an
industry forecast, revenues derived from the sale of video game systems and
game software were $4.5 billion in 1995. Improvements in technology, the
availability of communication bandwidth, the proliferation of distribution
channels for entertainment products and services, and the involvement of large
entertainment companies, together, signify a critical mass to support such
growth. On-line services offer the consumer access to the Internet and the
World Wide Web via internet access providers such as Netcom(R) and UUNet(R),
and to services such as America On-line(R) and Prodigy(R) which offer both
internet access and proprietary features. Numerous companies provide Web site
design and creation, such as Digital Planet(R), Dimension X(R) and
Starware(R), that integrate various forms of media including live action
video, animation, graphics and audio. Other interactive on-line services such
as video-on-demand are being deployed by cable television operators and
certain of the regional telephone companies. Although the Company currently
derives no significant revenues from these market segments, the Company
believes that its creative and technical processes will be marketable to the
multimedia industry specifically in the areas of video compression,
digitization, 2D and 3D graphics, and authoring for the more complex platforms
and applications such as digital versatile disk ("DVD") and server-based on-
demand services.
STRATEGIC ACCOMPLISHMENTS
The Company has implemented its business plan and capitalized on industry
trends and opportunities to accomplish the following:
Studio Services. In fiscal 1994, the Company identified a growth opportunity
in servicing technical and operational needs related to the domestic and
international distribution of entertainment content. The Company
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<PAGE>
pursued this opportunity by improving and upgrading its infrastructure,
constructing an archive and developing and implementing a management
information system to provide customers with instant access to information
regarding the status of their assets, work-in-process and shipments. Since
1993, the Company has invested approximately $17.1 million in its studio
services facilities. The facilities occupy approximately 82,000 square feet of
new space (in two buildings) and feature a state-of-the-art digital
infrastructure. Studio services revenues have increased to $23.5 million in
fiscal 1996 compared to $15.7 million in fiscal 1994. The Company intends to
capitalize on the emergence of growth opportunities related to the domestic
and international distribution of content and the digitization and compression
of content for new distribution and multimedia applications by continuing to
add capacity to its studio services facilities.
Broadcast Services. In fiscal 1995, the Company determined that it could
capitalize on its core competencies and customer relationships and expand its
broadcast operations internationally. The Company evaluated expansion in
Europe, South America, Asia and Africa. After extensive research, the Company
selected Asia and established a new broadcast facility in Singapore. The
Company selected Asia because of (i) the availability of powerful transponder
capacity serving the entire Asian and Asean populations; (ii) the growing
popularity and acceptance of television as an entertainment vehicle in various
Asian and Asean cultures; (iii) the ability of the region to draw advertising
dollars based upon the emergence of a large middle class with disposable
income; and (iv) the large number of international and local programmers
seeking access to the region using cost-efficient satellite delivery systems.
The Company invested approximately $19.6 million to design and construct its
Singapore broadcast facility. The all digital and fully integrated broadcast
facility occupies approximately 20,000 square feet of newly developed space.
MTV Asia is the Company's first major customer in Singapore. The Company's
long-term contract with MTV Asia provides a base upon which to build other
business. The value of the Singapore operation is derived from (i) MTV Asia's
long-term commitment to the Company; (ii) the growth potential of the region
in general and Singapore as a broadcast hub specifically; (iii) the
availability of the facility's excess capacity to generate revenues outside
the MTV Asia relationship; and (iv) the ability of the Company to apply its
outsourcing model to domestic or international customers in any location.
Broadcast services revenues increased to $20.9 million in fiscal 1996 compared
to $10.9 million in fiscal 1994. The Company intends to rebuild its domestic
broadcast facility to accommodate the transmission of digitally compressed
signals and server-based playback systems by the end of fiscal 1998.
Television Services. In 1994, the Company acquired the assets of DM&T, a
facility specializing in providing visual effects for television. The Company
invested a total of $16.3 million in the facility, including approximately
$7.7 million to acquire the DM&T assets and an additional $5.3 million for the
purchase of component digital equipment and other improvements. The Company
believes that its facility is among the most technologically advanced
television services facilities in the Los Angeles area. The Company expects to
complete construction by the end of the third quarter of fiscal 1997 of a new
television facility in Burbank providing new server-based technology targeted
at the episodic television market. The Company studied the migration to a file
server environment for all digital non-linear assembly of television
programming and implemented a new design incorporating server-based
technology. In addition, the Company incorporated four Rank Cintel URSA
Gold(R) telecines in the new infrastructure to provide high quality pictures
as well as seamless transition from telecine to off-line and on-line
applications. The Company invested approximately $17.4 million to design and
construct the Burbank facility.
The Company intends to exploit the depth of the Company's television service
offerings by pursuing revenue opportunities related to the production and
distribution of original television programming--one of the largest segments
of the Los Angeles entertainment market. The Company offers the television
industry a full range of services in desirable geographic locations, a fully
integrated infrastructure designed to reduce turnaround time and increase
creative flexibility, and segmented service offerings. Television services
revenues increased to $23.3 million in fiscal 1996 compared to $15.6 million
in fiscal 1994.
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Visual Effects Services. In fiscal 1995, the Company determined that it
could apply its core competencies in the digital manipulation of images for
television to high resolution visual effects for feature films. The Company
retained a highly respected creative staff and acquired certain high
resolution equipment including a Quantel(R) Domino(R) computer and a Silicon
Graphics(R) computer that runs Discreet Logic(R) Inferno(R) software. In
addition, the Company acquired six Silicon Graphics(R) workstations running a
variety of software for high resolution animation applications, and film
scanning and recording equipment required to digitize high resolution images.
As of November 3, 1996, the Company's total capital investment in the visual
effects operation was approximately $2.9 million. The Company has attracted
visual effects projects for medium budget feature films and portions of
projects for large budget major motion pictures. The Company anticipates
making additional investments in high resolution capacity in response to
demand. Visual effects services revenues increased to $2.3 million in fiscal
1996 compared to $1.5 million in fiscal 1995.
GROWTH STRATEGY
The Company seeks to benefit from the increasing worldwide demand for
original entertainment content and the development of new markets for existing
television and film libraries. The Company intends to increase its market
share and to establish a brand identity in the markets it serves by executing
the following growth strategies:
. Seek Consolidation Opportunities. The Company plans to pursue
acquisitions that complement existing operations, increase market share
and diversify product lines, including those in the visual effects area.
The Company participates in a highly fragmented industry in which many
small, entrepreneurial companies compete for market share. Many do not
have the size, diversity, liquidity or capital resources required to
modernize infrastructure or derive efficiencies from economies of scale.
The Company has successfully identified, acquired and integrated four
complementary business. The Company acquired the assets of three
companies in connection with its formation in 1993, acquired the assets
of DM&T in 1994, and capitalized and commenced its broadcast operations
in Singapore in 1995. The Company has entered into an agreement that
provides for an exclusive negotiating period for the potential
acquisition of a studio and television services business. The Company
has not reached agreement on price or completed its due diligence with
respect to such potential acquisition, and there can be no assurance
that the Company will be successful in consummating the transaction, if
it continues to pursue this opportunity.
. Offer Complete Outsourcing Solutions. The Company intends to expand the
range of outsourcing solutions it provides to customers and to bundle
its diverse services into a variety of combinations. This innovative
outsourcing approach provides customers several benefits including (i)
lower capital investment and operating costs than in-house alternatives;
(ii) more control over processes by using a single vendor; (iii) access
to current technology without the necessity of continuously upgrading
equipment; (iv) no diversion of technical, administrative and managerial
resources to non-core activities; (v) access to a diverse group of
broadly experienced technical and creative professionals; (vi) the
ability to enforce contractual standards of performance, thereby
improving accountability and reliability; and (vii) the ability to
reduce financial risk by identifying and fixing all of the costs
associated with a particular process.
. Deploy Leading Technologies. The Company plans to continue its
investment in component digital equipment and other leading technologies
in order to enhance its reputation for technological leadership in its
industry. Since its formation in 1993 through the first quarter of
fiscal 1997, the Company has invested $72.6 million to expand the scope
and scale of its operations, broaden its service offerings, expand
internationally and convert the majority of its infrastructure and
equipment to be compatible with new digital content formats. As part of
these capital expenditures, the Company has invested approximately $4.1
million to design, develop and implement a management information system
that provides timely and accurate information to customers about the
status of archived material, work orders, shipments and deliveries. The
Company believes that continued investment in infrastructure and the
deployment of digital technology will position the Company to benefit
from the domestic and international growth in entertainment content
production and distribution.
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. Expand Internationally. The Company intends to expand internationally in
response to specific customer demand, particularly where the Company's
technical expertise, financial strength and the ability to execute
quickly are competitive advantages. The Company has demonstrated its
ability to respond quickly to international expansion opportunities. For
example, it commenced negotiations with MTV Networks in August 1994
regarding a contract for services in Asia, and after locating,
designing, building and staffing a $19.6 million state-of-the-art
digital broadcast facility in Singapore, commenced the broadcast of two
MTV Asia channels, MTV Asean and MTV Pan China, in April 1995. In
addition, the Company recently commenced the broadcast of MTV India, and
also the broadcast of MGM Gold, an additional channel in Singapore. The
Company intends to capitalize on its experience in Singapore by pursuing
similar opportunities in other locations.
. Establish Strategic Alliances. The Company seeks to generate additional
revenue from its technological resources and facilities by establishing
strategic alliances with content creators and others. In fiscal 1996,
the Company entered into an agreement with Silverhammer, Inc., a design
and production firm specializing in the creation of network and
corporate visual promotions, identities, in-show graphics and internet
home pages. The agreement specifies that the Company will be
Silverhammer's exclusive service provider and permits the Company to
acquire an equity position in Silverhammer. Additionally, in January
1997, the Company agreed to enter into a joint venture ("Medialab Studio
L.A.") with Medialab (U.S.), a division of Canal+ (U.S.). Medialab
Studio L.A. will offer film and television producers performance
animation technology which provides the ability to generate 3-D computer
animated characters in real time, thereby reducing the time required for
certain types of animation. The Company has contributed an aggregate of
$400,000 of equipment, $100,000 in start up costs, and the use of the
facility in which the venture will be housed. Either party may decide to
discontinue the relationship by June 1, 1997, if the parties have not
agreed upon a business plan. If a business plan is approved, both
parties intend to contribute additional assets to the venture, which is
expected to include a license of Medialab's performance animation
technology and certain other assets anticipated to have a value of $2.5
million. However, the ultimate terms of the business plan and joint
venture have yet to be approved. There can be no assurance that the new
services offered will attract sufficient customers to justify the
continuation of the relationship or that the parties will approve the
business plan.
. Capitalize on the Increasing Application of Digital Technology. The
Company intends to capitalize on new methods of applying digital
technology for storing, retrieving and manipulating content as well as
increased demand for digital technology for use in high quality motion
video, multimedia applications and new content distribution channels.
For example, the Company anticipates opportunities in authoring and
mastering content for DVD and video on demand applications. The Company
believes that compression technologies, such as MPEG II, will gain
acceptance in the broadcast and cable industries and facilitate the
expansion of channel capacity and programming opportunities. The Company
purchased compression equipment in fiscal 1996 in anticipation of the
development of a market for compression applications. In addition, the
Company currently is developing the capability to transmit digitally
compressed signals to domestic satellites.
PRODUCTS AND SERVICES
The Company has defined its operating divisions in terms of the
entertainment industry market segments each serves. Each entertainment
industry market segment is driven by diverse but related economic factors, and
as a result, the Company is not solely dependent upon any single market
segment within the entertainment industry. The Company intends to maintain and
expand the diversity of its revenue sources and views such diversity as a
significant competitive operating and financial advantage.
For each of its operating divisions, the Company has defined a set of
services which support the entire technical and creative process of its
customers: studio services--"Content Preparation Process;" broadcast
services--"Network Delivery Process;" television services--"Original
Programming Delivery Process;" and visual effects--"Effects Creation Process."
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STUDIO SERVICES
The studio services division offers a broad range of facilities and
technical services to owners of television and film libraries. The division
provides all of the services necessary to manage, format and distribute
content on an international scale. These services include archiving original
elements and working masters, restoring and preserving damaged content,
creating working masters from original elements, duplicating masters for
professional applications, and formatting masters to meet specific end-user
standards and requirements. The Company offers the customer lower operating
costs, improved response time and reliability, access to new technology, and
adherence to standards of quality that are recognized by the international
technical community.
The Company's Content Preparation Process consists of the services outlined
in the chart below. While the Company markets these services as a cost-
effective package, service offerings are available individually and priced
separately.
The Content Preparation Process
Audio Layback
Restoration Transfer Conversion
Archive Preservation Transform Duplication
Archive. The storage and handling of videotape and film elements require
specialized security and environmental control procedures. Throughout the
entertainment industry, content representing millions of dollars of future
revenue is stored in physically small units that are subject to the risk of
loss resulting from physical deterioration, natural disaster, unauthorized
duplication or theft. The Company's archive is designed to store approximately
400,000 master videotapes and film elements in an environment protected from
temperature and humidity variation, seismic disturbance, fire, theft and other
external events. In addition to the physical security of the archive, content
owners require frequent and regular access to their libraries. Speed and
accuracy of access is a critical value added factor. The Company believes that
its archive, built at a cost of $3.1 million in fiscal 1994, is the largest
among independent service providers and among the most advanced with respect
to security, environmental control and access features.
Restoration. Substantially all film elements originating prior to 1983 have
faded, degraded or have been damaged in some way. Generally, damaged negatives
cannot be utilized in the Content Delivery Process because the resulting
broadcast submaster will not meet the minimum quality standards required in
domestic and foreign markets. The Company's technicians restore damaged film
negative to original and sometimes enhanced quality through the use of
proprietary optical and electronic equipment and techniques. The Company
believes it is well recognized for its ability to complete technically
challenging restoration assignments.
Preservation. Modern film stock, introduced in 1983, has a shelf life
exceeding 100 years. Because images recorded on old film stock degrade over
time resulting in the loss of color and in extreme cases the integrity of the
film itself, older film frequently is converted to a new archival film stock
medium. Film is the preferred archival medium because it has the highest image
resolution of any image storage medium. Using a proprietary process, the
Company takes the original (or restored) negative and creates an archival
answer print and interpositive (i.e., a new negative). The Company believes
that, due to technical and operational advances in its proprietary
preservation process, it is a market leader in the preservation of existing
film content.
Transfer. Substantially all film content ultimately is distributed to the
home video, broadcast, cable or pay-per-view television markets, requiring
that film images be transferred to video images. Each frame must be color
corrected and adapted to the size and aspect ratio of a television screen in
order to ensure the highest level of
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conformity to the original film version. Because certain film formats require
transfers with special characteristics, it is not unusual for a motion picture
to be mastered in many different versions. For example, anamorphic
(Cinemascope) formats require mastering in at least two aspect ratios
(pan/scan and letter box) and certain international broadcasters have other
requirements. The Company transfers film to videotape using Ursa Gold(R)
telecine equipment and DaVinci(R) digital color correction systems recently
installed at a cost exceeding $3.0 million. This equipment produces the
highest quality transfers available in the industry. Technological
developments, such as the anticipated domestic introduction of television sets
with 16 x 9 aspect ratios and the implementation of advanced definition
television systems for terrestrial and satellite broadcasting, if they occur,
should contribute to the growth of the Company's film-to-tape transfer
business in the future.
Transform. Production companies may choose to originate their work on
videotape even though the ultimate market is a theatrical release on film. The
Company developed a proprietary process called Transform(R) to convert
videotape to film. Transform(R) uses an electron beam recorder and a patented
color imaging system to transform video pictures from all current broadcast
standards to 16mm or 35mm film. The process involves transferring red, blue
and green video images sequentially to a 16mm fine grain intermediate film
stock using an electron beam modulated with the video image. These fine grain
separations are then sequentially step-printed onto color negative film stock.
The Transform(R) process is applicable to advertising commercials and
interstitial programming material (less than 90 seconds in running length) as
well as theatrical length presentations including feature films, concerts and
special events. The Company currently transforms numerous short segments,
special events, and six to ten feature films per year.
Audio Layback. Audio layback is the process of creating duplicate videotape
masters with sound tracks that are different from the original recorded master
sound track. Content owners selling their assets in foreign markets require
the replacement of dialog with voices speaking local languages. In some cases,
all of the audio elements, including dialog, sound effects, music and laughs,
must be recreated, remixed and synchronized with the original videotape. Audio
sources are premixed foreign language tracks or tracks that contain music and
effects only. The latter is used to make a final videotape product that will
be sent to a foreign country to permit addition of a foreign dialogue track to
the existing music and effects track. The Company attracts audio layback
business by offering (i) optimum sound quality; (ii) synchronization of audio
to picture within a half frame accuracy; (iii) consistent quality and
accuracy; (iv) quick turnaround; and (v) competitive pricing.
Conversion. Conversion is the process of changing the frame rates of a video
signal from one video standard (such as the United States standard) to another
(such as the European standard). Through the utilization of Digital Electronic
Film Transfer and Phase Correlation technologies, the Company provides the
highest quality conversion services available. The Company's primary
competitive advantages are its state-of-the-art equipment and its detailed
knowledge of the international markets with respect to quality-control
requirements and technical specifications.
Duplication. The final step in the Content Preparation Process is the
creation of submasters for distribution to professional end users. Master
tapes are used to make submasters in NTSC, PAL and other formats. Videotape
content is copied for use in intermediate processes, such as editing, on-air
backup and screening, and for final delivery to cable and pay-per-view
programmers, broadcast networks, television stations, airlines, home video
duplicators and foreign distributors. The Company duplicates videotape in all
international standards in 22 tape formats. The Company believes that its
professional duplication facility is technically advanced and has unique
characteristics that significantly increase equipment capacity utilization
while reducing error rates and labor costs.
BROADCAST SERVICES
The broadcast services division offers a broad range of facilities and
technical and creative services to domestic and international programmers. The
Company provides all of the facilities and services necessary to assemble and
distribute programming via satellite to viewers in the United States, Canada
and Asia. These services include assembling programming provided by the
customer into a 24-hour "network" format, creating
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interstitial and promotional graphics and other material that support the
brand identity of the programming, providing production support and facilities
for the timely creation of original programming such as announce and news
segments, and providing automated systems to deliver the programming to air
via playback and uplink facilities. In addition, the Company provides
broadcast facilities and services for the delivery of syndicated television
programming in the United States and Canada and transmits special events,
sports or news stories for insertion in a network, cable system or direct-to-
home broadcast. The Company's customer base consists of the major studios and
entertainment companies offering world-wide network programming, independent
content owners offering niche market programming and pay-per-view channels
marketing movies and special events to the cable industry and direct-to-home
viewers. Broadcast service operations are conducted in Burbank and the
Republic of Singapore.
The Company's Network Delivery Process consists of the services outlined in
the chart below. While the Company markets these services as a cost-effective
package, service offerings are available individually and priced separately.
The Network Delivery Process
Production Network Uplink
Promotion Assembly Origination Satellite
Audio Transponder
Production and Promotion. A broadcaster's identity and continuity during the
broadcast day are established and enhanced when an on-camera personality
(presenter) is used to introduce the channel or the channel's programming.
Timely broadcast programming, such as news, requires immediate and precise
coordination of on-camera talent, the script, the pre-recorded videotape and
graphic materials and the broadcast schedule. The Company operates a state-of-
the-art production studio in Singapore with three cameras, production and
audio control rooms, videotape playback and record, multi-language prompter,
computerized lighting, and dressing and makeup rooms. The studio is fully
configured for host, news and chroma key segments. A one-camera field crew is
also available for electronic field production recording, and the Company
offers live-to-satellite interview and other on-camera services. On-screen
marketing and broadcast continuity also depend on on-air promotional material
to support the channel's brand identity and the channel's programming. The
Company, working in conjunction with the customer's producers, offers a
complete on-air promotional service, including graphics, editing, voice-over
record, sound effects editing, sound mixing and music composition.
Audio. Programming designed for distribution in markets other than those for
which it was originally produced is prepared for export through language
translation and either subtitling or voice dubbing. The Company provides
dubbed language versioning with an audio layback and conform service that
supports various audio and videotape formats to create an international
language-specific master videotape. The Company's Burbank facility also
creates music and effects tracks from programming shot before an audience to
prepare television sitcoms for dialog record and international distribution.
The Company's Singapore facility supports subtitling with translation
coordination and a complete on-screen and closed-caption subtitling facility.
Subtitling currently is available in Chinese and English; other languages can
be added in response to customer need.
Assembly. Prior to broadcast, program and interstitial material is checked
for quality control and may be pre-compiled into final broadcast form prior to
on-air playback. Interstitial pre-compilation is performed in Company editing
facilities, often using proprietary systems and software which permit the
efficient assembly of high production value visual effects. Syndicated
programming is also prepared for distribution with commercials and similar
elements inserted prior to distribution. Control procedures are used to ensure
on-air reliability. The Company provides programming to almost all United
States broadcast television stations through daily satellite feeds and tape
shipments. A variety of movie and show formatting and time compression
services are available
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to prepare programming for distribution. Commercial, promotional, billboard,
warning, logo and other integration, as well as closed captioning for the
hearing impaired and source identification encoding, is performed. The Company
also provides program log and traffic support to programmers; affiliate
relations and station coordination; library storage of broadcast master tapes;
and a syndication program library and recycled videotape inventory.
Network Origination. The Company provides videotape playback and origination
to cable, pay-per-view and direct-to-home networks and services. The Company
accepts daily program schedules, programs, promos and advertising, and
delivers 24 hours of seamless daily programming to cable affiliates and home
satellite subscribers. The Company uses automated robotics systems for
broadcast playback, which include proprietary systems and software. The
Company also operates industry-standard encryption and/or compression systems
as needed for customer satellite distribution. The Company uses a customized
approach to satisfy each customer's timeliness, flexibility and reliability
requirements. Playback systems are both videotape and video server-based, and
subtitling and "local avail" (head and commercial insertion) are supported.
Quality control, tape storage and trafficking services are also offered by the
Company. Currently, the Company supports over twenty 24-hour channels from its
Burbank facility, and two 24-hour channels originate from the Singapore
facility.
Uplink and Satellite Transponders. The Company's Burbank facility operates a
C-band video-oriented satellite earth station facility with eight
transmit/receive antennas and over 30 transmit chains. Catalina is licensed by
the FCC and operates as a common carrier. Facilities are staffed 24 hours a
day and also are used for downlink and turnaround services. The Company
communicates with two transponders on the Galaxy IV(R) satellite in support of
the Company's syndication and Canadian distribution business segments.
Catalina accesses various "satellite neighborhoods" daily, including basic and
premium cable, broadcast syndication and direct-to-home markets. The Company
resells transponder capacity for ad hoc and other occasional use and bundles
its transponder capacity with other broadcast services to provide a complete
broadcast package at a fixed price.
TELEVISION SERVICES
The television services division provides a broad range of facilities and
technical and creative services directed to producers of original television
programming. The Company provides all of the technical and certain of the
creative services that are necessary to conform original film or video
principal photography to a final product suitable for network, syndicated,
cable or foreign television. These services include developing negative in the
Company's film laboratory, converting developed negative to video tape and/or
digital formats, creating music and sound effects, mixing all sound elements
for laydown to the final program master, creating visual effects in the final
program master, color correction, dirt and scratch removal, formatting for
commercial integrating and physical delivery via tape or digital delivery via
satellite of the program master for air. The Company's customer base includes
most of the major studios and broadcast networks that produce original
programming as well as a large number of independent production companies.
Television operations are conducted in Burbank and Santa Monica.
The Company's Programming Delivery Process consists of the services outlined
in the chart below. While the Company markets these services as a cost-
effective package, service offerings are available individually and priced
separately.
The Original Programming Delivery Process
Negative Off-Line Audio Assembly
Developing Editing Visual Effects Formatting
Transfer Duplication
Digitization
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Negative Developing. Because of the creative freedom, high resolution image
quality and flexibility attained by working with film, the majority of prime
time network and first run syndicated television programming originates on
film. "Dailies" (camera original negative shot during each day) for one hour
dramas, situation comedies and movies-of-the-week are delivered to the
Company's film laboratory to be developed overnight. The Company's film
laboratory specializes in negative developing for television applications and
has increased its television related activities in each year since the
Company's inception.
Transfer and Digitization. The transfer department accepts developed
negative from a laboratory and transfers the film to videotape. The transfer
process enables the customer to view the previous day's work on videotape and
begin the creative process of editing the footage. The transfer process is one
of the most technically and creatively challenging of any of the Company's
services. The Company must integrate various forms of audio and encode the
video picture with feet and frame numbers from the original film. The Company
utilizes state-of-the-art URSA Gold(R) telecine equipment adapted for
television specifications. The Company believes that its equipment produces
the highest quality results attainable in the industry today in part because
it uses only URSA Gold(R) technology for television transfer services.
Off-Line Editing. The Company delivers low resolution digitized images to
the customer for processing by various non-linear editing work stations, such
as the Avid(R), Media Composer(R), Lightworks(R) and Heavyworks(R). Using
these or similar systems, the customer determines the programming content and
creates an edit decision list, which will eventually be used to assemble the
source material into a final product suitable for broadcast. The Company
provides and fully supports non-linear off-line editing with personnel and
equipment for use by the customer within the Company's facilities or at other
locations designated by the customer. In addition, the Company is currently
constructing communications infrastructure to provide digitized images
directly from the film-to-tape transfer room to work stations via dedicated
phone lines.
Audio. After the customer has made substantially all of the creative
decisions necessary to determine the programming content, the Company offers
various services to enhance and conform the audio to the video image. The
Company creates sound effects, assists in replacing dialog and re-records all
the audio elements for integration with the final video product. The Company
designs sound effects to give life to the visual images with a proprietary
library of over 30,000 digital sound effects. Dialog replacement is sometimes
required to improve quality, replace lost dialog or eliminate extraneous noise
from the original recording. Re-recording combines sound effects, dialog,
music and laughter together to complete the final product. In addition, the
re-recording process allows the enhancement of the listening experience by
adding specialized sound treatments, such as stereo, Dolby(R) SR(R) and
Surroundsound(R). The Company's primary audio markets are situation comedies
and one-hour dramas. Finally, the Company has two theater sized re-recording
stages targeted at the feature film and made-for-TV movie markets. The Company
employs an award winning staff in both areas and is well respected for its
technical and creative contribution.
Visual Effects. Visual effects are used to enhance the visual experience of
the viewing audience by supplementing images obtained in principal photography
with computer generated images. Most often, visual effects create images that
cannot be created by any other means on a cost effective basis. DMC, the
Company's visual effects operation located in Santa Monica, specializes in
creating visual effects for television. DMC's compositing suites are
configured for nine layers of color correction and eight layers of compositing
with powerful wipe generators. These devices are used to generate bends,
warps, morphs, 3D shapes and transformations in real time. DMC also offers an
array of graphics and animation workstations using a variety of software to
accomplish unique effects, including 3D animation. The Company believes that
DMC is a leader in providing visual effects for the television industry as
evidenced by its involvement in numerous award winning series, including Star
Trek(R)--The Next Generation(R), Star Trek(R)--Deep Space Nine(R) and Star
Trek(R)--Voyager(R).
Assembly, Formatting and Duplication. Once all of the creative decisions
have been made by the customer, including the integration of sound and visual
effects, the Company employs the edit decision list to assemble the source
material into its final form. To accomplish this, the Company utilizes a
combination of
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component digital linear assembly systems and super computer based non-linear
assembly systems. The Company believes that its assembly systems, which will
become fully operational in the last three months of 1996, are among the most
technologically advanced in the industry. In addition, the Company utilizes
sophisticated computer graphics equipment to generate titles and characters
and to format the program to meet specific network requirements (e.g., time
compression and commercial blocks). Finally, the Company creates multiple
"masters" for delivery to the network for broadcast, archival and other
purposes designated by the customer.
VISUAL EFFECTS SERVICES
The visual effects services division offers a broad range of facilities and
technical and creative services to creators of special visual effects for
feature films and television. The Company provides services required to
digitally create or manipulate images in high resolution formats for
integration into feature films as well as certain television applications.
These services include negative developing and color correction utilizing the
Company's film laboratory facilities, film scanning and recording and digital
compositing. The Company bundles its visual effects services in order to lower
the cost of certain visual effects, improve response time and the consistency
of results, and to provide customers access to new technology. The Company's
customer base includes most of the major studios as well as independent visual
effects supervisors contracted by producers of feature films. Visual effects
operations are conducted in Burbank and Santa Monica.
The Company's Effect Creation Process consists of the services outlined in
the chart below. While the Company markets these services as a package,
service offerings are available individually and priced separately.
The Effect Creation Process
Correction
Pre-Production Design Scanning Developing
Consulting Creation Recording Printing
Pre-Production and Principal Photography Consulting. Using a script provided
by the production company, the Company provides a written outline for
implementing the effects, time frame and preliminary effects budget. The
Company makes recommendations on how best to realize each visual effect,
taking into consideration the complexity of the desired effect, the production
schedule and budget. Even projects that would not normally be considered a
special effect feature will make use of digital techniques to create sets,
backgrounds, lighting, crowds and other effects. The Company creates story
boards in order to reach an understanding as to which elements will be shot
and by whom prior to principal photography. Upon request, the Company will
provide a visual effects supervisor to assist in the principal photography
that will later be incorporated in a digital effect. Often, the Company
assembles a film crew to shoot elements that are necessary to properly
integrate a visual effect into a particular scene.
Effect Design and Creation. In order to reduce costs and meet shorter
release schedules, the studios have recently begun reducing the amount of time
available for the Effect Creation Process from twelve months to four months.
This acceleration is often at odds with the responsibility of the visual
effects supervisor to evaluate many effect alternatives before making a final
selection. In order to minimize costs, the Company first designs effects in
low (i.e., video) resolution. Once the design is approved, the Company creates
visual effects in high (i.e., film) resolution using powerful super computers,
such as the Domino(R) Double Four(R) and the Silicon Graphics(R) Onyx Reality
Engine II(R). The Domino(R) is used for high speed digital image creation,
animation, compositing, retouching, rotoscoping, motion and color correction.
The Reality Engine(R) runs a variety of software packages, including
Inferno(R) by Discrete Logic(R), which is capable of creating elaborate
digital multi-plane matte paintings and live action effect composites. The
Company also employs other Silicon Graphics(R) work stations to run
specialized software, including Alias(R), Soft Image(R) and Elastic Reality(R)
for 3D animation applications.
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Film Scanning and Recording. An integral part of the Effect Creation Process
is the digitizing of principal photography so that images can be created or
manipulated in a digital work station. The Company digitizes film on an
Oxberry(R) 6400 film scanner and transfers the digital information to a
central file server where it can be accessed by any of the Company's work
stations. Once the effect is completed and approved by the visual effects
supervisor, the Company downloads the digital information to a Celco(R)
Extreme Effects(R) digital film recorder, which records the digital
information on film. The completed conversion can then be assembled with the
film negative.
Color Correction, Negative Developing and Prints. Throughout the Effect
Creation Process the visual effects supervisor relies upon the film laboratory
to process and print the visual effects segments so that they can be viewed in
film resolution. In preparing the final cut it is often difficult to integrate
the effect seamlessly with the principal photography on a timely or cost
efficient basis. The Company's film laboratory offers a proprietary color
correction process designed to give the visual effects supervisor more control
over the integration of the digitally created images with the principal
photography. The Company believes that it has the only visual effects
operation that offers this film laboratory quality control feature.
CUSTOMERS
The Company's customer base includes the major studios, independent owners
of television and film libraries, programmers, producers of original
television programming and creators of visual effects. As of November 3, 1996,
the Company's customer base included approximately 1,800 customer accounts.
The Company is committed to building and retaining a loyal customer base by
providing a broad range of service offerings, state-of-the-art equipment and
technology, and superior customer service at competitive prices.
The Company's ten largest customers accounted for 57.4% of total revenues in
fiscal 1996. In addition, 29.5% of the Company's revenues were generated by
the six major domestic studios (Disney, MCA/Universal, Sony Pictures
Corporation, Viacom/Paramount, Warner Bros. and Twentieth Century Fox) in
fiscal 1996. MTV Asia accounted for 15% of the Company's revenues in fiscal
1996. No other customer accounted for 10% or more of the Company's revenues.
The increase in revenue concentration among the Company's top ten revenue
producing customers is the result of the substantial increase in revenues from
MTV Asia and the expansion of the Company's relationship with Sony Pictures
Corporation. The Company believes that the increase in the percentage of its
revenues generated by the major studios reflects the expansion of services
provided by each of the Company's operating divisions together with greater
customer acceptance of the Company's ability to provide complete outsourcing
solutions. Except for MTV Asia, TVN and a limited number of other customers,
none of the Company's customers has a long-term contractual relationship with
the Company whereby the customer is obligated to purchase any specified level
of services from the Company.
In the Company's television and visual effects divisions, customer
relationships also can be measured by the number and types of projects
completed by the Company during the production season. During the 1995-1996
television season, the Company provided one or more services to 67 episodic
television programs. In the 1996-1997 season, the Company expects to provide
one or more services to over 80 episodic television programs. The Company
believes that the increase in its television customer base is the result of an
increased volume of television production, the construction of a new
television facility in Burbank (which the Company expects to complete in the
third quarter of fiscal 1997) and significantly improved coordination between
the Burbank and Santa Monica television facilities. In fiscal 1995 and 1996,
the Company provided one or more visual effects services to eight and 13
feature film projects, respectively.
The Company's standard credit term for customers is "Net 30 Days," although,
in the Company's experience, the prevailing practice among major studios and
certain other customers is to pay outstanding accounts within approximately 60
to 90 days. The Company reviews a customer's credit history and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends, and other information. During fiscal
1996, the Company entered into a long term agreement for services with TVN
under which TVN agreed to repay $3.3 million in outstanding accounts
receivable for broadcast services over three years in monthly installments of
principal and interest at 8.0%.
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<PAGE>
TECHNOLOGY
The Company purchases hardware and software developed and manufactured by
others and integrates various systems and technologies in a proprietary manner
to accomplish the objectives of customers. The integration of hardware and
software often requires the development of new proprietary systems and
infrastructure by the Company. From time to time, the Company forms strategic
alliances with hardware and software manufacturers to jointly develop a
specific application. Examples of informal strategic alliances involving joint
development projects include: (i) BTS(R) and NVision(R) component digital
routing systems; (ii) Snell & Wilcox, Alchemist(R), phase correlation
standards conversion equipment; (iii) Rank Cintel URSA Gold(R) technology
deployment for television and feature mastering applications; (iv) Sony Corp.
LMS(R) automated robotic broadcast systems; and (v) Quantel, Inc.(R) Edit
Box(R) and Clip Box(R) file server and non-linear editing technology for
episodic television assembly.
The Company substantially has completed the deployment of new component
digital infrastructure in its television and studio services divisions. The
Company believes that this infrastructure is state-of-the-art and sets the
industry standard for performance, efficiency and reliability. The Company
intends to upgrade its broadcast services operation in Burbank to accommodate
new digital technologies and convert the remaining analog portions of the
Company's television business to component digital as it becomes technically
and operationally feasible. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION
Los Angeles is the center of domestic television and feature film production
and the exploitation of content libraries. It is also the largest and most
competitive market in the world in terms of total revenue potential in the
Company's studio, television and visual effects business segments. The
entertainment services industry in Los Angeles is highly fragmented, and no
single industry participant, including the Company, has a dominant market
share in any service offering. The Company believes that it is unique,
however, among industry competitors in terms of the breadth of its operating
divisions and the depth of service offerings within each business segment.
The Company experiences intense competition in each of its business
segments. Although the Company believes no one competitor offers a comparable
range of services, some of the Company's current and potential competitors,
particularly those who perform services in-house, have substantially greater
financial, technical, creative, marketing and other resources than the
Company. The Company's competitors may devote substantially greater resources
to the development and marketing of new competitive services. The Company
expects that competition will increase substantially as a result of industry
consolidations and alliances, as well as the emergence of new competitors. The
Company also actively competes with industry participants operating niche or
specialty businesses. In addition, certain of the Company's current and
prospective customers conduct in-house operations that the Company considers
competitive. For example, Warner Bros., a major customer, conducts extensive
in-house operations in several of the Company's business segments. The Company
believes that all of its services offerings are competitive with in-house
operations and other independent service providers.
The Company entered the international broadcast market with the completion
of its Singapore facility in 1995, and it will seek to provide services to
domestic and foreign programmers in regional television markets in Asia and
abroad. The Company competes with local service providers that may have
competitive advantages resulting from their experience in the region,
including in Singapore and elsewhere in Asia, who have well established
customer relationships and business operations.
EMPLOYEES
The Company employs creative, technical, engineering, administrative and
managerial staff in each operating division. In addition, the Company has
centralized certain financial and administrative functions, including
accounting, credit, billing, payroll and human resources. As of August 4,
1996, the Company had a total of 549 full time employees, of which 393 were
located in Burbank, 74 in Santa Monica and 82 in Singapore.
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The Company has entered into employment agreements with certain members of
its creative staff to secure their services. The Company believes that it
provides compensation and benefits that are competitive with the market for
persons with the skills required by the Company. The Company has experienced
no work stoppages since its formation in 1993, and considers its relations
with employees to be good.
PROPERTIES
The Company's principal executive offices, together with its facilities for
domestic broadcast, television and studio services, are located in four
buildings in the Burbank Media District. The Company leases these facilities,
which in the aggregate occupy approximately 86,000 square feet, under
agreements with terms expiring between January 1999 and October 1999, and
options to renew extending through October 2014. The Company's visual effects
division and a portion of its television division are located in Santa Monica
in a 29,000 square foot facility, which is leased under an agreement that
expires in October 1999 and may be renewed at the Company's option through
October 2004. The Company's film laboratory is located in an 18,000 square
foot facility in Burbank, and is owned by the Company. In December 1996, the
Company purchased a 90,000 square foot facility in Burbank in which the
Company occupies 45,000 square feet to house its archive. The film laboratory
services both the television and the studio services divisions. The Company
leases 20,000 square feet in Singapore to house its Singapore broadcast
facility. The lease expires in December 1996, and may be renewed at the
Company's option through December 2001. The Company believes that all of its
facilities substantially comply with applicable laws and regulations or is
taking action aimed at assuring compliance therewith. The Company does not
expect compliance with such laws and regulations to materially affect the
Company's capital expenditures or results of operations. The Company believes
that its facilities are adequate for its current needs and that additional
space will be available as needed for future expansion.
GOVERNMENT REGULATION
The Communications Act prohibits the operation of satellite earth station
facilities such as those operated by Catalina, except under licenses issued by
the FCC. Catalina holds three satellite earth station licenses and other
authorizations required for the operation of the Company's business. One of
the licenses is for a transportable earth station, which is granted for a
period of one year and has been routinely renewed. The FCC has adopted but not
yet implemented an order to extend the term for all such licenses to ten
years. Catalina also holds two licenses for fixed earth stations, granted for
a period of ten years, which expire in 2001 and 2004. While the FCC generally
renews licenses for satellite earth stations routinely, there can be no
assurance that the Company's licenses will be renewed at their expiration
dates, which could have a material adverse effect on the Company.
The Communications Act further prohibits the transfer of control of any
station license without prior approval of the FCC. The Company has filed an
application with the FCC for consent to the transfer of control of Catalina in
connection with this offering. The FCC granted that application by notice
released on December 18, 1996. That decision has become final.
Catalina also holds authorizations from the FCC to operate a microwave
station for the transmission of signals from a single point to the Company's
Burbank facilities, and to offer services to Canada and Mexico using both U.S.
and non-U.S. licensed satellites. Catalina also has filed applications
relating to those authorizations for transfer of control in connection with
this offering (the "Microwave Application" and the "Service Application,"
respectively). The Microwave Application is pending before the FCC. On January
31, 1997, the FCC granted special temporary authority for the Company to
transfer control of its microwave station. The FCC granted the Service
Application by decision released on January 9, 1997. The period for interested
parties to request reconsideration or for the FCC to review this decision on
its own motion has not yet expired. The Company expects that the grant of the
Service Application will become final and that approval of the Microwave
Application will be issued and become final in the normal course of FCC
administration, although there can be no assurance that these actions will
occur. The Company does not believe that failure to obtain FCC final approval
of the Service or Microwave Applications or delay in obtaining those approvals
would materially affect its business operations.
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<PAGE>
No FCC authorization is required for reception of transmission from domestic
satellites from points within the United States. The Company relies on third
party licenses or authorizations when it transmits domestic satellite traffic
through earth stations operated by such third parties. The FCC establishes
technical standards for satellite transmission equipment which change from
time to time, and also requires coordination of earth stations with land-based
microwave systems at certain frequencies to assure noninterference.
Transmission equipment must also be installed and operated in a manner that
avoids exposing humans to harmful levels of radio-frequency radiation. The
placement of earth stations or other antennae is typically subject to
regulation under local zoning ordinances.
LITIGATION
The Company is involved in two legal proceedings with the International
Alliance of Theatrical Stage Employees ("IATSE"), the union which formerly
represented approximately 100 employees of Compact. In the first case,
entitled ATS Acquisition Corp., Inc. v. National Labor Relations Board
("NLRB") Case No. 31-CA-20089, IATSE argued that the Company should have
bargained with it as a labor law "successor" following the sale of Compact's
assets to the Company in August 1993. The Company refused to bargain with
IATSE, contending that only a broad, company-wide bargaining unit was
appropriate. In a decision issued in July, 1996, the NLRB ordered the Company
to bargain with IATSE with regard to certain of the Compact bargaining unit
employees. The Company has continued to express its disagreement with this
bargaining unit. Since the NLRB's orders are not self-executing, the NLRB has
sought enforcement of its order in the United States Court of Appeals. The
Company will continue to assert that only company-wide bargaining is
appropriate following a secret ballot election conducted among its employees.
The Company will fulfill its legal obligations if bargaining is eventually
ordered by the courts. However, the National Labor Relations Act does not
require a party to compromise its position in collective bargaining. Moreover,
the NLRB has confirmed the Company's position that it lawfully implemented its
own wages, benefits and working conditions when it acquired the assets owned
by Compact in 1993 and denied the union's request for back pay. The NLRB's
bargaining order, therefore, provides for no backpay liability to the Company.
The second action, entitled IATSE, et. al. v. ATS Acquisition Corp., Inc.,
et. al., United States District Court Case No. CB 93-5574-JGD(x), was filed by
IATSE against the Company in United States District Court for the Central
District of California on September 14, 1993. This lawsuit essentially alleges
that the Company is an alter ego or "disguised continuance" of Compact and is
therefore bound by Compact's collective bargaining agreement with IATSE. In
1996, the court stayed further proceedings in the matter pending completion of
the NLRB proceedings referred to above. Accordingly, the Company has not been
forced to defend this lawsuit and believes that the resolution of Case No. 31-
CA-20089 will determine the final outcome of legal disputes with IATSE, and
that the Company will ultimately prevail in that matter.
In addition, the Company is subject from time to time to litigation arising
in the ordinary course of its business, and the Company believes that no such
litigation is pending (including the IATSE matters referred to above) that
would have a material adverse effect on the Company's results of operations or
financial condition.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and director nominees of the Company and
their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert T. Walston....... 38 Chairman of the Board and Chief Executive Officer
John H. Donlon.......... 52 President and Director
John H. Sabin........... 57 Vice President, Chief Financial Officer and Director
Gavin W. Schutz......... 43 Vice President, Chief Technology Officer and Director
Robert Bailey........... 39 Vice President, Director of Marketing and Director
James T. Conlon......... 48 Vice President and Director of International Operations
Shimon Topor(1)(2)...... 52 Director
Edward Kirtman(1)....... 44 Director
Paul Bricault(2)........ 33 Director nominee
Thomas Wertheimer....... 58 Director nominee
</TABLE>
- --------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Robert T. Walston is the founder of the Company and has served as Chairman
and Chief Executive Officer since August 1993. From 1991 until he founded the
Company, Mr. Walston served as a Vice President and Director of Steinhardt
Group, Inc. where he directed the firm's sourcing and financial analysis of
acquisitions of middle market companies. From 1988 to 1991, Mr. Walston was a
Vice President of Dean Witter Reynolds, Inc. where he worked on merger and
acquisition assignments and debt and equity offerings. Mr. Walston received a
BBA from Baylor University and an MBA from the University of Texas at Austin.
John H. Donlon has served as President and a Director of the Company since
August 1993. Prior to joining the Company, Mr. Donlon was President and Chief
Executive Officer of Compact Video Group, Inc., a provider of post-production
services to the television industry, from 1984 to 1993. From 1981 to 1984, Mr.
Donlon was employed by Technicolor, Inc. as President of Technicolor's
videocassette subsidiary and from 1977 to 1981 as Vice President and Director
of Technicolor's Laboratory Operations. Mr. Donlon received a BA degree from
the University of Florida.
John H. Sabin has served as Vice President, Chief Financial Officer and a
Director of the Company since August 1993. Prior to joining the Company he was
a Senior Vice President and Chief Financial Officer of Compact Video Group,
Inc. From 1988 to 1993 he was an Executive Vice President of Kenmare Capital
Corp., a private holding company involved in merchant banking activities. From
1978 to 1988, he was a Vice President and Chief Financial Officer of Robert
Bruce Industries, a publicly held multi-division apparel manufacturer and
wholesaler. Mr. Sabin received a BS degree in Industrial Administration from
Iowa State University.
Gavin W. Schutz has served as Vice President and Chief Technology Officer of
the Company since August 1993, and was elected a Director of the Company in
September 1996. Prior to joining the Company he was Director of Engineering of
Image Transform, Inc., a provider of feature mastering and standards
conversion services to the entertainment industry, from 1980 to 1993. Mr.
Schutz is responsible for the design of digital video standards converters,
time and smear correctors and video noise reduction using four field non-
recursive digital filtering algorithms. Mr. Schutz received a BS degree in
Electronic Engineering from the South Australia Institute of Technology.
Robert Bailey has served as Vice President and Director of Marketing of the
Company since August 1996, and was elected a Director of the Company in
September 1996. From 1993 to 1996 he served as Vice President
45
<PAGE>
and Director of Marketing for the Company's studio and television services
divisions. Prior to joining the Company he was a Vice President of Image
Transform, Inc., from 1985 to 1993. From 1977 to 1985, he was creator/producer
of "Hollywood Detective" for the A&E Channel, Producer/Director of "Eye on
L.A." for ABC and Producer of "Remmington Steele" for MTM Productions. Mr.
Bailey received a BA from the University of Southern California.
James T. Conlon has served as Vice President of the Company since August
1993, and Director of International Operations since 1994. From 1984 to 1993,
he was Director of Engineering, Director of Distribution Services and Manager
of Satellite Services at Compact Video Group, Inc. From 1975 to 1984, he held
various positions at Trans American Video and assisted the creative
development of Paramount's "Entertainment Tonight" and Merv Griffin
Productions' "Jeopardy". Mr. Conlon received a BS degree in Computer Science
from Pratt Institute and a MBA from the University of Southern California.
Shimon Topor has served as a Director of the Company since August 1993. He
has been a general partner in all of the private investment partnerships
controlled by Michael H. Steinhardt since 1985. Prior to joining the
Steinhardt organization, he managed the international operations of Bank
Hapoalim, served as Chairman and Chief Executive Officer of Israel Continental
Bank, and Senior Vice President of the Ampal Corporation. Mr. Topor received a
law degree from Hebrew University Law School.
Edward Kirtman has served as a Director of the Company since August 1993. He
has been a general partner in all of the private investment partnerships
controlled by Michael H. Steinhardt since 1995. From 1986 to 1994 he served as
the Chief Financial Officer of the Steinhardt organization's real estate
investment corporations and partnerships. Prior to joining the Steinhardt
organization, Mr. Kirtman was an Assistant Vice President of Heller Financial,
Inc. Mr. Kirtman received a BBA from Baruch College.
Paul Bricault will begin serving as a Director of the Company upon the
completion of the offering. Since 1994, he has served as an agent in corporate
consulting on emerging technologies for the William Morris Agency. From 1989
to 1994, he served as a Senior Media Analyst for Paul Kagan Associates, where
he was responsible for the firm's coverage of worldwide film, television and
new media markets. Mr. Bricault currently teaches a course in new technologies
and their impact on the motion picture industry for the graduate program of
the University of Southern California's School of Cinema-Television.
Mr. Bricault received a BA from the University of Western Ontario and an MA in
Communications Management from the Annenberg School of Communication at the
University of Southern California.
Thomas Wertheimer will begin serving as a Director of the Company upon the
completion of the offering. From 1964 to 1972, he worked for ABC where he
became Vice President of Business Affairs. From 1972 to 1976 he was Vice
President of Business Affairs of Universal Television. From 1976 to 1991, he
served as a Director of MCA, Inc. ("MCA") and was a Member of MCA's three
person Executive Committee from 1977 to 1991. From 1983 to 1996, he served as
Executive Vice President of MCA, and from 1991 to 1996 he took on the
additional positions of Chairman of both the Television and Home Entertainment
Groups. Since January 1996, Mr. Wertheimer has been consulting for MCA and
serving as Chairman of the Board of the KCRW Foundation, the UCLA Extension TV
and Film Advisory Board, and the Columbia Law School Board of Visitors. Mr.
Wertheimer received a BA from Princeton University and an LLB from Columbia
Law School.
The Company's executive officers are appointed by, and serve at the
discretion of, the Board of Directors. The Board of Directors is divided into
three classes. Class I, with terms expiring in 1999, is comprised of
Messrs. Walston, Topor and Kirtman. Class II, with the terms expiring in 1998,
is comprised of Messrs. Donlon, Sabin and Schutz. Class III, with terms
expiring in 1997, is comprised of Messrs. Bailey, Bricault and Wertheimer.
There are no family relationships among any of the executive officers or
directors of the Company.
DIRECTOR COMPENSATION
The Company's non-employee directors are not paid a fee for attending board
or committee meetings; however, all directors are reimbursed for reasonable
expenses incurred in attending such meetings. The Company's stock option plan
provides for automatic stock option grants to non-employee directors. See
"Management--Stock Plans" and "Certain Transactions."
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was formed to review and approve the
compensation and benefits for the Company's executive officers, administer the
Company's stock option and other benefit plans and make recommendations to the
Board of Directors regarding such matters. The Committee is currently composed
of Messrs. Topor and Kirtman. Prior to formation of the Compensation
Committee, the entire Board of Directors administered executive compensation
programs. No interlocking relationships exist between any member of the
Company's Compensation Committee and any member of any other company's board
of directors or compensation committee.
AUDIT COMMITTEE
The Company's Audit Committee recommends the selection of auditors for the
Company and review the results of the audits and other reports and services
provided by the Company's independent auditors. Upon the closing of this
offering, the Audit Committee will be composed of Messrs. Bricault and Topor.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of the
Company's directors for monetary damages to the maximum extent permitted under
the laws of the State of Delaware. Such limitation of liability has no effect
on the availability of equitable remedies, such as injunctive relief or
rescission.
The Company's Bylaws 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 maximum extent permitted
under the laws of the State of Delaware. The Company has entered into
indemnity agreements with each of its current directors and executive officers
that provide for indemnification of, and advancement of expenses to, such
persons to the maximum extent permitted under the laws of the State of
Delaware, including by reason of action or inaction occurring in the past and
circumstances in which indemnification and advancement of expenses are
discretionary under Delaware law.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Chief Executive
Officer and the other four most highly compensated executive officers whose
salary equals or exceeds $100,000 (collectively, the "Named Officers"), for
services rendered to the Company in all capacities during the fiscal year
ended August 4, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
COMPENSATION
---------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION
--------------------------- -------- ------- --------------- ------------
<S> <C> <C> <C> <C>
Robert T. Walston,
Chairman and Chief Executive Officer........................ $240,000 $ -- $3,508 $ --
John H. Donlon,
President................................................... 252,493 -- 4,449 --
John H. Sabin,
Vice President and Chief Financial Officer.................. 174,965 -- 3,617 --
Gavin W. Schutz,
Vice President and Chief Technology Officer................. 175,000 40,000 2,673 --
Robert Bailey,
Vice President and Director of Marketing.................... 125,000 40,000 -- --
</TABLE>
- --------------------
(1) Represents the Company's 401(k) contributions for these individuals for
the year ended December 31, 1995.
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<PAGE>
No Named Officer received a stock option grant during fiscal 1996. The
following table sets forth certain information concerning the number and value
of unexercised stock options held as of August 4, 1996 for each of the Named
Officers who hold stock options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT AT FISCAL YEAR END
SHARES FISCAL YEAR END ($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John H. Donlon.......... -- -- 89,209 88,852 $1,129,386 $1,124,866
John H. Sabin........... -- -- 72,990 72,698 924,053 920,357
Gavin W. Schutz......... -- -- 72,990 72,698 924,053 920,357
Robert Bailey........... -- -- 72,990 72,698 924,053 920,357
</TABLE>
- --------------------
(1) Based on the difference between the deemed fair market value of the
securities underlying the options at August 4, 1996 (which for purposes of
this table, is assumed to be $13.00 per share) and the exercise price.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, with Messrs. Walston,
Donlon, Sabin, Schutz and Bailey. Each of the employment agreements with
Messrs. Donlon, Sabin and Bailey is for a term extending through September
1999. The employment agreements with Messrs. Walston and Schutz each have a
term extending through the earlier of repayment of the term loan facility with
HKSB or April 2002, the maturity date of the term loan facility. Messrs.
Walston, Donlon, Sabin, Schutz and Bailey are entitled to receive annual
salaries of $260,000, $252,000, $175,000, $175,000 and $175,000, respectively.
In the event of termination without cause, Messrs. Walston, Donlon, Sabin,
Schutz and Bailey are entitled to receive the full amount of compensation
payable under the original terms of their respective employment agreements for
the remaining term of such agreements, and in the event of disability, the
full amount of compensation payable for the lesser of six months or the
remaining term of such agreements.
STOCK PLANS
1993 Stock Options. The Company granted stock options to four executive
officers of the Company on September 7, 1993. These options are exercisable
for 615,125 shares of Common Stock at $.34 per share, the fair market value on
the date of grant. These stock options vest over a six-year period at the rate
of 16.7% per year. As of November 3, 1996, none of these options have been
exercised.
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") provides
for the granting to employees (including officers and employee directors) of
incentive stock options and for the granting to employees (including officers
and employee directors) of nonstatutory stock options and stock purchase
rights ("SPRs"). A total of 1,650,000 shares of Common Stock has been reserved
for issuance under the 1997 Plan, which number will be increased on August 1
of each year, beginning in 1997, by a number of shares equal to five percent
of the Company's outstanding Common Stock as of such dates.
The 1997 Plan will be administered by the Board of Directors or a committee
designated by the Board (the "Administrator"). Options and SPRs granted under
the 1997 Plan are not generally transferable by the optionee except by will or
by the laws of descent and distribution, and are exercisable during the
lifetime of the optionee only by such optionee. Generally, options granted
under the 1997 Plan must be exercised within thirty days of the end of an
optionee's status as an employee of the Company, or within twelve months after
such optionee's termination by death or disability, but in no event later than
the expiration of the option term. The exercise price of all incentive and
nonstatutory stock options granted under the 1997 Plan will be determined by
the Administrator. With respect to any owner of 10% or more of the Company's
outstanding capital stock (a "10% Stockholder"), the exercise price of any
incentive stock option granted must equal at least 110% of the fair
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<PAGE>
market value on the grant date. The exercise price of incentive stock options
for all other employees must be no less than 100% of the fair market value per
share on the grant date. The maximum term of an option granted under the 1997
Plan may not exceed ten years from the date of grant (five years in the case
of an incentive stock option granted to a 10% Stockholder). In the case of
SPRs, unless the Administrator determines otherwise, the Company will have a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). Such repurchase option lapses at a rate determined by the
Administrator. The purchase price for shares repurchased by the Company will
be the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company.
1997 Director Option Plan. A total of 700,000 shares of Common Stock has
been reserved for issuance under the 1997 Director Option Plan (the "Director
Plan"). Non-employee directors will be entitled to participate in the Director
Plan.
The Director Plan provides for an automatic grant of an option to purchase
100,000 shares of Common Stock (the "Option") to each non-employee director
upon his becoming a non-employee director (other than an employee director who
ceases to be an employee but remains a director), except that the Director
Plan provides that existing non-employee directors and persons who become non-
employee directors prior to the day after the closing of this offering are
also granted an Option to purchase 100,000 shares of Common Stock. Options
will have a term of five years. One-quarter of the shares subject to an Option
will vest one year after its date of grant and an additional one quarter will
vest at the end of each year thereafter, provided that the optionee continues
to serve as a director on such dates. The exercise prices of the Option will
be 100% of the fair market value per share of the Company's Common Stock on
the date of the grant of the Option.
CERTAIN TRANSACTIONS
ACQUISITION OF COMPACT ASSETS BY SOLE STOCKHOLDER
4MC Burbank was incorporated in July 1993 as a wholly owned subsidiary of
TSP, a partnership formed for the purpose of acquiring certain net assets of
Compact Video Group, Inc., Compact Video Services, Inc., Image Transform, Inc.
and Meridian Studios, Inc. (collectively "Compact"). In August 1993, TSP was
capitalized by cash from private investment funds managed by Michael H.
Steinhardt and his affiliates and assets from Compact, providing for a total
capitalization at the time of formation of approximately $5.0 million. The
initial equity interest in TSP of the private investment funds managed by
Mr. Steinhardt was 80%. TSP contributed all of its cash and noncash assets to
4MC Burbank in exchange for all of the capital stock of 4MC Burbank. In
connection with this contribution, 4MC Burbank entered into a loan agreement
with Compact's primary lender with respect to approximately $10.6 million of
previously outstanding debt of Compact.
As a result of subsequent capital investments in TSP during fiscal 1994 and
1995, the equity interests of the private investment funds managed by
Mr. Steinhardt increased to 94.8%, 98.1% and 98.1% as of July 31, 1994, July
30, 1995 and August 4, 1996, respectively.
In connection with the acquisition of Compact in 1993, the Company's Chief
Executive Officer was granted a profit interest in TSP for identifying,
analyzing and consummating the acquisition. The profit interest is equal to
10% of the excess, if any, by which the distributions (in cash or in kind)
from TSP exceed the partners' total investment in TSP plus a return of 9% per
annum. No amounts have been earned or paid under this profit interest. Upon
completion of this offering, at an assumed initial public offering price of
$13.00, as a result of his profit interest in TSP, Mr. Walston will
beneficially own 23.5% of the Company's Common Stock (20.4% if the
Underwriters' over-allotment option is exercised in full).
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<PAGE>
LOANS FROM SOLE STOCKHOLDER
In August 1993, TSP agreed to provide 4MC Burbank with up to $10.0 million
pursuant to a subordinated note, which bears interest at 10% per annum and is
due in August 1998. In November 1994, TSP agreed to provide 4MC Burbank with
up to an additional $9.0 million on the same terms as the August 1993 note.
During fiscal 1994 and 1995, TSP advanced to 4MC Burbank $8.4 million and
$10.6 million, respectively, under these arrangements. In July 1995, TSP
contributed the $10.0 million principal amount of the August 1993 note to the
capital of 4MC Burbank. The remaining $9.0 million principal amount of, and
accrued interest on, the November 1994 note will be repaid using a portion of
the proceeds of this offering.
SERVICES PROVIDED TO STEINHARDT BAER PICTURES COMPANY
The Steinhardt Baer Pictures Company ("SBPC") is owned by Thomas Baer and S.
Pictures Company, Inc. (a corporation wholly owned by Michael H. Steinhardt).
SBPC holds limited partnership interests in a series of limited partnerships,
each of which owns the rights to a single motion picture (the "Movie LPs").
Mr. Baer was a director of 4MC Burbank from September 1993 until August 1996.
At various times during the period from 1993 to 1995, the Movie LPs engaged
4MC Burbank and/or its subsidiaries to provide services. The aggregate value
of services rendered by 4MC Burbank and its subsidiaries to the Movie LPs
totaled $188,000 in fiscal 1994, $2,000 in fiscal 1995 and $1,000 in fiscal
1996.
CONSULTING AGREEMENT WITH FORMER DIRECTOR
Donald Ross was a director of 4MC Burbank from March 1995 through August
1996. After the Company's acquisition of the DM&T assets, Mr. Ross, through a
wholly owned company, provided certain financial and administrative services
to 4MC Burbank and DMC on an independent contractor basis. During fiscal 1995
and 1996, 4MC Burbank paid Mr. Ross an aggregate of $147,000 and $205,000,
respectively. No amounts were paid to Mr. Ross in fiscal 1994. Mr. Ross is no
longer a director of, or independent contractor for, the Company.
INDEMNITY AGREEMENTS
The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director and executive officer of the
Company (the "Indemnitees"). The Indemnity Agreements provide that the Company
will indemnify each Indemnitee against payment of and liability for any and
all expenses actually and reasonably incurred by the Indemnitee in defending
or investigating a claim, by reason of the fact that the Indemnitee is or was
a director and/or officer of the Company or is or was serving at the request
of the Company as a director, officer, employee or agent of another
corporation, partnership, or other enterprise, provided it is determined that
the Indemnitee acted in good faith and reasonably believed his actions to be
in the best interests of the Company.
REORGANIZATION
On October 1, 1996, the Company sold 100,000 shares of Common Stock to TSP
in consideration for $1,000. On October 17, 1996, the Company completed a
reorganization pursuant to which it issued 5,900,000 shares of Common Stock to
TSP in exchange for 1,000 shares of 4MC Burbank common stock, representing
100% of the issued and outstanding shares of the corporation, and as a result
4MC Burbank became a wholly owned subsidiary of the Company. In connection
with the reorganization, 4MC Burbank's interests in its wholly owned
subsidiaries, DMC and 4MC Asia were transferred to the Company in the form of
a dividend distribution. The purpose of the reorganization was to facilitate
future financing transactions and acquisitions. On November 19, 1996, the
Company distributed a stock dividend of 475,000 shares of Common Stock to TSP.
IPO INSURANCE
The Company has agreed to purchase insurance to insure TSP against losses of
up to approximately $35 million relating to the offering. The Company will pay
$400,000 of the estimated $700,000 premium attributable to this insurance, and
TSP will pay the remaining $300,000.
The Company believes that the above transactions were, and any future
transactions between the Company and any affiliate thereof will be, on terms
no less favorable than those that generally are available from unaffiliated
third parties.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of February 4, 1997, and
as adjusted to reflect the sale of Common Stock offered hereby, by: (i) each
person who is known by the Company to own beneficially more than 5% of the
Common Stock; (ii) the Selling Stockholder; (iii) each of the Company's
directors and director nominees; (iv) each of the Named Officers; and (v) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED AFTER
PRIOR TO OFFERING(1) SHARES TO OFFERING(1)
--------------------------- BE SOLD -----------------------
NAME OF BENEFICIAL IN
OWNERS NUMBER PERCENT OFFERING NUMBER PERCENT
- ------------------ -------------- --------------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Technical Services
Partners, L.P.(2)........ 6,475,000 100.0 2,208,216 4,266,784 42.8
Robert T. Walston(3)...... -- -- -- 2,467,859 23.3
John H. Donlon(4)......... 89,209 1.4 -- 89,209 *
John H. Sabin(5).......... 72,990 1.1 -- 72,990 *
Gavin W. Schutz(6)........ 72,990 1.1 -- 72,990 *
Robert Bailey(7).......... 72,990 1.1 -- 72,990 *
Shimon Topor(2)(8)(10).... 6,475,000 100.0 -- 4,266,784 42.8
Edward Kirtman(2)(8)(10).. 6,475,000 100.0 -- 4,266,784 42.8
Paul Bricault(10)......... -- -- -- -- --
Thomas Wertheimer(10)..... -- -- -- -- --
All directors and
executive officers as a
group (8 persons)(9)(10). 6,783,179 100.0 -- 4,574,963 44.5
</TABLE>
- ------------------
* Less than 1% of outstanding shares.
(1) Assumes no exercise of the Underwriters' over-allotment option.
Applicable percentage of ownership is based on 6,475,000 shares of Common
Stock outstanding as of February 4, 1997. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common
Stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of February 4, 1997 at a price
less than or equal to the market price are deemed outstanding. Such
shares, however, are not deemed outstanding for the purposes of computing
the percentage ownership of any other person. Except as indicated in the
footnotes to this table and pursuant to applicable community property
laws, each stockholder named in the table has sole voting and investment
power with respect to the shares set forth opposite such stockholder's
name.
(2) Technical Services Partners, L.P. is a limited partnership the general
partner of which is Technical Services Holdings Inc. ("Holdings"), a
corporation, all of the voting capital stock of which is owned by
Steinhardt Partners, L.P. The non-voting capital stock of Holdings is
owned by Institutional Partners, L.P., S.P. International S.A.,
Steinhardt Overseas Fund, Ltd. The managing general partner of Steinhardt
Partners, L.P. is Michael Steinhardt. The principal business address of
Steinhardt Partners, L.P. and Messrs. Steinhardt, Topor and Kirtman is
605 Third Avenue, New York, New York 10158. Totals include shares
beneficially owned by Robert T. Walston reflecting his profit interest in
TSP.
(3) Mr. Walston's address is c/o Four Media Company, 2813 West Alameda
Avenue, Burbank, California 91505. As a result of his profit interest in
TSP, Mr. Walston will beneficially own 2,467,859 shares of the Company's
Common Stock (2,322,509 shares if the Underwriter's overallotment option
is exercised in full). See "Certain Transactions."
(4) Represents 89,209 shares issuable upon exercise of vested options.
(5) Represents 72,990 shares issuable upon exercise of vested options.
(6) Represents 72,990 shares issuable upon exercise of vested options.
(7) Represents 72,990 shares issuable upon exercise of vested options.
(8) These shares are owned by TSP. Messrs. Topor and Kirtman are executive
officers of the general partner of TSP, and general partners of
Steinhardt Partners, L.P., the owner of all the voting capital stock of
Holdings. Neither Mr. Topor nor Mr. Kirtman own any shares of Common
Stock directly, but may be considered the beneficial owner of the
securities listed above. However, Messrs. Topor and Kirtman disclaim
beneficial ownership of such shares.
(9) Includes 308,179 shares issuable upon exercise of vested options.
(10) Excludes 100,000 shares of Common Stock issuable upon exercise of stock
options to be granted upon effectiveness of the Registration Statement
pursuant to the Director Plan to each of Messrs. Topor, Kirtman, Bricault
and Wertheimer.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the closing of this offering, the authorized capital stock of the Company
will consist of 50,000,000 shares of Common Stock, $.01 par value and
5,000,000 shares of undesignated Preferred Stock, $.01 par value.
COMMON STOCK
As of February 4, 1997, there were 6,475,000 shares of Common Stock held of
record by the Company's sole stockholder. Holders of Common Stock are entitled
to one vote per share on all matters to be voted upon by the stockholders,
including the election of directors. As of February 4, 1997, options to
purchase an aggregate of 715,125 shares of Common Stock were also outstanding.
See "Management." 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 therefor. 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 any outstanding Preferred Stock. The Common Stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and non-assessable, and the shares of Common
Stock to be outstanding upon completion of this offering will be fully paid
and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions without any further vote or action by the
stockholders. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control. The Company has
no present plan to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation (the
"Certificate") and Bylaws summarized in the following paragraph may be deemed
to have anti-takeover effects and may delay, defer or prevent a tender offer,
proxy contest or takeover attempt that a stockholder might consider to be in
such stockholder's best interest, including those attempts that might result
in a premium over the market price for the shares held by such stockholder.
The Company's Certificate and Bylaws provide that: (i) the Board of
Directors shall be divided into three classes of directors, with the term of
each class being for a period of three years and expiring in a different year;
(ii) the number of directors shall be fixed by the Board of Directors, but
shall consist of no less than three nor more than 11 directors; (iii) a
majority of the Board of Directors then in office, although less than a
quorum, has the authority to fill any vacancies on the Board of Directors;
(iv) a stockholder give advance notice of a proposal or director nomination
that such stockholder desires to present at the annual meeting; (v) the Bylaws
of the Company may be amended only by the Board of Directors or by two-thirds
of the Company's voting stock; (vi) any action by the stockholders be taken
only at an annual or special meeting of stockholders and not by written
consent; and (vii) a special meeting of stockholders may be called only by the
Chairman of the Board of Directors or a majority of the directors then in
office, though less than a quorum.
REDEMPTION OF STOCK
Under the Company's Certificate, outstanding shares of stock of any class or
series may be redeemed, upon action by the Company's Board of Directors, to
the extent necessary to prevent the loss or secure the reinstatement of any
license from a governmental agency held by the Company or any of its
subsidiaries to conduct any portion of the
52
<PAGE>
business of the Company or such subsidiary, which license is conditioned upon
some or all of the holders of the Company's stock of any class or series
possessing prescribed qualifications. The redemption price of any stock is
payable in cash, property or rights, as described in the Company's Certificate
equal to the lesser of the fair market value (to be determined by the Board)
of the stock at the time of the redemption or the holder's purchase price of
the stock to be redeemed.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering. there has been no public market for the Company's
Common Stock. Sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock.
Upon completion of this offering, the Company will have an aggregate of
9,966,184 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, the 5,700,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless held by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act. The remaining 4,266,784 shares of Common Stock
are held by the Company's sole stockholder, TSP, and are "restricted"
securities within the meaning of Rule 144 under the Securities Act. Beginning
90 days after the date of this Prospectus, and absent consideration of the
contractual restrictions described below, all of these shares would be
eligible for sale by TSP in reliance upon Rule 144 promulgated under the
Securities Act. In addition, absent the restrictions described below, if TSP
were to effect a distribution of the shares of Common Stock it holds to its
constituent partners, up to 1,798,925 of these shares may become available for
immediate sale in the public market without restriction pursuant to Rule
144(k).
The Company's officers and directors and TSP have agreed not to offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or enter into any similar agreement that
transfers, in whole or in part, the economic risk of ownership of the Common
Stock, for a period of 270 days from the date of this Prospectus, in the case
of TSP, and three years from the date of this Prospectus, in the case of the
Company's officers and directors, without the prior written consent of Furman
Selz LLC. Furman Selz LLC may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. In addition, TSP has agreed that it will not effect a distribution
of the shares of Common Stock it holds to its constituent partners without
obtaining an agreement of the distributee to be bound by the terms of TSP's
lock-up agreement. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144 and 144(k), (i) no shares will be eligible for immediate sale on the
effective date of this offering and, unless earlier released from the lock-up
agreements, (ii) 1,798,925 shares of Common Stock will be eligible for sale
270 days after the effective date of this offering, and (iii) 2,467,859 shares
of Common Stock will be eligible for sale three years after the effective date
of this offering, subject to the volume limitations of Rule 144 in the case of
shares held by TSP or any of its distributees who are "affiliates" of the
Company.
Additionally, pursuant to Rules 144 and 701, beginning three years after the
effective date of this offering, upon the expiration of contractual lock-up
restrictions, an aggregate of approximately 1,015,125 shares will be eligible
for sale upon the exercise of outstanding vested stock options.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least two years but less than
three
53
<PAGE>
years, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
Common Stock (approximately 99,896 shares immediately after the offering) or
(ii) the average weekly trading volume during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or person whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding the sale and who has
beneficially owned his or her shares for at least three years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. In general, under Rule 701 under the Securities Act as
currently in effect, any employee, consultant or advisor of the Company who
purchases shares from the Company in connection with a compensatory stock or
option plan or other written agreement related to compensation is eligible to
resell such shares 90 days after the effective date of the offering in
reliance on Rule 144, but without compliance with certain restrictions
contained in Rule 144.
As of February 4, 1997, the Company had reserved an aggregate of 1,650,000
shares of Common Stock for issuance pursuant to the 1997 Plan, and options to
purchase approximately 100,000 shares were outstanding under the 1997 Plan. In
addition, 700,000 shares of Common Stock were reserved for issuance under the
Director Plan. 400,000 options are outstanding under the Director Plan. As
soon as practicable following the offering, the Company intends to file
registration statements under the Securities Act to register shares of Common
Stock reserved for issuance under the 1997 Plan and the Director Plan. Such
registration statements will automatically become effective immediately upon
filing, and any vested shares will thereupon be eligible for immediate public
sale.
54
<PAGE>
UNDERWRITING
Each of the Underwriters named below (the "Underwriters"), for which Furman
Selz LLC and PaineWebber Incorporated are acting as the representatives (the
"Representatives"), has severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company and the Selling
Stockholder, and the Company and the Selling Stockholder have agreed to sell
to each of the Underwriters, the number of shares of Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Furman Selz LLC...........................................
PaineWebber Incorporated..................................
---------
Total................................................. 5,700,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Common Stock listed above are subject to the
approval of certain legal matters by counsel and various other conditions. The
Underwriting Agreement also provides that the Underwriters are committed to
purchase all of such shares of Common Stock offered hereby, if any are
purchased (without consideration of any shares that may be purchased through
the Underwriters' over-allotment option).
The Representatives have advised the Company and the Selling Stockholder
that the Underwriters propose to offer the shares of Common Stock to the
public initially at the public offering price set forth on the cover of this
Prospectus and to certain dealers at such price less a concession of not in
excess of $ per share. The Underwriters may allow, and such selected
dealers may reallow, a concession not in excess of $ per share to certain
other dealers. After the initial public offering of the shares of Common
Stock, the public offering price and other selling terms may be changed by the
Representatives.
Prior to the offering made hereby, there has been no public market for the
Common Stock. Accordingly, the initial public offering price for the Common
Stock will be determined by negotiation among the Company, the Selling
Stockholder and the Representatives. Among the factors to be considered in
such negotiations are the Company's results of operations and current
financial condition, estimates of the business potential and prospects of the
Company, the experience of the Company's management, the economics of the
industry in general, the general condition of the equities market and other
relevant factors. There can be no assurance that any active trading market
will develop for the Common Stock or as to the price at which the Common Stock
may trade in the public market from time to time subsequent to the offering
made hereby.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 855,000
additional shares of Common Stock at the public offering price set forth on
the cover page of this Prospectus, less underwriting discounts and
commissions. To the extent that the Underwriters exercise this option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase such number of additional shares of Common Stock as is proportionate
to such Underwriter's initial commitment to purchase shares from the Company.
The Underwriters may exercise such option solely to cover over-allotments, if
any, incurred in the sale of the shares of Common Stock offered hereby.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, the Selling Stockholder and each officer and director of the
Company have agreed, subject to certain exceptions, not to offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or enter into any similar agreement that transfers, in whole or
in part, the
55
<PAGE>
economic risk of ownership of the Common Stock, for 180 days (in the case of
the Company), 270 days (in the case of the Selling Stockholder) and three
years (in the case of each officer and director) from the date of the
Underwriting Agreement, without the prior written consent of Furman Selz LLC.
The Representatives have informed the Company and the Selling Stockholder
that the Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "FOUR."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Troy & Gould Professional Corporation, Los Angeles,
California. Certain legal matters will be passed upon for the Underwriters by
Pillsbury Madison & Sutro LLP, Menlo Park, California.
EXPERTS
The consolidated balance sheets of 4MC-Burbank, Inc. as of July 30, 1995 and
August 4, 1996 and the consolidated statements of operations, stockholder's
equity, and cash flows for each of the three fiscal years in the period ended
August 4, 1996, and the balance sheet of Four Media Company at October 1,
1996, included in this prospectus have been included in reliance on the
reports of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., 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 schedule thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as part thereof. Statements contained in this Prospectus regarding the
contents of any contract or other document are not necessarily complete, and,
in each instance 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. A copy of the Registration
Statement, and the exhibits and schedule 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 Northwestern Atrium 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 Registration Statement
may be accessed electronically at the Commission's site on the World Wide Web
located at http://www.sec.gov.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent accountants and
quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
4MC-Burbank, Inc.
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets at July 30, 1995, August 4, 1996 and November
3, 1996 (unaudited)..................................................... F-3
Consolidated Statements of Operations for the fiscal years ended July 31,
1994, July 30, 1995, August 4, 1996 and the three months ended October
29, 1995 (unaudited) and November 3, 1996 (unaudited) .................. F-4
Consolidated Statements of Stockholder's Equity for the fiscal years
ended July 31, 1994, July 30, 1995, August 4, 1996 and three months
ended November 3, 1996 (unaudited)...................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended July 31,
1994, July 30, 1995, August 4, 1996 and the three months ended October
29, 1995 (unaudited) and November 3, 1996 (unaudited)................... F-6
Notes to Consolidated Financial Statements............................... F-7
Four Media Company
Report of Independent Accountants........................................ F-18
Balance Sheet at October 1, 1996......................................... F-19
Notes to Financial Statements............................................ F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
4MC-Burbank, Inc.
Burbank, California
We have audited the accompanying consolidated balance sheets of 4MC-Burbank,
Inc. (the "Company") as of July 30, 1995 and August 4, 1996, and the related
consolidated statements of operations, stockholder's equity, and cash flows
for each of the three fiscal years in the periods ended July 31, 1994, July
30, 1995 and August 4, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of 4MC-Burbank, Inc. as of July 30, 1995 and August 4, 1996, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the periods ended July 31, 1994, July 30, 1995 and
August 4, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Los Angeles, California
September 25, 1996
except for Note 12,
as to which the date is
November 18, 1996
F-2
<PAGE>
4MC-BURBANK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 30, AUGUST 4, NOVEMBER 3,
1995 1996 1996
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $ 6,651 $ 5,312 $ 5,490
Restricted cash................................ 717 709 709
Trade accounts receivable, net of allowance for
doubtful accounts of $563, $823 and $791 as of
July 30, 1995, August 4, 1996 and November 3,
1996, respectively............................ 9,745 8,622 13,744
Inventory...................................... 695 867 746
Prepaid expenses and other current assets...... 1,548 2,838 3,288
------- ------- -------
Total current assets......................... 19,356 18,348 23,977
Property, plant and equipment, net.............. 49,410 57,665 69,066
Deferred taxes.................................. 1,000 2,000 2,000
Long-term receivable............................ -- 2,008 1,756
Other assets.................................... 2,014 1,806 2,502
------- ------- -------
Total assets................................. $71,780 $81,827 $99,301
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt and
capital lease obligations..................... $ 3,470 $ 6,153 $ 6,360
Accounts payable............................... 5,010 5,803 9,004
Accrued and other liabilities.................. 5,211 4,750 5,064
------- ------- -------
Total current liabilities.................... 13,691 16,706 20,428
Long-term debt and capital lease obligations.... 29,472 33,978 47,610
Subordinated debt, due to stockholder........... 9,000 9,000 9,000
------- ------- -------
Total liabilities............................ 52,163 59,684 77,038
Commitments and contingencies (Note 7)
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares
authorized, issued and outstanding............ -- -- --
Additional paid-in capital..................... 15,010 15,010 15,010
Foreign currency translation adjustment........ 152 254 250
Retained earnings.............................. 4,455 6,879 7,003
------- ------- -------
Total stockholder's equity................... 19,617 22,143 22,263
------- ------- -------
Total liabilities and stockholder's equity... $71,780 $81,827 $99,301
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
4MC-BURBANK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
--------------------------- -----------------------
JULY 31, JULY 30, AUGUST 4, OCTOBER 29, NOVEMBER 3,
1994 1995 1996 1995 1996
-------- -------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Studio................... $15,746 $20,677 $23,468 $5,746 $5,957
Broadcast................ 10,876 16,163 20,901 5,489 5,512
Television............... 15,639 22,712 23,343 5,631 7,084
Visual effects........... -- 1,452 2,316 766 394
------- ------- ------- ------ ------
Total revenues.......... 42,261 61,004 70,028 17,632 18,947
------- ------- ------- ------ ------
Cost of services:
Personnel................ 17,096 22,795 25,344 6,527 6,779
Material................. 4,240 6,424 7,354 1,920 1,853
Facilities............... 3,774 3,917 4,692 1,124 1,328
Other.................... 3,752 5,560 6,021 1,504 1,745
------- ------- ------- ------ ------
Total cost of services.. 28,862 38,696 43,411 11,075 11,705
------- ------- ------- ------ ------
Gross profit........... 13,399 22,308 26,617 6,557 7,242
------- ------- ------- ------ ------
Operating expenses:
Sales, general and
administrative.......... 7,627 10,918 11,116 3,030 3,109
Depreciation and
amortization............ 3,284 6,241 10,165 2,497 2,795
------- ------- ------- ------ ------
Total operating
expenses............... 10,911 17,159 21,281 5,527 5,904
------- ------- ------- ------ ------
Income from
operations............ 2,488 5,149 5,336 1,030 1,338
Interest expense, net..... 1,253 2,917 3,906 921 1,214
------- ------- ------- ------ ------
Income before income
tax benefits.......... 1,235 2,232 1,430 109 124
Income tax benefits....... -- 988 994 204 --
------- ------- ------- ------ ------
Net income............. $ 1,235 $ 3,220 $ 2,424 $ 313 $ 124
======= ======= ======= ====== ======
Net income per share...... $ .19 $ .50 $ .37 $ .05 $ .02
======= ======= ======= ====== ======
Weighted average number of
common shares
outstanding.............. 6,475 6,475 6,475 6,475 6,475
======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
4MC-BURBANK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY TOTAL
------------- PAID-IN TRANSLATION RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS EQUITY
------ ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock..................... 1,000 $ -- $ 5,010 $ -- $ -- $ 5,010
Net income................................... 1,235 1,235
----- ----- ------- ----- ------ -------
Balance, July 31, 1994....................... 1,000 5,010 1,235 6,245
Stockholder subordinated debt conversion..... 10,000 10,000
Net income................................... 3,220 3,220
Foreign currency translation adjustments..... 152 152
----- ----- ------- ----- ------ -------
Balance, July 30, 1995....................... 1,000 15,010 152 4,455 19,617
Net income................................... 2,424 2,424
Foreign currency translation adjustments..... 102 102
----- ----- ------- ----- ------ -------
Balance, August 4, 1996...................... 1,000 -- 15,010 254 6,879 22,143
Foreign currency translation adjustments
(unaudited)................................. (4) (4)
Net income (unaudited)....................... 124 124
----- ----- ------- ----- ------ -------
Balance, November 3, 1996 (unaudited)........ 1,000 $ -- $15,010 $ 250 $7,003 $22,263
===== ===== ======= ===== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
4MC-BURBANK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED THREE MONTHS ENDED
----------------------------- -----------------------
JULY 31, JULY 30, AUGUST 4, OCTOBER 29, NOVEMBER 3,
1994 1995 1996 1995 1996
-------- -------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income................ $ 1,235 $ 3,220 $ 2,424 $ 313 $ 124
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization............ 3,284 6,241 10,165 2,536 2,795
Provision for doubtful
accounts................ 183 215 580 100 97
Deferred taxes........... -- (1,000) (1,000) (204) --
Changes in operating
assets and liabilities:
(Increase) decrease in
restricted cash........ -- (717) 8 13 --
Increase in trade and
long term receivables.. (668) (4,644) (1,469) (1,936) (4,967)
(Increase) decrease in
inventory.............. (39) (277) (172) 43 121
Increase in prepaid
expenses and other
current assets......... (694) (606) (1,289) (18) (889)
Increase in accounts
payable................ 1,862 3,148 792 1,053 3,201
Increase (decrease) in
accrued and other
liabilities............ (2,116) (992) (652) (315) 314
------- ------- -------- ------ -------
Net cash provided by
operating activities.. 3,047 4,588 9,387 1,585 796
Cash flows from investing
activities:
Purchases of property,
plant and equipment...... (7,877) (25,077) (10,318) (3,071) (8,753)
Organization costs for 4MC
Asia..................... -- (1,066) -- -- --
Acquisition of business... -- (4,759) -- -- --
------- ------- -------- ------ -------
Net cash used in
investing activities.. (7,877) (30,902) (10,318) (3,071) (8,753)
Cash flows from financing
activities:
Proceeds from subordinated
promissory note.......... 8,400 10,600 -- -- --
Proceeds from term loans.. -- 12,070 -- -- 16,000
Proceeds from revolving
credit facility.......... -- -- -- -- 1,580
Proceeds from term loan
financing of
acquisition.............. -- 3,542 -- -- --
Proceeds from equipment
notes.................... 1,261 3,723 3,685 1,143 3,383
Proceeds from issuance of
common stock in exchange
for note payable......... 4,000 -- -- -- --
Repayment of note
payable.................. (4,000) -- -- -- --
Repayment of equipment
notes and capital lease
obligations.............. (689) (1,833) (4,095) (811) (12,828)
------- ------- -------- ------ -------
Net cash provided by
(used in) financing
activities............ 8,972 28,102 (410) 332 8,135
Effect of exchange rate
changes on cash........... -- 172 2 (45) --
------- ------- -------- ------ -------
Net increase (decrease) in
cash...................... 4,142 1,960 (1,339) (1,199) 178
Cash at beginning of year.. 549 4,691 6,651 6,651 5,312
------- ------- -------- ------ -------
Cash at end of year........ $ 4,691 $ 6,651 $ 5,312 $5,452 $ 5,490
======= ======= ======== ====== =======
Supplemental disclosure of
cash flow information:
Cash paid during the
fiscal year for:
Interest................. $ 926 $ 3,664 $ 3,406 $ 704 $ 997
Income taxes............. -- -- -- -- --
Non cash investing and
financing activities:
Capital lease obligations
incurred................ $ 963 $ 2,284 $ 7,851 $1,761 $ 5,704
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION
4MC-Burbank, Inc. (the "Company") is a provider of technical and creative
services to owners, producers and distributors of television programming,
feature films and other entertainment content. The Company's services
integrate and apply a variety of systems and processes to enhance the creation
and distribution of entertainment content.
While the Company believes that it operates in one business segment, which
is providing services to the entertainment industry, the Company has organized
its activities into four divisions: studio, broadcast, television and visual
effects services. The studio services division located in Burbank, California,
manages, formats and distributes content worldwide. The broadcast services
division, located in Burbank, and the Republic of Singapore, assembles and
distributes television networks and programming via satellite to viewers in
the United States, Canada and Asia. The television services division, located
in Burbank and Santa Monica, California, assembles film or video principal
photography into a form suitable for network, syndicated, cable or foreign
television. The visual effects division, located in Santa Monica, digitally
creates and manipulates images in high-resolution formats for use in feature
films.
The Company was incorporated in July 1993 as a wholly owned subsidiary of
Technical Services Partners, L.P. ("TSP"), a limited partnership formed for
the purpose of acquiring certain defined net assets of Compact Video Group,
Inc., Compact Video Services, Inc., Image Transform, Inc. and Meridian
Studios, Inc. (collectively "Compact").
On August 4, 1993, TSP acquired and transferred to the Company,
substantially all of the assets of Compact. The acquisition was accounted for
under the purchase method of accounting. The purchase price of $5,010,000 was
allocated to the fair value of current assets of $5,127,000, property, plant,
and equipment of $16,939,000, the assumption of current liabilities (including
acquisition costs) of $6,506,000 and $10,550,000 in the form of a new term
loan with the Company's previous primary lender.
On October 26, 1994, 4MC Acquisition Corp., a wholly owned subsidiary of the
Company, acquired substantially all of the assets of Digital Magic and
Transfer Company ("DM&T") for a purchase price of $50,000 in cash. The
acquisition was accounted for under the purchase method of accounting. The
purchase price was allocated, at fair value, to current assets of $1,001,000,
property, plant, and equipment of $6,639,000, and included $4,048,000 in
assumed liabilities and acquisition costs, and $3,542,000 in equipment notes.
Subsequent to this acquisition, 4MC Acquisition Corp. changed its name to
Digital Magic Company ("DMC").
On February 13, 1995, Four Media Company Asia PTE Ltd. ("4MC Asia"), a
wholly owned subsidiary of the Company registered in the Republic of
Singapore, entered into an agreement with a customer to provide production,
post production and network origination services. The agreement has a seven
year term and provides for early termination by the customer after five years
by paying a fee, as defined in the agreement, not to exceed $3,500,000.
Results of operations include the 51 1/2 weeks ended July 31, 1994, the 52
weeks ended July 30, 1995, the 53 weeks ended August 4, 1996, the 13 weeks
ended October 29, 1995 and the 13 weeks ended November 3, 1996.
Interim Results (Unaudited). The accompanying consolidated balance sheet as
of November 3, 1996 and the consolidated statements of operations and cash
flows for the three months ended October 29, 1995 and November 3, 1996, and
the statement of stockholder's equity for the three months ended November 3,
1996 are unaudited. In the opinion of management, these statements have been
prepared on the same basis as the audited consolidated financial statements
and include all adjustments, consisting of only normal recurring adjustments,
necessary for the fair presentation of the results of the interim periods. The
data disclosed in these notes to the consolidated financial statements for
those interim periods are also unaudited.
F-7
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of 4MC-Burbank, Inc. and its wholly owned subsidiaries, DMC and
4MC Asia. All intercompany accounts and transactions have been eliminated.
Revenue Recognition. Revenues are recognized when a product is shipped or a
service is provided.
Foreign Currency Translation. All balance sheet accounts of 4MC Asia are
translated at the current exchange rate as of the end of the year. Statement
of operation items are translated at average currency exchange rates. The
resulting translation adjustment is recorded as a separate component of
stockholder's equity. The functional currency in which 4MC Asia transacts
business is the Singapore dollar. Transaction gains and losses included in
operations were not significant in fiscal 1995 or 1996.
Cash and Cash Equivalents. The Statement of Cash Flows classifies changes in
cash (short-term, highly liquid investments readily convertible into cash with
an original maturity of three months or less at the date of purchase)
according to operating, investing or financing activities. At times, cash
balances may be in excess of Federal Deposit Insurance Corporation insurance
limits.
Inventory. Inventories are stated at the lower of cost (first-in, first-out)
or market, and are comprised of raw materials and supplies.
Property, Plant and Equipment. Property, plant and equipment acquired from
Compact and DM&T were recorded at their acquisition cost which resulted in a
reduction of their historical carrying value in accordance with Accounting
Principles Board (APB) Opinion No. 16. Additions to property, plant and
equipment subsequent to the date of acquisition are recorded at cost.
Depreciation and Amortization. Depreciation of property, plant and equipment
is computed by use of the straight-line method based on the estimated useful
lives of 3 to 7 years of the respective assets, except for leasehold
improvements, which are amortized using the straight-line method over the life
of the improvement or the length of the lease, whichever is shorter.
Amortization of assets recorded under capital leases is based on the term of
the lease. Interest costs incurred during construction totaling $490,000 and
$142,000 were capitalized for the years ended July 30, 1995 and August 4,
1996, respectively, and are being amortized over the related assets estimated
useful lives. When properties are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts, and the
resulting gain or loss is credited or charged to operations. The policy of the
Company is to charge amounts expended for maintenance and repairs to current
year expense and to capitalize expenditures for major replacements and
betterments.
Other Assets. Other assets include costs incurred by 4MC Asia prior to the
commencement of operations and a lease interest associated with the
acquisition of the assets of DM&T. These assets are amortized on the straight-
line method over five to seven years. Other assets also include software
development costs. The Company capitalizes internal software development costs
when technological feasibility has been established. Capitalization ends when
the software is put into service. Amortization of software development costs
is computed by use of the straight-line method over three years.
Use of Estimates. The preparation of financial statements is in accordance
with generally accepted accounting principles and requires management to make
estimates and assumptions for the reporting period and as of the financial
statement date. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported amounts of revenues and expenses. Actual results could differ
from those estimates.
F-8
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Recently Issued Accounting Standards. In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No.
121 established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company is required to adopt the provisions of SFAS No.
121 for fiscal 1997, and the Company believes that upon its adoption there
should be no impact to the Company's financial position or results of
operations.
In November 1995, the FASB also issued SFAS No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes new accounting
standards for the measurement and recognition of stock-based awards prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees" however,
under this opinion, the Company will be required to disclose the pro forma
effect of stock-based awards on net income and earnings per share as if SFAS
No. 123 had been adopted. SFAS No. 123 is effective for fiscal 1997. The
Company intends to use the provisions of APB Opinion No. 25 in accounting for
stock-based awards. As such, this standard will have no impact on the
Company's results of operations upon adoption.
Fair Values of Financial Instruments. SFAS No. 107 "Disclosure About Fair
Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of fair
value information about most financial instruments both on and off the balance
sheet, if it is practicable to estimate. SFAS No. 107 excludes certain
financial instruments such as certain insurance contracts and all non-
financial instruments from its disclosure requirements. A financial instrument
is defined as a contractual obligation that ultimately ends with the delivery
of cash or an ownership interest in an entity. Disclosure regarding the fair
value of financial instruments are derived using external market sources,
estimates using present value or other valuation techniques. Cash, accounts
receivable, accounts payable, accrued and other liabilities and short-term
revolving credit agreements and variable rate long-term debt instruments
approximate their fair value.
Advertising. Advertising costs are expensed as incurred and included in
sales, general and administrative expenses. Advertising expenses amounted to
$288,000, $476,000 and $287,000 in the years ended July 31, 1994, July 30,
1995 and August 4, 1996, respectively and $114,000 (unaudited) and $32,000
(unaudited) for the three months ended October 29, 1995 and November 3, 1996,
respectively.
3. BUSINESS AND CREDIT CONCENTRATIONS
The Company grants credit to its customers, substantially all of whom are
participants in the entertainment industry. The Company reviews a customer's
credit history before extending credit. The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends, and other information. For the fiscal
year ended August 4, 1996 one customer accounted for 10% of the Company's
domestic sales and 12% of net accounts receivable. For the fiscal year ended
July 30, 1995, no single customer accounted for a significant amount of the
Company's domestic sales. For the fiscal year ended July 31, 1994, the
Company's two largest customers accounted for 16% and 10% of sales and 7% and
15% of net accounts receivable. For the three months ended November 3, 1996,
one customer accounted 15% of the Company's domestic sales and 11% of net
accounts receivable. During the fiscal year ended August 4, 1996, the Company
entered into a long term agreement for services with a customer and as a part
of the agreement the Company deferred payment in the amount of $3,300,000.
This amount is payable over three years in monthly installments of principal
and interest at 8%. There can be no assurance that this customer ultimately
will repay all outstanding amounts due to the Company.
F-9
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. BUSINESS AND CREDIT CONCENTRATIONS, CONTINUED
Approximately 30% and 57% of the Company's net income for the years ended
July 30, 1995 and August 4, 1996, respectively, related to 4MC Asia. For the
year ended August 4, 1996, 97% of 4MC Asia revenues and 15.3% of the Company's
consolidated total revenues were generated by one customer. This customer
accounted for 5% of the Company's consolidated net accounts receivable. For
the three months ended November 3, 1996 this customer accounted for 81% of 4MC
Asia revenues, 14% and 9% of Company's consolidated revenues and net accounts
receivable, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment (in thousands):
<TABLE>
<CAPTION>
JULY 30, AUGUST 4, NOVEMBER 3,
1995 1996 1996
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................... $ 925 $ 925 $ 925
Buildings and building improvements............ 4,511 4,689 4,918
Machinery and equipment........................ 46,801 62,399 63,374
------- ------- -------
52,237 68,013 69,217
Less, accumulated depreciation and
amortization.................................. 9,092 18,717 21,299
------- ------- -------
43,145 49,296 47,918
Construction in progress....................... 6,265 8,369 21,148
------- ------- -------
Property, plant and equipment, net........... $49,410 $57,665 $69,066
======= ======= =======
Included above is property and equipment under
capital leases of:
Machinery and equipment...................... 3,350 11,856 17,560
Less, accumulated amortization............... 542 1,756 2,365
------- ------- -------
Property and equipment under capital leases,
net......................................... $ 2,808 $10,100 $15,195
======= ======= =======
</TABLE>
During fiscal the years ended July 31, 1994, July 30, 1995 and August 4,
1996 and the three months ended October 29, 1996 and November 3, 1996, the
Company expensed maintenance, repairs and spare parts in amounts of
$1,389,000, $1,889,000, $1,795,000, $541,000 (unaudited) and $381,000
(unaudited), respectively.
During the year ended August 4, 1996, the Company settled its claim arising
from the January 17, 1994 earthquake for $4,093,000. Of this amount $2,333,000
was received as partial settlement during the year ended July 30, 1995 and the
remainder amounting to $1,760,000 was received in the 1996 fiscal year.
Insurance proceeds in excess of the net book value of destroyed assets and
repair costs of damaged assets were approximately $1,098,000. Of this amount
$198,000 and $900,000 was credited to sales, general and administrative
expense as a recovery under the business interruption coverage of expenses
incurred in 1995 and 1996, respectively.
5. INCOME TAXES
Deferred income taxes are determined in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established to reduce deferred tax assets to the
amount expected to be realized.
F-10
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES, CONTINUED
The income tax provision (benefit) consisted of the following (in
thousands):
<TABLE>
<CAPTION>
JULY 31, JULY 30, AUGUST 4,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal........................................ $ 380 $ -- $ 26
State.......................................... 115 12 11
Deferred
Federal........................................ (380) (768) (791)
State.......................................... (115) (232) (240)
----- ----- -----
Total........................................ $ -- $(988) $(994)
===== ===== =====
</TABLE>
The significant components of the deferred tax asset consisted of the
following (in thousands):
<TABLE>
<CAPTION>
JULY 31, JULY 30, AUGUST 4,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts.............. $ 209 $ 226 $ 339
Plant, property & equipment.................. 2,370 2,450 1,871
Intangible assets............................ 148 160 335
Accrued vacation............................. 158 161 168
Acquisition expenses......................... 311 78 43
Net operating loss carryforward.............. 1,068 1,116 1,894
Deferred lease............................... -- 180 (12)
Other........................................ 68 37 (191)
Valuation allowance.......................... (4,332) (3,408) (2,447)
------- ------- -------
Net deferred tax asset..................... $ -- $ 1,000 $ 2,000
======= ======= =======
</TABLE>
At July 31, 1994, July 30, 1995 and August 4, 1996, the Company had a net
deferred tax asset before valuation allowance of $4,332,000, $4,408,000 and
$4,447,000, respectively. The Company recorded a valuation allowance against
the entire deferred tax asset in 1994, as the Company was in its first year of
operations.
The Company has assessed its past earnings history and trends, budgeted
revenues and expiration dates of net operating loss carryforwards and has
determined that it is more likely than not that $2,000,000 of deferred tax
assets will be realized. The remaining valuation allowance of $2,447,000 is
maintained on deferred assets which the Company has not determined to be more
likely than not realizable at August 4, 1996. The Company will continue to
review this valuation allowance on a quarterly basis and make adjustments, as
appropriate.
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal tax at statutory rate............................... 34% 34% 34%
State income taxes, net of federal tax benefits............. -- 1 --
Permanent differences....................................... -- 1 1
Foreign income not subject to taxes......................... -- (10) (33)
Tax net operating loss carryforward......................... (31) (25) --
Reduction of valuation allowance............................ -- (45) (70)
Other....................................................... (3) -- (2)
--- --- ---
--% (44)% (70)%
=== === ===
</TABLE>
F-11
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES, CONTINUED
As of August 4, 1996, the Company has net operating loss carryforwards of
approximately $9,800,000 and $2,300,000 for Federal and California tax
purposes, respectively. The net operating loss carryforwards begin to expire
in 2009 and 1999 for Federal and California income tax purposes, respectively.
In 1995, the government of the Republic of Singapore granted 4MC Asia a
seven-year tax exemption as a "pioneer status" company. The tax exemption is
conditioned upon 4MC Asia meeting certain investment requirements. The Company
believes that it will meet these requirements, and will be able to realize the
full future benefit of the tax exemption. The resulting tax savings reflected
in net income amounted to $178,000 in fiscal 1995 and $378,000 in fiscal 1996.
Income taxes (unaudited) for the three months ended November 3, 1996 reflect
the recognition, for financial accounting purposes, of the use of net
operating loss carryforwards that fully offset the Company's tax provision for
the period. Income taxes (unaudited) for the three months ended October 29,
1995 reflect the recognition, for financial accounting purposes, of the use of
net operating loss carryforwards and an increase in net deferred tax assets.
6. LONG TERM DEBT
The following is a summary of long-term debt (in thousands):
<TABLE>
<CAPTION>
JULY 30, AUGUST 4, NOVEMBER 3,
1995 1996 1996
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CIT term loan.................................... -- -- $16,000
CIT revolving credit facility.................... -- -- 1,580
BABC term loan................................... $ 7,350 $ 6,615 --
BABC revolving credit facility................... 3,200 3,200 --
HKSB term loan................................... 12,070 11,817 11,817
Equipment notes.................................. 7,122 8,645 9,551
Capital lease obligations........................ 3,200 9,854 15,022
Subordinated promissory note..................... 9,000 9,000 9,000
------- ------- -------
41,942 49,131 62,970
Less, current maturities......................... 3,470 6,153 6,360
------- ------- -------
$38,472 $42,978 $56,610
======= ======= =======
</TABLE>
Aggregate loan and capital lease obligation maturities for the next five
fiscal years are as follows (in thousands):
<TABLE>
<CAPTION>
PRINCIPAL FUTURE LEASE
PAYMENTS PAYMENTS TOTAL
--------- ------------ -------
<S> <C> <C> <C>
Fiscal years ending in
1997............................................ $ 4,041 $2,112 $ 6,153
1998............................................ 14,082 2,288 16,370
1999............................................ 13,236 2,465 15,701
2000............................................ 3,480 1,778 5,258
2001............................................ 2,771 1,211 3,982
Thereafter...................................... 1,667 -- 1,667
------- ------ -------
Total......................................... $39,277 $9,854 $49,131
======= ====== =======
</TABLE>
On August 4, 1994, the Company entered into a loan agreement with Bank of
America Business Credit ("BABC") in conjunction with the purchase of the
assets of Compact. The bank provided a senior term and revolving loan which
are collateralized by substantially all the assets of the Company and its
subsidiaries. The term loan is due July 31, 1998, with monthly installments of
$61,250 commencing August 1995, at an interest
F-12
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG TERM DEBT, CONTINUED
rate of 8.5%. The revolving credit is due July 31, 1998 at an interest rate of
8.5% through July 31, 1995 and prime (8.25% as of August 4, 1996) plus 1.5%
thereafter. The loan agreement contains various covenants restricting the cash
payments to stockholder for management fees, dividends or repayment of the
subordinated note payable. The Company is also required to make mandatory
capital expenditures, maintain specified financial ratios and levels of net
worth.
On February 22, 1995, 4MC Asia entered into a loan agreement with The Hong
Kong and Shanghai Banking Corporation Limited ("HKSB"), providing a term loan
facility of SD$16,898,000 Singapore dollars (approximately $12,070,000 US
dollars at June 30, 1995). The loan is collateralized by substantially all of
4MC Asia's assets and is guaranteed by the Company. The loan is payable in 60
monthly installments commencing April 17, 1997 at a rate of 1.25% above the
HKSB prime rate (6.25% and 6.5% as of July 30, 1995 and August 4, 1996,
respectively). The loan agreement contains various restrictive covenants,
including the maintenance of $1,000,000 Singapore dollars (approximately
$717,000 U.S. dollars at July 30, 1995 and $709,000 as of August 4, 1996) in
cash deposits and certain debt-to-equity ratios.
The Company has entered into various capital lease and equipment notes
related to the purchase of equipment. These notes are due through 2001 and are
at interest rates of 8.0% to 11.9%.
On August 4, 1993, the Company entered into an agreement with TSP to provide
to the Company up to $10,000,000 in borrowings in the form of a subordinated
promissory note, at an interest rate of 10%, with no principal payment
required until August 1998. On September 6, 1993, TSP exchanged a $4,000,000
note payable by the Company for 800 shares of Common Stock. On November 17,
1994, the Company entered into an agreement for additional borrowings of up to
$9,000,000 under the same terms as the August 1993 subordinated promissory
note. Repayment of borrowings under the August 1993 and November 1994
subordinated notes is restricted under covenants contained in the BABC loan
agreement, various equipment notes and various capital lease obligations.
During the years ended July 31, 1994 and July 30, 1995, TSP advanced to the
Company $8,400,000 and $10,600,000, respectively, under the subordinated
promissory notes. On July 28, 1995, TSP contributed $10,000,000 in
subordinated promissory notes to the equity of the Company.
7. COMMITMENTS AND CONTINGENCIES
The Company and certain subsidiaries have employment agreements with certain
members of their creative staff to secure their services for up to two years
at amounts approximating their current levels of compensation. At August 4,
1996, the Company's remaining aggregate commitment under such contracts is
approximately $1,111,000.
F-13
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company leases its production and office facilities under noncancelable
operating leases with initial terms up to five years through 2000. These
leases contain renewal options, require additional payments for property
taxes, utilities, insurance and maintenance costs and are subject to periodic
escalation charges. Facilities rent expense amounted to $3,242,000,
$4,327,000, $4,392,000, $1,013,000 (unaudited) and $1,114,000 (unaudited) for
the fiscal years ended July 31, 1994, July 30, 1995 and August 4, 1996 and for
the three months ended October 29, 1995 and November 3, 1996, respectively. At
August 4, 1996 and November 3, 1996 the annual commitment under these
facilities leases is summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 4, NOVEMBER 3,
1996 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
Fiscal years ending in:
1997.................................................... $ 4,129 $ 3,877
1998.................................................... 3,951 3,962
1999.................................................... 3,787 3,142
2000.................................................... 356 --
------- -------
Total................................................. $12,223 $10,984
======= =======
</TABLE>
The Company leases certain office equipment under operating leases which
expire through 1999. Rent expense related to equipment amounted to $324,800,
$134,800, $190,200, $89,000 (unaudited) and $208,000 (unaudited) for the
fiscal years ended July 31, 1994, July 30, 1995 and August 4, 1996, and for
the three months ended October 29, 1995 and November 3, 1996, respectively. At
August 4, 1996 and November 3, 1996 the annual commitment under various leases
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 4, NOVEMBER 3,
1996 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
Fiscal years ending in:
1997.................................................... $ 434 $ 429
1998.................................................... 434 409
1999.................................................... 418 365
------ ------
Total................................................. $1,286 $1,203
====== ======
</TABLE>
The Company is involved in litigation matters arising in the normal course
of business. Management believes that the disposition of these lawsuits will
not materially affect the financial position or results of operations of the
Company.
8. EMPLOYEE BENEFIT PLANS
The Company's savings and investment plan covers substantially all of the
employees of the Company. The participants may contribute up to 15% of their
annual compensation (subject to the annual IRS limitation) to the plan and the
Company will match the participant's contribution up to a maximum of 2% of the
participant's compensation. The Company expensed $225,000, $208,000, $211,000,
$51,000 (unaudited) and $48,000 (unaudited) related to the plan for the years
ended July 31, 1994, July 30, 1995 and August 4, 1996 and for the three months
ended October 29, 1995 and November 3, 1996, respectively.
F-14
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTIES
As of July 30, 1995 and August 4, 1996, TSP was the holder of subordinated
promissory notes from the Company totaling $9,000,000. In addition, the
Company owed $450,000 of accrued interest to TSP as of August 4, 1996 and no
amounts were due as of July 30, 1995. During the years ended July 30, 1995 and
August 4, 1996, the Company paid $1,762,000 and $450,000, respectively, to TSP
in interest.
The Company provided services to a company controlled by a then member of
the Board of Directors in the amount of $188,008, $2,000 and $1,000 for the
years ended July 31, 1994, July 30, 1995 and August 4, 1996, respectively.
The Company paid consulting fees and expenses to a member of the Board of
Directors of the Company of $147,000 and $205,423 for the years ended July 30,
1995 and August 4, 1996, respectively. As of August 4, 1996, the director is
no longer affiliated with the Company.
The Company has entered into an agreement with an emerging company wherein
the Company would advance it up to $600,000. As of August 4, 1996 and November
3, 1996, the Company has advanced cash for operating purposes of approximately
$238,000 and $406,000 (unaudited), respectively. The Company has the option to
purchase a significant portion of the stock of the emerging company as of
January 1, 1997. Management has not determined at this time whether this
option will be exercised.
In connection with the acquisition of Compact in 1993, the Company's Chief
Executive Officer was granted a profit interest in TSP for identifying,
analyzing and consummating the acquisition. The profit interest is equal to
10% of the excess, if any, by which the distributions (in cash or in kind)
from TSP exceed the partners' total investment in TSP plus a return of 9% per
annum. No amounts have been earned or paid under this profit interest.
10. STOCK OPTIONS
The Company issued stock options to four key executives of the Company on
September 7, 1993. These options were for 95 shares of common stock at an
exercise price of $2,212 per share, the fair market value at the date of grant
as determined by the Company and approved by the Board of Directors. These
stock options vest over a six year period at 16.7% per year. As of August 4,
1996, options for 48 shares are exercisable, no options have been exercised or
canceled and no additional options have been granted.
F-15
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. BUSINESS SEGMENTS
Information about the Company's operations in different geographic areas for
the years ended July 31, 1994, July 30, 1995 and August 4, 1996 and the
quarter ended November 3, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
UNITED CONSOLIDATED
STATES ASIA CORPORATE TOTAL
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers:
Year ended July 31, 1994 $42,261 $ -- $ -- $42,261
Year ended July 30, 1995 56,999 4,005 -- 61,004
Year ended August 4, 1996 58,970 11,058 -- 70,028
- ------------------------------------------------------------------------------
Income from operations:
Year ended July 31, 1994 $ 7,601 $ -- $(5,113) $ 2,488
Year ended July 30, 1995 9,249 1,107 (5,207) 5,149
Year ended August 4, 1996 7,095 2,922 (4,681) 5,336
- ------------------------------------------------------------------------------
Identifiable assets:
Year ended July 31, 1994 $31,120 $ -- $1,862 $32,982
Year ended July 30, 1995 46,364 21,620 3,796 71,780
Year ended August 4, 1996 54,741 22,307 4,779 81,827
- ------------------------------------------------------------------------------
Capital expenditures:
Year ended July 31, 1994 $ 8,146 $ -- $ 694 $ 8,840
Year ended July 30, 1995 9,131 17,362 1,934 28,427
Year ended August 4, 1996 14,978 2,208 983 18,169
- ------------------------------------------------------------------------------
Depreciation expense and amortization:
Year ended July 31, 1994 $ 3,123 $ -- $ 161 $ 3,284
Year ended July 30, 1995 4,721 954 566 6,241
Year ended August 4, 1996 6,548 2,722 895 10,165
- ------------------------------------------------------------------------------
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
On October 17, 1996, the Company entered into a new credit agreement with
CIT Group/Business Credit, Inc. and CIT Group/Equipment Financing, Inc.
("CIT"). The agreement consists of a $34,000,000 credit facility including (i)
a $16,000,000 term loan, payable in 84 monthly principal payments commencing
November 1997 at an interest rate of LIBOR plus 2.75% or Prime plus .75%, at
the Company's option, (ii) a $11,000,000 revolving line of credit at an
interest rate of LIBOR plus 2.5% or Prime plus .50%, at the Company's option;
and (iii) a $7,000,000 capital expenditures line of credit payable in 60
monthly installments commencing three months after funding at an interest rate
of LIBOR plus 2.75% or Prime plus .75%, at the Company's option. These loans,
which are collateralized by substantially all the assets of 4MC-Burbank and
DMC, contains various covenants restricting the cash payment to the
stockholder for management fees, dividends or repayment of the subordinated
note payable. The Company is also required to maintain specified financial
ratios and levels of net worth for both the Company and specified
subsidiaries. As part of this financing, the Company repaid the $9,693,000
BABC loans and $1,919,000 of CIT equipment notes. The Company may, at its
option, elect a fixed rate for the term loan at the treasury rate (applicable
for the remaining term of the loan) plus 3.35%.
F-16
<PAGE>
4MC-BURBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENTS (UNAUDITED), CONTINUED
On September 25, 1996 the Company changed its name from Four Media Company
to "4MC-Burbank, Inc." On the same date, a holding company was incorporated in
the State of Delaware ("4MC Delaware"). On October 17, 1996, 4MC Delaware
completed a reorganization of the Company (the "Reorganization") which for
accounting purposes is accounted for as of September 29, 1996. Under the terms
of the Reorganization which is accounted for in a manner similar to a pooling
of interests, 4MC Delaware issued 5,900,000 shares on October 17, 1996 of its
common stock to TSP in exchange for 1,000 shares of 4MC-Burbank, Inc. common
stock, representing 100% of the issued and outstanding shares of the Company
and as a result, 4MC-Burbank became a wholly owned subsidiary of 4MC Delaware.
In conjunction with the Reorganization, the Company's interests in the wholly
owned subsidiaries, DMC and 4MC Asia were transferred to 4MC Delaware in the
form of a dividend distribution from the Company. The purpose of the
Reorganization was to facilitate future transactions and acquisitions.
Per share information based on the weighted average number of common shares
outstanding has been presented to reflect retroactively the Company's
reorganization and a related stock exchange with and stock dividend to its
sole stockholder in October and November 1996. Other stockholder's data
(stockholder's equity and stock options) presented in the financial statements
and notes have not been retroactively adjusted to present such reorganization.
For comparative financial presentation purposes the financial statements of
the consolidated group, as described above, for the three months ended
November 3, 1996 have been presented herein.
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Four Media Company
Burbank, California
We have audited the accompanying balance sheet of Four Media Company as of
October 1, 1996. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respect, the financial position of Four Media Company as of
October 1, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Los Angeles, California
October 1, 1996,
except for Note 2
as to which the date is
November 18, 1996
F-18
<PAGE>
FOUR MEDIA COMPANY
BALANCE SHEET
OCTOBER 1, 1996
<TABLE>
<S> <C>
ASSETS
Cash................................................................... $1,000
------
Total assets......................................................... $1,000
======
STOCKHOLDER'S EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued and outstanding................................................ $ --
Common stock, $.01 par value, 50,000,000 shares authorized, 100,000
shares issued and outstanding......................................... $1,000
------
Total stockholder's equity........................................... $1,000
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-19
<PAGE>
FOUR MEDIA COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Four Media Company (the "Company") was incorporated in the State of Delaware
on September 25, 1996. The authorized capital stock of the Company consists of
50,000,000 shares of common stock, par value of $.01 per share and 5,000,000
shares of preferred stock, par value of $.01 per share. As of October 1, 1996,
the Company issued and had outstanding 100,000 shares of Common Stock and no
preferred shares were issued or outstanding. Each holder of common stock shall
be entitled to one vote for each share held.
2. SUBSEQUENT EVENTS (UNAUDITED)
On October 17, 1996, the Company completed a reorganization (the
"Reorganization") which for accounting purposes is accounted for as of
September 29, 1996. Under the terms of the Reorganization which was accounted
for in a manner similar to a pooling of interests, the Company issued
5,900,000 shares of its common stock on October 17, 1996 to TSP in exchange
for 1,000 shares of 4MC-Burbank, Inc. common stock, representing 100% of the
issued and outstanding shares of the corporation and 4MC-Burbank became a
wholly owned subsidiary of the Company. In conjunction with the
Reorganization, 4MC-Burbank's interests in its wholly owned subsidiaries, DMC
and 4MC Asia were transferred to the Company in the form of a dividend
distribution. The purpose of the Reorganization was to facilitate future
financing transactions and acquisitions. On November 19, 1996, the Company
distributed a stock dividend to TSP of 475,000 shares of its common stock.
For comparative financial presentation purposes, the financial statements of
the consolidated group for the three months ended November 3, 1996 have been
presented with 4MC-Burbank included elsewhere herein.
The following stockholder's equity statement (unaudited) presents the
historical November 3, 1996 amounts as adjusted for the transactions described
above.
CONDENSED BALANCE SHEET (IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL REORGANIZATION AS ADJUSTED
NOVEMBER 3, 1996 ADJUSTMENTS NOVEMBER 3, 1996
---------------- -------------- ----------------
<S> <C> <C> <C>
Assets
Cash........................ $ 1 $ -- $ 1
Investment in wholly owned
subsidiary................. -- 22,263 22,263
--- ------- -------
Total assets.................. $ 1 $22,263 $22,264
=== ======= =======
Stockholder's equity
Preferred stock, $.01 per
value; 5,000,000 shares
authorized, no shares
issued and outstanding..... $-- $ -- $ --
Common stock, $.01 par
value; 50,000,000 shares
authorized, 6,475,000
shares issued and
outstanding................ 1 64 65
Additional paid-in capital.. -- 14,946 14,946
Foreign currency translation
adjustment................. -- 250 250
Retained earnings........... -- 7,003 7,003
--- ------- -------
Total stockholder's equity.... $ 1 $22,263 $22,264
=== ======= =======
</TABLE>
F-20
<PAGE>
The customers listed on the inside back cover of this Prospectus are a
random sampling of some of Four Media Company's customers. The placement of
the images on the inside back cover page and the identification of certain
illustrative clients are not intended to indicate the relative revenue
generated from the services provided to the clients named. Nine customers, MTV
Asia LDC, Sony Pictures Corporation, TVN Entertainment Corporation, Warner
Bros., Paramount Pictures, The Walt Disney Company, Twentieth Century Fox,
Universal Pictures and Hallmark Entertainment, Inc., accounted for 55% of the
Company's revenues in fiscal 1996. No other listed customer accounted for over
3% of the Company's fiscal 1996 revenues.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THIS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 13
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 14
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 29
Management............................................................... 45
Certain Transactions..................................................... 49
Principal and Selling Stockholders....................................... 51
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 56
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------------
UNTIL MARCH , 1997 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING 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 WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,700,000 SHARES
[LOGO OF FOUR MEDIA COMPANY]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FURMAN SELZ
PAINEWEBBER INCORPORATED
FEBRUARY , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of all expenses to be
incurred in connection with the issuance and distribution of the securities
that are the subject of this Registration Statement. All amounts shown, other
than the Securities and Exchange Commission registration fee and the NASD
filing fee, are estimates only.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 29,622
NASD filing fee............................................... 10,275
Nasdaq National Market listing fee............................ 40,000
Printing expenses............................................. 125,000
Transfer agent fees........................................... 5,000
Legal fees and expenses....................................... 675,000
Accounting fees and expenses.................................. 300,000
"Blue sky" fees and expenses.................................. 30,000
Miscellaneous expenses........................................ 185,103
IPO insurance premium......................................... 700,000*
----------
Total....................................................... $2,100,000
==========
</TABLE>
- --------------------
*TSP will pay $300,000 and the Company will pay $400,000 of the IPO insurance
premium.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and the Bylaws of the Company provide for
the indemnification of directors and officers to the fullest extent permitted
by the General Corporation Law of the State of Delaware (the "GCL").
Section 145 of the GCL authorizes indemnification when a person is made a
party to any proceeding by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation or was serving as a
director, officer, employee or agent of another enterprise, at the request of
the corporation, and if such person acted in good faith and in a manner
reasonably believed by him or her to be in, or not opposed to, the best
interests of the corporation. With respect to any criminal proceeding, such
person must have had no reasonable cause to believe that his or her conduct
was unlawful. If it is determined that the conduct of such person meets these
standards, he or she may be indemnified for expenses incurred and amounts paid
in such proceeding if actually and reasonably incurred by him or her in
connection therewith.
If such a proceeding is brought by or on behalf of the corporation (i.e., a
derivative suit), such person may be indemnified against expenses actually and
reasonably incurred if he or she acted in good faith and in a manner
reasonably believed by him or her to be in, or not opposed to, the best
interests of the corporation. There can be no indemnification with respect to
any matter as to which such person is adjudged to be liable to the
corporation; however, a court may, even in such case, allow such
indemnification to such person for such expenses as the court deems proper.
Where such person is successful in any such proceeding, he or she is entitled
to be indemnified against expenses actually and reasonably incurred by him or
her. In all other cases, indemnification is made by the corporation upon
determination by it that indemnification of such person is proper because such
person has met the applicable standard of conduct.
The Underwriting Agreement, the form of which is included as Exhibit 1.1 to
this Registration Statement, provides that the Company shall indemnify the
Underwriters under certain circumstances and the Underwriters shall indemnify
the officers and directors of the Company under certain circumstances.
II-1
<PAGE>
The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director and executive officer of the
Company (the "Indemnitees"). The Indemnity Agreements provide that the Company
will indemnify each Indemnitee against payment of and liability for any and
all expenses actually and reasonably incurred by the Indemnitee in defending
or investigating a claim, by reason of the fact that the Indemnitee is or was
a director and/or officer of the Company or is or was serving at the request
of the Company as a director, officer, employee or agent of another
corporation, partnership, or other enterprise, provided it is determined that
the Indemnitee acted in good faith and reasonably believed his actions to be
in the best interests of the Company.
The Company has agreed to purchase officers' and directors' insurance
covering liability for acts by such persons in their capacity as a director
and/or officer of the Company. Such insurance policy is expected to cost
approximately $600,000 and will cover a period of three years.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On October 1, 1996, the Company sold 100,000 shares of Common Stock to
Technical Services Partners, L.P., a Delaware limited partnership ("TSP"), in
consideration for $1,000, and on October 17, 1996, the Company issued
5,900,000 shares of Common Stock to TSP in exchange for 1,000 shares of common
stock of 4MC Burbank. On November 19, 1996 the Company distributed a stock
dividend to TSP of 475,000 shares of its Common Stock. The general partner of
TSP is Technical Services Holdings Inc. ("Holdings"), a corporation of which
all of the voting capital stock is owned by Steinhardt Partners, L.P. The non-
voting capital stock of Holdings is owned by Institutional Partners, L.P.,
S.P. International S.A., Steinhardt Overseas Fund, Ltd, Compact Video Group,
Inc., Image Transform Inc., Compact Video Services, Inc. and Meridian Studios,
Inc. The managing general partner of Steinhardt Partners, L.P. is Michael
Steinhardt. The shares issued on October 1, October 17, and November 19, 1996
were issued pursuant to exemptions available under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
The following table represents stock options granted within the past three
years:
<TABLE>
<CAPTION>
AMOUNT OF
DATE ISSUED SECURITYHOLDER TITLE OF SECURITIES SECURITIES CONSIDERATION
----------- ----------------- ------------------- ---------- ------------------------
<C> <C> <C> <C> <S>
November 19, 1996 Officer Options to purchase 100,000 Exercise price is $11.70
Common Stock per share
February 5, 1997 Directors Options to purchase 200,000 Exercise price is the
Common Stock initial public offering
price per share in this
offering
February 5, 1997 Director Nominees Options to purchase 200,000 Exercise price is the
Common Stock initial public offering
price per share in this
offering
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) The following exhibits, which are furnished with this Registration
Statement or incorporated herein by reference, are filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement. (filed herewith)
3.1 Certificate of Incorporation of the Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate. (filed herewith)
5.1 Opinion of Troy & Gould Professional Corporation. (filed herewith)
10.1 Four Media Company 1997 Stock Plan and Stock Option Agreement.(2)
10.2 Four Media Company 1997 Director Option Plan and Director Stock Plan
Stock Option Agreement, as amended. (filed herewith)
10.3 Form of Indemnity Agreement between the Company and each of its
officers and directors.(1)
10.4 Agreement dated as of February 13, 1995 between MTV Asia LDC and Four
Media Company Asia PTE. Ltd.+(2)
10.5 Guaranty by Viacom International Inc. of MTV Asia's obligations to
Four Media Company Asia PTE Ltd. dated February 13, 1995.(1)
10.6 Guaranty by Four Media Company of obligations of Four Media Company
Asia PTE Ltd. to MTV Asia dated February 13, 1995.(1)
10.7 January 18, 1996 Amendment Letter re Agreement dated as of February
13, 1995 between MTV Asia LDC and Four Media Company Asia PTE.
Ltd.+(1)
10.8 Uplink-Playback Service Deal Memorandum between TVN Entertainment
Corporation and Compact Video Services, Inc. dated November 20, 1989,
as amended.+(1)
10.9 Letter Agreement between Four Media Company and TVN Entertainment
Corporation dated March 18, 1996.+(1)
10.10 Agreement for Term Loan Facilities between The Hong Kong and Shanghai
Banking Corporation Limited and Four Media Company Asia PTE. Ltd.
dated February 22, 1995.(1)
10.10A Letter Agreement dated October 31, 1996 and Supplemental Loan
Agreement dated February 1997, amending the Agreement for Term Loan
Facilities between The Hong Kong and Shanghai Banking Corporation
Limited and Four Media Company Asia PTE. Ltd. dated February 22,
1995. (filed herewith)
10.11 Deed of Subordination between Four Media Company, Four Media Company
Asia PTE LTD and The Hong Kong and Shanghai Banking Corporation
Limited dated February 22, 1995.(1)
10.12 Deed of Debenture between Four Media Company Asia PTE LTD. and The
Hong Kong and Shanghai Banking Corporation Limited dated February 22,
1995.(1)
10.13 Deed of Assignment between Four Media Company Asia PTE LTD and The
Hong Kong and Shanghai Banking Corporation Limited dated February 22,
1995.(1)
10.14 Guarantee by Four Media Company of Four Media Company Asia PTE Ltd.
liabilities to The Hong Kong and Shanghai Banking Corporation Limited
dated February 16, 1995.(1)
10.15 Satellite Services Agreement re Transponder 7 between Global Access
Telecommunications Services, Inc. and Four Media Company dated April
12, 1996.(1)
10.16 Satellite Services Agreement re Transponder 5 between Global Access
Telecommunications Services, Inc. and Four Media Company dated April
12, 1996.(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.17 Global Access Telecommunications Services, Inc. Standard Terms and
Conditions.(1)
10.18 August 28, 1996 Letter Amendment to the Satellite Services Agreement
re Transponder 5 dated April 12, 1996 and to the Satellite Services
Agreement re Transponder 7 dated April 12, 1996.(1)
10.19 Financing agreement between The CIT Group/Business Credit, Inc., The
CIT Group/Equipment Financing, Inc., 4MC-Burbank, Inc. and Digital
Magic Company dated October 17, 1996.(2)
10.20 Lease between Singapore Telecommunications Limited and Four Media
Company Asia PTE Ltd. commencing December 15, 1994.(1)
10.21 Office Building Lease between Ford Motor Credit Company and Four Media
Company dated August 1, 1994.(1)
10.22 Employment Agreement between the Company and Robert T. Walston dated
October 1, 1996, as amended. (filed herewith)
10.23 Employment Agreement between the Company and John H. Donlon dated as
of October 1, 1996.(2)
10.24 Employment Agreement between the Company and John H. Sabin dated as of
October 1, 1996.(2)
10.25 Employment Agreement between the Company and Gavin W. Schutz dated as
of October 1, 1996, as amended. (filed herewith)
10.26 Employment Agreement between the Company and Robert Bailey dated as of
October 1, 1996.(2)
10.27 Purchase and Sale Agreement and Escrow Instructions between C.P.
Private Partners, L.P.I. and Four Media Company dated July 29,
1996.(1)
10.28 August 1, 1996 Amendment Letter re Agreement dated as of February 13,
1995 between MTV Asia and Four Media Company Asia PTE Ltd.+(2)
10.29 Term Loan Agreement between Tokai Bank of California and Four Media
Company dated
December 5, 1996. (filed herewith)
21.0 List of Subsidiaries.(1)
23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith)
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit
5.1).
(filed herewith)
24.1 Power of Attorney (contained in Part II).(1)
27.1 Financial Data Schedule.(1)
</TABLE>
- --------------------
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality.
(1) Previously filed with the Company's Registration Statement filed October
8, 1996 (File No. 333-13721).
(2) Previously filed with Amendment No. 1 to the Company's Registration
Statement filed December 27, 1996.
(b) Schedules are omitted since the required information is not present in
amounts sufficient to require submission of schedules or because the
information required is included in Registrant's Consolidated Financial
Statements and Notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under 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
II-4
<PAGE>
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the 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 Securities Act and will be governed
by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) 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 Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Burbank, State of California, on February 4, 1997.
Four Media Company
/s/ Robert T. Walston
By: _________________________________
ROBERT T. WALSTON CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert T. Walston Chairman of the February 4, 1997
- ------------------------------------- Board and Chief
ROBERT T. WALSTON Executive Officer
(Principal
Executive Officer)
* President and February 4, 1997
- ------------------------------------- Director
JOHN H. DONLON
/s/ John H. Sabin Vice President, February 4, 1997
- ------------------------------------- Chief Financial
JOHN H. SABIN Officer (Principal
Financial and
Accounting Officer)
and Director
* Vice President, February 4, 1997
- ------------------------------------- Chief Technology
GAVIN W. SCHUTZ Officer and
Director
* Vice President, February 4, 1997
- ------------------------------------- Director of
ROBERT BAILEY Marketing and
Director
* Director February 4, 1997
- -------------------------------------
SHIMON TOPOR
* Director February 4, 1997
- -------------------------------------
EDWARD KIRTMAN
/s/ Robert T. Walston
*By: ________________________________
ROBERT T. WALSTON,
AS ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT INDEX
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement. (filed herewith)
3.1 Certificate of Incorporation of the Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate. (filed herewith)
5.1 Opinion of Troy & Gould Professional Corporation. (filed herewith)
10.1 Four Media Company 1997 Stock Plan and Stock Option Agreement.(2)
10.2 Four Media Company 1997 Director Option Plan and Director Stock Plan
Stock Option Agreement, as amended. (filed herewith)
10.3 Form of Indemnity Agreement between the Company and each of its
officers and directors.(1)
10.4 Agreement dated as of February 13, 1995 between MTV Asia LDC and Four
Media Company Asia PTE. Ltd.+(2)
10.5 Guaranty by Viacom International Inc. of MTV Asia's obligations to
Four Media Company Asia PTE Ltd. dated February 13, 1995.(1)
10.6 Guaranty by Four Media Company of obligations of Four Media Company
Asia PTE Ltd. to MTV Asia dated February 13, 1995.(1)
10.7 January 18, 1996 Amendment Letter re Agreement dated as of February
13, 1995 between MTV Asia LDC and Four Media Company Asia PTE.
Ltd.+(1)
10.8 Uplink-Playback Service Deal Memorandum between TVN Entertainment
Corporation and Compact Video Services, Inc. dated November 20, 1989,
as amended.+(1)
10.9 Letter Agreement between Four Media Company and TVN Entertainment
Corporation dated March 18, 1996.+(1)
10.10 Agreement for Term Loan Facilities between The Hong Kong and Shanghai
Banking Corporation Limited and Four Media Company Asia PTE. Ltd.
dated February 22, 1995.(1)
10.10A Letter Agreement dated October 31, 1996 and Supplemental Loan
Agreement dated February 1997, amending the Agreement for Term Loan
Facilities between The Hong Kong and Shanghai Banking Corporation
Limited and Four Media Company Asia PTE. Ltd. dated February 22,
1995. (filed herewith)
10.11 Deed of Subordination between Four Media Company, Four Media Company
Asia PTE LTD and The Hong Kong and Shanghai Banking Corporation
Limited dated February 22, 1995.(1)
10.12 Deed of Debenture between Four Media Company Asia PTE LTD. and The
Hong Kong and Shanghai Banking Corporation Limited dated February 22,
1995.(1)
10.13 Deed of Assignment between Four Media Company Asia PTE LTD and The
Hong Kong and Shanghai Banking Corporation Limited dated February 22,
1995.(1)
10.14 Guarantee by Four Media Company of Four Media Company Asia PTE Ltd.
liabilities to The Hong Kong and Shanghai Banking Corporation Limited
dated February 16, 1995.(1)
10.15 Satellite Services Agreement re Transponder 7 between Global Access
Telecommunications Services, Inc. and Four Media Company dated April
12, 1996.(1)
10.16 Satellite Services Agreement re Transponder 5 between Global Access
Telecommunications Services, Inc. and Four Media Company dated April
12, 1996.(1)
10.17 Global Access Telecommunications Services, Inc. Standard Terms and
Conditions.(1)
10.18 August 28, 1996 Letter Amendment to the Satellite Services Agreement
re Transponder 5 dated April 12, 1996 and to the Satellite Services
Agreement re Transponder 7 dated April 12, 1996.(1)
10.19 Financing agreement between The CIT Group/Business Credit, Inc., The
CIT Group/Equipment Financing, Inc., 4MC-Burbank, Inc. and Digital
Magic Company dated October 17, 1996.(2)
10.20 Lease between Singapore Telecommunications Limited and Four Media
Company Asia PTE Ltd. commencing December 15, 1994.(1)
10.21 Office Building Lease between Ford Motor Credit Company and Four Media
Company dated August 1, 1994.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT INDEX
------- -------------
<C> <S>
10.22 Employment Agreement between the Company and Robert T. Walston dated
October 1, 1996, as amended. (filed herewith)
10.23 Employment Agreement between the Company and John H. Donlon dated as
of October 1, 1996.(2)
10.24 Employment Agreement between the Company and John H. Sabin dated as of
October 1, 1996.(2)
10.25 Employment Agreement between the Company and Gavin W. Schutz dated as
of October 1, 1996, as amended. (filed herewith)
10.26 Employment Agreement between the Company and Robert Bailey dated as of
October 1, 1996.(2)
10.27 Purchase and Sale Agreement and Escrow Instructions between C.P.
Private Partners, L.P.I. and Four Media Company dated July 29,
1996.(1)
10.28 August 1, 1996 Amendment Letter re Agreement dated as of February 13,
1995 between MTV Asia and Four Media Company Asia PTE Ltd.+(2)
10.29 Term Loan Agreement between Tokai Bank of California and Four Media
Company dated
December 5, 1996. (filed herewith)
21.0 List of Subsidiaries.(1)
23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith)
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit
5.1).
(filed herewith)
24.1 Power of Attorney (contained in Part II).(1)
27.1 Financial Data Schedule.(1)
</TABLE>
- --------------------
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality.
(1) Previously filed with the Company's Registration Statement filed October 8,
1996 (File No. 333-13721).
(2) Previously filed with Amendment No. 1 to the Company's Registration
Statement filed December 27, 1996.
<PAGE>
EXHIBIT 1.1
5,700,000 SHARES
FOUR MEDIA COMPANY
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
UNDERWRITING AGREEMENT
----------------------
FEBRUARY 5, 1997
FURMAN SELZ LLC
PAINEWEBBER INCORPORATED
As Representatives of the
several Underwriters
c/o Furman Selz LLC
230 Park Avenue
New York, New York 10169
Dear Sirs:
1. INTRODUCTION. Four Media Company, a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule I hereto (the "Underwriters"), for which Furman Selz LLC and
PaineWebber Incorporated are acting as the representatives (the
"Representatives"), an aggregate of 3,491,784 shares of the Company's Common
Stock, par value $.01 per share (the "Common Stock"). Technical Services
Partners, L.P., a Delaware limited partnership (the "Selling Stockholder")
proposes to sell to the several Underwriters an aggregate of 2,208,216
outstanding shares of Common Stock. The 3,491,784 shares of Common Stock to be
sold by the Company and the 2,208,216 shares of Common Stock to be sold by the
Selling Stockholder are referred to herein as the "Firm Shares." The Company
also proposes to issue and sell to the several Underwriters an aggregate of not
more than 855,000 additional shares of Common Stock (the "Additional Shares"),
if requested by the Underwriters in accordance with Section 9 hereof.
<PAGE>
The Firm Shares and the Additional Shares collectively are referred to herein as
the "Shares." The words "you" and "your" refer to the Representatives of the
Underwriters.
The Company and the Selling Stockholder hereby severally agree with the
several Underwriters as follows:
2. REPRESENTATIONS AND WARRANTIES.
(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. 333-13721)
under the Securities Act of 1933, as amended (the "Act"), with respect to
the Shares, including a form of prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Act and
the rules and regulations of the Securities and Exchange Commission (the
"Commission") thereunder (the "Rules and Regulations"). Such registration
statement has been filed with the Commission under the Act, and one or more
amendments to such registration statement also may have been so filed.
After the execution of this Underwriting Agreement (this "Agreement"), the
Company shall 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 (1) if the Company relies on Rule 434
under the Act, a Term Sheet (as hereinafter defined) relating to the
Shares, that shall identify the Preliminary Prospectus (as hereinafter
defined) that it supplements and containing such information as is required
by Rules 434 and 430A under the Act or permitted by Rule 424(b) under the
Act or (2) 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 filed with the Commission (or, if no such amendment
shall have been filed, in such registration statement), with such
insertions and changes 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)(1) or (A)(2) of this sentence as shall have been provided to and
approved by the Representatives prior to the filing thereof, 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 filing thereof. As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended at the time when
it was or is declared effective, including all financial schedules and
exhibits thereto; the Registration Statement shall be deemed to include any
information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion contained in such
registration statement or any amendment thereto (including the prospectus
-2-
<PAGE>
subject to completion, if any, included in the Registration Statement or
any amendment thereto or filed pursuant to Rule 424(a) under the Act at the
time it was or is declared effective); and the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Shares 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 (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 to the "date" of
a Prospectus that contains a Term Sheet shall mean the date of such Term
Sheet. To the extent the Company relies on Rule 462(b) under the Act ("Rule
462(b)") to increase the maximum aggregate offering price, the Company
shall have made in a timely manner any filing required under Rule 462(b)
and such filing shall be in compliance with such Rule.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus and has not instituted or
threatened to institute any proceedings with respect to such an order.
When any Preliminary Prospectus delivered to you for dissemination in
connection with the offering 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 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 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 and when any
amendment or supplement thereto is filed with the Commission pursuant to
Rule 424(b) (or, if the Prospectus or such amendment or supplement is not
required to be so filed, when the Registration Statement and when any
amendment thereto containing such amendment or supplement to the Prospectus
was or is declared effective) and at all times subsequent thereto up to and
including the Closing Date (as defined in Section 3 hereof) and the Option
Closing Date (as defined in Section 9 hereof), the Prospectus, as amended
or supplemented at any such time, including any amendment or supplement
effected by a Term Sheet (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 and (B) did not or will not
-3-
<PAGE>
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) shall 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, information furnished in
writing to the Company by or on behalf of the Underwriters through the
Representatives expressly for use therein.
(iii) The Company and each of its subsidiaries (the
"Subsidiaries") (A) is a duly organized and validly existing corporation in
good standing under the laws of its jurisdiction of incorporation, with
full power and authority (corporate and other) to own or lease its
properties and to 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 (B) is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction in which it owns or leases property or in which the conduct of
its business requires such qualification (except for those jurisdictions in
which the failure so to qualify would not have a Material Adverse Effect
(as hereinafter defined)). "Material Adverse Effect" means, when used in
connection with the Company or its Subsidiaries, any development, change or
effect that is materially adverse to the business, properties, assets, net
worth, condition (financial or other), results of operations or prospects
of the Company and its Subsidiaries taken as a whole.
(iv) The Company has the duly authorized and validly outstanding
capitalization set forth under the caption "Capitalization" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and will have the adjusted capitalization set forth
therein on the Closing Date and the Option Closing Date, based on the
assumptions set forth therein. As of the Closing Date, the securities of
the Company will conform to the descriptions thereof contained in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The outstanding shares of Common Stock have been
duly authorized and validly issued by the Company and are fully paid and
nonassessable. Except as created hereby or referred to in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding options, warrants, rights or other
arrangements requiring the Company or any Subsidiary at any time to issue
any capital stock. 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 Shares and neither the filing of the Registration
Statement nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to, the registration of any securities of the
Company. The Shares have been duly authorized; on the Closing Date or the
Option Closing Date (as the case may
-4-
<PAGE>
be), after payment therefor in accordance with the terms of this Agreement,
(A) the Firm Shares and the Additional Shares to be sold by the Company
hereunder will be validly issued, fully paid and nonassessable, and (B)
good and marketable title to the Shares will pass to the Underwriters on
the Closing Date or the Option Closing Date (as the case may be) free and
clear of any lien, encumbrance, security interest, claim or other
restriction whatsoever. Except as disclosed in the Prospectus, the
outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued, are fully paid and nonassessable and are
owned directly by the Company, free and clear of any lien, encumbrance,
security interest, claim or other restriction whatsoever. The Company has
received, subject to official notice of issuance, approval to have the
Shares listed on the Nasdaq National Market (the "NNM") and the Company
knows of no reason or set of facts which is likely to adversely affect such
approval.
(v) The consolidated financial statements and the related notes
and schedules thereto included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present in all material respects the
consolidated financial condition, results of operations, stockholders'
equity and cash flows of the Company and its Subsidiaries at the respective
dates and for the respective periods specified therein. Such financial
statements and the related notes and schedules thereto have been prepared
in accordance with generally accepted accounting principles consistently
applied throughout the periods involved (except as otherwise noted therein)
and such financial statements as are audited have been examined by Coopers
& Lybrand L.L.P., who are independent public accountants within the meaning
of the Act and the Rules and Regulations, as indicated in their reports
filed therewith. The selected financial information and statistical data
set forth under the captions "Prospectus Summary--Summary Financial
Information," "Capitalization," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Business" 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 and have been properly derived from the
financial statements and other operating records of the Company and its
Subsidiaries.
(vi) The Company and each of its Subsidiaries have filed (giving
effect to permitted extensions) all necessary foreign, federal, state and
local income, franchise and other material tax returns and have paid all
taxes shown as due thereunder (other than those being contested in good
faith and by appropriate proceeding or for which adequate reserves have
been established and reflected in the Company's financial statements), and
the Company has no knowledge of any tax deficiency which might be assessed
against the Company which, if so assessed, may have a Material Adverse
Effect.
-5-
<PAGE>
(vii) The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; neither the Company nor any Subsidiary has been
refused any insurance coverage sought or applied for; and neither the
Company nor any Subsidiary has any 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 have a Material
Adverse Effect, except as described in or contemplated by the Prospectus.
(viii) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
there is no pending action, suit, proceeding or investigation or, to the
knowledge of the Company, threatened action, suit, proceeding or
investigation before or by any court, regulatory body or administrative
agency or any other governmental agency or body, domestic or foreign, which
(A) questions the validity of the capital stock of the Company or this
Agreement or of any action taken or to be taken by the Company pursuant to
or in connection with this Agreement, (B) is required to be disclosed in
the Registration Statement which is not so disclosed (and such proceedings,
if any, as are summarized in the Registration Statement are accurately
summarized in all respects), or (C) may have a Material Adverse Effect.
(ix) The Company has full legal right, power and authority to
enter into this Agreement and to consummate the transactions provided for
herein. This Agreement has been duly authorized, executed and delivered by
the Company and, assuming it is a binding agreement of yours, constitutes a
legal, valid and binding agreement of the Company enforceable against the
Company in accordance with its terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting the enforcement
of creditors' rights and the application of equitable principles relating
to the availability of remedies and except as rights to indemnity or
contribution may be limited by federal or state securities laws and the
public policy underlying such laws), and none of the Company's execution or
delivery of this Agreement, its performance hereunder, its consummation of
the transactions contemplated herein, its application of the net proceeds
of the offering in the manner set forth under the caption "Use of Proceeds"
or the conduct of its business as described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
conflicts or will conflict with or results or will result in any breach or
violation of any of the terms or provisions of, or constitutes or will
constitute a default under, causes or will cause (or permits or will
permit) the maturation or acceleration of any liability or obligation or
the termination of any right under, or result in the creation or imposition
of any lien, charge, or encumbrance upon, any property or assets of the
Company or any of its Subsidiaries pursuant to the
-6-
<PAGE>
terms of (A) the charter or by-laws of the Company or any of its
Subsidiaries, as will have been amended, as of the Closing Date, (B) any
indenture, mortgage, deed of trust, voting trust agreement, stockholders'
agreement, note agreement or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which any of them are
or may be bound or to which any of their respective properties is or may be
subject and is material to the Company and its Subsidiaries taken as a
whole, or (C) any statute, judgment, decree, order, rule or regulation
applicable to the Company or any of its Subsidiaries of any government,
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign, having jurisdiction over
the Company, any of its Subsidiaries or any of their respective activities
or properties.
(x) All executed agreements or copies of executed agreements
filed as exhibits to the Registration Statement to which the Company or any
of its Subsidiaries is a party or by which any of them are or may be bound
or to which any of their assets, properties or businesses is or may be
subject have been duly and validly authorized, executed and delivered by
the Company or such Subsidiary, as the case may be, and constitute the
legal, valid and binding agreements of the Company or such Subsidiary, as
the case may be, enforceable against each of them in accordance with their
respective terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
relating to enforcement of creditors' rights generally, and general
equitable principles relating to the availability of remedies, and except
as rights to indemnity or contribution may be limited by federal or state
securities laws and the public policy underlying such laws). The
descriptions in the Registration Statement of contracts and other documents
are accurate in all material respects and fairly present the information
required to be shown with respect thereto by the Act and the Rules and
Regulations, and there are no contracts or other documents which are
required by the Act or the Rules and Regulations to be described in the
Registration Statement or filed as exhibits to the Registration Statement
which are not described or filed as required, and the exhibits which have
been filed are complete and correct copies of the documents of which they
purport to be copies.
(xi) Subsequent to the most recent respective dates as of which
information is given in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and except as expressly
described therein, neither the Company nor any of its Subsidiaries has
incurred, other than in the ordinary course of its business, any material
liabilities or obligations, direct or con tingent, purchased any of its
outstanding capital stock, paid or declared any dividends or other
distributions on its capital stock or entered into any material
transactions not in the ordinary course of business, and there has been no
material change in capital stock or debt or any material adverse change in
the business, properties, assets, net worth, condition (financial or
other), results of operations or prospects of the
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<PAGE>
Company and its Subsidiaries taken as a whole. Neither the Company nor any
of its Subsidiaries (or the manner in which it or any of them conducts its
business) is in breach or violation of, or in default under, any term or
provision of (A) its charter or by-laws, as will have been amended as of
the Closing Date, (B) any indenture, mortgage, deed of trust, voting trust
agreement, stockholders' agreement, note agreement or other agreement or
instrument to which it is a party or by which it is or may be bound or to
which any of its property is or may be subject, or any indebtedness, the
effect of which breach or default singly or in the aggregate may have a
Material Adverse Effect, or (C) any statute, judgment, decree, order, rule
or regulation applicable to the Company or any of its Subsidiaries or of
any arbitrator, court, regulatory body, administrative agency or any other
governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its Subsidiaries or any of their respective
activities or properties and the effect of which breach or default singly
or in the aggregate may have a Material Adverse Effect.
(xii) Except as set forth in the Prospectus, no labor disturbance
by, or labor dispute with, the employees of the Company or any of its
Subsidiaries exists or, to the Company's best knowledge, is threatened,
which may have a Material Adverse Effect.
(xiii) Since its inception, the Company has not incurred any
material liability arising under or as a result of the application of the
provisions of the Act.
(xiv) The Company and each of its Subsidiaries owns, or is
licensed or otherwise has sufficient right to use, the proprietary
knowledge, inventions, patents, trademarks, service marks, trade names,
logo marks and copyrights used in or necessary for the conduct of its
business (collectively "Rights") as described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
No claims have been asserted against the Company or any of its Subsidiaries
by any person with respect to the use of any such Rights or challenging or
questioning the validity or effectiveness of any such Rights. The use, in
connection with the business and operations of the Company of such Rights
does not, to the Company's best knowledge, infringe on the rights of any
person except where such infringement would not have a Material Adverse
Effect.
(xv) No consent, approval, authorization or order of or filing
with any court, regulatory body, administrative agency or any other
governmental agency or body, domestic or foreign, is required for the
performance of this Agreement or the consummation of the transactions
contemplated hereby, except such as have been or may be obtained under the
Act or may be required under state securities or Blue Sky laws in
connection with the Underwriters' purchase and distribution of the Shares
or such approval as may be required from the NNM or such
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<PAGE>
filings as may be required to effect certain amendments to the Company's
charter that are described in the Prospectus or such filings as are
otherwise described in the Prospectus, all of which will be obtained or
made prior to the Closing Date.
(xvi) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities under the
Registration Statement (other than those that have been disclosed in the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), that have not been waived with respect to the
Registration Statement.
(xvii) Neither the Company nor any of its officers, directors or
affiliates (within the meaning of the Rules and Regulations) has taken,
directly or indirectly, any action designed to stabilize or manipulate the
price of any security of the Company, or which has constituted or which
might in the future reasonably be expected to, cause or result in,
stabilization or manipulation of the price of any security of the Company,
to facilitate the sale or resale of the Shares or otherwise.
(xviii) The Company and each of its Subsidiaries has good and
marketable title to, or valid and enforceable leasehold interests in, all
properties and assets owned or leased by it, free and clear of all liens,
encumbrances, security interests, claims, restrictions, equities, claims
and defects, except (A) such as are described in the Registration Statement
and Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), or such as do not materially adversely affect the
value of any of such properties or assets taken as a whole and do not
materially interfere with the use made and proposed to be made of any of
such properties or assets, (B) liens for taxes not yet due and payable as
to which appropriate reserves have been established and reflected in the
financial statements included in the Registration Statement, and (C) except
for liens securing various capital leases and equipment notes related to
the purchase of such equipment. The Company and each of its Subsidiaries
owns or leases all such properties as are necessary to its operations as
now conducted, and as proposed to be conducted as set forth in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); and the properties and
business of the Company and its Subsidiaries conform in all material
respects to the descriptions thereof contained in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus). All the material leases and
subleases of the Company and its Subsidiaries are in full force and effect,
and neither the Company nor any Subsidiary is in default in respect of any
of the material terms or provisions of any such material leases or
subleases, and neither the Company nor any Subsidiary has notice of any
claim which has been asserted by
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<PAGE>
anyone adverse to the Company's or any of its Subsidiary's rights as lessee
or sublessee under either the material lease or sublease, or affecting or
questioning the Company's or any Subsidiary's right to the continued
possession of the leased or subleased premises under any such material
lease or sublease, which may have a Material Adverse Effect.
(xix) The Company and each of its Subsidiaries are (a) in
compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety,
the environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), or is taking action aimed at assuring
compliance therewith (b) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (c) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a Material Adverse Effect.
(xx) The costs and liabilities, if any, associated with the
effect of Environmental Laws on the business, operations and properties of
the Company and its Subsidiaries (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties) would not, singly or in the aggregate, have a
Material Adverse Effect.
(xxi) Neither the Company nor any Subsidiary has violated any
federal or state law relating to discrimination in the hiring, promotion or
pay of employees, nor any applicable federal or state wages and hours law,
nor any provisions of the Employee Retirement Income Security Act of 1974,
as amended, or the rules and regulations promulgated thereunder, the
consequences of which violation may have a Material Adverse Effect.
(xxii) The Company and each of its Subsidiaries holds all
franchises, licenses, permits, approvals, certificates and other
authorizations from federal, state and other governmental or regulatory
authorities necessary to the ownership, leasing and operation of its
properties or required for the present conduct of its business, and such
franchises, licenses, permits, approvals, certificates and other
governmental authorizations are in full force and effect and the Company
and its Subsidiaries are in compliance therewith in all material respects
except where the failure so to obtain, maintain or comply with would not
have a Material Adverse Effect.
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<PAGE>
(xxiii) No Subsidiary of the Company currently is prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such Subsidiary's capital stock, from
repaying to the Company any loans or advances to such Subsidiary from the
Company, except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
P1rospectus).
(xxiv) The books, records and accounts and systems of internal
accounting controls of the Company currently comply with the requirements
of Section 13(b)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(b) The Selling Stockholder represents and warrants to, and agrees with,
the several Underwriters that:
(i) The Selling Stockholder has full legal right, power and
authority to enter into this Agreement and the Letter of Transmittal and
Custody Agreement entered into with U.S. Stock Transfer Corporation
relating to the transactions contemplated hereby (the "Custody Agreement").
This Agreement and the Custody Agreement have been duly authorized,
executed and delivered by the Selling Stockholder, and (assuming this
Agreement is a binding agreement of yours) constitutes the valid and
binding agreement of the Selling Stockholder, enforceable against the
Selling Stockholder in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to
or affecting the enforcement of creditor's rights and the application of
equitable principles relating to the availability of remedies, and except
as rights to indemnity or contribution may be limited by federal or state
securities law or the public policy underlying such laws).
(ii) None of the execution, delivery or performance of this
Agreement and the Custody Agreement and the consummation of the
transactions herein contemplated, will conflict with or result in a breach
of, or default under, any indenture, mortgage, deed of trust, voting trust
agreement, stockholders' agreement, note agreement, or other agreement or
instrument to which the Selling Stockholder is a party or by which the
Selling Stockholder is or may be bound or to which any of its property is
or may be subject, or any statute, judgment, decree, order, rule or
regulation applicable to the Selling Stockholder of any government,
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign, having jurisdiction over
the Selling Stockholder or any of its activities or properties.
(iii) At the date hereof the Selling Stockholder has, and at the
time of delivery of the Shares to be sold by the Selling Stockholder to the
several
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Underwriters, the Selling Stockholder will have, full right, power and
authority to sell, assign, transfer and deliver the Shares to be sold by
the Selling Stockholder hereunder. At the date hereof the Selling
Stockholder is, and at the time of delivery of the Shares to be sold by the
Selling Stockholder, the Selling Stockholder will be, the lawful owner of
and has and will have, good and marketable title to such Shares free and
clear of any liens, encumbrances, security interests, claims, community
property rights, restrictions on transfer or other defects in title (other
than pursuant to this Agreement and such restrictions as may be imposed by
the securities laws). Upon delivery of and payment for the Shares to be
sold by the Selling Stockholder hereunder and assuming that each of the
Underwriters which has severally purchased such Shares acquires such Shares
in good faith without notice of any adverse claim (as such term is used in
Section 8-302 of the Uniform Commercial Code as in effect in the State of
New York), good and marketable title to such Shares will pass to the
Underwriters, free and clear of any liens, encumbrances, security
interests, claims, community property rights, restrictions on transfer or
other defects in title (other than those created by any Underwriter or as
contemplated in this Agreement). Except as described in the Registration
Statement and the Prospectus (or, if there is no Prospectus, the most
recent Preliminary Prospectus) or created hereby, there are no outstanding
options, warrants, rights, or other agreements or arrangements requiring
the Selling Stockholder at any time to transfer any Common Stock to be sold
hereunder by the Selling Stockholder.
(iv) At the time when the Registration Statement becomes or
became effective, and at all times subsequent thereto up to and including
the Closing Date and the Option Closing Date, the Registration Statement
and any amendments thereto will not contain any untrue statement of a
material fact regarding the Selling Stockholder or omit to state a material
fact regarding the Selling Stockholder required to be stated therein or
necessary in order to make the statements therein regarding the Selling
Stockholder not misleading, and the Prospectus (and any supplements
thereto) (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) will not contain any untrue statement of a material
fact regarding the Selling Stockholder or omit to state a material fact
regarding the Selling Stockholder required to be stated therein or
necessary in order to make the statements therein regarding the Selling
Stockholder, in the light of the circumstances under which they were made,
not misleading, and the Selling Stockholder is unaware of any material
misstatement in or omission from the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or of any material adverse information regarding
the business or operations of the Company which is not set forth in the
Registration Statement and the Prospectus (or, if the Prospectus is not
then in existence, in the most recent Preliminary Prospectus).
(v) The Selling Stockholder has not taken, directly or
indirectly, any action designed to stabilize or manipulate the price of any
security of the
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<PAGE>
Company, or which has constituted or which might in the future reasonably
be expected to cause or result in stabilization or manipulation of the
price of any security of the Company, to facilitate the sale or resale of
the Shares or otherwise.
(vi) Nothing has come to the attention of the Selling
Stockholder to cause the Selling Stockholder to believe that the Company's
representations and warranties contained in this Agreement are not
accurate.
(vii) There is not pending or threatened against the Selling
Stockholder any action, suit or proceeding which (A) questions the validity
of this Agreement or of any action taken or to be taken by the Selling
Stockholder pursuant to or in connection with this Agreement or (B) is
required to be disclosed in the Registration Statement which is not so
disclosed, and such actions, suits or proceedings as are summarized in the
Registration Statement, if any, are summarized accurately.
3. PURCHASE, SALE AND DELIVERY OF THE SHARES. On the basis of the
representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, (A) the Company agrees to
sell to each Underwriter and each Underwriter, severally and not jointly, agrees
to purchase from the Company at a purchase price of $____ per Share, the number
of Firm Shares set forth opposite the name of such Underwriter in Column (1) of
Schedule I hereto and (B) the Selling Stockholder agrees to sell to each
Underwriter, and each Underwriter, severally and not jointly, agrees to purchase
from the Selling Stockholder at a purchase price of $_______ per Share, the
number of Firm Shares set forth opposite the name of such Underwriter in Column
(2) of Schedule I hereto.
Delivery of certificates, and payment of the purchase price, for the Firm
Shares shall be made at the offices of Furman Selz LLC at 230 Park Avenue, New
York, New York 10169, or such other location as shall be agreed upon by the
Company and the Representatives. Such delivery and payment shall be made at
10:00 a.m., New York time, on February __, 1996 or at such other time and date
not more than ten business days thereafter as shall be agreed upon by the
Representatives and the Company. The time and date of such delivery and payment
are herein called the "Closing Date." Delivery of the certificates for the Firm
Shares shall be made to the Representatives for the respective accounts of the
several Underwriters against payment by the several Underwriters through the
Representatives of the purchase price for the Firm Shares by certified or
official bank checks in New York Clearing House (next day) funds drawn to the
order of the Company in the case of the Firm Shares sold by it and Technical
Services Partners, L.P. in the case of the Firm Shares sold by the Selling
Stockholder. The certificates for the Shares to be so delivered will be in
definitive, fully registered form, will bear no restrictive legends and will be
in such denominations and registered in such names as the Representatives shall
request, not less than two full business days prior to the Closing Date. The
certificates for the Firm
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<PAGE>
Shares will be made available to the Representatives at such office or such
other place as the Representatives may designate for inspection, checking and
packaging not later than 9:30 a.m., New York time, on the business day prior to
the Closing Date.
4. PUBLIC OFFERING OF THE SHARES. It is understood that the Underwriters
propose to make a public offering of the Shares at the price and upon the other
terms set forth in the Prospectus.
5. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDER.
(a) The Company covenants and agrees with each of the Underwriters
that:
(i) The Company will use its best efforts to cause the
Registration Statement and any amendments thereto, if not effective at the
time of execution of this Agreement, to become effective as promptly as
practicable. 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 424(b) and 434 under the Act. During any time when a
prospectus relating to the Shares is required to be delivered under the
Act, the Company (A) will comply with all requirements imposed upon it by
the Act and the Rules and Regulations to the extent necessary to permit the
continuance of sales of or dealings in the Shares in accordance with the
provisions hereof and of the Prospectus, as then amended or supplemented,
and (B) will not file with the Commission the prospectus, Term Sheet or the
amendment referred to in the third sentence of Section 2(a)(i) hereof, any
amendment or supplement to such prospectus, Term Sheet or any amendment to
the Registration Statement of which the Representatives shall not
previously have been advised and furnished with a copy a reasonable period
of time prior to the proposed filing and as to which filing the
Representatives shall not have given their consent.
(ii) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representatives (A) when the
Registration Statement, as amended, has become effective; if the provisions
of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective;
(B) of any request made by the Commission for amending the Registration
Statement, for supplementing any Preliminary Prospectus or the Prospectus
or for additional information; or (C) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or any post-effective amendment thereto or any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or the institution or threat of any
investigation or
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<PAGE>
proceeding for that purpose, and will use its best efforts to prevent the
issuance of any such order and, if issued, to obtain the lifting thereof as
soon as possible.
(iii) The Company will (A) use its best efforts to arrange for
the qualification of the Shares for offer and sale under the state
securities or blue sky laws of such jurisdictions as the Representatives
reasonably may designate, (B) continue such qualifications in effect for as
long as may be necessary to complete the distribution of the Shares, and
(C) make such applications, file such documents and furnish such
information as may be required for the purposes set forth in clauses (A)
and (B); provided, however, that the Company shall not be required to
-------- -------
qualify as a foreign corporation or file a general or unlimited consent to
service of process or take any action that would subject itself to taxation
in respect of doing business in any such jurisdiction.
(iv) The Company consents to the use of the Prospectus (and any
amendment or supplement thereto) by the Underwriters and all dealers to
whom the Shares may be sold, in connection with the offering or sale of the
Shares and for such period of time thereafter as the Prospectus is required
by law to be delivered in connection therewith. If, at any time when a
prospectus relating to the Shares is required to be delivered under the
Act, 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 to make the statements therein in
the light of the circumstances under which they are made, not misleading,
or if it becomes necessary at any time to amend or supplement the
Prospectus to comply with the Act or the Rules and Regulations, the Company
promptly will so notify the Representatives and, subject to Section 5(a)(i)
hereof, will prepare and file with the Commission an amendment to the
Registration Statement or an amendment or supplement to the Prospectus
which will correct such statement or omission or effect such compliance,
each such amendment or supplement to be reasonably satisfactory to counsel
to the Underwriters.
(v) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (90 days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the Company
will make generally available to its security holders, in the manner
specified in Rule 158(b) of the Rules and Regulations, and to the
Representatives, an earnings statement which will be in the detail required
by, and will otherwise comply with, the provisions of Section 11(a) of the
Act and Rule 158(a) of the Rules and Regulations, which statement need not
be audited unless required by the Act or the Rules and Regulations,
covering a period of at least 12 consecutive months after the effective
date of the Registration Statement.
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<PAGE>
(vi) During a period of five years after the date hereof, the
Company will deliver to the Representatives:
(A) as soon as practicable after filing with the Commission,
all such reports, forms or other documents as may be required from
time to time, under the Act, the Rules and Regulations, the Exchange
Act and the rules and regulations thereunder;
(B) as soon as they are available, copies of all information
(financial or other) mailed to stockholders;
(C) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the National
Association of Securities Dealers, Inc. ("NASD") or any securities
exchange or market;
(D) every press release and every material news item or
article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by the Company;
and
(E) any additional information of a public nature concerning
the Company or its business which the Representatives may reasonably
request.
During such five-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries
are consolidated, and will be accompanied by similar financial statements
for any significant subsidiary which is not so consolidated.
(vii) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company, a
Registrar (which may be the same entity as the Transfer Agent) for its
Common Stock.
(viii) The Company will furnish, without charge, to the
Representatives or on the Representatives' order, at such place as the
Representatives may designate, so long as a prospectus relating to the
Shares is required by law to be delivered, copies of each Preliminary
Prospectus, the Registration Statement and any pre-effective or post-
effective amendments thereto, and any registration statement filed pursuant
to Rule 462(b) (two of which copies will be signed and will include all
financial statements and exhibits) and the Prospectus, and all amendments
and supplements thereto, including any Term Sheet, in each case as soon as
available and in such quantities as the Representatives reasonably may
request. The Company will provide or cause to be provided to the
Representatives and upon request to each
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Underwriter, a copy of the report on Form SR filed by the Company as
required by Rule 463 under the Act.
(ix) The Company will not, directly or indirectly, without the
prior written consent of Furman Selz LLC, on behalf of the Underwriters,
issue, offer, sell, offer to sell, contract to sell, grant any option to
purchase, pledge, transfer or otherwise dispose (or announce any issuance,
offer, sale, offer of sale, contract of sale, grant of any option to
purchase, pledge, transfer or other 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 (a) pursuant to this Agreement, or (b) for granting of options or
for issuances pursuant to the exercise of stock options outstanding on, or
granted subsequent to, the date hereof pursuant to a stock option or other
employee benefit plan in existence on the date hereof and described in the
Prospectus.
(x) The Company will cause the Shares to be duly approved for
listing on the NNM, subject to official notice of issuance, prior to the
Closing Date.
(xi) The Company shall not, and shall not use its best effort
to, cause its officers, directors and affiliates of any of them (within the
meaning of the Rules and Regulations) will take, directly or indirectly,
any action designed to, or which might in the future reasonably be expected
to, cause or result in, or which will constitute, stabilization or
manipulation of the price of any securities of the Company.
(xii) The Company will apply the net proceeds of the offering
received by it in the manner set forth under the caption "Use of Proceeds"
in the Prospectus.
(xiii) The Company will timely file all such reports, forms or
other documents as may be required from time to time, under the Act, the
Rules and Regulations, the Exchange Act and the rules and regulations
thereunder, and all such reports, forms and documents filed will comply in
all material respects as to form and substance with the applicable
requirements under the Act, the Rules and Regulations, the Exchange Act and
the rules and regulations thereunder.
(b) The Selling Stockholder covenants and agrees with each of the
Underwriters that:
(i) The Selling Stockholder will not, directly or indirectly,
without the prior written consent of Furman Selz LLC, on behalf of the
Underwriters, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
including, without limitation, any distribution to any
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partner of the Selling Stockholder, (or announce any issuance, offer, sale,
offer of sale, contract of sale, grant of any option to purchase, pledge,
transfer or other disposition), any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for, shares of
Common Stock for a period of 270 days after the date hereof, and will not
take, directly or indirectly, any action designed to, or which might in the
foreseeable future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the
Company.
(ii) The Selling Stockholder consents to the use of the
Prospectus and any amendment or supplement thereto by the Underwriters and
all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for such period of time thereafter as
the Prospectus is required by law to be delivered in connection therewith.
6. EXPENSES.
(a) Regardless of whether the transactions contemplated in this
Agreement are consummated, and regardless of whether for any reason this
Agreement is terminated, the Company will pay, and hereby agrees to indemnify
each Underwriter against, all fees and expenses incident to the performance of
the obligations of the Company and the Selling Stockholder under this Agreement,
including, but not limited to, (i) fees and expenses of accountants and counsel
for the Company and the Selling Stockholder, (ii) all costs and expenses
incurred in connection with the preparation, duplication, printing, filing,
delivery and shipping of copies of the Registration Statement and any pre-
effective or post-effective amendments thereto, any registration statement filed
pursuant to Rule 462(b), any Preliminary Prospectus and the Prospectus and any
amendments or supplements thereto (including postage costs related to the
delivery by the Underwriters of any Preliminary Prospectus or Prospectus, or any
amendment or supplement thereto), this Agreement, the Agreement Among
Underwriters, any Selected Dealer Agreement, Underwriters' Questionnaire,
Underwriters' Power of Attorney and all other documents in connection with the
transactions contemplated herein, including the cost of all copies thereof,
(iii) fees and expenses relating to qualification of the Shares under state
securities or blue sky laws, including the cost of preparing and mailing the
preliminary and final blue sky memoranda and filing fees and disbursements and
fees of counsel (which fees shall not exceed $30,000) and other related
expenses, if any, in connection therewith, (iv) filing fees of the Commission
and the NASD relating to the Shares, (v) any fees and expenses in connection
with the listing of the Shares on the NNM, (vi) costs and expenses incident to
the preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Shares, including transfer agent's and registrar's fees and any
applicable transfer taxes incurred in connection with the delivery to the
Underwriters of the Shares to be sold by the Company and the Selling Stockholder
pursuant to this Agreement, (vii) costs and expenses incident to any meetings
with prospective investors in the Shares (other than as shall have been
specifically approved by the Representatives to be paid for by the
Underwriters), and
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<PAGE>
(viii) costs and expenses of advertising relating to the offering of the Shares
(other than as shall have been specifically approved by the Representatives to
be paid for by the Underwriters).
(b) If the purchase of the Shares as herein contemplated is not
consummated for any reason other than the Underwriters' default under this
Agreement or other than by reason of Sections 11(b)(ii), 11(b)(iii), 11(b)(iv)
or 11(b)(v)(A), the Company shall reimburse the several Underwriters for their
reasonable out-of-pocket expenses (including counsel fees and disbursements) in
connection with any investigation made by them, and any preparation made by them
in respect of marketing of the Shares or in contemplation of the performance by
them of their obligations hereunder.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligation of each
Underwriter to purchase and pay for the Shares set forth opposite the name of
such Underwriter in Schedule I is subject to the continuing accuracy of the
representations and warranties of the Company and the Selling Stockholder herein
as of the date hereof and as of the Closing Date as if they had been made on and
as of the Closing Date; the accuracy on and as of the Closing Date of the
statements of officers of the Company and the Selling Stockholder made pursuant
to the provisions hereof; the performance by the Company and the Selling
Stockholder on and as of the Closing Date of their respective covenants and
agreements hereunder; and the following additional conditions:
(a) If the Company has elected to rely on Rule 430A under the Act, the
Registration Statement shall have been declared effective, and the Prospectus
(containing the information omitted pursuant to Rule 430A) shall have been filed
with the Commission not later than the Commission's close of business on the
second business day following the date hereof or such later time and date to
which the Representatives shall have consented; if the Company does not elect to
rely on Rule 430A, the Registration Statement shall have been declared effective
not later than 11:00 a.m., New York time, on the date hereof or such later time
and date to which the Representatives shall have consented; if required, in the
case of any changes in or amendments or supplements to the Prospectus in
addition to those contemplated above, the Company shall have filed such
Prospectus or any Term Sheet that constitutes a part thereof as amended or
supplemented with the Commission in the manner and within the time period
required by Rules 424(b) and 434 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).
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact
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<PAGE>
which, in the Representatives' opinion, is material, or omits to state a fact
which, in the Representatives' opinion, is material and is required to be stated
therein or is necessary to make the statements therein not misleading, or that
the Prospectus, or any supplement thereto, contains an untrue statement of fact
which, in the Representatives' opinion, is material, or omits to state a fact
which, in the Representatives' opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representatives shall have
received from counsel to the Underwriters, such opinion or opinions with respect
to the issuance and sale of the Firm Shares, the Registration Statement and the
Prospectus and such other related matters as the Representatives reasonably may
request and such counsel shall have received such documents and other
information as they request to enable them to pass upon such matters.
(d) On the Closing Date the Underwriters shall have received the
opinion, dated the Closing Date, of Troy & Gould Professional Corporation,
counsel to the Company, to the effect set forth below:
(i) The Company has duly authorized the issuance and sale of the
Shares to be sold by it hereunder; such Shares, when issued by the Company
and paid for in accordance with the terms hereof, will be validly issued,
fully paid and nonassessable and will conform in all material respects to
the description thereof contained in the Prospectus and will not be subject
to any preemptive, subscription or other similar rights; and the Shares
have been approved for listing on the NNM except as created hereby or
referred to in the Prospectus;
(ii) Based on the advice of the Commission, the Registration
Statement has become effective under the Act; any required filing of a
registration statement pursuant to Rule 462(b) has been made in the manner
and within the time period required by Rule 462(b); any required filing of
the Prospectus or any Term Sheet that constitutes a part thereof pursuant
to Rules 424(b) and 434 has been made in the manner and within the time
periods required by Rules 424(b) and 434; 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
are pending or, to the best knowledge of such counsel, are threatened; the
Registration Statement and the Prospectus and, if any, each amendment and
supplement thereto (except for the financial statements, schedules and
other financial data included therein or in the exhibits thereto, as to
which such counsel need not express any opinion), complied as to form in
all material respects with the requirements of the Act and the Rules and
Regulations; the descriptions contained and summarized in the Registration
Statement and the Prospectus of contracts and other documents, are accurate
and fairly represent in all material respects the information
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<PAGE>
required to be shown by the Act and the Rules and Regulations; to the best
knowledge of such counsel, there are no contracts or documents which are
required by the Act to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement which
are not described or filed as required by the Act and the Rules and
Regulations;
(iii) To the best knowledge of such counsel, there is not pending
or threatened against the Company any action, suit, proceeding or
investigation before or by any court, regulatory body, or administrative
agency or any other governmental agency or body, domestic or foreign, of a
character required to be disclosed in the Registration Statement or the
Prospectus which is not so disclosed therein; and the statements set forth
under the captions "Business--Litigation," "Management--Director
Compensation," "--Executive Compensation," "--Compensation Committee
Interlocks and Insider Participation," "--1997 Stock Plans," "--Employment
Agreements," "--Limitation of Liability and Indemnification Matters,"
"Certain Transactions--Indemnification Agreements," and "Description of
Capital Stock--Certain Provisions of the Company's Bylaws," in the
Prospectus, and Item 14 in the Registration Statement, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide a summary of such legal matters,
documents and proceedings which is accurate in all material respects;
(iv) The Company has the corporate power and authority to enter
into this Agreement and to consummate the transactions provided for herein;
this Agreement has been duly authorized, executed and delivered by the
Company; and this Agreement, assuming due authorization, execution and
delivery by each other party hereto, is a valid and binding agreement of
the Company, enforceable in accordance with its terms, except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
now or hereafter in effect relating to or affecting creditors' rights
generally or by general principles of equity relating to the availability
of remedies and except as rights to indemnity and contribution may be
limited by federal or state securities laws or the public policy underlying
such laws.
(v) None of the Company's execution or delivery of this
Agreement, its performance hereof, its consummation of the transactions
contemplated herein or its application of the net proceeds of the offering
in the manner set forth under the caption "Use of Proceeds" in the
Prospectus and in compliance with restrictive covenants in loan agreements
of the Company and its Subsidiaries, conflicts or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any of its Subsidiaries pursuant to: (A) the terms of the
charter or by-laws of the domestic Subsidiaries; (B) to the best knowledge
of such counsel, the terms of any indenture, mortgage, deed of trust,
voting trust agreement,
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<PAGE>
stockholder's agreement, note agreement or other agreement or instrument to
which the domestic Subsidiaries is a party or by which it is or may be
bound or to which any of their respective properties may be subject; (C) to
the best knowledge of such counsel, any statute, rule or regulation of any
regulatory body or administrative agency or other governmental agency or
body, domestic or foreign, having jurisdiction over the domestic
Subsidiaries or any of their respective activities or properties; or (D) to
the best knowledge of such counsel, any judgment, decree or order of any
government, arbitrator, court, regulatory body or administrative agency or
other governmental agency or body, domestic or foreign, having such
jurisdiction; and no consent, approval, authorization or order of any
domestic court, regulatory body or administrative agency or other domestic
governmental agency or body, has been or is required for the Company's
performance of this Agreement or the consummation of the transactions
contemplated hereby, except such as have been obtained under the Act or may
be required under state securities or blue sky laws in connection with the
purchase and distribution by the Underwriters of the Shares;
In addition, such counsel shall state that such counsel has
participated in conferences with officers and representatives of the Company,
the Company's independent public accountants and you and your counsel, at which
the contents of the Registration Statement and the Prospectus were discussed and
(without taking any further action to verify independently the statements made
in the Registration Statement and the Prospectus and, except as stated in the
foregoing opinion, without assuming responsibility for the accuracy,
completeness or fairness of such statements) nothing has come to such counsel's
attention that causes such counsel to believe that, both as of the Effective
Date and as of the Closing Date, the Registration Statement, or any amendments
thereto, contains or contained any untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the Prospectus
or any amendment or supplement thereto as of the date thereof and as of the
Closing Date contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that such
counsel need not express any opinion with respect to the financial statements,
schedules and other financial data included in the Registration Statement or the
Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the State of California or
the United States, or the general corporation law of the State of Delaware, or
as to intellectual property or specified regulatory matters (to the extent
satisfactory in form and scope to counsel for the Underwriters) such counsel may
rely upon or substitute the opinion of other counsel reasonably acceptable to
Underwriters' counsel. The foregoing opinion also shall state that the
Underwriters are justified in relying upon such
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<PAGE>
opinion of any other counsel, and copies of such opinion shall be delivered to
the Representatives and counsel for the Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date of
such opinion.
(e) On the Closing Date the Underwriters shall have received the
opinion, dated the Closing Date, of Greenberg Glusker Fields Claman & Machtinger
LLP, counsel to the Company, to the effect set forth below:
(i) The Company and each of its Subsidiaries (A) is a duly
incorporated and validly existing corporation in good standing under the
laws of its jurisdiction of incorporation with full corporate power and
authority to own or lease its properties and to conduct its business as
described in the Prospectus, and (B) is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction (x) in
which the conduct of its business requires such qualification (except for
those jurisdictions in which the failure so to qualify can be cured without
having a Material Adverse Effect) and (y) in which it owns or leases
property;
(ii) The Company has authorized capital stock as set forth in
the Prospectus; the authorized capital stock of the Company conforms in all
material respects to the descriptions thereof contained in the Prospectus;
the outstanding shares of Common Stock have been duly authorized and
validly issued by the Company, are fully paid and nonassessable, and are
free of any preemptive or other rights to subscribe for any of the Shares;
to the best knowledge of such counsel, except as described in the
Prospectus, there are no outstanding options, warrants, rights or other
arrangements requiring the Company or any Subsidiary at any time to issue
any capital stock;
(iii) The statements set forth under the caption "Business--
Government Regulations" in the Prospectus, and Item 15 in the Registration
Statement relating to the stock issuance and stock dividend and the
exemption from registration relating thereto, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, provide a summary of such legal matters, documents and
proceedings which is accurate in all material respects;
(iv) None of the Company's execution or delivery of this
Agreement, its performance hereof, its consummation of the transactions
contemplated herein or its application of the net proceeds of the offering
in the manner set forth under the caption "Use of Proceeds" in the
Prospectus and in compliance with restrictive covenants in loan agreements
of the Company and its Subsidiaries, conflicts or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitute a default under, or result
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<PAGE>
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its Subsidiaries pursuant to:
(A) the terms of the charter or by-laws of the foreign Subsidiary; (B) to
the best knowledge of such counsel, the terms of any indenture, mortgage,
deed of trust, voting trust agreement, stockholder's agreement, note
agreement or other agreement or instrument to which the foreign Subsidiary
is a party or by which it is or may be bound or to which any of its
property may be subject; (C) to the best knowledge of such counsel, any
statute, rule or regulation of any regulatory body or administrative agency
or other governmental agency or body, domestic or foreign, having
jurisdiction over the foreign Subsidiary or any of its activities or
properties; or (D) to the best knowledge of such counsel, any judgment,
decree or order of any government, arbitrator, court, regulatory body or
administrative agency or other governmental agency or body, domestic or
foreign, having such jurisdiction; and to the best knowledge of such
counsel, no consent, approval, authorization or order of any Singapore
court, regulatory body or administrative agency or other Singapore
governmental agency or body, has been or is required for the Company's
performance of this Agreement or the consummation of the transactions
contemplated hereby;
(v) To the best knowledge of such counsel, the conduct of the
businesses of the Company and its Subsidiaries as described in the
Prospectus is not in violation of any federal, state or local statute,
administrative regulation or other law, which violation is likely to have a
Material Adverse Effect; the Company and each of its Subsidiaries have
obtained all licenses, permits, franchises, certificates and other
authorizations from state, federal and other regulatory authorities as are
necessary or required for the ownership, leasing and operation of its
properties and the conduct of its business as presently conducted and as
contemplated in the Prospectus, except for such licenses, permits,
franchises, certificates and other authorizations the failure of which to
obtain, individually or in the aggregate, would not have a Material Adverse
Effect;
(vi) The issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned by the Company free and clear of any
perfected security interests (except for the capital stock of Digital Magic
Company and 4MC-Burbank, Inc., which is pledged as security to The CIT
Group/Business Credit, Inc.) or, to the best knowledge of such counsel, any
other liens, encumbrances, claims or security interests; no Subsidiary of
the Company currently is prohibited, directly or indirectly, from paying
any dividends to the Company, from making any other distribution on such
Subsidiary's capital stock, from repaying to the Company any loans or
advances to such Subsidiary from the Company, except as described in or
contemplated by the Prospectus; and
(vii) Based solely upon consultation with officers and
representatives of the Company, and without any additional investigation of
the underlying facts and statements of such officers and representatives
during such
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<PAGE>
consultation, such counsel is not aware of any insufficiency in the
Company's ownership of, or right to use, the Rights used in, or necessary
for, the conduct of its business as described in the Prospectus. To the
best knowledge of such counsel, no claims have been asserted against the
Company or any of its Subsidiaries by any person to the use of any such
Rights or challenging or questioning the validity or effectiveness of any
such Rights. Based solely upon consultation with officers and
representatives of the Company, and without any additional investigation of
the underlying facts and statements of such officers and representatives
during such consultation, the use, in connection with the business and
operations of the Company and its Subsidiaries of such rights does not, to
such counsel's best knowledge, infringe on the rights of any person.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the State of California or
the United States, or the general corporation law of the State of Delaware, or
as to intellectual property or specified regulatory matters (to the extent
satisfactory in form and scope to counsel for the Underwriters) such counsel may
rely upon or substitute the opinion of other counsel reasonably acceptable to
Underwriters' counsel. The foregoing opinion also shall state that the
Underwriters are justified in relying upon such opinion of any other counsel,
and copies of such opinion shall be delivered to the Representatives and counsel
for the Underwriters.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date of
such opinion.
(f) On or prior to the Closing Date, counsel to the Underwriters shall
have been furnished such documents, certificates and opinions as they reasonably
may require in order to evidence the accuracy, completeness or satisfaction of
any of the representations or warranties of the Company or the Selling
Stockholder or conditions herein contained.
(g) At the time that this Agreement is executed by the Company the
Underwriters shall have received from Coopers & Lybrand L.L.P. a letter as of
the date this Agreement is executed by the Company with respect to the financial
statements and certain financial information contained in the Registration
Statement or the Prospectus in form and substance satisfactory to you (the
"Original Letter"), and on the Closing Date the Underwriters shall have received
from such firm a letter dated the Closing Date stating that, as of the Closing
Date, and as though made on the Closing Date, nothing has come to the attention
of such firm to suggest that the statements made in the Original Letter are not
true and correct.
(h) On the Closing Date, the Underwriters shall have received a
certificate, dated the Closing Date, of the principal executive officer and the
principal financial or
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<PAGE>
accounting officer of the Company to the effect that each of such persons has
carefully examined the Registration Statement and the Prospectus and any
amendments or supplements thereto and this Agreement, and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date,
and the Company has complied with all agreements and covenants and
satisfied all conditions contained in this Agreement on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best knowledge of each of
such persons, are contemplated or threatened under the Act and any and all
filings required by Rule 424, Rule 430A, Rule 434 and Rule 462(b) have been
timely made;
(iii) The Registration Statement and Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and
information required to be included therein, and neither the Registration
Statement nor any amendment thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and
neither the Prospectus (or any supplement thereto) or any Preliminary
Prospectus includes or included any untrue statement of a material fact or
omits or omitted 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 were made, not misleading; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus up to and
including the Closing Date, neither the Company nor any of the Subsidiaries
has incurred, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent; neither the
Company nor any of the Subsidiaries has purchased any of its outstanding
capital stock or paid or declared any dividends or other distributions on
its capital stock; neither the Company nor any of the Subsidiaries has
entered into any transactions not in the ordinary course of business; and
there has not been any change in the capital stock or consolidated long-
term debt or any increase in the consolidated short-term borrowings (other
than any increase in short-term borrowings in the ordinary course of
business) of the Company or any material adverse change to the business,
properties, assets, net worth, condition (financial or other), results of
operations or prospects of the Company and its Subsidiaries taken as a
whole; neither the Company nor any of the Subsidiaries has sustained any
material loss or damage to its property or assets, whether or not insured;
there is no litigation which is pending or threatened against the Company
or any of its Subsidiaries which
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<PAGE>
is required under the Act or the Rules and Regulations to be set forth in
an amended or supplemented Prospectus which has not been set forth; and
there has not occurred any event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in
this paragraph (h) are to such documents as amended and supplemented at the
date of the certificate.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus up to and including the
Closing Date there has not been (i) any change or decrease specified in the
letter or letters referred to in paragraph (g) of this Section 7 or (ii) any
change, or any development involving a prospective change, in the business or
properties of the Company or its Subsidiaries which change or decrease in the
case of clause (i) or change or development in the case of clause (ii) makes it
impractical or inadvisable in the Representatives' judgment to proceed with the
public offering or the delivery of the Shares as contemplated by the Prospectus.
(j) No order suspending the sale of the Shares in any jurisdiction
designated by you pursuant to Section 5(a)(iii)(A) hereof has been issued on or
prior to the Closing Date and no proceedings for that purpose have been
instituted or, to your knowledge or that of the Company, have been or are
contemplated.
(k) On the Closing Date, the Underwriters shall have received the
opinion, dated the Closing Date, of Schulte, Roth & Zabel LLP, in its capacity
as counsel for the Selling Stockholder, to the effect set forth below:
(i) The Selling Stockholder has full legal right, power and
authority to enter into this Agreement and the Custody Agreement and to
sell, assign, transfer and deliver in the manner provided herein the Shares
sold by the Selling Stockholder; this Agreement and the Custody Agreement
have been duly authorized, executed and delivered by the Selling
Stockholder; and the Custody Agreement and this Agreement, assuming due
authorization, execution and delivery by each other party hereto and
further assuming it is a valid and binding agreement of each of the
Underwriters, are valid and binding agreements of the Selling Stockholder,
enforceable against the Selling Stockholder in accordance with each of
their terms (except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws now or hereafter in effect
relating to or affecting creditors' rights generally and by general
principles of equity relating to the availability of remedies and except as
rights to indemnity and contribution may be limited by federal or state
securities laws or the public policy underlying such laws);
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<PAGE>
(ii) None of the execution, delivery or performance of this
Agreement and the Custody Agreement by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions herein
contemplated, conflict with or result in a breach of, or default under, any
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note agreement or other agreement or other instrument known to
such counsel to which the Selling Stockholder is a party or by which the
Selling Stockholder is bound or to which any of the capital stock of the
Company owned by the Selling Stockholder is subject, and nothing has come
to such counsel's attention which causes such counsel to believe that such
actions will result in any violation of any law, rule, administrative
regulation or court decree applicable to such Selling Stockholder (other
than state securities or blue sky laws or regulations, as to which such
counsel express no opinion);
(iii) Upon the delivery of the Shares to be sold hereunder by
the Selling Stockholder and payment therefor in accordance with the terms
of this Agreement and assuming that each of the Underwriters which has
severally purchased such Shares acquires such Shares in good faith without
notice of any adverse claim (as such term is used in Section 8-302 of the
Uniform Commercial Code as in effect in the State of New York), such
Underwriter will have acquired all of the rights of the Selling Stockholder
to the Shares sold by the Selling Stockholder hereunder, and in addition
will have acquired title to such Shares free and clear of any adverse claim
(other than those created by any Underwriter or as contemplated in this
Agreement); and
(iv) The statements set forth in Item 15 of the Registration
Statement (except for statements relating to the stock issuance and stock
dividend and the exemption from registration relating thereto), insofar as
such statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide a summary of such legal matters,
documents and proceedings which is accurate in all material respects.
References to the Registration Statement and the Prospectus in this
paragraph (k) shall include any amendment or supplement thereto at the date of
such opinion.
(l) On the Closing Date, the Underwriters shall have received a
certificate, dated the Closing Date, from the Selling Stockholder to the effect
that the Selling Stockholder carefully has examined the Registration Statement
and the Prospectus and any amendments or supplements thereto and this Agreement,
and that:
(i) The representations and warranties of the Selling Stockholder
in this Agreement are true and correct, as if made at and as of the Closing
Date, and the Selling Stockholder has complied with all the agreements and
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satisfied all the conditions contained in this Agreement to be performed or
satisfied by the Selling Stockholder at or prior to the Closing Date; and
(ii) The Registration Statement and Prospectus and, if any, each
amendment and each supplement thereto, contain all statements required to
be included therein regarding the Selling Stockholder, and none of the
Registration Statement nor any amendment thereto includes any untrue
statement of a material fact regarding the Selling Stockholder or omits to
state any material fact regarding the Selling Stockholder required to be
stated therein or necessary to make the statements therein regarding the
Selling Stockholder not misleading, and neither the Prospectus (and any
supplements thereto) or any Preliminary Prospectus includes or included any
untrue statement of a material fact regarding the Selling Stockholder or
omits or omitted to state a material fact regarding the Selling Stockholder
required to be stated therein or necessary in order to make the statements
therein regarding the Selling Stockholder, in the light of the
circumstances under which they were made, not misleading.
(m) The Representatives shall have received from each person who is a
director or officer of the Company an agreement to the effect that such person
will not, directly or indirectly, without the prior written consent of Furman
Selz LLC, on behalf of the Underwriters, during the period ending three years
after the date of the Prospectus, offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, any shares of Common Stock or any securities convertible into or exercisable
or exchangeable for, shares of Common Stock.
(n) The Company and the Selling Stockholder shall have furnished the
Underwriters with such further opinions, letters, certificates or documents as
you or counsel for the Underwriters may reasonably request. All opinions,
certificates, letters and documents to be furnished by the Company and the
Selling Stockholder will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and to
counsel for the Underwriters. The Company and the Selling Stockholder shall
furnish the Underwriters with conformed copies of such opinions, certificates,
letters and documents in such quantities as you reasonably request. The
certificates delivered under this Section 7 shall constitute representations,
warranties and agreements of the Company and the Selling Stockholder, as the
case may be, as to all matters set forth therein as fully and effectively as if
such matters had been set forth in Section 2 of this Agreement.
(o) The Shares shall have been duly authorized for listing on the NNM,
subject to official notice of issuance.
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8. INDEMNIFICATION.
(a) The Company and the Selling Stockholder, jointly and severally,
agree to indemnify and hold harmless each Underwriter and each person, if any,
who controls such Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, against any and all losses, claims, damages or
liabilities, joint or several (and actions in respect thereof), to which such
Underwriter or such controlling person may become subject, under the Act or
other federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or actions arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or the Prospectus or any
Preliminary Prospectus, or any amendment or supplement thereto, or any blue sky
application or other document executed by the Company or the Selling Stockholder
specifically for the purpose of qualifying, or based upon written information
furnished by the Company or the Selling Stockholder filed in any state or other
jurisdiction in order to qualify, any or all of the Shares under the securities
or blue sky laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein (in the case of the
Prospectus or any amendment or supplement thereto, in the light of the
circumstances under which they were made) not misleading and will reimburse, as
incurred, such Underwriter or such controlling persons for any legal or other
expenses reasonably incurred by such Underwriter or such controlling persons in
connection with investigating, defending or appearing as a third party witness
in connection with any such loss, claim, damage, liability or action; provided,
--------
however, that the obligations of the Selling Stockholder pursuant to this
- -------
Section 8(a) shall apply only with respect to information provided by the
Selling Stockholder for inclusion in such documents; and provided further, that
-------- -------
the Company and the Selling Stockholder will not be liable in any such case to
the extent that any such loss, claim, damage, liability or action arises out of
or is based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any of such documents in reliance upon and in
conformity with information furnished in writing to the Company by or on behalf
of such Underwriter through the Representatives expressly for use therein; and
provided further, that such indemnity with respect to any Preliminary Prospectus
- -------- -------
shall not inure to the benefit of any Underwriter (or to the benefit of any
person controlling such Underwriter) from whom the person asserting any such
loss, claim, damage, liability or action purchased Shares which are the subject
thereof to the extent that any such loss, claim, damage, liability or action (i)
results from the fact that such Underwriter failed to send or give a copy of the
Prospectus (as amended or supplemented) to such person at or prior to the
confirmation of the sale of such Shares to such person in any case where such
delivery is required by the Act and (ii) arises out of or is based upon an
untrue statement or omission of a material fact contained in such Preliminary
Prospectus that was corrected in the Prospectus (as amended and supplemented),
unless such failure resulted from non-compliance by the Company with Section
5(a)(viii) hereof; and provided further, the liability of the
-------- -------
-30-
<PAGE>
Selling Stockholder under this paragraph (a) shall be limited to the amount of
the net proceeds received by the Selling Stockholder from the sale of the Shares
hereunder.
The indemnity agreement in this paragraph (a) shall be in addition to
any liability which the Company and the Selling Stockholder otherwise may have.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement and each person, if any, who
controls the Company or the Selling Stockholder within the meaning of Section 15
of the Act or Section 20 of the Exchange Act against any and all losses, claims,
damages or liabilities (and actions in respect thereof) to which the Company or
the Selling Stockholder, any such director, officer, or controlling person may
become subject, under the Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or the Prospectus or any Preliminary Prospectus, or any amendment or
supplement thereto or in any Blue Sky Application, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements 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 information furnished in writing by or
on behalf of that Underwriter through the Representatives to the Company
expressly for use therein; and will reimburse, as incurred, all legal or other
expenses reasonably incurred by the Company or the Selling Stockholder, any such
director, officer, controlling person in connection with investigating,
defending or appearing as a third party witness in connection with any such
loss, claim, damage, liability or action. The Company and the Selling
Stockholder acknowledge that the statements with respect to the public offering
of the Shares set forth in the third and penultimate paragraphs under the
heading "Underwriting," the last paragraph on the cover page of the Prospectus
and the stabilization legend in the Prospectus have been furnished by the
Underwriters to the Company expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus.
The indemnity agreement contained in this paragraph (b) shall be in
addition to any liability which the Underwriters otherwise may have.
(c) 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 one or more indemnifying parties
under this Section 8, notify such indemnifying party or parties of the
commencement thereof; but the failure so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under paragraph (a) or (b) of this Section 8 or to the extent
-31-
<PAGE>
that the indemnifying party was not adversely affected by such omission. In
case any such action is brought against an indemnified party and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties against which a claim is to be made will be entitled to
participate therein and, to the extent that it or they may wish, to assume the
defense thereof, with counsel reasonably 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 has
reasonably concluded (based on the advice of its counsel) that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right, upon written notice to the
Indemnifying Party, to select separate counsel to assume such legal defenses and
otherwise to participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses (other than the reasonable costs of investigation)
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party has employed such counsel in connection
with the assumption of such different or additional legal defenses in accordance
with the proviso to the immediately preceding sentence (it being understood,
however, that an indemnifying party shall not, in connection with any one such
action or proceeding or separate but substantially similar or related actions or
proceedings arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) at any time for each
such indemnified party), (ii) the indemnifying party has not employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action, or
(iii) the indemnifying party has authorized in writing the employment of counsel
for the indemnified party at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) above in respect of any losses, claims, damages, expenses
or liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, 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)
(i) in such proportion as is appropriate to reflect the relative benefits
received by each of the contributing parties, on the one hand, and the party to
be indemnified, on the other hand, from the offering of the Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company and/or the
-32-
<PAGE>
Selling Stockholder on the one hand, and the Underwriters, on the other, shall
be deemed to be in the same proportion as the total net proceeds from the
offering of the Shares (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the cover page of the Prospectus. Relative fault
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 or the
Selling Stockholder or by the Underwriters, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this paragraph (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph (d), the Underwriters shall not
be required to contribute in the aggregate, any amount in excess of the
underwriting discount applicable to the Shares purchased by the Underwriters
hereunder. The Underwriters' obligations to contribute pursuant to this
paragraph (d) are several in proportion to their respective underwriting
obligations, and not joint. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), (i) 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 (ii) each director of the Company, each officer of the
Company who has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act and the Selling Stockholder shall have the same rights to
contribution as the Company, subject in each case to this paragraph (d). Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect to
which a claim for contribution may be made against another party or parties
under this paragraph (d), notify such party or parties from 7-33whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any other obligation (x) it or they may have hereunder or otherwise than under
this paragraph (d) or (y) to the extent that such party or parties were not
adversely affected by such omission. The contribution agreement set forth above
shall be in addition to any liabilities which any indemnifying party otherwise
may have.
9. RIGHT TO INCREASE OFFERING. At anytime during a period of 30 days
from the date of the Prospectus, the Underwriters, by no less than two business
days' prior notice to the Company may designate a closing (which may be
concurrent with, and part of, the closing on the Closing Date with respect to
the Firm Shares or may be a second closing held on a date subsequent to the
Closing Date, in either case such date shall be referred to herein as the
"Option Closing Date") at which the Underwriters may purchase all or less than
all of the Additional Shares in accordance with the provisions of this Section 9
at the purchase
-33-
<PAGE>
price per share to be paid for the Firm Shares. In no event shall the Option
Closing Date be later than 10 business days after written notice of election to
purchase Additional Shares is given.
The Company agrees to sell to the several Underwriters on the Option
Closing Date the number of Additional Shares specified in such notice and the
Underwriters agree severally and not jointly, to purchase such Additional Shares
on the Option Closing Date. Such Additional Shares shall be purchased for the
account of each Underwriter in the same proportion as the number of Firm Shares
set forth opposite the name of such Underwriter in Column (3) of Schedule I
bears to the total number of Firm Shares (subject to adjustment by you to
eliminate fractions) and may be purchased by the Underwriters only for the
purpose of covering over-allotments made in connection with the sale of the Firm
Shares.
No Additional Shares shall be sold or delivered unless the Firm Shares
previously have been, or simultaneously are, sold and delivered. The right to
purchase the Additional Shares or any portion thereof may be surrendered and
terminated at any time upon notice by you to the Company.
Except to the extent modified by this Section 9, all provisions of
this Agreement relating to the transactions contemplated to occur on the Closing
Date for the sale of the Firm Shares shall apply, mutatis mutandis, to the
Option Closing Date for the sale of the Additional Shares.
10. REPRESENTATIONS, ETC. TO SURVIVE DELIVERY. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers, the Selling Stockholder and
the Underwriters, respectively, set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by or
on behalf of the Underwriters, and will survive delivery of and payment for the
Shares. Any successors to the Underwriters shall be entitled to the indemnity,
contribution and reimbursement agreements contained in this Agreement.
11. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at 11:00 a.m., New York
time, on the first business day following the date hereof, or at such earlier
time after the Registration Statement becomes effective as the Representatives,
in their sole discretion, shall release the Shares for the sale to the public
unless prior to such time the Representatives shall have received written notice
from the Company that it elects that this Agreement shall not become effective,
or the Representatives shall have given written notice to the Company that the
Representatives on behalf of the Underwriters elect that this Agreement shall
not become effective; provided, however, that the provisions of this Section 11
-------- -------
and of Section 6 and Section 8 hereof shall at all times be effective. For
purposes of this Section 11(a), the Shares to be purchased hereunder shall be
deemed to have been so released upon the earlier of
-34-
<PAGE>
notification by the Representatives to securities dealers releasing such Shares
for offering or the release by the Representatives for publication of the first
newspaper advertisement which is subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 6 and 8
hereof) may be terminated by the Representatives by notice to the Company and
the Selling Stockholder in the event that the Company or the Selling Stockholder
have failed to comply in any respect with any of the provisions of this
Agreement required on their respective parts to be performed at or prior to the
Closing Date or the Option Closing Date, or if any of the representations or
warranties of the Company or the Selling Stockholder are not accurate in any
respect or if the covenants, agreements or conditions of, or applicable to the
Company or the Selling Stockholder herein contained have not been complied with
in any respect or satisfied within the time specified on the Closing Date or the
Option Closing Date, respectively, or if prior to the Closing Date or the Option
Closing Date:
(i) the Company or any of its Subsidiaries shall have sustained
a loss by strike, fire, flood, accident or other calamity of such a
character as to interfere materially with the conduct of the business and
operations of the Company and its Subsidiaries taken as a whole regardless
of whether or not such loss was insured;
(ii) trading in the Common Stock shall have been suspended by
the Commission or the NNM or trading in securities generally on the New
York Stock Exchange or the NNM shall have been suspended or a material
limitation on such trading shall have been imposed or minimum or maximum
prices shall have been established on either such exchange or market;
(iii) a banking moratorium shall have been declared by New York
or United States authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an outbreak
or escalation of any other insurrection or armed conflict involving the
United States; or
(v) there shall have been a material adverse change in (A)
general economic, political or financial conditions or (B) the present or
prospective business or condition (financial or other) of the Company and
its Subsidiaries taken as a whole that, in each case, in the
Representatives' judgment makes it impracticable or inadvisable to make or
consummate the public offering, sale or delivery of the Company's Shares on
the terms and in the manner contemplated in the Prospectus and the
Registration Statement.
-35-
<PAGE>
(c) Termination of this Agreement under this Section 11 or Section 12
after the Firm Shares have been purchased by the Underwriters hereunder shall be
applicable only to the Additional Shares. Termination of this Agreement shall
be without liability of any party to any other party other than as provided in
Sections 6 and 8 hereof.
12. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 7 or 11 hereof) to
purchase and pay for (a) in the case of the Closing Date, the number of Firm
Shares agreed to be purchased by such Underwriter or Underwriters upon tender to
you of such Firm Shares in accordance with the terms hereof or (b) in the case
of the Option Closing Date, the number of Additional Shares agreed to be
purchased by such Underwriter or Underwriters upon tender to you of such
Additional Shares in accordance with the terms hereof, and the number of such
Shares shall not exceed 10% of the Firm Shares or Additional Shares required to
be purchased on the Closing Date or the Option Closing Date, as the case may be,
then, each of the non-defaulting Underwriters shall purchase and pay for (in
addition to the number of such Shares which it has severally agreed to purchase
hereunder) that proportion of the number of Shares which the defaulting
Underwriter or Underwriters shall have so failed or refused to purchase on such
Closing Date or Option Closing Date, as the case may be, which the number of
Shares agreed to be purchased by such non-defaulting Underwriter bears to the
aggregate number of Shares so agreed to be purchased by all such non-defaulting
Underwriters on such Closing Date or Option Closing Date, as the case may be.
In such case, you shall have the right to postpone the Closing Date or the
Option Closing Date, as the case may be, to a date not exceeding seven full
business days after the date originally fixed as such Closing Date or the Option
Closing Date, as the case may be, pursuant to the terms hereof in order that any
necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made.
If one or more of the Underwriters shall fail or refuse (otherwise than for
a reason sufficient to justify the termination of this Agreement under the
provisions of Section 7 or 11 hereof) to purchase and pay for (a) in the case of
the Closing Date, the number of Firm Shares agreed to be purchased by such
Underwriter or Underwriters upon tender to you of such Firm Shares in accordance
with the terms hereof or (b) in the case of the Option Closing Date, the number
of Additional Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to you of such Additional Shares in accordance with the terms
hereof, and the number of such Shares shall exceed 10% of the Firm Shares or
Additional Shares required to be purchased by all the Underwriters on the
Closing Date or the Option Closing Date, as the case may be, then (unless within
48 hours after such default arrangements to your satisfaction shall have been
made for the purchase of the defaulted Shares by an Underwriter or Underwriters)
and subject to the provisions of Section 11(b) hereof, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or on
the part of the Company or the Selling Stockholder except as otherwise provided
in Sections 6 and 8 hereof. As used in this Agreement, the term "Underwriter"
-36-
<PAGE>
includes any person substituted for an Underwriter under this paragraph.
Nothing in this Section 12, and no action taken hereunder, shall relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
13. NOTICES. All communications hereunder shall be in writing and if sent
to the Representatives shall be mailed or delivered or sent by facsimile
transmission and confirmed by letter to c/o Furman Selz LLC at 230 Park Avenue,
New York, New York 10169, Attention: Syndicate Department (facsimile number:
(212) 309-8274) or, if sent to the Company, shall be mailed or delivered or sent
by facsimile transmission and confirmed by letter to the Company at 2813 West
Alameda Avenue, Burbank, California 91505, Attention: Chief Executive Officer
(facsimile number: (818) 846-5197).
14. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Company, the Selling Stockholder, and each Underwriter and the
Company's, the Selling Stockholder's and each Underwriter's 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 the
representations, warranties, indemnities and contribution agreements of the
Company and the Selling Stockholder contained in this Agreement also shall be
for the benefit of any person or persons, if any, who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and except that the Underwriters' indemnity and contribution agreements shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement, and any person or persons,
if any, who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act and the Selling Stockholder. No purchaser of
Shares from the Underwriters will be deemed a successor because of such
purchase.
15. APPLICABLE LAW; JURISDICTION. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the choice of law or conflict of law principles thereof. Each party
hereto consents to the jurisdiction of each court in which any action is
commenced seeking indemnity or contribution pursuant to Section 8 above and
agrees to accept, either directly or through an agent, service of process of
each such court.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
-37-
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
the Underwriters' acceptance thereof in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
FOUR MEDIA COMPANY
By:
------------------------------
Name:
Title:
Accepted as of the date first
above written:
FURMAN SELZ LLC TECHNICAL SERVICES
PARTNERS, L.P.
By: FURMAN SELZ LLC By:
Acting on its own behalf and as ------------------------------
the Representatives of Name:
the several Underwriters Title:
referred to in the foregoing
Agreement
By:______________________________
Name:
Title:
-38-
<PAGE>
SCHEDULE I
UNDERWRITERS
Underwriting Agreement dated February 5, 1997
<TABLE>
<CAPTION>
(1) (2) (3)
Number of Firm Aggregate
Number of Firm Shares to be Number of
Shares to be Purchased from Firm Shares
Purchased from the Selling to be
the Company Stockholder Purchased
----------------- -------------- -----------
Name and Address
- ----------------
<S> <C> <C> <C>
Furman Selz LLC __________ __________ _________
PaineWebber Incorporated __________ __________ _________
Total __________ __________ _________
- -----
</TABLE>
I-1
<PAGE>
EXHIBIT 4.1
+++++++++++ +++++++++++
+ Number + + Shares +
+LU + + +
+++++++++++ +++++++++++
[LOGO OF FOUR MEDIA COMPANY]
COMMON STOCK COMMON STOCK
SEE REVERSE FOR CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
CUSIP 350872 10 7
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
FOUR MEDIA COMPANY
transferable on the books of the Corporation by the holder hereof in person or
by a duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[SEAL OF FOUR MEDIA COMPANY]
/s/ John H. Sabin /s/ Robert Walston
CHIEF FINANCIAL OFFICER AND SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ............ Custodian ............
(Cust) (Minor)
under Uniform Gifts to Minors
Act ...............................
(State)
UNIF TRF MIN ACT - ........ Custodian (until age ....)
(Cust)
........... under Uniform Transfers
(Minor)
to Minors Act .....................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
++++++++++++++++++++++++++++++++++++++
+ +
+ +
++++++++++++++++++++++++++++++++++++++
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated __________________________
X _______________________________________________
X _______________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
NOTICE: CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By_____________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF TROY & GOULD]
February 3, 1997
File No. FOU8-1
Four Media Company
2813 W. Alameda Avenue
Burbank, California 91505
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
(the "Registration Statement") of Four Media Company (the "Company"), exhibits
filed in connection therewith, and the form of prospectus related thereto, which
you have filed with the Securities and Exchange Commission (the "SEC") in
connection with the registration under the Securities Act of 1933, as amended
(the "Securities Act"), of up to 5,700,000 shares of Common Stock, $.01 par
value ("Common Stock"), of which 3,491,784 shares are to be issued and sold by
the Company (the "New Shares") and 2,208,216 shares (the "Outstanding Shares")
are to be sold by the sole stockholder of the Company, and up to an additional
855,000 shares are to be sold by the Company upon the exercise of the
underwriters' over-allotment option (together with the New Shares, the
"Aggregate New Shares").
For purposes of this opinion, we have examined such matters of law and
originals, or copies certified or otherwise identified to our satisfaction, of
such documents, corporate records and other instruments as we have deemed
necessary. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to originals of all documents submitted to us as certified,
photostatic or conformed copies, and the authenticity of originals of all
such latter documents. We have also assumed the due execution and delivery of
all documents where due execution and delivery are prerequisites to the
effectiveness thereof. We have relied upon certificates of public officials and
certificates of officers of the Company for the accuracy of material factual
matters contained therein which were not independently established.
EXHIBIT 5.1
<PAGE>
[LETTERHEAD OF TROY & GOULD]
Four Media Company
February 3, 1997
Page 2
Based on the foregoing, it is our opinion that, subject to effectiveness
with the SEC (such Registration Statement as finally declared effective and the
form of Prospectus filed pursuant to Rule 424(b) under the Securities Act being
hereinafter referred to as the "Registration Statement" and the "Prospectus,"
respectively) and to registration or qualification under the securities laws
of the states in which securities may be sold,
1. the Aggregate New Shares are duly and validly authorized and, upon
the sale and issuance thereof in the manner referred to in the Registration
Statement, and upon payment therefor, will constitute legally issued, fully
paid and nonassessable shares of the Common Stock of the Company; and
2. the Outstanding Shares are legally issued, duly and validly
authorized and constitute fully paid and nonassessable shares of the Common
Stock of the Company.
We consent to the use of our name under the caption "Legal Matters" in the
Prospectus and the Registration Statement, and to the filing of this opinion as
an exhibit to the Registration Statement. By giving you this opinion and
consent, we do not admit that we are experts with respect to any part of the
Registration Statement or Prospectus within the meaning of the term "expert" as
used in Section 11 of the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder, nor do we admit that we are in the category
of persons whose consent is required under Section 7 of said act.
Very truly yours,
/s/ TROY & GOULD P.C.
-----------------------------------
TROY & GOULD
Professional Corporation
EXHIBIT 5.1
<PAGE>
FOUR MEDIA COMPANY
1997 AMENDED AND RESTATED DIRECTOR STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
---------------------------
- -----------------------------
- -----------------------------
- -----------------------------
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number: _________________________
Date of Grant: _________________________
Vesting Commencement Date: _________________________
Exercise Price per Share: $________________________
Total Number of Shares for which
Option is Granted: _________________________
Total Exercise Price: $________________________
Term/Expiration Date: _________________________
Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in four equal cumulative
installments on or after each successive annual anniversary of the Date of Grant
in accordance with the following schedule:
1
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Exercise
Becoming Exercisable Date
-------------------- --------
<S> <C> <C>
First Anniversary ___________________ _______
Second Anniversary ___________________ _______
Third Anniversary ___________________ _______
Fourth Anniversary ___________________ _______
</TABLE>
Termination Period:
------------------
This Option may be exercised for three (3) month after termination of your
status as a Director, or such longer period as may be applicable upon death or
Disability of Optionee as provided in the Plan. In no event shall this Option
be exercised later than the Term/Expiration Date as provided above.
II. AGREEMENT
---------
1. Grant of Option. FOUR MEDIA COMPANY, a Delaware corporation (the
---------------
"Company"), hereby grants to the Optionee named in the Notice of Grant (the
"Optionee"), an option (the "Option") to purchase the total number of shares of
Common Stock (the "Shares") set forth in the above Notice of Stock Option Grant,
at the exercise price per share set forth in the Notice of Stock Option Grant
(the "Exercise Price") subject to the terms, definitions and provisions of the
Amended and Restated 1997 Director Option Plan (the "Plan") adopted by the
Company, which is incorporated herein by reference. Unless otherwise defined
herein, the terms defined in the Plan shall have the same defined meanings in
this Option Agreement.
2. Exercise of Option,
------------------
(a) Right to Exercise. This Option shall be exercisable during its
-----------------
term in accordance with the Vesting Schedule set out in the Notice of Stock
Option Grant and with the applicable provisions of the Plan and this Option
Agreement. In the event of Optionee's death, disability or cessation of service
as a Director, this
2
<PAGE>
Option shall be exercisable in accordance with the applicable provisions of the
Plan and this Option Agreement.
(b) Method of Exercise. This Option shall be exercisable by written
------------------
notice (in the form attached as Exhibit A) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock exchange upon which the Shares may then be
listed. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
3. Optionee's Representations. If the Shares purchasable pursuant to the
--------------------------
exercise of this Option have not been registered under the Securities Act of
1933, as amended, at the time this Option is exercised, Optionee shall, if
required by the Company, concurrently with the exercise of all or any portion of
this Option, deliver to the Company his or her Investment Representation
Statement in the form attached hereto as Exhibit B.
4. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Optionee:
(a) cash;
(b) check;
(c) surrender of other shares of Common Stock of the Company which
(A) in the case of Shares acquired pursuant to the
3
<PAGE>
exercise of an Option, have been owned by the Optionee for more than six (6)
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the Exercise Price of the Shares as to which the Option is
being exercised; or
(d) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale proceeds required to pay the Exercise Price.
5. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company if the
Company determines that stockholder approval is required by law or any
regulations applicable to Company, or if the issuance of such Shares upon such
exercise or the method of payment of consideration for such shares would
constitute a violation of any applicable federal or state securities or other
law or regulation, including any rule under Part 207 of Title 12 of the Code of
Federal Regulations ("Regulation G") as promulgated by the Federal Reserve
Board.
6. Termination of Continuous Status as a Director . In the event an
-----------------------------------------------
Optionee's status as a Director terminates (other than upon the Optionee's death
or total and permanent disability), Optionee may, to the extent otherwise so
entitled at the date of such termination (the "Termination Date"), exercise this
Option during the Termination Period set out in the Notice of Stock Option
Grant. To the extent that Optionee was not entitled to exercise this Option at
the date of such termination, or if Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
7. Disability of Optionee. In the event of termination of an Optionee's
----------------------
status as a Director as a result of his or her disability (as defined in Section
22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the
date of such termination (and in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), exercise the Option
to the extent otherwise entitled to exercise it at the date of such termination.
To the extent that Optionee was not entitled to exercise the Option at the date
of termination, or if Optionee does not exercise such Option to the extent so
entitled
4
<PAGE>
within the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
8. Death of Optionee. In the event of termination of Optionee's status
-----------------
as a Director as a result of the death of Optionee, the Option may be exercised
at any time within twelve (12) months following the date of death (but in no
event later than the date of expiration of the term of this Option as set forth
in Section 10 below), by Optionee's estate or by a person who acquired the right
to exercise the Option by bequest or inheritance, but only to the extent the
Optionee could exercise the Option at the date of death.
9. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
10. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the Plan and the terms of this Option.
11. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal and California tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
(a) Grant of Options. The Optionee will not recognize any income for
----------------
either federal or California income tax purposes upon grant of an Option under
the Plan.
(b) Exercise of Options. There may be a regular federal income tax
-------------------
liability and California income tax liability upon the exercise of an Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates)
5
<PAGE>
equal to the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price.
(c) Disposition of Shares. If Shares received pursuant to exercise of
---------------------
the Option are held for more than one year, any gain or loss realized on
disposition of the Shares will be treated as long-term capital gain or loss for
federal and California income tax purposes; and if Shares are held for one year
or less, any such profit or loss will be treated as short-term capital gain or
loss.
12. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This Option Agreement is governed by California law except for that
body of law pertaining to conflict of laws.
FOUR MEDIA COMPANY,
a Delaware corporation
By:___________________________
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A DIRECTOR OF THE COMPANY
(NOT THROUGH THE ACT OF BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS
AGREEMENT, NOR IN THE COMPANY'S 1997 AMENDED AND RESTATED DIRECTOR STOCK OPTION
PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY
RIGHT WITH RESPECT TO CONTINUATION OF SERVICE AS A DIRECTOR OR NOMINATION TO
SERVE AS A DIRECTOR, NOR SHALL IT INTERFERE IN ANY WAY WITH ANY RIGHTS WHICH THE
DIRECTOR OR THE COMPANY MAY HAVE TO TERMINATE THE DIRECTOR'S RELATIONSHIP WITH
THE COMPANY AT ANY TIME.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Stock Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Stock Option
Agreement and fully understands all provisions of the Option. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Company's Board of Directors or Compensation Committee
administering the Plan upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated:__________________ _______________________
Optionee
Residence Address:
______________________
______________________
______________________
6
<PAGE>
EXHIBIT A
---------
1997 AMENDED AND RESTATED DIRECTOR OPTION PLAN
EXERCISE NOTICE
FOUR MEDIA COMPANY
2813 W. ALAMEDA AVENUE
BURBANK, CA 91505
Attention: Secretary
1. Exercise of Option. Effective as of today, _________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
________ shares of the Common Stock (the "Shares") of FOUR MEDIA COMPANY (the
"Company") under and pursuant to the Amended and Restated 1997 Director Option
Plan (the "Plan") and the Stock Option Agreement dated _______, 19__ (the
"Option Agreement"). Unless otherwise defined herein, the terms defined in the
Plan shall have the same defined meanings in this Exercise Notice.
2. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
3. Rights as Stockholder. Until the stock certificate evidencing such
---------------------
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a stockholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 12.
Optionee shall enjoy rights as a stockholder until such time as
Optionee disposes of the Shares.
<PAGE>
4. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
5. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company may
-------
cause the legend set forth below or legends similar thereto, to be placed upon
any certificate(s) evidencing ownership of the Shares together with any other
legends that may be required by the Company or by state or federal securities
laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL SATISFACTORY TO
THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE
OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been transferred.
6. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and
2
<PAGE>
assigns of the Company. Subject to the restrictions on transfer herein set
forth, this Agreement shall be binding upon Optionee and his or her heirs,
executors, administrators, successors and assigns.
7. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the Compensation Committee thereof that
administers the Plan, which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Board or Compensation
Committee shall be final and binding on the Company and on Optionee.
8. Governing Law; Severability. This Agreement shall be governed by and
---------------------------
construed in accordance with the laws of the State of California excluding that
body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
9. Notices. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
10. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
11. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
full Exercise Price for the Shares.
12. Entire Agreement. The Plan and Notice of Grant/Option Agreement are
----------------
incorporated herein by reference. This Agreement, the Plan, the Option
Agreement and the Investment Representation Statement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their
3
<PAGE>
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee.
Submitted by: Accepted by:
OPTIONEE: FOUR MEDIA COMPANY
By:______________________________
Its:_____________________________
_________________________
(Signature)
Address: Address:
- ------- -------
_________________________ 2813 W. ALAMEDA AVENUE
BURBANK, CA 91505
_________________________
4
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : FOUR MEDIA COMPANY
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act or qualified under any State Securities Laws
in reliance upon a specific exemption therefrom, which exemption may depend
upon, among other things, the bona fide nature of Optionee's investment intent
as expressed herein. In this connection, Optionee understands that, in the view
of the Securities and Exchange Commission, the statutory basis for such
exemption may be unavailable if Optionee's representation was predicated solely
upon a present intention to hold these Securities for the minimum capital gains
period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future. Optionee further understands
that the
1
<PAGE>
Securities must be held indefinitely unless they are subsequently registered
under the Securities Act and qualified under applicable State Securities Laws or
an exemption from such registration and/or qualification is available. Optionee
further acknowledges and understands that the Company is under no obligation to
register the Securities. Optionee understands that the certificate evidencing
the Securities will be imprinted with a legend which prohibits the transfer of
the Securities unless they are so registered and qualified or such registration
or qualification is not required in the opinion of counsel satisfactory to the
Company.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer qualifies under Rule
701 at the time of the grant of the Option to the Optionee, the exercise will be
exempt from registration under the Securities Act. In the event the Company
becomes subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer
period as any market stand-off agreement may require) the Securities exempt
under Rule 701 may be resold, subject to the satisfaction of certain of the
conditions specified by Rule 144, including: (1) the resale being made through
a broker in an unsolicited "broker's transaction" or in transactions directly
with a market maker (as said term is defined under the Securities Exchange Act
of 1934); and, in the case of an affiliate, (2) the availability of certain
public information about the Company, (3) the amount of Securities being sold
during any three month period not exceeding the limitations specified in Rule
144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than three
2
<PAGE>
years, the satisfaction of the conditions set forth in sections (1), (2), (3)
and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and
3
<PAGE>
their respective brokers who participate in such transactions do so at their own
risk. Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.
Signature of Optionee:
___________________________
Date:___________, 19__
4
<PAGE>
FOUR MEDIA COMPANY
AMENDED AND RESTATED 1997 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this Four Media Company Amended
--------------------
and Restated 1997 Director Option Plan are to attract the best available persons
for service as Outside Directors of the Company and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means FOUR MEDIA COMPANY, a Delaware corporation.
-------
(e) "Director" means a member of the Board or a nominee to become a
--------
member of the Board.
(f) "Employee" means any person, including officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(h) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
<PAGE>
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of
Common Stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such system or exchange (or the
exchange with the greatest volume of trading in Common Stock) on the date of
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not on
the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, the Fair Market Value of a Share of
Common Stock shall be the mean between the high bid and low asked prices for the
Common Stock on the date of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the Board.
(i) "Inside Director" means a Director who is an Employee.
---------------
(j) "Option" means a stock option granted pursuant to the Plan.
------
(k) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(l) "Optionee" means a Director who holds an Option.
--------
(m) "Outside Director" means a Director who is not an Employee.
----------------
(n) "Parent" means a "parent corporation," whether now or hereafter
------
existing as defined in Section 424(e) of the Code.
(o) "Plan" means this Four Media Company Amended and Restated 1997
----
Director Option Plan.
2
<PAGE>
(p) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 700,000 Shares of Common Stock (the "Pool"). The Shares may
be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
---------------------------------------------------
(a) Procedure for Grants. All grants of Options to Outside Directors
--------------------
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each existing Outside Director and each Outside Director who
first becomes an Outside Director prior to the day after the closing of the
Company's initial public offering ("IPO") shall be granted an Option to purchase
100,000 Shares (the "Option") on the effective date of the IPO. Each Outside
Director who first becomes an Outside Director after the closing date of the
IPO, either through election by the stockholders of the Company or appointment
by the Board to fill a vacancy, shall be granted an Option to purchase 100,000
Shares on the date on which such person becomes an Outside Director. The
previous two sentences
3
<PAGE>
notwithstanding, no Inside Director who ceases to be an Inside Director but who
remains a Director shall receive an Option.
(iii) Notwithstanding the provisions of subsection (ii) hereof, any
exercise of an Option granted before the Company has obtained stockholder
approval of the Plan, if required, in accordance with Section 16 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan, if required,
in accordance with Section 16 hereof.
(iv) The terms of any Option granted hereunder shall be as follows:
(A) The term of the Option shall be ten (10) years.
(B) The Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in Sections 8
and 10 hereof.
(C) The exercise price per Share for all Options granted under
this Plan prior to the closing date of the IPO shall be the per Share price to
the public in the Company's IPO. The exercise price per Share for all other
grants shall be 100% of the Fair Market Value per Share on the date of grant of
the Option. In the event that the date of grant of an Option is not a trading
day, the exercise price per Share shall be the Fair Market Value on the next
trading day immediately following the date of grant of the Option.
(D) Subject to Section 10 hereof, and provided that the
closing of the IPO has occurred within two weeks of the effective date of the
IPO, the Option shall become exercisable as to one-quarter (1/4) of the Shares
subject to the Option one year after its date of grant, and as to an additional
one-quarter( 1/4) at the end of each year thereafter, provided that the Optionee
continues to serve as a Director on such dates.
(v) If any Option(s) to be granted under the Plan would cause the
number of Shares subject to outstanding Options plus the number of Shares
previously purchased under Options to exceed the Pool, then the remaining Shares
available for Option grant shall be granted under Options to Outside Directors
only to
4
<PAGE>
the extent then available, and if more than one Outside Director would be so
eligible, on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or the stockholders to increase the number of Shares which
may be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 16 hereof. It shall continue in effect for a
term of ten (10) years unless sooner terminated under Section 11.
7. Form of Consideration. The consideration to be paid for the Shares to
---------------------
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other Shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) delivery of a properly
executed exercise notice together with such other documentation as the Company
and the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale proceeds required to pay the exercise
price, or (v) any combination of the foregoing methods of payment.
8. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4 hereof; provided, however, that no
5
<PAGE>
Options shall be exercisable until, if required, stockholder approval of the
Plan in accordance with Section 16 hereof has been obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Rule 16b-3. Options granted to Outside Directors must comply with
----------
the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or
any successor statute thereto and shall contain such additional conditions or
restrictions as may be required thereunder to qualify Plan transactions, and
other transactions by Outside Directors that otherwise could be matched with
Plan transactions, for the maximum exemption from Section 16 of the Exchange
Act.
(c) Termination of Continuous Status as a Director. Subject to Section
----------------------------------------------
10 hereof, in the event an Optionee's status as a Director terminates (other
than upon the Optionee's death or total and permanent disability [as defined in
Section 22(e)(3) of
6
<PAGE>
the Code]) the Optionee may exercise his or her Option, but only within three
(3) months following the date of such termination, and only to the extent that
the Optionee was entitled to exercise it on the date of such termination (but in
no event later than the expiration of its ten (10) year term). To the extent
that the Optionee was not entitled to exercise an Option on the date of such
termination, and to the extent that the Optionee does not exercise such Option
(to the extent otherwise so entitled) within the time specified herein, the
Option shall terminate.
(d) Disability of Optionee. In the event Optionee's status as a
----------------------
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but
only within twelve (12) months following the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of termination, or if he or she does not exercise such Option (to the
extent otherwise so entitled) within the time specified herein, the Option shall
terminate.
(e) Death of Optionee. In the event of an Optionee's death, the
-----------------
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
7
<PAGE>
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset
----------------------------------------------------------------------
Sale or Change of Control.
- -------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued and outstanding Shares resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued and outstanding Shares
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or Subsidiary thereof (the
"Successor Corporation"). If an Option is assumed or substituted for, the Option
or equivalent option shall continue to be exercisable as provided in Section 4
hereof for so long as the Optionee serves as a Director or a director of the
Successor Corporation. Following such assumption or substitution, if the
Optionee's status as a Director or director of the Successor
8
<PAGE>
Corporation, as applicable, is terminated other than upon a voluntary
resignation by the Optionee, the Option or option shall become fully
exercisable, including as to Shares for which it would not otherwise be
exercisable. Thereafter, the Option or option shall remain exercisable in
accordance with Sections 8(c) through (e) above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
11. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 under
the Exchange Act (or any other applicable law or regulation), the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
9
<PAGE>
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
16. Stockholder Approval. If required by any law or regulation (including
--------------------
Stock Exchange regulation) applicable to the Company, continuance of the Plan
shall be subject to approval by the stockholders of the Company at or prior to
the first annual
10
<PAGE>
meeting of stockholders held subsequent to the granting of an Option hereunder.
If required by law or regulation, such stockholder approval shall be obtained in
the degree and manner required under applicable state and federal law.
17. Restatement of Prior Plan. This Plan amends, restates and supersedes
-------------------------
in its entirety that certain 1997 Director Option Plan approved by the Company's
Board of Directors as of November 19, 1996.
11
<PAGE>
EXHIBIT 10.10A
[LETTERHEAD OF HONGKONG BANK]
PRIVATE & CONFIDENTIAL
31 October 1996
Four Media Company Asia Pte Ltd This Letter of
20 Choon Guan Street 604-00 Offer supersedes
City South Telephone Exchange our Letter of
Singapore 078809 Offer dated
24JUL96.
Attention: Robert T. Walston / Alan Unger
- -----------------------------------------
Dear Sirs
BANKING FACILITIES
With reference to the intended public listing of the new holding company, Four
Media Company, Delaware (FMCD) in the United States, we advise that we have
amended the terms and conditions for the undermentioned facilities which are
subject to review at any time and in any event, in JANUARY 1997:
1. FACILITIES PRESENT LIMITS PROPOSED LIMITS
---------- --------------- ---------------
A. General Banking Facilities
------------------------------
Guarantee SGD 90,000.00 SGD 40,000.00
B. Term Facility
-----------------
7 Year Term Loan SGD16,898,136.33 SGD16,898,136.33
2. SECURITY
--------
As security we currently hold a corporate guarantee from Four Media Company,
U.S.A. for SGD16.95 million with Board Resolution and Certificate of
Incumbency and Counsel's opinion. This will be released and be replaced by a
corporate guarantee from the new holding company, Four Media Company,
Delaware (FMCD) for SGD16.95 million together with Board Resolution and
Certificate of Incumbency and Counsel's opinion (form enclosed).
3. COVENANTS HELD
--------------
a) Four Media Company Asia Pte Ltd shall remain a 100% owned subsidiary of
Four Media Company, Burbank and more than 50% of the issued and paid-up
capital of Four Media Company, Burbank shall remain ultimately owned by
Steinhardt Organization (to be deleted). .../2
<PAGE>
[LETTERHEAD OF HONGKONG BANK]
- 2 -
- --------------------------------------------------------------------------------
b) Four Media Company Asia Pte Ltd shall advise the Bank of any development
/ changes / problems with contract with MTV Asia (held).
c) Gearing covenant shall be as follows:
Year 1 : Not to exceed 2.40:1
Year 2 : Not to exceed 2.30:1
Year 3 : Not to exceed 2.20:1
Year 4 to 5 : Not to exceed 1.50:1
Year 6 to 7 : Not to exceed 1.10:1
d) Repayment of subordination of shareholders' loans shall be allowed in
compliance with covenants.
Additional Covenants To Be Obtained
-----------------------------------
e) In the event of a public listing of FMCD, the combined shareholding of
Robert Walston and key management including James Danlon, John Sabin,
Gavin Schutz and Robert Bailey shall be maintained at the post listing
level with the minimum percentage being 15.00% until 15 April 2000.
Thereafter the bank shall be notified prior to any change in the
shareholding of the above shareholders.
f) FMCD, the guarantor, shall notify the bank prior to its entering into
contingent liabilities in the amounts of USD1.0 million and above.
Contingent liabilities are defined as any contingent items such as
corporate guarantees, guarantees, performance bonds, standby DCs or DCs
which will not be reflected as primary liabilities in the guarantor's
audited financial statements.
g) The consolidated net worth of the guarantor, FMCD, shall be no less than
USD22.0 million as at the end of each January and the respective
financial year end, i.e. July.
h) The consolidated financial condition of the guarantor, FMCD, after the
transfer of all shares of operating entities shall not adversely differ
from the audited consolidated accounts of the existing holding company,
Four Media Company, Burbank as at financial year ending 04 August 1996.
i) The employment contracts for Robert T. Walston and Gavin Schutz shall be
extended throughout the term of the loan facility. .../3
<PAGE>
[LETTERHEAD OF HONGKONG BANK]
- 3 -
- --------------------------------------------------------------------------------
All Securities, Terms and Conditions enumerated in our Letter of Offer dated 28
January 1996 and previously executed loan facility documentation remain
unchanged.
We are pleased to be of assistance to you and shall be grateful if you could
arrange for the authorized signatories of the company, in accordance with the
terms of the mandate given to the Bank, to sign and return to us the duplicate
copy of this letter together with a Certified True Copy of your Board Resolution
and the enclosed document by 22 November 1996 to signify your confirmation as to
----------------
the correctness of the securities held and your understanding and acceptance of
the terms and conditions under which these facilities are granted.
Yours faithfully
/s/ ISABELLA CHEONG /s/ LILIAN YAP
- ------------------------------ --------------------------------
ISABELLA CHEONG LILIAN YAP
DEPUTY MANAGER MANAGER
KW/al
We confirm our acceptance of the terms and conditions stated herewith.
/s/ ROBERT T. WALSTON
- --------------------------------
For and on behalf of
FOUR MEDIA COMPANY ASIA PTE LTD
NAME: ROBERT T. WALSTON
DESIGNATION: MANAGING DIRECTOR
DATE: 1/3/97
<PAGE>
[LETTERHEAD OF LEE & LEE]
4 February 1997
Four Media Company Asia Pte. Ltd. BY FAX & POST
30 Choon Guan Street (Fax: 420 2732)
#04-00, City South Telephone Exchange No. of pages: 15
Singapore 079809
Attention: Mr. Alan Unger
- -------------------------
Greenburg Glusker Fields Claman & Machtinger BY FAX & POST
1900 Avenue of the Stars (Fax: 001-1-310-553-0687)
Suite 2100 No. of pages: 15
Los Angeles
California 90067-4590
United States of America
Attention: Ms. Jill A. Cossman
- ------------------------------
Dear Sirs:
S$16,950,000 MILLION TERM LOAN FACILITY ("THE FACILITY") TO FOUR MEDIA COMPANY
ASIA PTE. LTD. ("4MCA") FROM THE HONGKONG AND SHANGHAI BANKING CORPORATION
LIMITED ("THE BANK") -- REORGANIZATION OF FOUR MEDIA COMPANY, BURBANK ("4MC
BURBANK").
We refer to the above matter.
We enclose herewith a copy of the Supplemental Loan Agreement dated 3 February
1997 executed by 4MCA and the Bank for your information. We will be attending to
the stamping of the same today.
Please let us have the originals of the documents listed in Clauses 4.1(1) (a)
---------
to (f) as soon as possible.
Yours faithfully
/s/ LEE & LEE
- -------------------
Lee & Lee
enc.
cc Clients (without enc)
Attention: Ms. Isabelle Cheong/Ms. Annie Ng (Fax: 338 1894)
-------------------------------------------
<PAGE>
BETWEEN
FOUR MEDIA COMPANY ASIA PTE LTD
and
THE HONGKONG AND SHANGHAI BANKING CORPORATION
---------------------------
SUPPLEMENTAL LOAN AGREEMENT
---------------------------
LEE & LEE
5 Shanton Way, Level 19
UIC Building
Singapore 088808
<PAGE>
THIS SUPPLEMENTAL LOAN AGREEMENT is dated 8 February 1997 and made BETWEEN:
(1) FOUR MEDIA COMPANY ASIA PTE LTD, a company incorporated in Singapore and
having its registered office at 30 Choon Guan Street, #04-00, City South
Telephone Exchange, Singapore 079809 ("the Borrower"); and
(2) THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED, a company
incorporated in Hong Kong and having a place of business at 40-A Orchard
Road #01-00, MacDonald House, Singapore 238838 ("the Bank")
and is supplemental to a Loan Agreement dated 22nd February 1996 ("the Loan
Agreement") made between the Borrower and the Bank, pursuant to which the Bank
agreed to make available to the Borrower a term loan facility of up to Singapore
Dollars Sixteen Million Nine Hundred and Fifty Thousand (S$16,950,000) ("the
Facility").
WHEREAS:
- -------
A. It was a term of the Bank's agreement to make available the Facility to the
Borrower that Four Media Company, a corporation incorporated in the state of
Delaware, the United States of America ("U.S.A.") ("the Original Guarantor")
with its principal place of business at 2813 West Alameda Avenue, Burbank,
California 91505-4456, U.S.A. execute in favour of the Bank a guarantee and
a deed of subordination both as security for the Borrower's obligations
under the Loan Agreement.
B. The Original Guarantor had on 16 and 22 February 1995 executed a guarantee
("the Existing Guarantee") and a deed of subordination ("the Existing Deed
of Subordination") in favour of the Bank respectively. The Borrower was a
wholly owned subsidiary of the Original Guarantor at the time of execution
of the Existing Deed of Guarantee and the Existing Deed of Subordination.
C. The Original Guarantor had on 25 September 1996 changed its name from "Four
Media Company" to "4MC-Burbank, Inc".
D. Pursuant to a reorganization exercise ("the Reorganization"), a holding
company under the name of "Four Media Company" was on 25 September 1996
incorporated in the state of Delaware, U.S.A. ("4MC Delaware") with its
principal place of business at 2813 West Alameda Avenue, Burbank, California
91505-4455, U.S.A. which acquired, on 17 October 1996, all the outstanding
capital stock of or, as the case may be, the issued shares in, inter alia,
the Original Guarantor and the Borrower.
E. The Borrower has requested the Bank and the Bank has agreed, inter alia, to
the Reorganization on and subject to (i) the provision of, inter alia, a
corporate guarantee by 4MC Delaware (in terms substantially similar to the
Existing Guarantee) and (ii) the terms and conditions hereinafter set out.
NOW IT IS HEREBY AGREED AS FOLLOWS:
- ----------------------------------
1. INTERPRETATION;
--------------
<PAGE>
- 2 -
1.1 In this Supplemental Loan Agreement, all words and phrases defined in the
Loan Agreement and not otherwise defined herein shall bear the meanings
ascribed to them in the Loan Agreement.
2. AMENDMENTS TO THE LOAN AGREEMENT:
--------------------------------
2.1 Clause 1.02 shall be amended as follows:
(i) by deleting the word "Guarantor" at the end of the definition of
"Deed of Subordination" and replacing with the words "Subordinated
Lender";
(ii) by inserting after the definition of "First Drawdown Date" the
following new definition:
""Group" means the Guarantor and its Subsidiaries;";
(iii) by inserting after the word "incorporated" in the first line of the
definition of "Guarantor" the words "on 25 September 1996";
(iv) by inserting after the definition of "Project Costs" the following
new definition:
""Reorganization" means the reorganization exercise pursuant to
which the Guarantor acquired all the outstanding capital stock of,
or, as the case may be, the issued shares in, inter alia, the
Subordinated Lender and the Borrower;" and
(v) by inserting after the definition of "Repayment Dates" the following
new definition:
""Subordinated Lender" means 4MC-Burbank, Inc. (previously known as
"Four Media Company") a corporation incorporated in the state of
Delaware, the United States of America with its principal place of
business at 2813 West Alameda Avenue, Burbank, California 91805-
445, U.S.A.".
2.2 Clause 5.01(a) shall be amended by inserting the words "each of" before,
and the words "and the Subordinated Lender" after, the words "the
Guarantor" respectively in the first line thereof.
2.3 Clause 5.01(c) shall be amended by inserting the words "each of" before,
and the words "and the Subordinated Lender" after, the words "the
Guarantor" respectively in the first line thereof.
2.4 Clause 5.01(f) shall be amended as follows:
(i) by replacing the word "and" in the first line thereof with a comma;
(ii) by inserting the words "and the Subordinated Lender" after the words
"the Guarantor" in the first, fifth and ninth lines thereof; and
<PAGE>
(iii) by replacing the word "or" in the fifth and ninth lines thereof with
a comma.
2.5 Clause 5.01(g)(i) shall be amended as follows:
(i) by inserting after the word "Guarantor" in the seventh line thereof
the words "or the Subordinated Lender"; and
(ii) by replacing the word "its" in the seventh line thereof with the
words "their respective".
2.6 Clause 5.01(h) shall be amended as follows:
(i) by replacing the word "or" in the fifth line thereof with a comma;
and
(ii) by inserting after the words "the Guarantor" in the fifth line
thereof the words "or the Subordinated Lender".
2.7 Clause 5.01(i) shall be amended as follows:
(i) by replacing the word "and" in the fourth line with a comma;
(ii) by inserting after the words "the Guarantor" in the fourth line
thereof the words "and the Subordinated Lender";
(iii) by replacing the word "or" in the fourth line of sub-section (i)
with a comma;
(iv) by inserting after the words "the Guarantor" in the fourth line of
sub-section (i) the words "or the Subordinated Lender";
(v) by replacing the word "or" in the second, sixth and eighth lines of
sub-section (ii) with a comma;
(vi) by inserting after the word "Guarantor" in the second, seventh and
eighth lines of sub-section (ii) the words "or the Subordinated
Lender";
(vii) by replacing the word "or" in the second and fourth lines of
sub-section (iii) with a comma;
(viii) by inserting after the word "Guarantor" in the second line of
sub-section (iii) the words "or the Subordinated Lender"; and
(ix) by inserting after the word "Guarantor's" in the fourth line of
sub-section (iii) the words "or the Subordinated Lender's".
2.8 Clause 5.01(j) shall be amended as follows:
(i) by inserting after the words "Borrower and" in the second line
thereof the following words:
<PAGE>
- 4 -
"the latest audited consolidated and unconsolidated balance sheets
and profit and loss accounts of";
(ii) by inserting after the words "the Guarantor" in the second line
thereof the words "and the Subordinated Lender"; and
(iii) by inserting after the words "the Borrower" in the sixth and
seventh lines thereof the words ", the Guarantor and the
Subordinated Lender respectively".
2.9 Clause 5.01(k) shall be amended as follows:
(i) by replacing the word "or" in the second line thereof with a comma;
and
(ii) by inserting after the word "Guarantor" in the third line thereof
the words "or the Subordinated Lender".
2.10 Clause 5.01(l) shall be amended as follows:
(i) by replacing the word "and" in the second line thereof with a
comma; and
(ii) by inserting after the words "the Guarantor" in the second line
thereof the words "and the Subordinated Lender".
2.11 Clause 5.01(m) shall be amended by deleting the following words in the
first to the fourth lines thereof:
"and more than 50 per cent of the issued and paid-up share capital of the
Guarantor is ultimately owned by entities controlled by Michael Steinhardt
(Social Security No. 116-300-670)".
2.12 Clause 5.02 shall be amended as follows:
(i) by inserting at the end of the fourth line thereof the words "most
recent audited consolidated and unconsolidated balance sheets and
profit and loss accounts of the"; and
(ii) by inserting after the word "Guarantor" in the fifth line thereof
the words "and the Subordinated Lender".
2.13 Clause 6.01(a) shall be amended as follows:
(i) by inserting after the words "the Guarantor" in the first line
thereof the words "and the Subordinated Lender";
(ii) by inserting after the words "respective audited financial
statements" in the fourth line thereof the following words:
"(in the case of the Borrower) and audited consolidated and
<PAGE>
- 5 -
unconsolidated financial statements (in the case of the Guarantor
and the Subordinated Lender)";
(iii) by replacing the word "and" in the seventh line thereof with a
comma; and
(iv) by inserting after the words "the Guarantor's" in the seventh line
thereof the words "and the Subordinated Lender's".
2.14 Clause 6.01(d) shall be amended as follows:
(i) by replacing the word "and" in the first line thereof with a comma;
(ii) by inserting after the words "the Guarantor" in the first line
thereof the words "and the Subordinated Lender"; and
(iii) by inserting after the words "the Guarantor" in the fifth line
thereof the words "and/or the Subordinated Lender".
2.15 Clause 6.01(g) shall be amended as follows:
(i) by replacing the word "or" in the third line thereof with a comma;
and
(ii) by inserting after the words "the Guarantor" in the third line
thereof the words "or the Subordinated Lender".
2.16 Clause 6.01(o) shall be amended as follows:
(i) by replacing the word "or" in the sixth and seventh lines thereof
with a comma; and
(ii) by inserting after the words "the Guarantor" in the sixth and
seventh lines thereof the words "or the Subordinated Lender".
2.17 Clause 6.01(p) shall be amended by replacing the word "Guarantor" in
sub-sections (i) and (ii) thereof with the words "Subordinated Lenders";
2.18 Clause 6.01(s) shall be amended by deleting the following words in the
second to fourth lines thereof:
"and the Guarantor shall not permit or suffer to permit any change in
control of more than 50 per cent. of its issued and paid-up share
capital".
2.19 Clause 6.01(v) shall be amended as follows:
(i) by replacing the word "Guarantor" in the third and fourth lines
thereof with the words "Subordinated Lender"; and
(ii) by deleting the word "and" at the end thereof.
<PAGE>
- 6 -
2.20 Clause 6.01(w) shall be amended by deleting the words "use its best
endeavours to" in the first line thereof and inserting the word "and" at
the end thereof.
2.21 Clause 6.01 shall be amended by inserting a new Clause 6.01(x) as follows:
"that the Borrower shall forthwith notify the Bank of any development or
change in, or problems arising from the performance or otherwise of, the
MTV Contract which may materially and adversely affect the ability of the
Borrower to perform its obligations thereunder and under this Agreement
and/or the Security Documents.".
2.22 Clause 6 shall be amended by inserting a new Clause 6.03 after Clause 6.02
as follows:
"The Borrower hereby undertakes with the Bank from the date of this
Agreement and for so long thereafter as the Term Loan or any other sum
hereunder or under any of the Security Documents remains outstanding:
(a) that the Borrower shall procure that, upon the closing of the public
offering of the issued and outstanding stock of the Guarantor on the
Nasdaq National Market:
(i) the aggregate beneficial shareholding of Robert T. Walston,
John H. Donlon, John H. Sabin, Gavin W. Schutz and Robert
Bailey in the issued and paid up capital of the Guarantor shall
not at any time on or before 15 April 2000 be less than 15 per
cent. of the issued and outstanding stock of the Guarantor;
(ii) the Bank shall be notified promptly of any change in the
beneficial shareholding of any of the persons named in sub-
clause (a)(i) occurring after 15 April 2000;
(b) that the Borrower shall procure that the Guarantor shall give the
Bank not less than 14 days' prior notification of its intention to
enter into contingent liabilities exceeding in aggregate
US$1,000,000. For the purpose of this sub-clause (b), "contingent
liabilities" shall include any liability arising under any
guarantees, performance bonds, letters of credit or documentary
credits which will not be reflected as primary liabilities in the
Guarantor's audited consolidated and unconsolidated financial
statements;
(c) that the Borrower shall procure that the Consolidated Tangible Net
Worth of the Guarantor shall not be less than US$22,000,000 as at the
end of January and July. For the purpose of this sub-clause (c),
"Consolidated Tangible Net Worth" means the aggregate of the amount
paid up or credited as paid up on the issued share capital of the
Guarantor and the amounts standing to the credit of the capital and
revenue reserves of the Group (including any share premium account,
capital redemption reserve fund, revaluation reserves and profit and
loss account), all as shown by the latest audited consolidated
balance sheet
<PAGE>
- 7 -
of the Group but:
(i) adjusted as may be appropriate to reflect any variation in the
amount of such paid up share capital or the amounts standing to
the credit of such capital and revenue reserves (such capital
and revenue reserves not to include any unaudited gains or
profits and deducting from such capital and revenue reserves
any losses or provisions for losses, whether audited or
unaudited) since the date of such latest consolidated balance
sheet;
(ii) (save to the extent actually accounted for in the preparation
of the consolidated balance sheet) deducting therefrom any
amounts attributable to goodwill (including goodwill arising on
consolidation) or other intangible assets; and
(iii) (save to the extent actually accounted for in the preparation
of the consolidated balance sheet) deducting therefrom any
amounts distributed or proposed to be distributed in cash or in
specie (other than bonus share issue);
(d) that the Borrower shall procure that the consolidated financial
condition of the Group after the Reorganization shall not be
adversely different from the consolidated financial condition of the
Subordinated Lender and its Subsidiaries as at the financial year
ending 4 August 1996; and
(e) that the Borrower shall furnish to the Bank:
(i) within 14 days of the closing of the public offering of the
issued and outstanding stock of the Guarantor on the Nasdaq
National Market, evidence satisfactory to the Bank that Robert
Walston beneficially owns not less than 15% of the issued and
outstanding stock of the Guarantor; and
(ii) forthwith upon the exercise of any option over any of the
issued and outstanding stock in the Guarantor by any one or
more of John H. Donlon, John H. Sabin, Gavin W. Schutz and
Robert Bailey, evidence satisfactory to the Bank of their
respective interests or ownership in the issued and outstanding
stock of the Guarantor."
2.23 Clause 8.01(b) shall be amended as follows:
(i) by replacing the word "or" in the first line thereof with a comma;
and
(ii) by inserting after the words "the Guarantor" in the first line
thereof the words "or the Subordinated Lender".
2.24 Clause 8.01(c) shall be amended as follows:
(i) by replacing the word "or" in the second line thereof with a comma;
and
<PAGE>
- 8 -
(ii) by inserting after the words "the Guarantor" in the second line
thereof the words "or the Subordinated Lender".
2.25 Clause 8.01(e) shall be amended as follows:
(i) by replacing the word "or" in the first line thereof with a comma;
and
(ii) by inserting after the words "the Guarantor" in the first line
thereof the words "or the Subordinated Lender".
2.26 Clause 8.01(f) shall be amended as follows:
(i) by replacing the word "or" in the second line thereof with a comma;
and
(ii) by inserting after the words "the Guarantor" in the second line
thereof the words "or the Subordinated Lender".
2.27 Clause 8.01(g) shall be amended as follows:
(i) by replacing the word "or" in the second line thereof with a comma;
and
(ii) by inserting after the words "the Guarantor" in the second line
thereof the words "or the Subordinated Lender".
2.28 Clause 8.01(h) shall be amended as follows:
(i) by inserting after the word "Guarantor" in the third line thereof
the words "and/or the Subordinated Lender";
(ii) by replacing the word "or" in the fourth and seventh lines thereof
with a comma;
(iii) by inserting after the words "the Guarantor's" in the fourth line
thereof the words "or the Subordinated Lender's"; and
(iv) by inserting after the words "the Guarantor" in the seventh line
thereof the words "or the Subordinated Lender".
2.29 Clause 8.01(i) shall be amended as follows:
(i) by replacing the word "or" in the first line thereof with a comma;
and
(ii) by inserting after the words "the Guarantor" in the first line
thereof the words "or the Subordinated Lender".
2.30 Clause 8.01(k) shall be amended as follows:
(i) by replacing the word "or" in the second line thereof with a comma;
(ii) by inserting after the words "the Guarantor" in the second line
thereof
<PAGE>
- 9 -
the words "or the Subordinated Lender"; and
(iii) by deleting the following words in the third and fourth lines
thereof:
"or in the control of more than 50 per cent. of the issued and
paid-up share capital of the Guarantor"
and substituting therefor the following words:
"or in the control of any of the issued and outstanding stock of
the Guarantor beneficially owned by any one or more of Robert T.
Walston, John H. Donlon, John H. Sabin, Gavin W. Schutz and Robert
Bailey".
2.31 Clause 8.01(m) shall be amended as follows:
(i) by replacing the word "or" in the fourth line thereof with a comma;
and
(ii) by inserting after the words "the Guarantor's" in the fourth line
thereof the words "or the Subordinated Lender's".
2.32 Clause 12.02 shall be amended by inserting after the words "the
Guarantor," the words "the Subordinated Lender,".
3. ACKNOWLEDGMENTS:
---------------
3.1 For the avoidance of doubt, the Borrower acknowledges and agrees that the
Security Documents secure and continue to secure the performance of all
its obligations and liabilities under the Loan Agreement as supplemented,
amended or varied by this Supplemental Loan Agreement.
4. CONDITIONS PRECEDENT:
--------------------
4.1 This Supplemental Loan Agreement shall be effective:
(1) Receipt of Documents: when the Bank has received in form and
--------------------
substance satisfactory to it the following:
(a) an original or a copy, certified as a true copy by an
authorized officer, of resolutions of the Board of Directors
of the Borrower evidencing approval of this Supplemental Loan
Agreement and authorizing its appropriate officers to execute
and deliver this Supplemental Loan Agreement and to give all
notices and take all other action required under this
Supplemental Loan Agreement;
(b) a copy, certified as a true copy by an authorized officer, of
resolutions of the Board of Directors of the Guarantor
evidencing approval of the Guarantee and authorizing its
appropriate officers to execute and deliver the Guarantee and
<PAGE>
- 10 -
to give all notices and take all other action required under the
Guarantee;
(c) the Certificate of Incumbency (in form and substance satisfactory
to the Bank) signed and sealed by the Secretary of the Guarantor;
(d) a copy, certified as a true copy by an authorized officer, of all
authorizations required by the Guarantor to authorize, or
required by the Guarantor in connection with, the execution,
delivery, performance, validity, enforceability and admissibility
in evidence of the Guarantee;
(e) the Guarantee duly executed by the Guarantor and duly stamped
(where applicable) together with such further documentation as
may be required in connection with the registration, completion
and perfection in all respects of the security thereby created;
(f) legal opinions (in form and substance satisfactory to the Bank)
by solicitors in the relevant jurisdiction in respect of the
Guarantor's entry into and performance of the Guarantee;
(g) evidence satisfactory to the Bank that the Guarantor holds all
the issued and paid up share capital of the Borrower;
(h) such other documents and evidence as the Bank may require.
(2) Other Conditions: upon the following conditions being satisfied:
----------------
(a) that all acts, conditions and things required to be done and
performed and to have happened precedent to the execution and
delivery of this Supplemental Loan Agreement and to constitute
the same legal, valid and binding obligations enforceable in
accordance with its terms shall have been done and performed and
have happened in due and strict compliance with all applicable
laws:
(b) that all fees and expenses which have accrued under Clause 7 have
been paid;
(c) that the representations and warranties set out in the Loan
Agreement (with the substitution in Clauses 5.01(j) and (k)
thereof of references to the most recent audited balance sheet
and profit and loss account of the Borrower and the most recent
audited consolidated and unconsolidated balance sheet and profit
and loss account of the Guarantor and the Subordinated Lender
respectively) and herein are true and correct as if made with
respect to the facts and circumstances existing at such relevant
time; and
(d) that no Event of Default has occurred and is continuing and no
event
<PAGE>
- 11 -
or circumstance which constitutes or which with the giving of notice
or lapse of time or both would constitute an Event of Default shall
have occurred.
5. LOAN AGREEMENT TO CONTINUE TO APPLY:
-----------------------------------
5.1 Save as amended or modified herein, all the terms and conditions of the
Loan Agreement shall continue to apply and to have full force and effect
and each and every reference in the Loan Agreement to "this Agreement",
"hereunder", "herein" "hereof" or similar expressions shall mean and refer
to the Loan Agreement as supplemented amended or varied herein or as may
from time to time be further supplemented amended or varied.
6. REPRESENTATIONS AND WARRANTIES:
------------------------------
6.1 The Borrower represents and warrants to the Bank that:
(a) the representations and warranties set out in Clause 5 of the Loan
Agreement (with the substitution in Clauses 5.01(j) and (k) thereof of
references to the most recent audited balance sheet and profit and
loss account of the Borrower and the most recent audited consolidated
and unconsolidated balance sheet and profit and loss account of the
Guarantor and the Subordinated Lender respectively) are true and
correct as if made on the date of this Supplemental Loan Agreement
with reference to the facts and circumstances existing at such date;
(b) the Borrower has power to execute, deliver and perform its obligations
under this Supplemental Loan Agreement; all necessary action has been
taken to authorize the execution, delivery and performance of this
Supplemental Loan Agreement; this Supplemental Loan Agreement
constitutes valid and legally binding obligations of the Borrower
enforceable in accordance with its terms; and
(c) the execution, delivery and performance of this Supplemental Loan
Agreement by the Borrower will not (i) contravene any existing law,
regulation or authorization to which the Borrower is subject, or (ii)
result in any breach of or default under any agreement or other
instrument which the Borrower is a party or is subject or (iii)
contravene or conflict with any provision of its Memorandum and
Articles of Association.
7. FEES AND EXPENSES:
-----------------
7.1 The Borrower shall pay to the Bank on the date of this Supplemental Loan
Agreement, an arrangement fee of Singapore Dollars Five Thousand (S$5,000).
7.2 The Borrower shall pay to the Bank on demand:
<PAGE>
- 12 -
(a) all expenses (whether legal, printing and out-of-pocket expenses)
incurred by the Bank in connection with the negotiation, preparation
and execution of this Supplemental Loan Agreement, the Guarantee and
all documents executed in connection herewith or therewith or in
pursuance hereof or therewith or of any amendment or extension of or
the granting of any waiver or consent under this Supplemental Loan
Agreement, the Guarantee or any such document;
(b) all expenses (including legal, printing and out-of-pocket expenses on
a full indemnity basis) incurred by the Bank in connection with the
enforcement of, or preservation of any rights under, the Loan
Agreement (including this Supplemental Loan Agreement) and the
Security Documents or otherwise in respect of the moneys owing
thereunder together with interest at the respective rates referred to
in Clause 9.01 of the Loan Agreement from the date on which such
expenses were expended to the date of payment (as well after as before
judgment); and
(c) all goods and services, value added and other similar taxes payable on
such expenses
7.3 The Borrower shall pay all stamp, documentary, registration or other like
duties or taxes (including any duties or taxes payable by the Bank) imposed
on or in connection with the Loan Agreement (including this Supplemental
Loan Agreement and all documents execution in connection herewith or in
pursuance hereof) or the Security Documents and shall indemnify the Bank
against any liability arising by reason of any delay or omission by the
Borrower to pay such duties or taxes.
8. LAW AND JURISDICTION
--------------------
8.1 This Supplemental Loan Agreement is governed by and shall be construed in
accordance with the laws of Singapore. Each party to this Supplemental Loan
Agreement irrevocably submits to the non-exclusive jurisdiction of the
Singapore courts.
IN WITNESS WHEREOF the parties hereto have caused this Supplemental Loan
Agreement to be duly executed.
<PAGE>
- 13 -
THE BORROWER
- ------------
The Common Seal of | /s/ illegible
FOUR MEDIA COMPANY | /s/ illegible
ASIA PTE LTD |
was hereunto affixed | [SEAL OF FOUR MEDIA CO]
in the presence of: |
Address: 30 Choon Guan Street
#04-00
City South Telephone Exchange
Singapore 078808
Fax: 420 2732
THE BANK
- --------
Signed Sealed and Delivered by | /s/ Isabella Cheong Mena
Isabella Cheong Mena Wooi | Wooi
the duly authorized Attorney for |
THE HONGKONG AND SHANGHAI | /s/ illegible
BANKING CORPORATION LIMITED |
acting under a Power of Attorney | [SEAL]
dated the [illegible] day of [illegible] 1989 |
(a copy of which was deposited |
in the Registry of the Supreme Court |
of Singapore on the 9 day of Nov 1989 |
and registered as No. 1673 of 1989) |
in the presence of: |
Address: 40-A Orchard Road
#01-00
MacDonald House
Singapore 238838
Telex: HSBC RS 21259
Fax: 338 1894
<PAGE>
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
--------------------
This Agreement, dated as of October 1, 1996, is entered into by and between
Four Media Company, a Delaware corporation (the "Company"), and Robert T.
Walston ("Executive").
INTRODUCTION
------------
The Company and its operating subsidiaries ("Affiliates") are engaged in
the business of providing technical and creative services to the entertainment
industry. The Company desires to employ Executive, and Executive desires to
accept such employment, under the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
---------
EMPLOYMENT; TERM; DUTIES
------------------------
1.1 Employment. Upon the terms and conditions hereinafter set forth, the
----------
Company hereby employs Executive, and Executive hereby accepts employment, as
Chief Executive Officer of the Company and, if so elected, Executive shall also
serve as Chairman of the Board.
1.2 Term. Subject to Section 4.1, Executive's employment hereunder shall
----
be for a term of three (3) years commencing on the date hereof and expiring at
the close of business on the day prior to the third anniversary of the date
hereof (the "Initial Term"). The Initial Term shall be automatically extended
for successive three-year terms (each such extension referred to as a "Renewal
Term") unless either party gives the other party written notice of its or his
desire to terminate, which notice of termination shall be given not less than
six months prior to the expiration of the Initial Term or any Renewal Term, as
the case may be. Notwithstanding the foregoing, Executive shall be obligated to
deliver a written reminder (the "Reminder Notice") to the Company respecting
such termination notice, which Reminder Notice shall be delivered no earlier
than eight months prior to the expiration of the Initial Term or any Renewal
Term, as the case may be, and no later than six and one-half months prior to the
expiration of the Initial Term or any Renewal Term, as the case may be. If
Executive fails to timely deliver the Reminder Notice, then the Initial Term or
any Renewal Term, as the case may be, shall not be automatically
<PAGE>
extended for an additional three-year period even if the Company fails to timely
deliver a notice of termination to Executive.
1.3 Duties. During the Initial Term or any Renewal Term (sometimes
------
collectively referred to as the "Term"), Executive shall perform such executive
duties for the Company and/or its Affiliates, consistent with his position
hereunder, as may be assigned to him from time to time by the Board of
Directors. Executive shall devote his entire productive business time,
attention and energies to the performance of his duties hereunder. Executive
shall use his best efforts to advance the interests and business of the Company
and its Affiliates. Executive shall abide by all rules, regulations and
policies of the Company, as may be in effect from time to time. Notwithstanding
the foregoing, Executive may act for his own account in passive-type investments
as provided in Section 5.3, or as a member of other boards of directors, where
the time allocated for those activities does not materially interfere with or
create a conflict of interest with the discharge of his duties for the Company.
1.4 Reporting. All employees of the Company shall report to Executive and
---------
Executive shall report directly to the Board of Directors of the Company.
1.5 Exclusive Agreement. Executive represents and warrants to the Company
-------------------
that there are no agreements or arrangements, whether written or oral, in effect
which would prevent Executive from rendering his exclusive services to the
Company during the Term.
ARTICLE II
----------
COMPENSATION
------------
2.1 Compensation. For all services rendered by Executive hereunder and
------------
all covenants and conditions undertaken by him pursuant to this Agreement, the
Company shall pay, and Executive shall accept, as full compensation, the amounts
set forth in this Article II.
2.2 Base Salary. The base salary shall be an annual salary of $260,000
-----------
("Base Salary"), payable by the Company in accordance with the Company's normal
payroll practices.
2.3 Bonus. In addition to the Base Salary, the Company may make
-----
discretionary bonus payments to Executive, under such terms, conditions and
requirements as may be established by the Company's Board of Directors in its
sole discretion.
2.4 Deductions. The Company shall deduct from the compensation described
----------
in Sections 2.2 and 2.3 any federal, state
2
<PAGE>
or local withholding taxes, social security contributions and any other amounts
which may be required to be deducted or withheld by the Company pursuant to any
federal, state or local laws, rules or regulations.
2.5 Disability Adjustment. Any compensation otherwise payable to
---------------------
Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which
Executive is disabled (as contemplated in Section 4.3) shall be reduced by any
amounts payable to Executive for loss of earnings or the like under any
insurance plan or policy sponsored by the Company.
ARTICLE III
-----------
BENEFITS; EXPENSES
------------------
3.1 Benefits. During the Term, Executive shall be entitled to participate
--------
in such group life, health, accident, disability or hospitalization insurance
plans, pension plans and retirement plans as the Company may make available to
its other executive employees as a group, subject to the terms and conditions of
any such plans.
3.2 Expenses. The Company agrees that Executive is authorized to incur
--------
reasonable expenses in the performance of his duties hereunder and in promoting
the business of the Company. The Company shall from time to time pay or
reimburse Executive for the reasonable and necessary expenses incurred by
Executive in connection with the performance of his duties hereunder if such
expenses have been previously approved by the Company or if reimbursement is
otherwise appropriate in accordance with the Company's established policies and
if the Company receives such verification thereof as the Company may require in
order to qualify such expenses as deductible business expenses.
3.3 Vacation. Executive shall accrue, on a daily basis, a total of four
--------
(4) work weeks of vacation per year following the date of this Agreement. If
Executive's earned but unused vacation time reaches six (6) work weeks,
Executive will not continue to accrue additional vacation time until he uses
enough vacation to fall below this maximum amount. Thereafter, Executive will
start earning vacation benefits again until the six (6) work week maximum is
again reached. Any accrued but unused vacation time will be paid to Executive
on a pro rata basis at termination of employment.
3.4 Key Man Insurance. The Company may secure in its own name or
-----------------
otherwise, and at its own expense, life, health, accident and other insurance
covering Executive alone or with others, and Executive shall not have any right,
title or interest in or to such insurance other than as expressly provided
herein. Executive agrees to assist the Company in procuring such insurance by
submitting to the usual and customary medical and other
3
<PAGE>
examinations to be conducted by such physicians as the Company or such insurance
company may designate and by signing such applications and other written
instruments as may be required by the insurance companies to which application
is made for such insurance. Executive's failure to submit to such usual and
customary medical and other examinations shall be deemed a material breach of
this Agreement.
ARTICLE IV
----------
TERMINATION; DEATH; DISABILITY
------------------------------
4.1 Termination of Employment With Cause. In addition to any other
------------------------------------
remedies available to the Company at law, in equity or as set forth in this
Agreement, the Company shall have the right, upon written notice to Executive,
to immediately terminate his employment hereunder without any further liability
or obligation to him in respect of his employment (other than its obligation to
pay Base Salary accrued but unpaid as of the date of termination) if Executive:
(a) breaches any material provision of this Agreement and, if such breach is
curable, in the sole judgment of the Company, such breach is not cured within
ten (10) days after written notice thereof from the Company; or (b) has
committed an act of gross misconduct in connection with the performance of his
duties hereunder, as determined in good faith by the Board of Directors; or (c)
demonstrates habitual negligence in the performance of his duties, as determined
by the Board of Directors; or (d) is convicted of or pleads nolo contendere to
---- ----------
any misdemeanor involving moral turpitude or to any felony; or (e) has committed
any act of fraud, misappropriation of funds or embezzlement in connection with
his employment hereunder (a "Termination With Cause").
4.2 Termination of Employment Without Cause. During the Term, the Company
---------------------------------------
may at any time, in its sole discretion, terminate the employment of Executive
hereunder without cause by written notice to him. In such event, the Company
shall pay Executive an amount equal to the sum of the following:
(a) any Base Salary accrued but unpaid as of the date of termination;
(b) an amount equal to Executive's monthly Base Salary in effect on
the date of termination for the remainder of the Term, payable as and when
such amounts would have been due and payable hereunder had such termination
not occurred (the "Severance Period"); and
(c) any reimbursement for expenses incurred in accordance with Section
3.2.
4
<PAGE>
In addition, the Company shall use its best efforts to arrange for the
continuation, through the Severance Period, of such health and/or medical
benefits or plans as are in effect as of the date of termination, if and only if
permissible under such plans. If not so permissible, the Company shall pay to
Executive an amount sufficient to enable Executive to arrange for substantially
equivalent health and/or medical coverage during the Severance Period.
Executive acknowledges that the payments and benefits referred to in
this Section 4.2, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.2, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.2, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
If Executive's employment is terminated under this Section 4.2,
Executive shall use all reasonable efforts to obtain other employment or become
self-employed as promptly as possible. If Executive secures other employment or
becomes self-employed during the Severance Period, the Company's obligations
under this Section 4.2 shall be reduced by the earnings from such employment or
self-employment received by Executive. During the Severance Period, Executive
will notify the Company in writing of any offer of employment within 10 days of
Executive's receipt of same. In addition, Executive will immediately notify the
Company in writing if Executive becomes employed or self-employed during the
Severance Period.
4.3 Death; Disability. In the event that Executive dies or becomes
-----------------
Disabled (as defined herein), Executive's employment shall terminate when such
death or Disability occurs and the Company shall pay Executive (or his legal
representative, as the case may be) as follows:
(a) any Base Salary accrued but unpaid as of the date of death or
termination for Disability;
(b) any reimbursement for expenses incurred in accordance with Section
3.2.; and
(c) an amount equal to Executive's monthly Base Salary in effect on
such termination date for the lesser of (i) six months or (ii) the remainder of
the Term, payable as and when such amounts would have been due and payable
hereunder had such termination not occurred. The monthly Base Salary with
respect to any period during which Executive is Disabled shall be reduced by
amounts payable to him under any insurance plan sponsored by the Company,
5
<PAGE>
provided that Executive's aggregate compensation during the period of Disability
shall be equal to 100% of his monthly Base Salary then in effect.
For the purposes of this Agreement, Executive shall be deemed to be
"Disabled" or have a "Disability" if, because of Executive's physical or mental
disability, (a) he has been substantially unable to perform his duties
hereunder for twelve (12) work weeks in any twelve (12)-month period, and (b) he
has utilized any and all benefits available to him under state and federal laws
and is either (i) unable to reasonably and effectively carry out his duties with
reasonable accommodations by the Company or (ii) unable to reasonably and
effectively carry out his duties because any reasonable accommodation which may
be required would cause the Company undue hardship. In the event of a
disagreement concerning Executive's perceived Disability, Executive shall submit
to such examinations as are deemed appropriate by three practicing physicians
specializing in the area of Executive's Disability, one selected by Executive,
one selected by the Company, and one selected by both such physicians. The
majority decision of such three physicians shall be final and binding on the
parties. Nothing in this paragraph is intended to limit the Company's right to
invoke the provisions of this paragraph with respect to any perceived Disability
of Executive.
Executive acknowledges that the payments referred to in this Section
4.3, together with any rights or benefits under any written plan or agreement
which have vested on or prior to the termination date of Executive's employment
under this Section 4.3, constitute the only payments to which Executive (or his
legal representative, as the case may be) shall be entitled to receive from the
Company hereunder in the event of a termination of his employment for death or
Disability, and that except for such payments the Company shall have no further
liability or obligation to him (or his legal representatives, as the case may
be) hereunder or otherwise in respect of his employment.
4.4 Continued Compliance. The amounts or benefits payable by the Company
--------------------
under Sections 4.2(b) and 4.3(c) are subject to Executive's continued compliance
with the provisions of Article V below. If Executive violates the provisions of
Article V, then the Company will have no obligation to make any of the payments
that remain payable by the Company under Sections 4.2(b) and 4.3(c) on or after
the date of such violation.
6
<PAGE>
ARTICLE V
---------
OWNERSHIP OF PROCEEDS OF EMPLOYMENT; NON-DISCLOSURE;
----------------------------------------------------
NON-COMPETITION
---------------
5.1 Ownership of Proceeds of Employment. The Company shall be the sole
-----------------------------------
and exclusive owner throughout the universe in perpetuity of all of the results
and proceeds of Executive's services, work and labor during the Term in
connection with Executive's employment by the Company, free and clear of any and
all claims, liens or encumbrances. All results and proceeds of Executive's
services, work and labor during the Term shall be deemed to be works-made-for-
hire for the Company within the meaning of the copyright laws of the United
States and the Company shall be deemed to be the sole author thereof in all
territories and for all purposes.
5.2 Non-Disclosure of Confidential Information. As used herein,
------------------------------------------
"Confidential Information" means any and all information affecting or relating
to the business of the Company and its Affiliates, including without limitation,
financial data, customer lists and data, licensing arrangements, business
strategies, pricing information, product development, intellectual, artistic,
literary, dramatic or musical rights, works, or other materials of any kind or
nature (whether or not entitled to protection under applicable copyright laws,
or reduced to or embodied in any medium or tangible form), including without
limitation, all copyrights, patents, trademarks, service marks, trade secrets,
contract rights, titles, themes, stories, treatments, ideas, concepts,
technologies, art work, logos, hardware, software, and may be embodied in any
and all computer programs, tapes, diskettes, disks, mailing lists, lists of
actual or prospective customers and/or suppliers, notebooks, documents,
memoranda, reports, files, correspondence, charts, lists and all other written,
printed or otherwise recorded material of any kind whatsoever and any other
information, whether or not reduced to writing, including "know-how", ideas,
concepts, research, processes, and plans. "Confidential Information" does not
include information that is in the public domain, information that is generally
known in the trade, or information that Executive can prove he acquired wholly
independently of his employment with the Company. Executive shall not, at any
time during the Term or thereafter, directly or indirectly, disclose or furnish
to any other person, firm or corporation any Confidential Information, except in
the course of the proper performance of his duties hereunder or as required by
law (in which event Executive shall give prior written notice to Company and
shall cooperate with Company and Company's counsel in complying with such legal
requirements). Promptly upon the expiration or termination of Executive's
employment hereunder for any reason or whenever the Company so requests,
Executive shall surrender to the Company all documents, drawings, work papers,
lists, memoranda, records and
7
<PAGE>
other data (including all copies) constituting or pertaining in any way to any
of the Confidential Information.
5.3 Non-Competition. Executive shall not, for so long as he is entitled
---------------
to compensation under or pursuant to this Agreement (whether or not he is
actively employed by the Company hereunder), directly or indirectly: (a) compete
with the Company; or (b) be interested in, employed by, engaged in or
participate in the ownership, management, operation or control of, or act in any
advisory or other capacity for, any Competing Entity which conducts its business
within the Territory (as such terms are hereinafter defined); provided, however,
-------- -------
that notwithstanding the foregoing, Executive may make solely passive
investments in any Competing Entity the common stock of which is "publicly
held," and of which Executive shall not own or control, directly or indirectly,
in the aggregate securities which constitute more than one (1%) percent of the
voting rights or equity ownership of such Competing Entity; or (c) solicit or
divert any business or any customer from the Company or assist any person, firm
or corporation in doing so or attempting to do so; or (d) cause or seek to cause
any person, firm or corporation to refrain from dealing or doing business with
the Company or assist any person, firm or corporation in doing so or attempting
to do so.
For purposes of this Section 5.3, (i) the term "Competing Entity"
shall mean any entity which presently or during the period referred to above
engages in any business activity the Company is then engaged in or proposes to
be engaged in; and (ii) the term "Territory" shall mean any geographic area in
which the Company conducts business during such period.
5.4 Non-Solicitation. Executive shall not, for a period of two (2) years
----------------
from the date of any termination or expiration of his employment hereunder,
directly or indirectly: (a) solicit or hire, or attempt to solicit or hire, any
employee of the Company, or assist any person, firm or corporation in doing so
or attempting to do so; or (b) plan for, acquire any financial interest in or
perform any services for himself or any other entity in connection with a
business in which Executive's interest, duties or activities would inherently
require Executive to reveal any Confidential Information; or (c) solicit or
cause to be solicited the disclosure of or disclose any Confidential Information
for any purpose whatsoever or for any other party.
5.5 Breach of Provisions. In the event that Executive shall breach any of
--------------------
the provisions of this Article V, or in the event that any such breach is
threatened by Executive, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court, domestic or foreign,
having the capacity to grant such relief, without the necessity of posting a
bond, to restrain any such breach or threatened breach
8
<PAGE>
and to enforce the provisions of this Article V. Executive acknowledges and
agrees that there is no adequate remedy at law for any such breach or threatened
breach and, in the event that any action or proceeding is brought seeking
injunctive relief, Executive shall not use as a defense thereto that there is an
adequate remedy at law.
5.6 Reasonable Restrictions. The parties acknowledge that the foregoing
-----------------------
restrictions, the duration and the territorial scope thereof as set forth in
this Article V, are under all of the circumstances reasonable and necessary for
the protection of the Company and its business.
5.7 Definition. For purposes of this Article V, the term "Company" shall
----------
be deemed to include any subsidiary of, affiliate of, predecessor to, or
successor of the Company.
ARTICLE VI
----------
MISCELLANEOUS
-------------
6.1 Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective legal representatives, heirs,
distributees, successors and assigns; provided that the rights and obligations
--------
of Executive hereunder shall not be assignable by him.
6.2 Notices. Any notice provided for herein shall be in writing and shall
-------
be deemed to have been given or made when personally delivered or three (3) days
following deposit for mailing by first class registered or certified mail,
return receipt requested, or if delivered by facsimile transmission, upon
confirmation of receipt of the transmission, to the address of the other party
set forth below or to such other address as may be specified by notice given in
accordance with this Section 6.2:
(a) If to the Company:
Four Media Company
2813 W. Alameda Avenue
Burbank, CA 91505
Attention: John Donlon, President
Fax No.: (818) 846-5197
9
<PAGE>
With a copy to:
Greenberg Glusker Fields Claman
& Machtinger LLP
1900 Avenue of the Stars, #2100
Los Angeles, CA 90067
Attention: Jill A. Cossman, Esq.
Fax No.: (310) 553-0687
(b) If to Executive:
Mr. Robert T. Walston
9010 Briarcrest Lane
Beverly Hills, CA 90210
With a copy to:
_______________________________
_______________________________
_______________________________
_______________________________
Fax No.:
6.3 Severability. If any provision of this Agreement, or portion thereof,
------------
shall be held invalid or unenforceable by a court of competent jurisdiction,
such invalidity or unenforceability shall attach only to such provision or
portion thereof, and shall not in any manner affect or render invalid or
unenforceable any other provision of this Agreement or portion thereof, and this
Agreement shall be carried out as if any such invalid or unenforceable provision
or portion thereof were not contained herein. In addition, any such invalid or
unenforceable provision or portion thereof shall be deemed, without further
action on the part of the parties hereto, modified, amended or limited to the
extent necessary to render the same valid and enforceable.
6.4 Confidentiality. The parties hereto agree that they will not, during
---------------
the Term or thereafter, disclose to any other person or entity the terms or
conditions of this Agreement (excluding the financial terms hereof) without the
prior written consent of the other party or as required by law, regulatory
authority or as necessary for either party to obtain personal loans or
financing. Approval of the Company and of Executive shall be required with
respect to any press releases regarding this Agreement and the activities of
Executive contemplated hereunder.
6.5 Arbitration. Any controversy, claim or dispute arising out of or in
-----------
any way relating to this Agreement, the alleged breach thereof, and/or
Executive's employment with the Company or
10
<PAGE>
termination therefrom, including without limitation, any and all claims for
employment discrimination or harassment, shall be determined by binding
arbitration administered by the American Arbitration Association under its
National Rules for Resolution of Employment Disputes ("Rules") which are in
effect at the time of the arbitration or the demand therefor. The Rules are
hereby incorporated by reference. California Code of Civil Procedure
(S)1283.05, which provides for certain discovery rights, shall apply to any such
arbitration, and said code section is also hereby incorporated by reference. In
reaching a decision, the arbitrator shall have no authority to change, extend,
modify or suspend any of the terms of this Agreement. The arbitration shall be
commenced and heard in Los Angeles County, California. The arbitrator(s) shall
apply the substantive law (and the law of remedies, if applicable) of California
or federal law, or both, as applicable to the claim(s) asserted. Judgment on
the award may be entered in any court of competent jurisdiction, even if a party
who received notice under the Rules fails to appear at the arbitration
hearing(s). The parties may seek, from a court of competent jurisdiction,
provisional remedies or injunctive relief in support of their respective rights
and remedies hereunder without waiving any right to arbitration. However, the
merits of any action that involves such provisional remedies or injunctive
relief, including, without limitation, the terms of any permanent injunction,
shall be determined by arbitration under this paragraph.
6.6 Waiver. No waiver by a party hereto of a breach or default hereunder
------
by the other party shall be considered valid unless in writing signed by such
first party, and no such waiver shall be deemed a waiver of any subsequent
breach or default of the same or any other nature.
6.7 Controlling Nature of Agreement. To the extent any terms of this
-------------------------------
Agreement are inconsistent with the terms or provisions of the Company's
Employee Manual or any other personnel policy statements or documents, the terms
of this Agreement shall control. To the extent that any terms and conditions of
Executive's employment are not covered in this Agreement, the terms and
conditions set forth in the Employee Manual or any similar document shall
control such terms.
6.8 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between the parties with respect to the subject matter hereof, and supersedes
any and all prior agreements or understanding between the Company and Executive,
whether written or oral, fully or partially performed relating to any or all
matters covered by and contained or otherwise dealt with in this Agreement.
This Agreement does not constitute a commitment of the Company with regard to
Executive's employment, express or implied, other than to the extent expressly
provided for herein.
11
<PAGE>
6.9 Amendment. No modification, change or amendment of this Agreement or
---------
any of its provisions shall be valid unless in writing and signed by the party
against whom such claimed modification, change or amendment is sought to be
enforced.
6.10 Authority. The parties each represent and warrant that they have the
---------
power, authority and right to enter into this Agreement and to carry out and
perform the terms, covenants and conditions hereof.
6.11 Applicable Law. This Agreement, and all of the rights and obligations
--------------
of the parties in connection with the employment relationship established
hereby, shall be governed by and construed in accordance with the substantive
laws of the State of California without giving effect to principles relating to
conflicts of law.
6.12 Counterparts. Thus Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"COMPANY"
FOUR MEDIA COMPANY
By: /s/ J. H. Donlon
____________________________
Name: John H. Donlon
__________________________
Title: President
_________________________
"EXECUTIVE"
/s/ Robert Walston
________________________________
Robert T. Walston
12
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
1. Identification
--------------
This First Amendment to Employment Agreement (the "Amendment"), dated as of
November 17, 1996, is entered into by and between Four Media Company, a Delaware
corporation (the "Company"), and Robert T. Walston ("Executive").
2. Recitals
--------
2.1 The Company and Executive entered into that certain Employment
Agreement dated as of October 1, 1996 (the "Agreement").
2.2 The Hong Kong and Shanghai Banking Corporation Limited (the "Bank"),
having entered into an Agreement for Term Loan Facilities dated February 22,
1995 with the Company's wholly-owned subsidiary Four Media Company Asia Pte Ltd.
("4MCA"), as required that, in connection with certain amendments to the
Agreement for Term Loan Facilities, the Agreement with Executive be extended
throughout the term of the Bank's loan facility.
2.3 The Company and Executive desire to so extend the term of the
Agreement on the terms and conditions hereinafter set forth.
3. Amendment
---------
Section 1.2 of the Agreement is hereby amended to provide that the "Initial
Term" (as defined in Section 1.2 of the Agreement) shall terminate on the later
of: (a) September 30, 1999; and (b) the date on which the Bank has been repaid
in full under the Bank's loan facility to 4MCA (which date shall in no event be
later than April 1, 2002).
4. Full Force and Effect
---------------------
The Agreement remains in full force and effect, as amended by this
Amendment.
IN WITNESS WHEREOF, this Amendment has been entered into as of the date
first set forth above.
"COMPANY"
FOUR MEDIA COMPANY, a Delaware
corporation
By: /s/ J.H. Donlon
----------------------------
Its: President
-----------------------
"EXECUTIVE"
/s/ Robert T. Walston
-------------------------------
Robert T. Walston
13
<PAGE>
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
--------------------
This Agreement, dated as of October 1, 1996, is entered into by and between
Four Media Company, a Delaware corporation (the "Company"), and Gavin W. Schutz
("Executive").
INTRODUCTION
------------
The Company and its operating subsidiaries ("Affiliates") are engaged in
the business of providing technical and creative services to the entertainment
industry. The Company desires to employ Executive, and Executive desires to
accept such employment, under the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
---------
EMPLOYMENT; TERM; DUTIES
------------------------
1.1 Employment. Upon the terms and conditions hereinafter set forth, the
----------
Company hereby employs Executive, and Executive hereby accepts employment, as
Vice President and Chief Technology Officer of the Company.
1.2 Term. Subject to Section 4.1, Executive's employment hereunder shall
----
be for a term of three (3) years commencing on the date hereof and expiring at
the close of business on the day prior to the third anniversary of the date
hereof (the "Initial Term"). The Initial Term shall be automatically extended
for successive three-year terms (each such extension referred to as a "Renewal
Term") unless either party gives the other party written notice of its or his
desire to terminate, which notice of termination shall be given not less than
six months prior to the expiration of the Initial Term or any Renewal Term, as
the case may be. Notwithstanding the foregoing, Executive shall be obligated to
deliver a written reminder (the "Reminder Notice") to the Company respecting
such termination notice, which Reminder Notice shall be delivered no earlier
than eight months prior to the expiration of the Initial Term or any Renewal
Term, as the case may be, and no later than six and one-half months prior to the
expiration of the Initial Term or any Renewal Term, as the case may be. If
Executive fails to timely deliver the Reminder Notice, then the Initial Term or
any Renewal Term, as the case may be, shall not be automatically
<PAGE>
extended for an additional three-year period even if the Company fails to timely
deliver a notice of termination to Executive.
1.3 Duties. During the Initial Term or any Renewal Term (sometimes
------
collectively referred to as the "Term"), Executive shall perform such executive
duties for the Company and/or its Affiliates, consistent with his position
hereunder, as may be assigned to him from time to time by the Board of
Directors. Executive shall devote his entire productive business time,
attention and energies to the performance of his duties hereunder. Executive
shall use his best efforts to advance the interests and business of the Company
and its Affiliates. Executive shall abide by all rules, regulations and
policies of the Company, as may be in effect from time to time. Notwithstanding
the foregoing, Executive may act for his own account in passive-type investments
as provided in Section 5.3, or as a member of other boards of directors, where
the time allocated for those activities does not materially interfere with or
create a conflict of interest with the discharge of his duties for the Company.
1.4 Reporting. Executive shall report directly to the President of the
---------
Company.
1.5 Exclusive Agreement. Executive represents and warrants to the Company
-------------------
that there are no agreements or arrangements, whether written or oral, in effect
which would prevent Executive from rendering his exclusive services to the
Company during the Term.
ARTICLE II
----------
COMPENSATION
------------
2.1 Compensation. For all services rendered by Executive hereunder and
------------
all covenants and conditions undertaken by him pursuant to this Agreement, the
Company shall pay, and Executive shall accept, as full compensation, the amounts
set forth in this Article II.
2.2 Base Salary. The base salary shall be an annual salary of $175,000
-----------
("Base Salary"), payable by the Company in accordance with the Company's normal
payroll practices.
2.3 Bonus. In addition to the Base Salary, the Company may make
-----
discretionary bonus payments to Executive, under such terms, conditions and
requirements as may be established by the Company's Board of Directors in its
sole discretion.
2.4 Deductions. The Company shall deduct from the compensation described
----------
in Sections 2.2 and 2.3 any federal, state or local withholding taxes, social
security contributions and any
2
<PAGE>
other amounts which may be required to be deducted or withheld by the Company
pursuant to any federal, state or local laws, rules or regulations.
2.5 Disability Adjustment. Any compensation otherwise payable to
---------------------
Executive pursuant to Sections 2.2 and 2.3 in respect of any period during which
Executive is disabled (as contemplated in Section 4.3) shall be reduced by any
amounts payable to Executive for loss of earnings or the like under any
insurance plan or policy sponsored by the Company.
ARTICLE III
-----------
BENEFITS; EXPENSES
------------------
3.1 Benefits. During the Term, Executive shall be entitled to participate
--------
in such group life, health, accident, disability or hospitalization insurance
plans, pension plans and retirement plans as the Company may make available to
its other executive employees as a group, subject to the terms and conditions of
any such plans.
3.2 Expenses. The Company agrees that Executive is authorized to incur
--------
reasonable expenses in the performance of his duties hereunder and in promoting
the business of the Company. The Company shall from time to time pay or
reimburse Executive for the reasonable and necessary expenses incurred by
Executive in connection with the performance of his duties hereunder if such
expenses have been previously approved by the Company or if reimbursement is
otherwise appropriate in accordance with the Company's established policies and
if the Company receives such verification thereof as the Company may require in
order to qualify such expenses as deductible business expenses.
3.3 Vacation. Executive shall accrue, on a daily basis, a total of four
--------
(4) work weeks of vacation per year following the date of this Agreement. If
Executive's earned but unused vacation time reaches six (6) work weeks,
Executive will not continue to accrue additional vacation time until he uses
enough vacation to fall below this maximum amount. Thereafter, Executive will
start earning vacation benefits again until the six (6) work week maximum is
again reached. Any accrued but unused vacation time will be paid to Executive
on a pro rata basis at termination of employment.
3.4 Key Man Insurance. The Company may secure in its own name or
-----------------
otherwise, and at its own expense, life, health, accident and other insurance
covering Executive alone or with others, and Executive shall not have any right,
title or interest in or to such insurance other than as expressly provided
herein. Executive agrees to assist the Company in procuring such insurance by
submitting to the usual and customary medical and other examinations to be
conducted by such physicians as the Company or
3
<PAGE>
such insurance company may designate and by signing such applications and other
written instruments as may be required by the insurance companies to which
application is made for such insurance. Executive's failure to submit to such
usual and customary medical and other examinations shall be deemed a material
breach of this Agreement.
ARTICLE IV
----------
TERMINATION; DEATH; DISABILITY
------------------------------
4.1 Termination of Employment With Cause. In addition to any other
------------------------------------
remedies available to the Company at law, in equity or as set forth in this
Agreement, the Company shall have the right, upon written notice to Executive,
to immediately terminate his employment hereunder without any further liability
or obligation to him in respect of his employment (other than its obligation to
pay Base Salary accrued but unpaid as of the date of termination) if Executive:
(a) breaches any material provision of this Agreement and, if such breach is
curable, in the sole judgment of the Company, such breach is not cured within
ten (10) days after written notice thereof from the Company; or (b) has
committed an act of gross misconduct in connection with the performance of his
duties hereunder, as determined in good faith by the Board of Directors; or (c)
demonstrates habitual negligence in the performance of his duties, as determined
by the Board of Directors; or (d) is convicted of or pleads nolo contendere to
---- ----------
any misdemeanor involving moral turpitude or to any felony; or (e) has committed
any act of fraud, misappropriation of funds or embezzlement in connection with
his employment hereunder (a "Termination With Cause").
4.2 Termination of Employment Without Cause. During the Term, the Company
---------------------------------------
may at any time, in its sole discretion, terminate the employment of Executive
hereunder without cause by written notice to him. In such event, the Company
shall pay Executive an amount equal to the sum of the following:
(a) any Base Salary accrued but unpaid as of the date of termination;
(b) an amount equal to Executive's monthly Base Salary in effect on
the date of termination for the remainder of the Term, payable as and when
such amounts would have been due and payable hereunder had such termination
not occurred (the "Severance Period"); and
(c) any reimbursement for expenses incurred in accordance with Section
3.2.
4
<PAGE>
In addition, the Company shall use its best efforts to arrange for the
continuation, through the Severance Period, of such health and/or medical
benefits or plans as are in effect as of the date of termination, if and only if
permissible under such plans. If not so permissible, the Company shall pay to
Executive an amount sufficient to enable Executive to arrange for substantially
equivalent health and/or medical coverage during the Severance Period.
Executive acknowledges that the payments and benefits referred to in
this Section 4.2, together with any rights or benefits under any written plan or
agreement which have vested on or prior to the termination date of Executive's
employment under this Section 4.2, constitute the only payments to which
Executive shall be entitled to receive from the Company hereunder in the event
of any termination of his employment pursuant to this Section 4.2, and that
except for such payments or benefits the Company shall have no further liability
or obligation to him hereunder or otherwise in respect of his employment.
If Executive's employment is terminated under this Section 4.2,
Executive shall use all reasonable efforts to obtain other employment or become
self-employed as promptly as possible. If Executive secures other employment or
becomes self-employed during the Severance Period, the Company's obligations
under this Section 4.2 shall be reduced by the earnings from such employment or
self-employment received by Executive. During the Severance Period, Executive
will notify the Company in writing of any offer of employment within 10 days of
Executive's receipt of same. In addition, Executive will immediately notify the
Company in writing if Executive becomes employed or self-employed during the
Severance Period.
4.3 Death; Disability. In the event that Executive dies or becomes
-----------------
Disabled (as defined herein), Executive's employment shall terminate when such
death or Disability occurs and the Company shall pay Executive (or his legal
representative, as the case may be) as follows:
(a) any Base Salary accrued but unpaid as of the date of death or
termination for Disability;
(b) any reimbursement for expenses incurred in accordance with Section
3.2.; and
(c) an amount equal to Executive's monthly Base Salary in effect on
such termination date for the lesser of (i) six months or (ii) the remainder of
the Term, payable as and when such amounts would have been due and payable
hereunder had such termination not occurred. The monthly Base Salary with
respect to any period during which Executive is Disabled shall be reduced by
amounts payable to him under any insurance plan sponsored by the Company,
5
<PAGE>
provided that Executive's aggregate compensation during the period of Disability
shall be equal to 100% of his monthly Base Salary then in effect.
For the purposes of this Agreement, Executive shall be deemed to be
"Disabled" or have a "Disability" if, because of Executive's physical or mental
disability, (a) he has been substantially unable to perform his duties
hereunder for twelve (12) work weeks in any twelve (12)-month period, and (b) he
has utilized any and all benefits available to him under state and federal laws
and is either (i) unable to reasonably and effectively carry out his duties with
reasonable accommodations by the Company or (ii) unable to reasonably and
effectively carry out his duties because any reasonable accommodation which may
be required would cause the Company undue hardship. In the event of a
disagreement concerning Executive's perceived Disability, Executive shall submit
to such examinations as are deemed appropriate by three practicing physicians
specializing in the area of Executive's Disability, one selected by Executive,
one selected by the Company, and one selected by both such physicians. The
majority decision of such three physicians shall be final and binding on the
parties. Nothing in this paragraph is intended to limit the Company's right to
invoke the provisions of this paragraph with respect to any perceived Disability
of Executive.
Executive acknowledges that the payments referred to in this Section
4.3, together with any rights or benefits under any written plan or agreement
which have vested on or prior to the termination date of Executive's employment
under this Section 4.3, constitute the only payments to which Executive (or his
legal representative, as the case may be) shall be entitled to receive from the
Company hereunder in the event of a termination of his employment for death or
Disability, and that except for such payments the Company shall have no further
liability or obligation to him (or his legal representatives, as the case may
be) hereunder or otherwise in respect of his employment.
4.4 Continued Compliance. The amounts or benefits payable by the Company
--------------------
under Sections 4.2(b) and 4.3(c) are subject to Executive's continued compliance
with the provisions of Article V below. If Executive violates the provisions of
Article V, then the Company will have no obligation to make any of the payments
that remain payable by the Company under Sections 4.2(b) and 4.3(c) on or after
the date of such violation.
6
<PAGE>
ARTICLE V
---------
OWNERSHIP OF PROCEEDS OF EMPLOYMENT; NON-DISCLOSURE;
----------------------------------------------------
NON-COMPETITION
---------------
5.1 Ownership of Proceeds of Employment. The Company shall be the sole
-----------------------------------
and exclusive owner throughout the universe in perpetuity of all of the results
and proceeds of Executive's services, work and labor during the Term in
connection with Executive's employment by the Company, free and clear of any and
all claims, liens or encumbrances. All results and proceeds of Executive's
services, work and labor during the Term shall be deemed to be works-made-for-
hire for the Company within the meaning of the copyright laws of the United
States and the Company shall be deemed to be the sole author thereof in all
territories and for all purposes.
5.2 Non-Disclosure of Confidential Information. As used herein,
------------------------------------------
"Confidential Information" means any and all information affecting or relating
to the business of the Company and its Affiliates, including without limitation,
financial data, customer lists and data, licensing arrangements, business
strategies, pricing information, product development, intellectual, artistic,
literary, dramatic or musical rights, works, or other materials of any kind or
nature (whether or not entitled to protection under applicable copyright laws,
or reduced to or embodied in any medium or tangible form), including without
limitation, all copyrights, patents, trademarks, service marks, trade secrets,
contract rights, titles, themes, stories, treatments, ideas, concepts,
technologies, art work, logos, hardware, software, and may be embodied in any
and all computer programs, tapes, diskettes, disks, mailing lists, lists of
actual or prospective customers and/or suppliers, notebooks, documents,
memoranda, reports, files, correspondence, charts, lists and all other written,
printed or otherwise recorded material of any kind whatsoever and any other
information, whether or not reduced to writing, including "know-how", ideas,
concepts, research, processes, and plans. "Confidential Information" does not
include information that is in the public domain, information that is generally
known in the trade, or information that Executive can prove he acquired wholly
independently of his employment with the Company. Executive shall not, at any
time during the Term or thereafter, directly or indirectly, disclose or furnish
to any other person, firm or corporation any Confidential Information, except in
the course of the proper performance of his duties hereunder or as required by
law (in which event Executive shall give prior written notice to Company and
shall cooperate with Company and Company's counsel in complying with such legal
requirements). Promptly upon the expiration or termination of Executive's
employment hereunder for any reason or whenever the Company so requests,
Executive shall surrender to the Company all documents, drawings, work papers,
lists, memoranda, records and
7
<PAGE>
other data (including all copies) constituting or pertaining in any way to any
of the Confidential Information.
5.3 Non-Competition. Executive shall not, for so long as he is entitled
---------------
to compensation under or pursuant to this Agreement (whether or not he is
actively employed by the Company hereunder), directly or indirectly: (a)
compete with the Company; or (b) be interested in, employed by, engaged in or
participate in the ownership, management, operation or control of, or act in any
advisory or other capacity for, any Competing Entity which conducts its business
within the Territory (as such terms are hereinafter defined); provided, however,
-------- -------
that notwithstanding the foregoing, Executive may make solely passive
investments in any Competing Entity the common stock of which is "publicly
held," and of which Executive shall not own or control, directly or indirectly,
in the aggregate securities which constitute more than one (1%) percent of the
voting rights or equity ownership of such Competing Entity; or (c) solicit or
divert any business or any customer from the Company or assist any person, firm
or corporation in doing so or attempting to do so; or (d) cause or seek to cause
any person, firm or corporation to refrain from dealing or doing business with
the Company or assist any person, firm or corporation in doing so or attempting
to do so.
For purposes of this Section 5.3, (i) the term "Competing Entity"
shall mean any entity which presently or during the period referred to above
engages in any business activity the Company is then engaged in or proposes to
be engaged in; and (ii) the term "Territory" shall mean any geographic area in
which the Company conducts business during such period.
5.4 Non-Solicitation. Executive shall not, for a period of two (2) years
----------------
from the date of any termination or expiration of his employment hereunder,
directly or indirectly: (a) solicit or hire, or attempt to solicit or hire, any
employee of the Company, or assist any person, firm or corporation in doing so
or attempting to do so; or (b) plan for, acquire any financial interest in or
perform any services for himself or any other entity in connection with a
business in which Executive's interest, duties or activities would inherently
require Executive to reveal any Confidential Information; or (c) solicit or
cause to be solicited the disclosure of or disclose any Confidential Information
for any purpose whatsoever or for any other party.
5.5 Breach of Provisions. In the event that Executive shall breach any of
--------------------
the provisions of this Article V, or in the event that any such breach is
threatened by Executive, in addition to and without limiting or waiving any
other remedies available to the Company at law or in equity, the Company shall
be entitled to immediate injunctive relief in any court, domestic or foreign,
having the capacity to grant such relief, without the necessity of posting a
bond, to restrain any such breach or threatened breach
8
<PAGE>
and to enforce the provisions of this Article V. Executive acknowledges and
agrees that there is no adequate remedy at law for any such breach or threatened
breach and, in the event that any action or proceeding is brought seeking
injunctive relief, Executive shall not use as a defense thereto that there is an
adequate remedy at law.
5.6 Reasonable Restrictions. The parties acknowledge that the foregoing
-----------------------
restrictions, the duration and the territorial scope thereof as set forth in
this Article V, are under all of the circumstances reasonable and necessary for
the protection of the Company and its business.
5.7 Definition. For purposes of this Article V, the term "Company" shall
----------
be deemed to include any subsidiary of, affiliate of, predecessor to, or
successor of the Company.
ARTICLE VI
----------
MISCELLANEOUS
-------------
6.1 Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective legal representatives, heirs,
distributees, successors and assigns; provided that the rights and obligations
--------
of Executive hereunder shall not be assignable by him.
6.2 Notices. Any notice provided for herein shall be in writing and shall
-------
be deemed to have been given or made when personally delivered or three (3) days
following deposit for mailing by first class registered or certified mail,
return receipt requested, or if delivered by facsimile transmission, upon
confirmation of receipt of the transmission, to the address of the other party
set forth below or to such other address as may be specified by notice given in
accordance with this Section 6.2:
(a) If to the Company:
Four Media Company
2813 W. Alameda Avenue
Burbank, CA 91505
Attention: Robert T. Walston, C.E.O.
Fax No.: (818) 846-5197
9
<PAGE>
With a copy to:
Greenberg Glusker Fields Claman
& Machtinger LLP
1900 Avenue of the Stars, #2100
Los Angeles, CA 90067
Attention: Jill A. Cossman, Esq.
Fax No.: (310) 553-0687
(b) If to Executive:
Gavin W. Schutz
414 Masa <Illegible>
____________________________
Glendale, CA 91208
____________________________
With a copy to:
_______________________________
_______________________________
_______________________________
_______________________________
Fax No.:
6.3 Severability. If any provision of this Agreement, or portion thereof,
------------
shall be held invalid or unenforceable by a court of competent jurisdiction,
such invalidity or unenforceability shall attach only to such provision or
portion thereof, and shall not in any manner affect or render invalid or
unenforceable any other provision of this Agreement or portion thereof, and this
Agreement shall be carried out as if any such invalid or unenforceable provision
or portion thereof were not contained herein. In addition, any such invalid or
unenforceable provision or portion thereof shall be deemed, without further
action on the part of the parties hereto, modified, amended or limited to the
extent necessary to render the same valid and enforceable.
6.4 Confidentiality. The parties hereto agree that they will not, during
---------------
the Term or thereafter, disclose to any other person or entity the terms or
conditions of this Agreement (excluding the financial terms hereof) without the
prior written consent of the other party or as required by law, regulatory
authority or as necessary for either party to obtain personal loans or
financing. Approval of the Company and of Executive shall be required with
respect to any press releases regarding this Agreement and the activities of
Executive contemplated hereunder.
6.5 Arbitration. Any controversy, claim or dispute arising out of or in
-----------
any way relating to this Agreement, the alleged breach thereof, and/or
Executive's employment with the Company or
10
<PAGE>
termination therefrom, including without limitation, any and all claims for
employment discrimination or harassment, shall be determined by binding
arbitration administered by the American Arbitration Association under its
National Rules for Resolution of Employment Disputes ("Rules") which are in
effect at the time of the arbitration or the demand therefor. The Rules are
hereby incorporated by reference. California Code of Civil Procedure
(S)1283.05, which provides for certain discovery rights, shall apply to any such
arbitration, and said code section is also hereby incorporated by reference. In
reaching a decision, the arbitrator shall have no authority to change, extend,
modify or suspend any of the terms of this Agreement. The arbitration shall be
commenced and heard in Los Angeles County, California. The arbitrator(s) shall
apply the substantive law (and the law of remedies, if applicable) of California
or federal law, or both, as applicable to the claim(s) asserted. Judgment on
the award may be entered in any court of competent jurisdiction, even if a party
who received notice under the Rules fails to appear at the arbitration
hearing(s). The parties may seek, from a court of competent jurisdiction,
provisional remedies or injunctive relief in support of their respective rights
and remedies hereunder without waiving any right to arbitration. However, the
merits of any action that involves such provisional remedies or injunctive
relief, including, without limitation, the terms of any permanent injunction,
shall be determined by arbitration under this paragraph.
6.6 Waiver. No waiver by a party hereto of a breach or default hereunder
------
by the other party shall be considered valid unless in writing signed by such
first party, and no such waiver shall be deemed a waiver of any subsequent
breach or default of the same or any other nature.
6.7 Controlling Nature of Agreement. To the extent any terms of this
-------------------------------
Agreement are inconsistent with the terms or provisions of the Company's
Employee Manual or any other personnel policy statements or documents, the terms
of this Agreement shall control. To the extent that any terms and conditions of
Executive's employment are not covered in this Agreement, the terms and
conditions set forth in the Employee Manual or any similar document shall
control such terms.
6.8 Entire Agreement. This Agreement sets forth the entire agreement
----------------
between the parties with respect to the subject matter hereof, and supersedes
any and all prior agreements or understanding between the Company and Executive,
whether written or oral, fully or partially performed relating to any or all
matters covered by and contained or otherwise dealt with in this Agreement.
This Agreement does not constitute a commitment of the Company with regard to
Executive's employment, express or implied, other than to the extent expressly
provided for herein.
11
<PAGE>
6.9 Amendment. No modification, change or amendment of this Agreement or
---------
any of its provisions shall be valid unless in writing and signed by the party
against whom such claimed modification, change or amendment is sought to be
enforced.
6.10 Authority. The parties each represent and warrant that they have the
---------
power, authority and right to enter into this Agreement and to carry out and
perform the terms, covenants and conditions hereof.
6.11 Applicable Law. This Agreement, and all of the rights and obligations
--------------
of the parties in connection with the employment relationship established
hereby, shall be governed by and construed in accordance with the substantive
laws of the State of California without giving effect to principles relating to
conflicts of law.
6.12 Counterparts. Thus Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"COMPANY"
FOUR MEDIA COMPANY
By: /s/ Robert Walston
____________________________
Name: Robert Walston
__________________________
Title: CEO
_________________________
"EXECUTIVE"
G Schutz
________________________________
Gavin W. Schutz
12
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
1. Identification
--------------
This First Amendment to Employment Agreement (the "Amendment"), dated as of
December 30, 1996, is entered into by and between Four Media Company, a Delaware
corporation (the "Company"), and Gavin W. Schutz ("Executive").
2. Recitals
--------
2.1 The Company and Executive entered into that certain Employment
Agreement dated as of October 1, 1996 (the "Agreement").
2.2 The Hong Kong and Shanghai Banking Corporation Limited, having entered
into an Agreement for Term Loan Facilities dated February 22, 1995 with the
Company's wholly-owned subsidiary Four Media Company Asia Pte Ltd., has required
that, in connection with certain amendments to the Agreement for Term Loan
Facilities, the Agreement with Executive be extended throughout the term of the
Bank's loan facility.
2.3 The Company and Executive desire to so extend the term of the
Agreement on the terms and conditions hereinafter set forth.
3. Amendment
---------
The first sentence of Section 1.2 of the Agreement is deleted in its
entirety and the following is substituted in place thereof:
"Subject to Section 4.1, Executive's employment hereunder shall
commence on the date hereof and shall terminate on the later of:
(a) September 30, 1999 (the "Original Termination Date"); and (b)
the date on which The Hong Kong and Shanghai Banking Corporation
Limited (the "Bank") has been repaid in full under that certain
Agreement for Term Loan Facilities dated February 22, 1995 with
Four Media Company Asia Pte Ltd., which date shall in no event be
later than April 1, 2002 (the "Bank Repayment Date") (such
employment term to be referred to as the "Initial Term").
Notwithstanding the foregoing, from and after the Original
Termination Date, the Initial Term shall continue to and
including the Bank Repayment Date only so long as Executive's
total compensation hereunder remains competitive with "industry"
compensation for comparable job responsibilities."
4. Full Force and Effect
---------------------
The Agreement remains in full force and effect, as amended by this
Amendment.
IN WITNESS WHEREOF, this Amendment has been entered into as of the date
first set forth above.
"COMPANY"
FOUR MEDIA COMPANY, a Delaware
corporation
By: /s/ Robert Walston
----------------------------
Its: CEO
-----------------------
"EXECUTIVE"
/s/ Gavin W. Schutz
-------------------------------
Gavin W. Schutz
13
<PAGE>
EXHIBIT 10.29
TERM LOAN AGREEMENT
THIS TERM LOAN AGREEMENT ("Agreement") is made this 5th day of December,
1996 by and between FOUR MEDIA COMPANY, a Delaware corporation ("Borrower"), and
TOKAI BANK OF CALIFORNIA, a California banking corporation ("Lender").
A. Borrower has applied to Lender for a loan in the principal amount of
Eight Million Four Hundred Thousand and No/100 Dollars ($8,400,000.00).
B. Lender has agreed to make the loan to Borrower upon the terms and
conditions hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1
---------
DEFINITIONS AND INTERPRETATIONS
-------------------------------
For purposes of this Agreement, the following terms shall have the
following meanings:
1.1 DEFINITIONS. The definitions set forth in the Recitals are
-----------
incorporated herein by reference.
"Agreement" shall mean this Loan Agreement, either as originally
executed or as it may from time to time be supplemented, modified, or amended.
"Affiliate" shall mean any person or business entity, directly or
indirectly, in control of, controlled by or under the common control of
Borrower, or of a successor thereof, whether through merger, consolidation,
transfer of assets or otherwise.
"Assets" shall have the meaning usually given that term in
accordance with GAAP, but shall exclude sums due to Borrower from Affiliates
(other than subsidiaries).
"Assignment of Leases" shall mean the Absolute Assignment of
Leases and Rents in form and content satisfactory to Lender to be delivered by
Borrower to Lender covering the Property.
"Business Day" shall mean a day of the year on which banks are
not required or authorized to close in California.
"Contingent Liabilities" shall mean all contingent liabilities as
determined and computed in accordance with GAAP.
"Current Assets" shall mean all current assets as determined and
computed in accordance with GAAP (excluding loans to officers and employees).
"Current Liabilities" shall mean all current liabilities as
determined and computed in accordance with GAAP.
1
<PAGE>
"Deed of Trust" shall mean the Deed of Trust, Assignment of
Rents, Security Agreement and Fixture Filing given by Borrower, as Trustor, to
North American Title Company, as Trustee for the benefit of Lender, as
Beneficiary.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as the same may be amended from time to time, and, unless the context
otherwise requires, the regulations thereunder.
"Event of Default" shall mean any of those events specified in
Article 5 hereof.
"Financial Statements" means balance sheets, income statements,
reconciliation of capital structure, statements of sources and applications of
funds together with appropriate notes and footnotes in accordance with GAAP.
"Financing Statement" shall mean a financing statement (Form
UCC-1) given by Borrower to Lender and dated concurrent herewith.
"Fixed Rate" shall mean the Fixed Rate as defined in the Note.
"Fixtures" shall mean the fixtures as defined in the Deed of
Trust.
"GAAP" shall mean generally accepted accounting principles
consistently applied and maintained throughout the period indicated and
consistent with the prior financial practice of Borrower, except for changes
mandated by the Financial Accounting Standards Board or any similar accounting
authority of comparable standing.
"Governmental Agency" or "Government Agency" shall mean any
federal, state or local governmental or quasi-governmental agency, authority,
board, bureau, commission, department, instrumentality or public body, court,
administrative tribunal, or public utility.
"Guarantor" shall mean, collectively, 4MC-Burbank, Inc., a
Delaware corporation and Digital Magic Company, a Delaware corporation.
"Guaranty" shall mean the continuing guaranty of each Guarantor
guaranteeing payment of the Loan.
"Hazardous Substances Indemnity Agreement" shall mean the
Hazardous Substances Indemnity Agreement dated the date hereof between the
Borrower and the Lender.
"Insurance Policies" shall mean any of the policies of insurance
specified in Article 4 Section 4.1. hereof.
"Laws" shall mean, collectively, all federal, state, and local
laws, rules, regulations, ordinances, and codes.
"Liabilities" shall have the meaning usually given that term in
accordance with GAAP.
2
<PAGE>
"Libor Rate" shall mean the Libor Rate as defined in the Note.
"Loan" shall mean the loan described in Article 3 of this
Agreement in the principal amount of $8,400,000.00.
"Loan Documents" shall mean the Note, Deed of Trust, Financing
Statement, this Agreement, and such other documents as Lender may require
Borrower to give to Lender as evidence of and/or security for the Loan and the
Guaranty.
"Loan Proceeds" shall mean all funds advanced by Lender as a Loan
to Borrower under this Agreement.
"Maturity Date" shall mean December 31, 2003.
"Net Profit" shall have the meaning usually given that term in
accordance with GAAP.
"Note" shall mean the Promissory Note of Borrower payable to the
order of Lender, evidencing the Loan.
"Organizational Documents" shall mean:
(i) Borrower's Certificate of Incorporation and By-Laws.
(ii) An affidavit of Borrower signed by an officer of
Borrower, where applicable, in form and substance satisfactory to Lender
affirming the authority of Borrower to borrow the Loan and enter into the Loan
Documents, and affirming the names and signatures of all officers of Borrower
authorized to execute documents in connection with the Loans.
"PBGC" means the Pension Benefit Guaranty Corporation or any
successor established under ERISA.
"Permitted Encumbrances" shall mean the matters approved by
Lender shown in the report of title of the Title Company.
"Person" shall mean an individual, corporation, partnership,
joint venture, trust or unincorporated organization or a Government Agency.
"Personalty and Fixtures" shall mean the personalty and fixtures
as defined in the Deed of Trust.
"Plan" means an employee benefit plan or other plan maintained
for employees of Borrower and covered by Title IV of ERISA.
"Prime Rate" shall mean Lender's Prime Rate which is the rate
announced from time to time by Lender to be the Prime Rate as reflected in the
books and records of Lender. The Prime Rate may
3
<PAGE>
vary from time to time and the interest rate shall automatically change on the
same day the Prime Rate changes.
"Property" shall mean the Property as defined in the Deed of
Trust.
"Tangible Net Worth" shall mean the excess of Assets over
Liabilities, excluding, however, from the determination of Assets: (i) all
assets that would be classified as intangible assets under GAAP, including
without limitation, goodwill (whether representing the excess of cost over book
value of assets acquired or otherwise), negative goodwill, patents, trademarks,
trade names, copyrights, franchises and deferred charges (including, without
limitation, unamortized debt discount and expense, organization costs and
research and development costs); and (ii) subordinated debt.
"Title Company" shall mean North American Title Company.
"Title Policy" shall mean a standard American Land Title
Association Lender's policy of title insurance for the Property, insuring Lender
in the amount of the Loans and with such other endorsements as Lender may
request.
"Working Capital" shall mean the existence of Current Assets,
excluding LIFO reserves, over Current Liabilities as those terms are understood
in accordance with GAAP.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with GAAP consistent with those applied
in the preparation of the Financial Statements referred to in Article 4 Section
4.14 and all financial data submitted pursuant to this Agreement shall be
prepared in accordance with such principles.
1.3 USE OF DEFINED TERMS. Any defined terms used in the plural shall
--------------------
include the singular and such terms shall encompass all members of the relevant
class.
1.4 SCHEDULES AND EXHIBITS. All schedules and exhibits to this
----------------------
Agreement, either as originally existing or as the same may from time to time be
supplemented, modified or amended, are incorporated herein by reference.
1.5 REFERENCES. Any reference to this Agreement or any other
----------
document shall include such document both as originally executed and as it may
from time to time be supplemented and modified. References herein to Articles,
Sections and Exhibits shall be construed as references to this Agreement unless
a different document is named.
1.6 OTHER TERMS. The term "document" is used in its broadest sense
-----------
and encompasses agreements, certificates, opinions, consents, instruments and
other written material of every kind. The terms "including" and "include" shall
mean "including (include), without limitation."
4
<PAGE>
ARTICLE 2
---------
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
----------------------------------------------
Borrower hereby represents and warrants to Lender as of the date of
this Agreement, the date the Loan Proceeds are disbursed to Borrower, and each
and every date during the existence of the Loan, or any portion thereof, as the
context admits or requires, that:
2.1 BORROWER'S CAPACITY. Borrower is and shall continue to be a
-------------------
corporation duly organized and existing under the Laws of the State of Delaware,
and duly qualified to do business in any state in which the nature of its
business requires it to be so qualified.
2.2 VALIDITY OF LOAN DOCUMENTS. The Loan Documents are and shall
--------------------------
continue to be in all respects valid and binding upon Borrower according to
their terms, subject to all Laws, including equitable principles, insolvency
laws, and other matters applying to creditors generally; provided, however, that
the implementation of such Laws do not and will not affect the ultimate
realization of the security afforded thereby. The execution and delivery by
Borrower of and the performance by Borrower of all its obligations under the
Loan Documents have been duly authorized by all necessary action and do not and
will not:
(a) Require any consent or approval not heretofore obtained or
any other person holding any interest or entitled to receive any interest issued
or to be issued by Borrower or otherwise;
(b) Violate any provision of the Organizational Documents or
other agreements to which Borrower is bound;
(c) Result in or require the creation or imposition of any
mortgage, deed of trust, pledge, lien, security interest, claim, charge, right
of others or other encumbrance of any nature (other than under the Loan
Documents) upon or with respect to any property now owned or leased or hereafter
acquired by Borrower;
(d) Violate any provision of any Laws, or of any order, writ,
judgment, injunction, decree, determination, or award;
(e) Result in a breach of or constitute a default under, cause
or permit the acceleration of any obligation owed under, or require any consent
under any indenture or loan or credit agreement or any other agreement, lease,
or instrument to which Borrower is a party or by which Borrower or any property
of Borrower is bound or affected.
2.3 BORROWER NOT IN DEFAULT OR VIOLATION. Borrower is not in default
------------------------------------
under or in violation of any Laws, order, writ, judgment, injunction, decree,
determination or award. Borrower is not in default under any obligation,
agreement, instrument, loan, or indenture, whether to Lender or otherwise, or
any lease. No event has occurred and is continuing, or would result from the
making of the Loans or an Advance, which constitutes an Event of Default, or
would constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
2.4 NO GOVERNMENTAL APPROVALS REQUIRED. Borrower does not require
----------------------------------
any authorization, consent, approval, order, license, exemption from, or filing,
registration, or qualification
5
<PAGE>
with, any Governmental Agency in connection with the execution and delivery by
Borrower, and the performance by Borrower, of all or any of its obligations
under, the Loan Documents, except that filing and/or recording with Governmental
Agencies may be required to perfect liens, security interest, or other charges
or encumbrances granted Lender by Borrower.
2.5 TAX LIABILITY. Borrower has filed and shall file all tax returns
-------------
(federal, state, and local) required to be filed and has paid and shall pay all
taxes shown thereon to be due and all property taxes due, including interest and
penalties, if any.
2.6 FINANCIAL STATEMENTS. All Financial Statements, tax returns and
--------------------
other financial information of Borrower which have heretofore been submitted to
Lender fairly present the financial position of Borrower at the respective dates
of their preparation. Since the dates of such Financial Statements, tax returns
and other financial information, there has been no material adverse change in
the financial condition of Borrower.
2.7 PENDING LITIGATION. There are no actions, suits, or proceedings
------------------
pending, or to the knowledge of Borrower threatened, against or affecting the
Borrower, or involving the validity or enforceability of any of the Loan
Documents or the priority of the lien thereof, at Law or in equity, or before or
by any Governmental Agency, except actions, suits, and proceedings that are
fully covered by insurance or which, if adversely determined, would not
substantially impair the ability of Borrower to perform each and every one of
its obligations under and by virtue of the Loan Documents; and Borrower is not
in default with respect to any order, writ, injunction, decree, or demand of any
court or any Governmental Agency.
2.8 VIOLATION OF LAWS. Borrower has no knowledge of any violations
-----------------
or notices of violations of any Laws relating to the Property.
2.9 COMPLIANCE WITH ZONING ORDINANCES AND ENVIRONMENTAL LAWS.
--------------------------------------------------------
Borrower and the Property presently comply with, and will in the future comply
fully with, all applicable Laws, and all permits and approvals issued
thereunder, affecting the improvements to be located upon the Property, the
sale, operation, leasing or financing of the Property and the intended
occupancy, use and enjoyment of the Property, including, but not limited to, all
applicable subdivision Laws, licenses and permits, building codes, zoning
ordinances, environmental protection Laws, flood disaster Laws, and all Laws
pertaining to industrial hygiene and the environmental conditions on, under or
about the Property, including, but not limited to, soil and groundwater
condition. Borrower does not presently, and will not in the future, use, store,
manufacture, generate, transport to or from, or dispose of any toxic substances,
hazardous materials, hazardous wastes, radioactive materials, flammable
explosives or related material on or in connection with the Property or the
business of Borrower on the Property. Borrower does not presently, and will not
in the future, permit any lessee on the Property to use, store, manufacture,
generate, transport to or from, or dispose of any toxic substances, hazardous
materials, hazardous waste, radioactive materials, flammable explosives, related
material on or in connection with the Property or the business on the Property.
("Toxic substances," "hazardous materials" and "hazardous waste" shall include
"Hazardous Substances" as defined in the Hazardous Substances Indemnity
Agreement.) Borrower shall not seek, make or consent to any change in the
zoning, conditions of use, or any other applicable land use permits, approvals
or regulations pertaining to the Property, or any portion thereof, which would
constitute a violation of the warranties and representations herein contained,
or would otherwise impair the ability of Borrower to complete construction of
any improvements now underway constituting the Property, or would change the
nature of the use or occupancy of the Property.
6
<PAGE>
2.10 COMPLIANCE WITH ERISA. Borrower does not and shall not maintain
---------------------
any employee benefit plan or other plan maintained for employees of Borrower
which is or might be deemed to be covered by Title IV or ERISA, except plans
that are or shall be in compliance with all applicable provisions of ERISA. No
Reportable Event has occurred or is continuing with respect to any Plan.
2.11 SOLVENCY. Borrower is and shall continue to be able to pay its
--------
debts as they mature and the realizable value of its Assets is, and at all times
that it may have obligations hereunder shall continue to be, sufficient to
satisfy any and all obligations hereunder.
2.12 PRINCIPAL PLACE OF BUSINESS. The principal place of business of
---------------------------
Borrower is as set forth under Section 7.11 of this Agreement. In the event
that Borrower hereafter intends to move its principal place of business, it
shall first give at least thirty (30) days' prior written notice to Lender of
its intention so to move, the date that such move is anticipated, and its new
address. No later than ten (10) days after commencement of the move by
Borrower, Borrower will deliver such new Financing Statements (on Form UCC-1),
Continuation Statements (on Form UCC-2) or other instruments as Lender may
require.
2.13 PERMITS. Borrower possesses all licenses, permits, franchises,
-------
patents, copyrights, trademarks, and trade names, or rights thereto, that are
necessary to conduct its business substantially as now conducted and as
presently proposed to be conducted, and Borrower is not in material violation of
any valid rights of others with respect to any of the foregoing.
ARTICLE 3
---------
THE LOAN
--------
3.1 THE LOAN. Lender agrees, on the terms and conditions hereinafter
--------
set forth, to make the Loan provided for in this Article. Borrower may repay or
prepay the Loan Proceeds pursuant to this Article.
3.2 NOTE. The Loan shall be evidenced by the Note. Each payment
----
under the Loan shall be evidenced and recorded by Lender upon Lender's Loan
Records, which recordation shall be prima facie evidence of such payment;
provided, however, that the failure by Lender to make any such recordation shall
not limit or otherwise affect the obligation of Borrower hereunder or under the
Note.
3.3 INTEREST. Interest on the outstanding principal balance under
--------
the Note shall accrue at the rate provided for in the Note and shall be paid as
provided for in the Note.
3.4 USE OF PROCEEDS. The Loan Proceeds shall be used by Borrower to
---------------
purchase the Property.
3.5 CONDITIONS PRECEDENT TO LOAN. The obligation of Lender to make
----------------------------
the Loan is subject to and expressly conditioned upon the following:
(a) Borrower, at its sole expense, shall deliver to Lender, at
its office in Los Angeles, California, on or before the date of the first
Advance the following, in form and substance satisfactory to Lender, in Lender's
sole opinion and judgment:
(i) The Note;
7
<PAGE>
(ii) The Guaranty;
(iii) The Deed of Trust;
(iv) The Assignment of Leases;
(v) The UCC-1 Financing Statement;
(vi) This Agreement;
(vii) The Loan Disbursement Instructions;
(viii) The Agreement to Furnish Insurance;
(ix) The Hazardous Substances Indemnity Agreement;
(x) The Non-Disturbance and Attornment Agreements;
(xi) The Tenant Estoppels;
(xii) The Title Policy or evidence of a commitment thereof;
(xiii) The Insurance Policies;
(xiv) Such additional assignments, agreements,
certificates, reports, approvals, instruments, documents, financing statements,
consents, and opinions as Lender may reasonably request;
(b) Review and approval by Lender, its counsel, or both, of true
and correct copies of Borrower's Organizational Documents, matters affecting the
Property, and all other Loan Documents;
(c) Review and approval by Lender of true and correct copies of
Financial Statements of Borrower;
(d) No suit, action, or other proceeding of material consequence
shall be pending or threatened which seeks to restrain or prohibit the
consummation of the transactions contemplated by this Agreement, or to obtain
damages or other relief in connection therewith;
3.6 LIMITATIONS ON ADVANCES AND PAYMENTS.
------------------------------------
(a) The Loan Proceeds shall be disbursed in accordance with the
provisions of Section 3.4 above;
(b) Borrower shall have the right at any time to prepay any
portion of the Principal Balance bearing interest at the Prime Rate without
premium or penalty. Borrower shall have no right to prepay any portion of the
Principal Balance bearing interest at the Libor Rate or Fixed Rate. Any such
prepayment shall not result in a reamortization, deferral, postponement,
suspension or waiver of any and all other payments due under the Note.
(c) Payments shall be as provided for in the Note;
(d) Borrower hereby authorizes Lender, if and to the extent any
payment of principal or interest or sum otherwise due hereunder is not promptly
made pursuant to the Note, and to the extent of any obligation of Borrower to
Lender under this Agreement or any other agreement, to charge against any
account of Borrower with Lender an amount equal to part or all of the principal
costs and expenses, and accrued interest from time to time due and payable to
Lender under the Note or otherwise. Lender is under no obligation to charge such
past due payments against any account of Borrower, but may elect to do so in
Lender's sole and absolute opinion and judgment;
8
<PAGE>
(e) If, with respect to the Loan there is, due to either (i) the
introduction of or any change (including, without limitation, any change by way
of imposition or increase of reserve requirements) in any Law or regulation or
in the interpretation thereof, or (ii) the compliance by Lender with any new
guidelines or request from any central bank or other governmental authority
(whether or not having the force of Law), any increase in the cost of Lender of
agreeing to make or making, funding or maintaining such Loan, then Borrower
shall from time to time, upon demand by Lender, pay to Lender additional amounts
sufficient to indemnify Lender against such increased costs. A certificate as to
the amount of such increased costs submitted to Borrower by Lender shall be
prima facie evidence of the increased costs, and shall be immediately due and
payable upon demand.
3.7 SECURITY. The Loan shall be secured by the following, in each case,
--------
subject only to the Permitted Encumbrances:
(a) The Property;
(b) Any leases, subleases, and consession rights now or in the future
affecting the Property or any part thereof;
3.8 GUARANTY. As further support for the repayment of the Loan, each
--------
Guarantor shall guarantee repayment thereof pursuant to the Guaranty.
3.9 DEPOSIT ACCOUNT. Borrower shall maintain its operating account with
---------------
Lender at all times during the term of this Agreement.
ARTICLE 4
---------
BORROWER'S COVENANTS
--------------------
In addition to anything else herein stated, Borrower agrees:
4.1 INSURANCE. To obtain and at all times maintain hazard and liability
---------
insurance in amount and form satisfactory to Lender and issued by a company or
companies rated B+ or better in Best's Key Rating Guide. The insurance is to
include business interruption, boiler and machinery and glass insurance. Lender
is to be a loss payable payee under the hazard insurance and an additional
insured under said liability insurance. Said liability insurance is to include,
but not be limited to, workman's compensation and employer's liability
insurance. In the event any portion of the Property is determined to be in a
Flood Hazard Area at any time as reported by the U.S. Secretary of the
Department of Housing and Urban Development, Borrower shall obtain and at all
times maintain flood hazard insurance satisfactory to Lender. All policies or a
certificate acceptable to Lender shall be delivered to Lender together with
evidence of payment of premium thereon and an agreement to give Lender at least
thirty (30) days' prior notice of any material changes, termination, or
expiration of the policies. All insurance policies provided under any lease with
tenants of the Property shall be assigned to Lender as additional security.
4.2 RIGHT OF ENTRY. Lender and Lender's employees or agents shall have the
--------------
right upon twenty four (24) hours prior notice to enter upon Borrower's premises
during normal business hours for whatever purpose Lender deems appropriate,
including, without limitation, inspection of the premises and the posting of
such notices and other written or printed material thereon as Lender may deem
appropriate or desirable.
9
<PAGE>
4.3 LENDER MAY EXAMINE BOOKS AND RECORDS. Lender shall have the right,
------------------------------------
from time to time, acting by and through its employees or agents, to examine the
books, records, and accounting data of Borrower, and to make extracts therefrom
or copies thereof. Borrower shall promptly make such books, records, and
accounting data available to Lender, as stated above, upon written request, and
upon like request shall promptly advise Lender, in writing, of the location of
such books, records, and accounting data.
4.4 NO AUTOMATIC SET-OFF. The existence of the deposit account described
--------------------
in Article 3 Section 3.9 and/or the fact of any sum or sums being on deposit in
said account shall in no way constitute a set-off against or be deemed to
compensate the obligation of the Loan or any payment or performance due under
this Agreement or any of the other Loan Documents, unless and until the Lender,
by affirmative action, shall so apply said account or any portion thereof and
then only to the extent thereof so designated by Lender.
4.5 PAYMENT OF TAXES. Borrower shall pay and discharge all taxes,
----------------
assessments, and governmental charges or levies imposed upon Borrower or upon
its income or profits, or upon any properties belonging to it prior to the date
on which penalties attach thereto, and all lawful claims which, if unpaid might
become a lien or charge of a material nature upon any of its properties,
provided that Borrower shall not be required to pay any such tax, assessment,
charge, levy or claim which is being contested in good faith and by proper
proceedings if it maintains adequate reserves with respect thereto.
4.6 PRESERVATION OF CORPORATE EXISTENCE. Borrower shall preserve and
-----------------------------------
maintain its respective corporate existence, right, franchises and privileges in
the jurisdiction of incorporation, and qualify and remain qualified as a foreign
corporation in any jurisdiction in which such qualification is or may be
necessary, in view of Borrower's business and operations or the ownership of its
properties, including the Property.
4.7 COMPLIANCE WITH LAWS AND CONTRACTS. Borrower shall comply with the
----------------------------------
requirements of all applicable Laws and orders of any Governmental Agency,
provided that if Borrower has not so complied by the date prescribed in any such
Law or order, regulation, Borrower shall comply therewith by the date set forth
in any order of the Governmental Agency charged with the enforcement of such
Law, rule or regulation if such date is later, and comply with all contracts,
agreements, indentures or instruments by which it is bound.
4.8 MAINTENANCE OF PROPERTIES. Borrower shall use its best efforts to
-------------------------
maintain and preserve, or cause to be maintained and preserved, all of its
properties, necessary or useful in the proper conduct of its business, including
such as may be under lease, in good working order and condition, ordinary wear
and tear excepted.
4.9 Intentionally deleted.
4.10 Intentionally deleted.
4.11 Intentionally deleted.
4.12 Intentionally deleted.
10
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4.13 Intentionally deleted.
4.14 REPORTING REQUIREMENTS. So long as Borrower shall have any obligation
----------------------
to Lender under this Agreement, Borrower shall deliver to the Lender the
following financial statements and reports:
(a) As soon as practicable and in any event within fifteen (15) days
after Borrower knows or should reasonably have known of the commencement of any
legal action against it, except actions seeking money judgement that are fully
insured or bonded or reasonably estimated to involve less than $100,000.00, a
report of the commencement of such action containing a statement signed by the
chief financial officer of Borrower setting forth details such legal action and
any action Borrower proposes to take with respect thereto;
(b) Within fifteen (15) days of the occurrence of any Event of Default
or event which, with the giving of notice or lapse of time, or both, would
constitute an Event of Default, a report regarding such Event of Default or
event setting forth details and describing any action which Borrower proposes to
take with respect thereto, signed by an officer of Borrower;
(c) Any change in name of Borrower or use of any trade names or trade
styles not presently used;
(d) As soon as practicable and in any event within forty five (45)
days after the end of each quarter of each fiscal year of Borrower, balance
sheets of Borrower as of end of each such quarter and a statement of earnings
and surplus for each such quarter, setting forth in each case in comparative
form the corresponding figures for the corresponding period of the preceding
fiscal year, all in reasonable detail and duly certified (subject to year-end
audit adjustments) by the chief financial officer of Borrower as having been
prepared in accordance with GAAP consistent with those applied in the
preparation of the Financial Statements referred to in subsection 4.14(e),
together with a certificate of said officer stating that he/ she has no
knowledge that an Event of Default, or any event which, with notice or lapse of
time, or both, would constitute an Event of Default or such event has occurred
and is continuing or, if an Event of Default or such event has occurred and is
continuing, a statement as to the nature thereof and the action which Borrower
proposes to take with respect thereto and a certificate of the said officer
certifying to the best of such officer's knowledge after reasonable inquiry
Borrower's compliance with all covenants contained herein:
(e) As soon as available and in any event within ninety (90) days
after the end of each fiscal year of Borrower, a copy of the (unqualified)
Financial Statements for such year, audited by an independent certified public
accountant of recognized standing acceptable to Lender and within fifteen (15)
days of filing each year, a copy of Borrower's federal and state income tax
returns, complete with supporting schedules and exhibits;
(f) Within sixty (60) days after the end of each fiscal year, a
certificate of the president and chief financial officer of Borrower stating
that neither such officer has any knowledge that an Event of Default or any
event which, with notice or lapse of time, or both, would constitute an Event of
Default, has occurred and is continuing, or if, in the opinion of either such
officer, an Event of Default or such an event has occurred and is continuing, a
statement as to the nature thereof;
11
<PAGE>
(g) Promptly upon receipt thereof, one (1) copy of any other report
submitted to Borrower by independent accountants in connection with any annual,
interim or special audit made by them of the books of Borrower;
(h) Within five (5) days of (i) any contact from any Governmental
Agency concerning any environmental protection Laws, including, but not limited
to, any notice of any proceeding or inquiry with respect to the presence of any
hazardous waste, toxic substances or hazardous materials on the Property or the
migration thereof from or to other property, (ii) any and all claims made or
threatened by any third party against or relating to the Property concerning any
loss or injury resulting from toxic substances, hazardous waste, or hazardous
materials, or (iii) Borrower's discovery of any occurrence or condition on any
property adjoining or in the vicinity of the Property that could cause the
Property, or any part thereof, to be subject to any restrictions on the
ownership, occupancy, transferability, or loss of the Property under any Law,
Borrower shall deliver to Lender a report regarding such contact and setting
forth in detail and describing any action which Borrower proposes to take with
respect thereto, signed by an officer of Borrower (Lender acknowledges that
Borrower has advised Lender that the Property is located within the San Fernando
SuperFund site);
(i) Within five (5) business days of becoming aware of any
developments or other information which may materially and adversely affect
Borrower's properties, business, prospects, profits or condition (financial or
otherwise) or Borrower's ability to perform this agreement or the other Loan
Documents, telephonic or telegraphic notice specifying the nature of such
development or information and such anticipated effect, which shall be promptly
confirmed in writing;
(j) As soon as available and in any event within forty five (45) days
after the end of each semi-annual period of Borrower, copies of the rent roll
and operating statements on the Property, in form and substance satisfactory to
Lender;
(k) As soon as available and in any event within fifteen (15) days of
filing and release, in the event the company goes public, copies of the 10Q and
10K financial statements of Borrower, in form and substance satisfactory to
Lender; and
(l) Such other information respecting the business, properties or the
condition or operations, financial or otherwise, of Borrower as the Lender may
from time to time reasonably request.
ARTICLE 5
---------
EVENTS OF DEFAULT
-----------------
An "Event of Default" shall be deemed to have occurred hereunder if:
5.1 DEFAULT UNDER LOAN DOCUMENTS. Borrower shall fail to pay principal or
----------------------------
interest, or both, when due under the terms of the Notes; or Borrower shall fail
to perform or observe any term, covenant, or agreement contained in this
Agreement or in any of the other Loan Documents, which failure may be cured by
the payment of money, and, in any of such events, such failure shall continue
for a period of ten (10) days from the date such payment or performance was due;
or Borrower shall fail to perform or observe any term, covenant or agreement
contained in this Agreement or in any of the other Loan Documents, which failure
cannot be cured by the payment of money and such failure shall continue for a
period of fifteen (15) days after the Lender shall have given written notice to
Borrower specifying such
12
<PAGE>
default; provided however, that if such non-monetary default is curable but is
of a nature that such cure cannot be completed within such fifteen (15) day
period, Borrower shall be allowed to cure such default if Borrower shall
promptly commence such cure after receipt of such notice and diligently
prosecutes the same to completion after receipt of such notice, (provided
further, however, that in no event shall such extension operate to extend the
Maturity Date); or
5.2 BREACH OF WARRANTY. Any warranties or representations made or agreed
------------------
to be made in this Agreement or in any of the other Loan Documents shall be
breached in any material respect or shall prove to be false or misleading in any
respect when made; or
5.3 LITIGATION AGAINST BORROWER. Any suit shall be filed against Borrower,
---------------------------
which, if adversely determined, could substantially impair the ability of
Borrower to perform any or all of its obligations under and by virtue of this
Agreement or any of the other Loan Documents, unless Borrower's counsel
furnishes to Lender its opinion, to the satisfaction of Lender and Lender's
counsel, that, in its judgment the suit is essentially without merit; or
5.4 LEVY UPON PROPERTY. A levy shall be made on the Property under any
------------------
process and such levy shall not be bonded over or shall continue unstayed for
thirty (30) days or more.
5.5 ACCELERATION OF OTHER DEBTS. Borrower does, or omits to do, any act,
---------------------------
or any event occurs, as a result of which any material obligation of Borrower,
whether or not arising hereunder and/or relating to or affecting the Property or
Borrower's ability to perform hereunder, may be declared immediately due and
payable by the holder thereof; or
5.6 TRANSFER OF PROPERTY. Borrower shall, without the prior written
--------------------
consent of Lender, which consent the Lender may either give or withhold in its
sole and absolute opinion and judgment voluntarily, involuntarily or by
operation of law, sell, transfer, convey, lease (except for leases on
commercially reasonable terms at current market rents for similar property), or
encumber the Property, or any interest therein except as permitted herein, or
shall contract for such sale, transfer, conveyance, or encumbrance unless the
contract provides for repayment of the Loan in full at the time of conveyance;
or
5.7 BANKRUPTCY. Borrower shall fail to pay its debts as they become due,
----------
or shall make an assignment for the benefit of its creditors, or shall admit, in
writing, its inability to pay its debts as they become due, or shall file a
petition under any chapter of the Federal Bankruptcy Code or any similar law,
now or hereafter existing, or shall become "insolvent" as that term is generally
defined under the Federal Bankruptcy Code, or shall in any involuntary
bankruptcy case commenced against it file an answer admitting insolvency or
inability to pay its debts as they become due, or shall fail to obtain a
dismissal of such case within sixty (60) calendar days after its commencement or
convert the case from one chapter of the Federal Bankruptcy Code to another
chapter, or be the subject of an order for relief in such bankruptcy case, or be
adjudged a bankrupt or insolvent, or shall have a custodian, trustee, or
receiver appointed for, or have any court take jurisdiction of, its properties,
or any part thereof, in any voluntary or involuntary proceeding, including, but
not limited to, those for the purpose of reorganization, arrangement,
dissolution, or liquidation, and such custodian, trustee, or receiver shall not
be discharged, or such jurisdiction shall not be relinquished, vacated, or
stayed within sixty (60) days after the appointment; or
5.8 BORROWER STATUS. Without Lender's prior written consent, Borrower
---------------
shall be liquidated, dissolved, or fail to maintain its status as a going
concern; or
13
<PAGE>
5.9 EXECUTION LEVY. Execution shall have been levied against the
--------------
Property or any lien creditor shall commence suit to enforce a judgment lien
against the Property and such action or suit shall not have been bonded or shall
continue unstayed for a period of thirty (30) days or more;
5.10 ATTACHMENT. Any proceeding shall be brought, the object of which is
----------
that any part of the Lender's commitment to make the Advances hereunder shall at
any time be subject or liable to attachment or levy by any creditor of Borrower;
or
5.11 DESTRUCTION. Any part or all of the Property is materially damaged or
-----------
destroyed by fire or other casualty and the loss shall prove to be inadequately
covered by insurance actually collected or in the process of collection to
restore the Property to its condition prior to such fire or other casualty
unless Borrower deposits with Lender the amount, in the form of cash or a letter
of credit acceptable to Lender, as estimated by Lender which together with
available insurance proceeds will be adequate to restore the Property to its
condition prior to such fire or casualty; or
5.12 EMINENT DOMAIN. Any material part or all of the Property shall be the
--------------
subject of an eminent domain proceeding or a taking adverse to the interest of
Lender; or
5.13 MISREPRESENTATION AND/OR NON-DISCLOSURE. Borrower has made certain
---------------------------------------
statements and disclosures in order to induce Lender to make the Loan and enter
into this Agreement, and, in the event Borrower has made material
misrepresentations or failed to disclose any material fact, Lender may treat
such misrepresentation or omission as a breach of this Agreement. Such action
shall not affect any remedies Lender may have for such misrepresentation or
non-disclosure, as such, or under its Deed of Trust for such misrepresentation
or concealment; or
5.14 ERISA. Any of the following events occur or exist with respect to
-----
Borrower:
(a) Any Reportable Event with respect to any Plan;
(b) The filing under Title IV of ERISA of a notice of intent to
terminate any Plan or the termination of any Plan;
(c) Any event or circumstance that might constitute grounds
entitling the PBGC to institute proceedings for the termination of, or for the
appointment of a trustee to administrate any Plan, or the institution by the
PBGC of any such proceeding; or
5.15 FINANCIAL CONDITION. There shall be any material adverse changes in
-------------------
Borrower's financial condition.
5.16 DEFAULT UNDER GUARANTY. Any Guarantor is declared to be in default
----------------------
under the terms of its Guaranty.
ARTICLE 6
---------
REMEDIES
--------
6.1 CEASE PAYMENT AND/OR ACCELERATE. Upon, or at any time after, the
-------------------------------
occurrence of an Event of Default or upon the occurrence of a default in any
other joint and/or several
14
<PAGE>
obligation or obligations of the Borrower, to Lender, Lender shall have no
obligation to make any further Advances, all sums disbursed or advanced by
Lender and all accrued and unpaid interest thereon shall, at the option of
Lender, become immediately due and payable, and Lender shall be released from
any and all obligations to Borrower under the terms of this Agreement.
6.2 RIGHTS AND REMEDIES NON-EXCLUSIVE. In addition to the specific rights
---------------------------------
and remedies hereinabove mentioned, Lender shall have the right to avail itself
of any other rights or remedies to which it may be entitled, at Law or in
equity, including, but not limited to, the right to realize upon any or all of
its security and/or the right to enforce the Guaranty, and to do so in any
order. Furthermore, the rights and remedies set forth above are not exclusive,
and Lender may avail itself of any individual right or remedy set forth in this
Agreement, or available at Law or in equity, without utilizing any other right
or remedy.
ARTICLE 7
---------
GENERAL CONDITIONS AND MISCELLANEOUS
------------------------------------
7.1 NONLIABILITY OF LENDER. Borrower acknowledges and agrees that by
----------------------
accepting or approving anything required to be observed, performed, fulfilled,
or given to Lender pursuant to this Agreement or the other Loan Documents,
including any certificate, Financial Statement, appraisal or insurance policy,
Lender shall not be deemed to have warranted or represented the sufficiency,
legality, effectiveness or legal effect of the same, or of any term, provision,
or condition thereof, and such acceptance or approval thereof shall not be or
constitute any warranty or representation to anyone with respect thereto by
Lender.
7.2 NO THIRD PARTIES BENEFITTED. This Agreement is made for the purpose of
---------------------------
defining and setting forth certain obligations, rights, and duties of Borrower
and Lender in connection with the Loan. It shall be deemed a supplement to the
Note and the other Loan Documents, and shall not be construed as a modification
of the Note or the other Loan Documents, except as provided herein. It is made
for the sole protection of Borrower and Lender, and Lender's successors and
assigns. No other person shall have any rights of any nature hereunder or by
reason hereof or the right to rely hereon. In the event of a conflict between
this Agreement and the Note, the provisions of the Note shall control. In the
event of a conflict between this Agreement and the Deed of Trust, the provisions
of this Agreement shall control.
7.3 INDEMNITY BY BORROWER. Borrower hereby indemnifies and agrees to hold
---------------------
harmless Lender and its directors, officers, agents and employees (individually
and collectively the "Indemnitee(s)") from and against:
(a) Any and all claims, demands, actions or causes of actions that
are asserted against any Indemnitee by any person if the claim, demand, action
or cause of action, directly or indirectly, relates to a claim, demand, action
or cause of action that the person has or asserts against Borrower; and
(b) Any and all liabilities, losses, costs or expenses (including
court costs and attorneys' fees) that any Indemnitee suffers or incurs as a
result of the assertion of any claim, demand, action or cause of action
specified in this Section 7.3.
7.4 CHANGE IN LAWS. In the event of the enactment, after the date of this
--------------
Agreement, of any Laws: (a) deducting from the value of property for the purpose
of taxation of any lien or
15
<PAGE>
security interest thereon; (b) imposing upon Lender the payment of the whole or
any part of the taxes or assessments or charges or liens herein required to be
paid by Borrower; (c) changing in any way the Laws relating to the taxation of
deeds of trust or mortgages or security agreements, or the interest of the
mortgagee or secured party in the property covered thereby; or (d) the manner of
collection of such taxes so as to affect the Deed of Trust secured thereby or
Lender, then, and in any such event, Borrower, upon demand by Lender, shall
promptly pay such taxes, assessments, charges or liens, or reimburse Lender
therefor. If Borrower shall be prohibited from paying such tax or from
reimbursing Lender for the amount thereof, Borrower shall execute a modification
to the Loan Documents which modification shall increase the interest rate
payable pursuant to the Note so as to permit Lender to maintain its yield as if
such tax had not been imposed. If Borrower shall be prohibited from executing
the above-referenced modifications, Lender may, in Lender's sole opinion and
judgment, declare the principal of all amounts disbursed and owing under the
Note, this Agreement, and the other Loan Documents (including all obligations
secured by this Agreement or the other Loan Documents) and all other
indebtedness of Borrower to Lender, together with interest thereon, to be
forthwith due and payable, regardless of any other specified maturity or due
date.
7.5 TIME IS OF THE ESSENCE. Time is of the essence of this Agreement and
----------------------
of each and every provision hereof. The waiver by Lender of any breach or
breaches hereof shall not be deemed, nor shall the same constitute, a waiver of
any subsequent breach or breaches.
7.6 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and
--------------------------
inure to the benefit of Borrower and Lender and their respective successors and
assigns, except that Borrower may not assign its rights hereunder or any
interest herein without the prior written consent of Lender. Lender shall have
the right to assign its rights under this Agreement or the other Loan Documents
and to grant participations in the Loan to others, but all waivers or
abridgements of Borrower's obligations that may be granted from time to time by
Lender in writing, shall be binding upon such assignees or participants.
7.7 EXECUTION IN COUNTERPARTS. This Agreement and any other Loan
-------------------------
Document, except the Note and the Deed of Trust, may be executed in any number
of counterparts, and any party hereto or thereto may execute any counterpart,
each of which, when executed and delivered, will be deemed to be an original,
and all of which counterparts of this Agreement or any other Loan Document, as
the case may be, taken together will be deemed to be but one and the same
instrument. The execution of this Agreement or any other Loan Document by any
party hereto or thereto will not become effective until counterparts hereon or
thereof, as the case may be, have been executed by all the parties hereto or
thereto.
7.8 INTEGRATION; AMENDMENTS; CONSENTS. This Agreement, together with the
---------------------------------
documents referred to herein, constitutes the entire agreement of the parties
touching upon the subject matter hereof, supersedes any prior negotiations or
agreements on such matter. No amendment, modification or supplement of any
provision of this Agreement or any of the other Loan Documents shall be
effective unless in writing, signed by Lender and Borrower; and no waiver of any
of Borrower's obligations under this Agreement or any of the other Loan
Documents or consent to any departure by Borrower therefrom shall be effective
unless in writing, signed by Lender, and then only in the specific instance and
for the specific purpose given.
7.9 COSTS, EXPENSES AND TAXES. Borrower shall pay to Lender, on demand:
-------------------------
(a) The reasonable attorneys' fees and out-of-pocket expenses
incurred by Lender in connection with the negotiation, preparation, execution,
delivery and administration of the
16
<PAGE>
Agreement and any other Loan Document and any matter related thereto, including,
but not limited to, appraisals of the Property;
(b) The reasonable costs and expenses of Lender in connection with
the enforcement of this Agreement and any other Loan Document and any matter
related thereto, including the reasonable fees and out-of-pocket expenses of any
legal counsel, independent public accountants, and other outside experts
retained by Lender; and
(c) All costs, expenses, fees, premiums and other charges relating to
or arising from this Agreement or any of the other Loan Documents or any
transactions contemplated hereby or thereby or the compliance with any of the
terms and conditions hereof or thereof, including, but not limited to, recording
fees, filing fees, credit report fees, release or reconveyance fees, title
insurance premiums and the cost of realty tax service for the term of the Loan.
All sums paid or expended by Lender under the terms of this Agreement
shall be considered to be, and shall be, a part of the Loan. All such sums,
together with all amounts to be paid by Borrower pursuant to this Agreement,
shall bear interest from the date of expenditure at the default rate provided in
the Note, shall be secured by the Deed of Trust and shall be immediately due and
payable by Borrower upon demand.
7.10 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
-----------------------------------------
warranties of Borrower contained herein or in any other Loan Document shall
survive the making of the Loan and the execution and delivery of the Note, and
are material and have been or will be relied upon by Lender, notwithstanding any
investigation made by Lender or on behalf of Lender. For the purpose of this
Agreement, all statements contained in any certificate, agreement, Financial
Statement, or other writing delivered by or on behalf of Borrower pursuant
hereto or to any other Loan Document or in connection with the transactions
contemplated hereby or thereby shall be deemed to be representations and
warranties of Borrower contained herein or in the other Loan Documents, as the
case may be.
7.11 NOTICES. All notices, requests, demands, directions, and other
-------
communications provided for hereunder and under any other Loan Document (a
"Notice"), must be in writing and must be mailed by registered mail,
telegraphed, delivered or sent by telex, cable or other form of electronic
written communication to the appropriate party at its respective address set
forth below or, as to any party, at any other address as may be designated by it
in a written notice sent to the other parties in accordance with this Section.
Any notice given by telegram, telex, cable or other form of electronic
written communication must be confirmed within forty-eight (48) hours by letter
mailed or delivered to the appropriate party at its respective address. If any
notice is given by mail, it will be effective three (3) calendar days after
being deposited in the mails with registered postage prepaid; if given by
telegraph or cable, when delivered to the telegraph company with charges
prepaid; if given by telex or other form of electronic written communication,
when sent; or if given by personal delivery, when delivered.
17
<PAGE>
Such notices will be given to the following:
To Lender: TOKAI BANK OF CALIFORNIA
Attention: Commercial Banking Department
300 South Grand Avenue
Los Angeles, California 90071
To Borrower: FOUR MEDIA COMPANY
2813 West Alameda Avenue
Burbank, California 91505-4455
7.12 FURTHER ASSURANCES. Borrower shall, at its sole expense and without
------------------
expense to Lender, do, execute and deliver such further acts and documents as
Lender from time to time may reasonably require for the purpose of assuring and
confirming unto Lender the rights hereby created or intended, now or hereafter
so to be, or for carrying out the intention or facilitating the performance of
the terms of any Loan Documents, or for assuring the validity of any security
interest.
7.13 GOVERNING LAW. The Loan shall be deemed to have been made in
-------------
California, and this Agreement and the other Loan Documents shall be governed by
and construed and enforced in accordance with the Laws of the State of
California.
7.14 SEVERABILITY OF PROVISIONS. If any provision of this Agreement or of
--------------------------
any of the other Loan Documents is held to be inoperative, unenforceable or
invalid, such provision shall be inoperative, unenforceable or invalid without
affecting the remaining provisions; this Agreement and the other Loan
Documents shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement or the
other Loan Documents; and to this end the provisions of this Agreement and the
other Loan Documents are declared to be severable, remaining in full force and
effect.
7.15 JOINT AND SEVERAL OBLIGATIONS. If this Agreement is executed by more
-----------------------------
than one person as Borrower, the obligations of each of such persons hereunder
shall be joint and several obligations.
7.16 CONSTRUCTION. Whenever the context of this Agreement requires, the
------------
singular shall include the plural and the masculine gender shall include the
feminine and/or neuter.
7.17 HEADINGS. Article and Section headings in this Agreement are included
--------
for convenience of reference only and are not part of this Agreement for any
other purpose.
18
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have hereunto caused this Agreement
to be executed on the date first above written.
"Lender" "Borrower"
TOKAI BANK OF CALIFORNIA, a California FOUR MEDIA COMPANY, a Delaware
banking corporation corporation
By: By: /s/ JOHN SABIN
---------------------------------- ----------------------------------
ANTHONY CRUZ JOHN SABIN
Vice President Vice President/Chief Financial
Commercial Banking Department Officer
By:
----------------------------------
STEPHEN MOYER
Vice President
19
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated September 25, 1996, except for Note 12, as to which the date
is November 18, 1996, on our audits of the financial statements of 4MC-
Burbank, Inc. and our report dated October 1, 1996, except for Note 2, as to
which the date is November 18, 1996, on our audit of the financial statement
of Four Media Company. We also consent to the reference to our firm under the
caption "Experts."
Coopers & Lybrand L.L.P.
Los Angeles, California
December 27, 1996
