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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
AUGUST 1, 1999 0-21943
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FOUR MEDIA COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4599440
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2813 West Alameda Avenue
Burbank, California 91505
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: 818-840-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock, par value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
- - - - - - - - - -
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes X No
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of October 27, 1999 was $29,949,008.
As of October 27, 1999, 19,693,629 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the 1999 Annual Meeting of Stockholders to be held in January
2000.
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PART I
The following should be read in conjunction with the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Form 10-K. When used in
the following discussion, the words "believes," "anticipates," "intends,"
"expects" and similar expressions are intended to identify forward-looking
statements. These statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected. We
caution you not to place undue reliance on forward-looking statements, which
speak only as of the date of this report.
Item 1. Business
Overview
We are a leading provider of technical and creative services to producers
and distributors of television programming, television commercials, feature
films and other entertainment content, as well as to owners of film and
television libraries. The name Four Media Company is derived from our core
competencies in film, video, sound and data. These services include the
processing, enhancement, storage and distribution of film and video from the
point it leaves the camera until it is shown, in various formats, to audiences
around the world. We seek 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 our formation in 1993, we have invested extensively in new digital
systems and equipment. In addition, we have successfully identified and either
acquired or started and then integrated fourteen complementary businesses. The
latest of these acquisitions occurred in June 1999 when we acquired the
operations of Ross Digital Sound and Picture ("DSP"). As a result of our
investments and acquisitions, we are 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 are
able to offer our customers a single source for such services.
We have fourteen wholly-owned operating subsidiaries: 4MC-Burbank, Inc.
("4MC Burbank"), Digital Magic Company ("DMC"), Anderson Video Company
("Anderson"), Four Media Company Asia Pte. Ltd. ("4MC Asia"), 4MC-Company 3,
Inc. ("Co3"), Visualize, d.b.a. Pacific Ocean Post ("POP"), VSDD Acquisition
Corporation ("VSI"), MSCL, Inc., FilmCore Editorial San Francisco, LLC, FilmCore
Editorial Los Angeles, LLC (the latter three collectively "Encore"), Company 11
Productions ("Co11"), 4MC Radiant, Inc. ("Radiant"), Four Media Company (UK)
Limited ("4MC UK"), and Digital Sound & Picture, Inc. ("DSP"). Also, we have
one majority-owned subsidiary, POP Animation, and one minority-owned investee,
Cinram POP DVD Center, LLC. We continue to be acquisition-oriented and are
continually evaluating acquisition opportunities to enhance our operations and
profitability.
We have organized our activities into the following four divisions, each of
which offers services that are integral to the creation, enhancement and/or
distribution of entertainment content.
Television Division. The television division provides producers of
original television programming and television commercials with certain
technical and creative services that are necessary to conform original film or
video principal photography into a final product suitable for airing on network,
syndicated, cable or foreign television. These services include developing
negative in our film laboratory; converting developed negative to videotape
and/or digital formats; creating music and sound effects; mixing sound elements
for inclusion with the final program master; creating visual effects;
integrating visual effects into the final program master; 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. We conduct television operations in Burbank, Hollywood, Universal
City, Culver City, Santa Monica and San Francisco, California.
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Mastering and Distribution Division. The mastering and distribution
division (formerly, the studio 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 mastering and distribution division offers
customers lower operating costs, improved response time and reliability, access
to new technology, and adherence to quality standards that are recognized
throughout the 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. We conduct mastering and
distribution operations in Burbank and Universal City, California, and London,
England.
Broadcast and Syndication Division. The broadcast and syndication division
(formerly, 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 assembling 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
language translation and subtitling; providing production support and facilities
for the timely creation of original programming such as host and news segments,
and live shows; and providing automated playback systems and satellite uplink
facilities. In addition, the broadcast and syndication 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
segments for insertion in third party networks. The division's customer base
includes major entertainment companies offering worldwide network programming,
independent content owners offering niche market programming, and pay-per-view
services marketing movies and special events to cable and direct-to-home
viewers. We conduct broadcast and syndication operations in Burbank, California
and the Republic of Singapore.
Film and Animation Division. The film and animation division (formerly,
the visual effects division) 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 and television commercials.
These services include developing negative and correcting color in our film
laboratory; digitally scanning film; digitally compositing multiple layers of
effects; digitally creating computer generated animated sequences and recording
the results on film and creating computer generated animated sequences. The
division's customer base includes most of the major domestic studios, as well as
independent film production companies. We conduct film and animation operations
in Santa Monica, California.
Recent Developments
On November 1, 1999 we announced that we have entered into a letter of
intent to sell 100% of the Company's issued and outstanding common stock to
Liberty Media Corporation (NYSE: LMG.A). As contemplated by the letter of
intent, one hundred percent (100%) of Four Media's issued and outstanding stock
will be acquired in exchange for approximately 6.35 million shares of Class A
Liberty Media Group stock, par value $1.00 ("LMG.A shares(s)"). One LMG.A share
will be issued for each 3.1 shares of Four Media common stock outstanding.
Warburg, Pincus Equity Partners, L.P., Fleming Asset Management USA and Robert
T. Walston, collectively holders of approximately 70% of the issued and
outstanding shares of Four Media, are expected to enter into agreements with
Liberty Media to vote in favor of the transaction. The transaction is subject to
execution of definitive documentation, expiration of applicable waiting periods
under pre-notification regulations, Four Media stockholder and Board of
Directors approval, and other customary closing conditions, including other
appropriate corporate approvals. The parties contemplate that a definitive
agreement will be signed in mid-November 1999 and closing is anticipated to
occur in the first quarter of 2000.
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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 and on-line services. 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. We believe that several trends in the entertainment industry
have had and will continue to have a positive impact on our 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 domestic and foreign markets, and wider
application of digital technologies to content manipulation and distribution,
including the emergence of new distribution channels.
Motion Picture Production and Distribution Industry. The domestic motion
picture industry encompasses the production, distribution and exhibition of
feature-length motion pictures, including their distribution in home video,
broadcast and cable 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. In 1999, there were 509 feature films
released, up from 507 in 1998. Our film and animation division creates and
integrates digital visual effects and animation sequences into newly released
feature films.
Recent growth in international revenue has far exceeded growth in North
American (United States and Canada) revenues, with international revenue now
accounting for approximately half of total revenue. According to an August 1996
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. Our mastering and distribution 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.
Television Production and Distribution Industry. The North American
television production and distribution industry serves the largest broadcast
market in the world, with a population of approximately 300 million and more
than 97 million television households. In North America, programming is
delivered to television households via conventional broadcast networks, cable
channels, individual television stations and satellite delivery systems.
Broadcast television networks in the United States include two relatively new
networks, the United Paramount Network and the Warner Bros. Network, as well as
the established networks, ABC, NBC, CBS and Fox. These networks penetrate
nearly 100% of domestic television households and provide access to a broad-
based mass audience for television advertisers. Spending for television
advertising, which drives the production of new programming and the sale of
existing content libraries, was $39.9 billion in 1998, a 7.5% annual growth rate
since 1992. Projected spending for 2002 is estimated at $46.6 billion. While
the networks have seen an erosion of their penetration and reduced advertising
revenues, the basic cable networks have increased penetration, programming and
advertising revenues.
The demand for entertainment content has increased significantly as a
result of the introduction of new broadcast networks, cable channels, direct
broadcast satellite systems, pay television, increased cable penetration and the
growth of home video. The new broadcast and cable 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 production and related spending. Our television division
supports the creation of television programming and advertising for domestic
distribution and our broadcast and syndication division supports the delivery of
programming through various channels of distribution including cable,
independent television stations 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.
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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 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. Our television division supports the creation of programming for
international distribution, our mastering and distribution division supports the
preparation of content to be viewed in international markets, and our broadcast
and syndication division supports the distribution of cable channels in Asia.
Broadband Production and Distribution Industry. The interactive multimedia
industry encompasses video games, "edutainment" and on-line interactive
services. Improvements in technology, the increasing availability and cost
expenditures of communication bandwidth including internet, cable modems, direct
satellite access, the proliferation of distribution channels for entertainment
products and services, and the involvement of large entertainment companies,
provide the critical mass to support continued growth of broadband distribution
of entertainment content. Advertisers spent an estimated $1.9 billion for
online advertising in 1998, up 112% from 1997. Online advertising spending in
2002 is expected to exceed $8.0 billion reflecting anticipated increases in
online penetration of worldwide households and advances in online commerce. The
content currently being created for online access integrates various forms of
media including live action video, animation, graphics and audio. We anticipate
growing demand for content specifically formulated for interactive applications
both for internet and television distribution. Our current revenues from these
emerging market segments represent only a small portion of consolidated results.
However, we expect the rapid growth of the broadband production and distribution
industry will positively impact us specifically in the areas of video
compression, digitization, 2D and 3D graphics, and authoring, particularly for
server-based content on-demand services.
Products and Services
We have defined our operating divisions in terms of the entertainment
industry market segments that each serves. Each sector is driven by related but
diverse economic factors and, as a result, we are not solely dependent upon any
single market segment within the entertainment industry. We intend to maintain
and expand the diversity of our revenue sources and view such diversity as a
significant competitive operating and financial advantage. For each of our
operating divisions, we have defined a set of services which support our
customers' entire technical and creative process. As such, we seek to provide
complete outsourcing solutions utilizing the full range of its services in each
division.
Television Division
The television division provides a broad range of facilities and technical
and creative services directed to producers of original television programming.
Our 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. We provide all of the technical and 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
distribution. These services include the following:
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. Camera original negative shot during each production day, called
"Dailies", for a one-hour drama, situation comedy or movie-of-the-week are
delivered to our film laboratory for overnight development. Our film laboratory
specializes in negative developing for television applications and has increased
its television related activities in each year since our inception.
Transfer and Digital Formatting Services. We accept developed negative
from a laboratory and transfer the film to various digital formats including,
among others, videotape. The transfer process enables the customer to view a
video tape of the previous day's work and begin the creative process of editing.
The transfer process is technically challenging, and is used to integrate
various forms of audio and encode with feet and frame numbers from the original
film. We also convert film into various digital formats suitable for
distribution through multiple
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mediums such as DVD and direct broadcast satellite services. We believe our
state-of-the-art technology and the highly skilled talent we retain allows us to
produce the highest quality results attainable in the industry today.
Off-Line Editing. We deliver low resolution digitized images to the
customer for processing by various non-linear editing work stations. Using
these systems, the customer determines a program's content and creates an edit
decision list, which will eventually be used to assemble the source material
into a final product suitable for broadcast. We provide and fully support such
editing with personnel and equipment for use by the customer within our
facilities or at a location designated by the customer. In addition, we are
currently constructing communications infrastructure to provide digitized images
directly from the film-to-tape transfer process to a work station via dedicated
phone lines.
Audio/Sound Effects. Through our facilities in Burbank, Culver City and
Santa Monica, we edit and create sound effects, assist in replacing dialog and
re-record all the audio elements for integration with film and video elements.
We design 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 or applause 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). Our Burbank facility has four studios devoted to situation
comedies and one-hour dramas as well as two theater-sized re-recording stages
targeted at the feature film and made-for-television movie markets. Our Santa
Monica facility has eleven studios which primarily serve the sound needs of
commercial advertising, music videos and certain home video applications. We
employ an award winning staff and are well respected for our technical and
creative contribution.
Visual Effects. Visual effects are used to enhance the entertainment
experience of the viewing audience by supplementing images obtained in principal
photography with computer generated imagery. The visual effects are typically
used to create images that cannot be created by any other cost effective means.
Digital Magic and POP, both located in Santa Monica, specialize in creating
visual effects for television. Our 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. We also offer an array of graphics and
animation workstations using a variety of software to accomplish unique effects,
including 3D animation. We are a leader in providing visual effects for the
television industry as evidenced by our involvement in numerous award winning
series, including the X Files(R) and Star Trek(R)--Voyager(R).
Assembly, Formatting and Duplication. Once client-directed creative
decisions are complete, including the integration of sound and visual effects,
we utilize the edit decision list to assemble the source material into its final
form. This assembly is accomplished by using a combination of digital linear
assembly systems and full-resolution non-linear assembly systems. We believe
that our assembly systems, which became operational in 1996, are among the most
technologically advanced in the industry. In addition, we utilize sophisticated
computer graphics equipment to generate titles and character imagery and to
format the program to meet specific network requirements (including time
compression and commercial breaks). Finally, we create multiple master
videotapes for delivery to the network for broadcast, archival and other
purposes designated by the customer.
Mastering and Distribution Services Division
The mastering and distribution 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 the following:
Storage of Original Elements and Working Masters. 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. Our archive is designed to store
approximately 500,000 master videotapes and film elements in an environment
protected from temperature and humidity variation, seismic disturbance, fire,
theft and other external events. We currently store approximately 340,000
master videotapes and film elements in the archive. In addition to the physical
security of
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the archive, content owners require frequent and regular access to their
libraries. Speed and accuracy of access is a critical value added factor. We
believe that our archive is the largest among independent service providers and
among the most advanced with respect to security, environmental control and
access features.
Restoration of Damaged Content. Substantially all film elements
originating prior to 1983 have faded, degraded or have been damaged. Damaged
film negative must be restored because submasters produced from damaged film
will generally not meet the minimum quality standards required in domestic and
foreign broadcast markets. Our technicians restore damaged film negative to
original and sometimes enhanced quality through the use of proprietary optical
and electronic equipment and techniques. We believe we are well recognized for
our ability to complete technically challenging restoration assignments.
Preservation of Existing Film. In order to protect film assets from
degradation, older film is frequently converted to new archival film stock.
Modern film stock is the preferred archival medium because it has the highest
image resolution of any image storage medium and a shelf life that exceeds 100
years. Using a proprietary process, we take the original (or restored) film
negative and create an archival answer print and interpositive (i.e., a new
negative). We believe that, due to technical and operational advances in our
proprietary preservation process, we are a market leader in the preservation of
existing film content.
Transferring Film to Digital Format. Most film content ultimately is
distributed to the home video, broadcast, cable or pay-per-view television
markets, requiring that film images be transferred to a video format. 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 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. We transfer film to videotape using URSA Diamond(R)
and Spirit(R) telecine equipment and DaVinci(R) digital color correction
systems. Technological developments, such as the domestic introduction of
television sets with a 16 x 9 aspect ratio and the implementation of advanced
and high definition digital television systems for terrestrial and satellite
broadcasting, should contribute to the growth of our film transfer business.
Converting Digital Format and Analog Videotape. Production companies may
choose to originate their work on videotape even though the ultimate market is a
theatrical release on film. We developed a proprietary process which converts
videotape to film using advanced electronic systems to transform video pictures
from all current broadcast standards to 16mm or 35mm film. This process is used
for theatrical advertising, commercials, studio promotions and trailers, as well
as theatrical length presentations including feature films, concerts and special
events.
Audio Layback and Standards Conversion. 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. We attract
audio layback business by offering optimum sound quality and synchronization of
audio to picture within a half frame accuracy. Standards conversion is the
process of changing the frame rate of one video signal (such as the United
States standard). We use advanced technologies to provide the highest quality
conversion services available.
Professional Duplication. Professional duplication is the process of
creating submasters for distribution to professional end users. Master tapes
are used to make submasters in up to seven domestic and international broadcast
standards as well as up to 22 different tape formats. In addition, 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. We believe that our professional
duplication facility is technically advanced and has unique characteristics that
significantly increase equipment capacity utilization while reducing error rates
and labor cost.
Broadcast and Syndication Division
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The broadcast and syndication division offers a broad range of facilities
and technical and creative services to domestic and international programmers.
We service the basic and premium cable, broadcast syndication, Canadian network
first run and direct-to-home market segments (i.e., pay-per-view) by providing
substantially 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 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 host and news segments and live shows, and providing
automated playback systems to deliver the programming to air via an uplink
facility. In addition, we provide facilities and services for the delivery of
syndicated television programming in the United States and Canada. We also
transmit and receive special events, sports or news programs for insertion in
third-party networks. Our customer base consists of the major studios and
independent distributors offering network programming, world-wide independent
content owners offering niche market programming, and pay-per-view services
marketing movies and special events to the cable industry and direct-to-home
viewers.
Production. Timely broadcast programming, such as live shows and news,
requires immediate and precise coordination of on-camera talent, the script,
pre-recorded videotape and graphics materials, and the broadcast schedule. We
operate 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. Our
Singapore facility also offers a small field crew and live-to-satellite
interview and teleconference services.
On-Air Promotion. On-screen marketing and broadcast continuity depend on
on-air promotional material to support the channel's brand identity and
programming. Working in conjunction with a client's writers and producers, we
offer a complete on-air promotion service, including graphics, editing, voice-
over record, sound effects editing, sound mixing and music composition.
Language Translation. 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. We provide
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. Our Burbank facility also creates music and
effects tracks from programming shot before an audience to prepare television
sitcoms for dialog record and international distribution. Our Singapore
facility supports translation and a complete on-screen and closed-caption
subtitling facility.
Assembly. We provide programming to most United States broadcast
television stations through daily satellite feeds and tape shipments. Prior to
broadcast, all material is quality control checked and may be pre-compiled into
final broadcast form prior to on-air playback. Pre-compilation is performed in
our editing facilities, often using 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. A variety of movie and show formatting and time compression
services are available 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. We also provide scheduling support to programmers; affiliate
relations and station coordination; library storage of broadcast master tapes;
and a syndication program library and recycled videotape inventory.
Origination and Distribution. We provide videotape playback and
origination to cable, pay-per-view and direct-to-home networks. We accept daily
program schedules, programs, promos and advertising and deliver 24 hours of
seamless daily programming to cable affiliates and home satellite subscribers.
We use automated systems for broadcast playback, which includes proprietary
systems and software. We also operate industry-standard encryption and/or
compression systems as needed for customer satellite distribution. We use a
customized approach to satisfy each customer's timeliness, flexibility and
reliability requirements. Currently, we support over twenty 24-hour channels
from our Burbank facility and seven 24-hour channels originate from our
Singapore facility.
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Uplink and Satellite Transponder. Our Burbank facility operates a
satellite earth station facility with eight transmit/receive antennas. We are
licensed by the Federal Communications Commission ("FCC") and operate as a
common carrier. Facilities are staffed 24 hours a day and are also used for
downlink and turnaround services. We currently utilize a transponder on the
Loral Skynet Telstar 4(R) satellite in support of our syndication and Canadian
distribution businesses. We access various "satellite neighborhoods," including
basic and premium cable, broadcast syndication and direct-to-home markets. We
resell transponder capacity for ad hoc and other occasional use and bundles its
transponder capacity with other broadcast and syndication services to provide a
complete broadcast package at a fixed price.
Film and Animation Division
The film and animation division offers a broad range of facilities and
technical and creative services to creators of special visual effects and
animation sequences for feature films. We bundle our film and animation to
lower the effective cost of certain visual effects, improve response time and
consistency of results and to provide customers access to new technology. Our
customer base includes most of the major studios as well as independent visual
effects supervisors contracted by producers of feature films. We provide
services necessary to digitally create or manipulate images in high resolution
formats for integration into feature films. These services include the
following:
Pre-Production and Principal Photography Consulting. Using a script
provided by the production company, we provide a written outline for
implementing the effects, a time frame and a preliminary effects budget. We
make 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 similar imagery. Prior to principal photography, we create
a story board as the basis of understanding as to which elements will be shot
and by whom. Upon request, we will provide a visual effects supervisor to
assist in principal photography that will later be incorporated in a digital
effect. We will also assemble 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, studios are limiting the amount of time available for the
effect creation process from twelve to four months. This acceleration is often
at odds with the responsibility of the visual effects supervisor to evaluate
different alternatives before making a final selection. In order to minimize
costs, we first design effects in low (i.e., video) resolution. Once the design
is approved, we create visual effects in high (i.e., film) resolution using
powerful computers, provided by Quantel and SGI, both manufacturers of server
based image processing equipment. Quantel products are used for high speed
digital image creation, animation, compositing, retouching, rotoscoping, and
motion and color correction. SGI computers use a variety of software packages
to create elaborate digital effects.
Film Scanning and Recording. Scanning is the process of digitally
formatting principal photography so that images can be created or manipulated in
a digital work station. We digitally format film on a film scanner and transfer
the digital information to a central file server where it can be accessed by any
of our work stations. Once the effect is completed and approved by the visual
effects supervisor, we download the digital information to a 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 Printing. Our film laboratory is
utilized to process and print the visual effects segments for viewing 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. Our 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. We believe that
we have the only visual effects operation incorporating this film laboratory
quality control feature.
9
<PAGE>
Customers
Our customer base consists of producers and distributors of television
programming, television commercials, feature films and other entertainment
content as well as owners of television and film libraries, including major
domestic studios such as Paramount Pictures, Sony Pictures Corporation,
Twentieth Century Fox, Universal Pictures, The Walt Disney Company and Warner
Brothers. As of August 1, 1999, our customer base was over 3,000. We are
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.
Our ten largest customers accounted for 44.7% and 37.2% of total revenues
in fiscal 1998 and 1999, respectively. In addition, 27.7% and 26.1% of our
revenues were generated by the major domestic studios in fiscal 1998 and 1999,
respectively. No individual customer accounted for 10.0% or more of our
revenues. Consistent with industry practice, we do not have a long-term
contractual relationship with most of our customers whereby the customer is
obligated to purchase any specified level of services from us. Our standard
credit term for customers is "Net 30 Days," although, in our experience, the
prevailing practice among major studios and certain other customers is to pay
outstanding accounts within approximately 60 to 90 days. We review a customer's
credit history and establish an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.
In our television division, customer relationships can also be measured by
the number and types of projects we complete during the production season. For
example, the number of episodic television programs that we provided one or more
services to has increased from 84 in 1997 to 114 in 1998 to 129 in 1999. We
believe that the increase in our television customer base is the result of an
increased volume of television production, the construction of a new television
facility in Burbank (which was completed in the fourth quarter of fiscal 1997),
various acquisitions and significantly improved coordination between our
television facilities.
Technology
We purchase hardware and software developed and manufactured by others and
integrate various systems and technologies in a proprietary manner to accomplish
the objectives of our customers. The integration of hardware and software often
requires us to develop new proprietary systems and infrastructure. From time to
time, we form strategic alliances with hardware and software manufacturers to
jointly develop a specific application.
We believe that our infrastructure is state-of-the-art and sets the
industry standard for performance, efficiency and reliability. (This statement
is based on our belief and is not supported by any independent verification).
We intend to upgrade our broadcast and syndication operation in Burbank to
accommodate new digital technologies and convert the remaining analog portions
of our television business to support digital applications and formats as it
becomes technically and operationally feasible. The time frames for the upgrade
of our broadcast and syndication operations in Burbank and the remaining analog
portions of our television operations are as follows:
Broadcast and Syndication Division. We intend to complete the upgrade of
our broadcast and syndication operations in Burbank by the end of the first
quarter of fiscal 2000. These upgrades will expand our ability to broadcast
digitally compressed audio and video signals to satellite transponders.
Television Division. Digital upgrades to the television division are
conducted on an ongoing basis. We experience customer demand for services that
require analog infrastructure and, as a result, will continue to maintain analog
infrastructure as necessary to satisfy such demand. Approximately eighty
percent of the digital upgrades for our television division are complete. The
timing of the remaining digital upgrades will depend upon each facility's
respective workload. Facilities are upgraded during the time when the business
disruption will be minimal. We anticipate that the remaining upgrades will be
performed by the end of the second quarter of fiscal year 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information regarding these upgrades.
10
<PAGE>
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 for
our mastering and distribution, film and animation, and television divisions.
The entertainment services industry in Los Angeles is highly fragmented and no
single industry participant, including us, has a dominant market share in any
service offering. We believe that we are unique, however, among industry
competitors in terms of the breadth of our operating divisions and the depth of
service offerings within each business segment. We entered the international
broadcast market with the completion of our Singapore facility in 1995 and seek
to provide services to domestic and foreign programmers in regional television
markets in Asia and abroad. We compete 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.
We experience intense competition in each of our four business divisions.
Some of our current and potential competitors, particularly those who perform
services in-house, have substantially greater financial, technical, creative,
marketing and other resources than we do. Our competitors may devote
substantially greater resources to the development and marketing of new
competitive services and the utilization of new technologies. We expect that
competition will increase substantially as a result of industry consolidations
and alliances, as well as the emergence of new competitors. We also actively
compete with industry participants operating niche or specialty businesses. In
addition, many of our customers conduct in-house operations that we consider
competitive. We believe that all of our service offerings are competitive with
in-house operations and with independent service providers.
Government Regulation
Under the Communications Act of 1934, as amended, transmissions from our
domestic broadcast division's earth station to satellites must be made pursuant
to a license granted by the FCC. Catalina Transmission Corp., our indirect
wholly-owned subsidiary, holds three satellite earth station licenses. The
licenses for these stations were granted for periods of five to ten years and
are routinely renewed. Our licenses expire in 2001, 2004, and 2007. While the
FCC generally renews licenses for satellite earth stations routinely, there can
be no assurance that our licenses will be renewed at their expiration dates,
which could have a material adverse effect on us.
FCC authorization is not required for reception of transmission from
domestic satellites from points within the United States. We rely on third
party licenses or authorizations when we transmit domestic satellite traffic
through earth stations operated by 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 non-interference. 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.
Employees
We employ creative, technical, engineering, administrative and managerial
staff in each of our operating divisions. In addition, we have centralized
certain financial and administrative functions, including accounting, credit,
billing, payroll and human resources. We have approximately 1,476 full time
employees, of which 611 are located in Burbank, including 68 in Universal City,
384 in Santa Monica, 157 in Hollywood, 220 in London, England, 85 in Singapore
and 19 in San Francisco. Our acquisitions of TVP Group Plc ("TVP"), TVi Limited
("TVi") and DSP during the fourth quarter of fiscal 1999 added approximately 250
employees.
As of August 1, 1999, we had entered into employment agreements with
approximately 90 members of our creative and managerial staff to secure their
services for terms ranging from one to seven years. These employment agreements
are in the ordinary course of our business and are consistent with the practices
of other companies in the post production industry. In addition, we have
employment agreements with the executives that will be named in the executive
compensation section of the proxy statement for our January 2000 annual meeting.
11
<PAGE>
We believe that we provide compensation and benefits that are competitive
with the market for persons having the skills we require. We have not
experienced any work stoppages since our formation in 1993. Of our 1,476
employees, 130 are members of a collective bargaining unit.
Item 2. Properties
At August 1, 1999, our operations were located in Burbank, Hollywood,
Universal City, Culver City, Santa Monica and San Francisco, California, the
Republic of Singapore and London, England. We own approximately 263,000 square
feet of building space and lease approximately 289,000 square feet of building
space. Most of our leased properties have renewal options generally for one or
two five-year option periods.
In Burbank, we lease five facilities, which in the aggregate consists of
approximately 126,000 square feet, under agreements with terms expiring between
December 2000 and August 2009. These facilities, which include four properties
in the Burbank Media District and one property located in Universal City, are
used to house our executive offices, our domestic broadcast and syndication
operations, equipment rental operations and parts of our television operations.
Two floors of one of the Burbank facilities are sub-leased to a third party with
initial terms through February 2003 and March 2005. We also own four properties
located in Burbank, including two facilities constituting approximately 44,000
square feet which house our broadcast and syndication, and mastering and
distribution operations, an 18,000 square foot facility used for our film
laboratory and a 95,000 square foot facility of which our archive occupies
45,000 square feet. The remainder of this fourth facility is leased to a third
party through January 2000.
In Santa Monica, we lease eight facilities constituting a total of
approximately 91,000 square feet. These facilities house additional executive
offices, our film and animation division and part of our television division.
The Santa Monica lease agreements expire between January 2000 and March 2003.
We have an option to purchase one of the properties we currently lease, which
consists of approximately 6,500 square feet and intend to exercise such option.
We own two properties in Santa Monica constituting approximately 57,000 square
feet. Of these two properties, one is approximately 13,000 square feet and is
dedicated to the television division. The other property, currently not used in
our operations, is being considered for sale.
In Hollywood, we own four properties totaling approximately 49,000 square
feet and lease one property which consists of approximately 3,000 square feet.
These properties house executive offices and part of our television operations.
The lease agreement on the leased property expires in January 2002. We have an
option to purchase the leased property and intend to exercise such option. In
San Francisco, we lease two properties which aggregate approximately 7,000
square feet. These leases expire in June 2002 and September 2004. In Culver
City, we lease three properties totaling of approximately 12,000 square feet.
These facilities are used to house part of our television division and expire
between December 2000 and January 2004.
Internationally, we lease a total of 57,000 square feet in four facilities.
In Singapore, we lease a 20,000 square foot facility, which houses our Singapore
broadcast and syndication operations. This lease expires in September 2000. In
London, we lease two facilities constituting a total of approximately 9,000
square feet, assumed in connection with the TVP acquisition, and a 28,000 square
foot facility, assumed in connection with the TVi acquisition.
Item 3. Legal Proceedings
On March 16, 1999, we entered into a settlement agreement with the
International Alliance of Theatrical Stage Employees ("IATSE") relating to
several matters pending before the National Labor relations Board ("NLRB").
Under the terms of the settlement agreement, we agreed to enter into a
collective bargaining agreement with IATSE which affects 130 employees and to
pay an aggregate of approximately $240,000 in claims for back pay from certain
current and former employees. In consideration of this, IATSE has agreed to
cease all negative publicity against us and to dismiss all actions pending
before the NLRB.
12
<PAGE>
In addition, we are subject to litigation from time to time arising in the
ordinary course of our business. We do not believe that there is any litigation
pending that would have a material adverse effect on our results of operations
or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended August 1, 1999.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock has been traded on the Nasdaq Stock Market/SM/ under the
symbol "FOUR" since February 7, 1997. The following table sets forth the high
and low closing prices of our common stock for the periods indicated and are as
reported on The Nasdaq Stock Market/SM/.
<TABLE>
<CAPTION>
Year Ended August 3, 1997 High Low
---- ---
<S> <C> <C>
Third Quarter (from February 7, 1997) 10 1/2 5 1/4
Fourth Quarter 8 5/8 5 7/8
Year Ended August 2, 1998
First Quarter 10 1/8 6 3/8
Second Quarter 9 3/8 7 5/16
Third Quarter 10 1/2 7 1/8
Fourth Quarter 10 1/2 7 1/8
Year Ended August 1, 1999
First Quarter 8 3 5/16
Second Quarter 8 11/16 5 3/4
Third Quarter 7 1/2 5 5/8
Fourth Quarter 7 5/8 5 9/16
</TABLE>
As of October 27, 1999, there were 14 stockholders of record and an
estimated 1,600 beneficial owners of our common stock. We have never paid cash
dividends on our stock and anticipate that we will continue to retain our
earnings, if any, to finance the growth of our business. In addition, our bank
line of credit prohibits the payment of cash dividends on capital stock without
the bank's prior written consent.
The market price of our common stock is highly volatile and is subject to
wide fluctuations in response to a wide variety of factors including:
. quarterly variations in operating results;
. announcements of technological innovations or new services by us or our
competitors;
. conditions affecting the entertainment industry;
. changes in financial estimates by securities analysts; and
. other events or factors.
For example, during the 12 month period ended October 27, 1999, our common
stock closed as low as $4.38 and as high as $8.69 per share. In addition, the
stock market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many small
capitalization and technology companies and that often have been unrelated to
the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. If brought against us, such litigation could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on our business, results of operations and financial
condition.
13
<PAGE>
Item 6. Selected Consolidated Financial Data
The following selected financial data as of and for the five years ended
August 1, 1999 is derived from our consolidated financial statements. The
selected consolidated financial data should be read in conjunction with the
Consolidated Financial Statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.
<TABLE>
<CAPTION>
Fiscal Years Ended (2)
-------------------------------------------------------------
July 30, August 4, August 3, August 2, August 1,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Statement of Income Data: (dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Television ............................................... $22,712 $23,343 $30,768 $ 60,405 $125,491
Mastering and distribution ............................... 20,677 23,468 26,658 35,633 41,571
Broadcast and syndication ................................ 16,163 20,901 23,694 22,701 22,609
Film and animation ....................................... 1,452 2,316 3,407 10,429 7,313
------- ------- ------- -------- --------
Total revenues............................................. 61,004 70,028 84,527 129,168 196,984
------- ------- ------- -------- --------
Operating costs:
Direct operating costs .................................... 38,696 43,411 53,184 81,144 115,983
Depreciation and amortization ............................ 6,241 10,165 13,175 18,191 27,476
Sales, general and administrative ........................ 10,918 11,116 12,899 18,504 34,901
------- ------- ------- -------- --------
Total operating costs .................................. 55,855 64,692 79,258 117,839 178,360
------- ------- ------- -------- --------
Income from operations ................................... 5,149 5,336 5,269 11,329 18,624
Other income (expense):
Interest income............................................ -- -- -- 12 1,425
Interest expense ......................................... (2,917) (3,906) (3,887) (8,151) (14,178)
Other expense (3) ........................................ -- -- -- -- (933)
------- ------- ------- -------- --------
Total other income (expense)............................... (2,917) (3,906) (3,887) (8,139) (13,686)
------- ------- ------- -------- --------
Income before income tax benefits and extraordinary item . 2,232 1,430 1,382 3,190 4,938
Income tax benefits ........................................... 988 994 -- -- --
------- ------- ------- -------- --------
Income before extraordinary item ......................... 3,220 2,424 1,382 3,190 4,938
Extraordinary loss on early extinguishment of debt ............ -- -- -- (2,449) --
------- ------- ------- -------- --------
Net income................................................. $ 3,220 $ 2,424 $ 1,382 $ 741 $ 4,938
======= ======= ======= ======== ========
Earnings per common share - Basic:
Income before extraordinary item........................... $0.50 $0.37 $ 0.17 $ 0.33 $0.37
Extraordinary item......................................... -- -- -- (0.25) --
------- ------- ------- -------- --------
Net income................................................. $0.50 $0.37 $ 0.17 $ 0.08 $0.37
======= ======= ======= ======== ========
Earnings per common share - Diluted:
Income before extraordinary item........................... $0.50 $0.37 $ 0.16 $ 0.29 $0.34
Extraordinary item......................................... -- -- -- (0.22) --
------- ------- ------- -------- --------
Net income................................................. $0.50 $0.37 $ 0.16 $ 0.07 $0.34
======= ======= ======= ======== ========
Weighted average number of common shares outstanding:
Basic...................................................... 6,475 6,475 7,971 9,634 13,271
Diluted.................................................... 6,475 6,475 8,563 10,898 14,729
Other Data:
EBITDA(1) ..................................................... $11,390 $15,501 $18,444 $ 29,520 $ 46,100
Net cash provided by operations ............................... 4,588 9,387 7,908 5,268 34,484
Net cash used in investing activities ......................... 30,902 10,318 40,142 54,905 111,360
Net cash provided by (used in) financing activities ........... 28,102 (410) 33,164 47,347 83,408
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
As of (2)
---------------------------------------------------------------------------------
July 30, August 4, August 3, August 2, August 1,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands)
Balance Sheet Data:
Cash, including restricted cash ....... $ 7,368 $ 6,021 $ 6,769 $ 3,301 $ 9,841
Working capital ....................... 5,665 1,642 1,829 13,149 14,506
Total assets .......................... 71,780 81,827 132,237 217,298 343,543
Long-term debt ........................ 38,472 42,978 54,633 124,671 171,321
Total debt ............................ 41,942 49,131 65,192 130,855 184,296
Total stockholders' equity ............ 19,617 22,143 49,738 67,113 124,971
</TABLE>
- ---------------------------------
(1) 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. Our definition of EBITDA may not be
identical to similarly titled measures of other companies. We believe that
in addition to cash flows and net income, EBITDA is a useful financial
performance measurement for assessing the operating performance of our
company because, together with net income and cash flows, EBITDA is widely
used to provide investors with an additional basis to evaluate our ability
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
--------------------------------------------------------------
July 30, August 4, August 3, August 2, August 1,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands)
Income before extraordinary item..... $ 3,220 $ 2,424 $ 1,382 $ 3,190 $ 4,938
Add (deduct):
Interest expense, net................ 2,917 3,906 3,887 8,139 12,753
Income tax benefits.................. (988) (994) -- -- --
Other expense, net................... -- -- -- -- 933
Depreciation and amortization........ 6,241 10,165 13,175 18,191 27,476
------- ------- ------- ------- -------
EBITDA .............................. $11,390 $15,501 $18,444 $ 29,520 $46,100
======= ======= ======= ======= =======
</TABLE>
(2) We have made a number of significant acquisitions in each of the years
presented. See Note 3 to the Consolidated Financial Statements.
(3) Other expense is comprised primarily of costs incurred related to our
uncompleted bond offering during fiscal 1999.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
When used in the preceding and following discussion, the words
"believes," "expects," "anticipates," "intends," and similar expressions are
intended to identify forward looking statements. Such statements are subject to
a number of known risks and uncertainties. Actual results in the future could
differ materially from these described in the forward looking statements. Such
risks and uncertainties include, but are not limited to, industry-wide market
factors such as the timing of, and spending on, feature film and television
programming production, foreign and domestic television advertising, and foreign
and domestic spending by broadcasters, cable companies and syndicators on first
run and existing content libraries. In addition, our failure to maintain
relationships with key customers and certain key personnel, more rapid than
expected technological obsolescence, failure to integrate acquired operations as
well as regulatory developments affecting our operations and acquisitions could
also cause actual results to differ materially from those described in forward
looking statements.
Overview
We are a leading provider of technical and creative services to owners,
producers and distributors of television programming, feature films and other
entertainment content. Our services integrate and apply a variety of systems
and processes to enhance the creation and distribution of entertainment content.
We seek 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.
On November 1, 1999, we announced that we have entered into a letter of
intent to sell 100% of the Company's issued and outstanding common stock to
Liberty Media Corporation (NYSE: LMG.A). As contemplated by the letter of
intent, one hundred percent (100%) of Four Media's issued and outstanding stock
will be acquired in exchange for approximately 6.35 million shares of Class A
Liberty Media Group stock, par value $1.00 ("LMG.A shares(s)"). One LMG.A share
will be issued for each 3.1 shares of Four Media common stock outstanding.
Warburg, Pincus Equity Partners, L.P., Fleming Asset Management USA and Robert
T. Walston, collectively holders of approximately 70% of the issued and
outstanding shares of Four Media, are expected to enter into agreements with
Liberty Media to vote in favor of the transaction. The transaction is subject to
execution of definitive documentation, expiration of applicable waiting periods
under pre-notification regulations, Four Media stockholder and Board of
Director approval, and other customary closing conditions, including other
appropriate corporate approvals. The parties contemplate that a definitive
agreement will be signed in mid-November 1999 and closing is anticipated to
occur in the first quarter of 2000.
We completed a number of acquisitions during 1998 and 1999 including: POP
(February 1998), VSI (May 1998), Encore (September 1998), TVP (April 1999), TVi
(May 1999), and DSP (June 1999).
Our business is divided into four divisions: television; mastering and
distribution; broadcast and syndication; and film and animation. In each of
these divisions, we offer most of the systems and technical solutions that
constitute the processes that are integral to the creation, enhancement and
distribution of entertainment content. The television division, located in
Burbank, Hollywood, Culver City, Santa Monica, and San Francisco, California
assembles film or video principal photography into a form suitable for domestic
network, syndicated, cable or foreign television. The mastering and
distribution services division, located in Burbank and Universal City,
California, and London, England manages, formats and distributes existing
content libraries to end users in the United States and internationally. The
broadcast and syndication 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 film and
animation division, located in Santa Monica, California digitally creates and
manipulates images in high resolution formats and creates computer animated
sequences for use in
16
<PAGE>
feature films. The following table sets forth revenues by business division and
the related percentage of consolidated revenues for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------------------------------
August 3, 1997 August 2, 1998 August 1, 1999
-------------- -------------- --------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues by division:
Television................................. $30,768 36.4% $ 60,405 46.8% $125,491 63.7%
Mastering and distribution................. 26,658 31.5 35,633 27.5 41,571 21.1
Broadcast and syndication.................. 23,694 28.0 22,701 17.6 22,609 11.5
Film and animation......................... 3,407 4.1 10,429 8.1 7,313 3.7
------- ------ -------- ------ -------- ------
Total revenues............................. $84,527 100.0% $129,168 100.0% $196,984 100.0%
======= ====== ======== ====== ======== ======
</TABLE>
Revenues increased from $84.5 million in fiscal 1997 to $197.0 million in
fiscal 1999. We attribute this growth to several factors including:
. acquisitions and international expansion;
. an increase in demand for our services resulting from the growth in
worldwide demand for entertainment content;
. an expansion of capacity resulting from our extensive investment in
new digital infrastructure;
. the diversification of our service offerings; and
. the increasing acceptance of our bundled service outsourcing
solutions.
EBITDA increased from $18.4 million in fiscal 1997 to $46.1 million in
fiscal 1999. We attribute this growth to several factors including: (i) growth
in revenues from fiscal 1997 to fiscal 1999; and (ii) decrease in the ratio of
overhead and fixed costs to revenues, as we have generally increased capacity
utilization and decreased the cost of adding new capacity. See the consolidated
financial statements and the related notes included elsewhere in this Annual
Report for additional information regarding these factors.
We believe that EBITDA is an important measure of our financial
performance. "EBITDA" is defined as earnings before interest, taxes,
depreciation and amortization, excluding gains and losses on asset sales and
nonrecurring charges. Our investments in new infrastructure, machine capacity,
technology and goodwill resulting from our significant acquisition activity have
produced a relatively high depreciation and amortization expense and will remain
a significant non-cash charge to earnings. EBITDA is calculated before
depreciation and amortization charges and, in businesses with significant non-
cash expenses, is widely 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, we intend 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 our capital expenditures which may be required to maintain our market
share, revenues and leadership position in our industry. Moreover, not all
EBITDA will be available to pay interest or repay debt. Our presentation of
EBITDA may not be comparable to similarly titled measures reported by other
companies. See footnote 1 of "Selected Financial Data" for additional
information regarding our presentation of EBITDA.
17
<PAGE>
Results of Operations
The following table sets forth the percentage of revenues represented by
certain items in our statement of operations and EBITDA.
<TABLE>
<CAPTION>
Fiscal Years Ended
August 3, 1997 August 2, 1998 August 1, 1999
------------- -------------- --------------
<S> <C> <C> <C>
Revenues.......................................................... 100.0% 100.0% 100.0%
Operating costs:
Direct operating costs....................................... 62.9 62.8 58.9
Depreciation and amortization................................ 15.6 14.1 13.9
Sales, general and administrative............................ 15.3 14.3 17.7
----- ----- -----
Total operating costs..................................... 93.8 91.2 90.5
----- ----- -----
Income from operations................................. 6.2 8.8 9.5
Other income (expense):
Interest income (expense), net............................... (4.6) (6.3) (6.5)
Other income (expense), net.................................. -- -- (0.5)
----- ----- -----
Total other income (expense).............................. (4.6) (6.3) (7.0)
----- ----- -----
Income before income tax benefits and extraordinary item.. 1.6 2.5 2.5
Income tax benefits............................................... -- -- --
----- ----- -----
Income before extraordinary item.......................... 1.6 2.5 2.5
----- ----- -----
Extraordinary loss on early extinguishment of debt................ -- (1.9) --
----- ----- -----
Net income................................................ 1.6% 0.6% 2.5%
===== ===== =====
EBITDA............................................................ 21.8% 22.9% 23.4%
</TABLE>
Fiscal Year Ended August 1, 1999 Compared to Fiscal Year Ended August 2, 1998
Revenues. Total revenues for fiscal 1999 increased $67.8 million, or
52.5%, to $197.0 million compared to $129.2 million in fiscal 1998. The revenue
increase was attributable primarily to the factors set forth below.
Television revenues for fiscal 1999 increased $65.1 million, or 107.8%, to
$125.5 million compared to $60.4 million in fiscal 1998. The major components
of this increase include increased sound revenues ($5.4 million), telecine
revenues ($22.4 million), editorial revenues ($23.5 million), graphics revenues
($10.3 million), and duplication revenues ($3.5 million). These revenue
increases are primarily attributable to the addition of the sound editorial
department ($1.8 million), POP acquired in February 1998 ($8.9 million), VSI
acquired in May 1998 ($4.2 million), Encore acquired in September 1998 ($44.3
million), and DSP acquired in July 1999 ($0.5 million).
Mastering and distribution revenues for fiscal 1999 increased $6.0 million,
or 16.9%, to $41.6 million compared to $35.6 million in fiscal 1998. The major
components of this increase include increased professional duplication revenues
($2.1 million) and telecine revenues ($0.2 million) and revenues of
approximately $2.2 million and $1.9 million from the acquisitions of TVP and
TVi, respectively, offset by decreased laboratory revenues ($0.2 million) and
quality control revenues ($0.2 million).
Broadcast and syndication revenues for fiscal 1999 decreased $0.1 million,
or 0.4%, to $22.6 million compared to $22.7 million in fiscal 1998. Revenues
from our Singapore operations increased 6.7% as a result of increased broadcast
services provided to Nickelodeon beginning in November 1998. Revenues from our
domestic broadcast operations increased 6.5% attributed to additional
contractual and occasional services. This is offset by a 31.4% decrease in
revenues from our domestic syndication operations.
Film and animation revenues for fiscal 1999 decreased $3.1 million, or
29.8%, to $7.3 million compared to $10.4 million in fiscal 1998. This decrease
is the result of a decline in the number of large budget action and effects
feature films available.
18
<PAGE>
Direct Operating Costs. Direct operating costs for fiscal 1999 increased
$34.8 million, or 42.9%, to $116.0 million compared to $81.1 million in fiscal
1998. As a percentage of revenues, direct operating costs decreased 3.9% to
58.9% compared to 62.8% in fiscal 1998. The 3.9% decrease is primarily
attributable to a 2.5% reduction in material costs and a 1.0% reduction in
equipment rental and leasing. These reductions are the result of our continued
ability to leverage our existing cost structure to operate our expanded
operations.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for fiscal 1999 increased $9.3 million, or 51.1%, to $27.5 million
compared to $18.2 million in fiscal 1998. This increase was primarily the
result of capital expenditures during fiscal 1998 and 1999, the acquisition of
equipment and amortization of goodwill recorded as a result of the POP, VSI,
Encore, DSP, TVP and TVi acquisitions.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses for fiscal 1999 increased $16.4 million, or 88.7%, to
$34.9 million compared to $18.5 million in fiscal 1998. As a percentage of
revenues, such expenses increased 3.4% to 17.7% in fiscal 1999 compared to 14.3%
in fiscal 1998. The increase as a percentage of revenues was primarily
attributable to increased overhead costs associated with the Encore acquisition.
Interest Income and Expense. Interest expense for fiscal 1999 increased
$6.1 million, or 75.3%, to $14.2 million compared to $8.1 million in fiscal
1998. The increase is attributable to additional long term borrowings incurred
by the Company to fund its acquisitions and to fund capital expenditures in
fiscal 1998 and 1999. Interest income is primarily comprised of interest income
recognized on two notes we have with a customer.
Other Expense. Other expense for fiscal 1999 is comprised primarily of
costs incurred related to our uncompleted bond offering.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for
fiscal 1999 increased $16.6 million or 56.3% to $46.1 million as compared to
$29.5 million in fiscal 1998. The increase in EBITDA results from the factors
discussed above.
Income Taxes. As a result of the utilization of net operating loss carry
forwards and the tax holiday enjoyed by our Singapore subsidiary, we do not have
a provision for income taxes for fiscal 1999 and 1998.
Fiscal Year Ended August 2, 1998 Compared to Fiscal Year Ended August 3, 1997
Revenues. Total revenues for fiscal 1998 increased $44.7 million, or
52.8%, to $129.2 million compared to $84.5 million in fiscal 1997. The revenue
increase was attributable primarily to the factors set forth below.
Mastering and distribution revenues for fiscal 1998 increased $8.9 million,
or 33.7%, to $35.6 million compared to $26.7 million in fiscal 1997. The major
components of this increase include increased professional duplication revenues
($5.2 million), laboratory revenues ($0.7 million), telecine revenues ($2.1
million) and quality control revenues ($0.7 million). Of those increases,
approximately $4.2 million relates to Anderson, which was acquired in March
1997.
Broadcast and syndication revenues for fiscal 1998 decreased $1.0 million,
or 4.2%, to $22.7 million compared to $23.7 million in fiscal 1997. Revenues
from our Singapore operations decreased 23.8% in fiscal 1998 compared to fiscal
1997 as a result of the completion in 1997 of a one year contract with MGM Gold
and translation losses caused by a devaluation of the Singapore dollar. The
decrease in revenues from the Singapore operations was offset by (i) a 17.1%
increase in revenues from our domestic broadcast and syndication operations, due
primarily to expanded service relationships with TVN Entertainment, Inc., and
(ii) a 36.2% increase in syndication revenue, driven by capacity expansion to
meet enhanced demand from studio relationships.
Television revenues for fiscal 1998 increased $29.6 million, or 96.3%, to
$60.4 million compared to $30.8 million in fiscal 1997. The major components of
this increase include increased sound revenues ($4.8 million), telecine revenues
($11.0 million), editorial revenues ($6.7 million), graphics revenues ($4.2
million), and duplication revenues ($3.0 million). These revenue increases are
primarily attributable to completion of our new
19
<PAGE>
digital television facility in Burbank ($5.0 million), Anderson ($3.4 million),
the fiscal 1998 start-up of our commercial operation, Co3 ($8.8 million), POP
acquired in February 1998 ($11.7 million), and VSI acquired in May 1998 ($0.7
million).
Film and animation revenues for fiscal 1998 increased $7.0 million, or
206.1%, to $10.4 million compared to $3.4 million in fiscal 1997. This increase
is attributable to several new film projects obtained during the period, of
which $5.7 million was contributed by POP, which was acquired in February 1998.
Direct Operating Costs. Direct operating costs for fiscal 1998 increased
$27.9 million, or 52.4%, to $81.1 million compared to $53.2 million in fiscal
1997. As a percentage of revenues, direct operating costs remained relatively
constant at 62.8% in fiscal 1998 compared to 62.9% in fiscal 1997.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for fiscal 1998 increased $5.0 million, or 38.1%, to $18.2 million
compared to $13.2 million in fiscal 1997. The increase was primarily the result
of $52.4 million in capital expenditures during fiscal 1998, the acquisition of
the equipment of Anderson in March 1997, the acquisition of the equipment of POP
and VSI in February 1998 and May 1998, respectively, and amortization of
goodwill recorded from the Anderson, POP, and VSI acquisitions.
Sales, General and Administrative Expenses. Sales, general and
administrative expenses for fiscal 1998 increased $5.6 million, or 43.5%, to
$18.5 million compared to $12.9 million in fiscal 1997. As a percentage of
revenues, such expenses decreased 1.0% to 14.3% in fiscal 1998 compared to 15.3%
in fiscal 1997. The dollar increase is primarily attributed to the acquisitions
of Anderson, POP and VSI. The improvement of 1.0% as a percentage of revenues
is a result of our continued ability to leverage our existing corporate overhead
to manage our expanded domestic and international operations.
Interest Expense. Interest expense for fiscal 1998 increased $4.2 million,
or 109.4%, to $8.1 million compared to $3.9 million in fiscal 1997. The
increase is attributable to additional long term borrowings we incurred to fund
the POP acquisition, pay loan fees and other costs associated with our debt
refinancing, and to fund capital expenditures in fiscal 1997 and fiscal 1998.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for
fiscal 1998 increased $11.1 million, or 60.0%, to $29.5 million as compared to
$18.4 million in fiscal 1997. The increase in EBITDA results from the factors
discussed above.
Extraordinary Loss. To effect our growth and acquisition plans, in
February 1998, we entered into a new $200.0 million credit facility. See "--
Liquidity and Capital Resources" below for a description of this facility. Part
of the facility was used to retire approximately $80.0 million of existing debt.
The new facility has significantly more favorable interest rates and
amortization requirements than the replaced debt. However, we incurred
prepayment penalties from the early retirement of debt resulting in an
extraordinary loss of $2.4 million.
Liquidity and Capital Resources
Net Cash Provided by Operating Activities. Our net cash provided by
operating activities was $7.9 million, $5.3 million, and $34.5 million in fiscal
1997, 1998 and 1999, respectively. The increase in net cash provided by
operations in fiscal 1999 was primarily attributable to increased income before
depreciation and amortization ($32.4 million) and improved collection of
accounts receivable.
Net Cash Provided by Financing Activities. Our net cash provided by
financing activities was $33.2 million, $47.3 million, and $83.4 million in
fiscal 1997, 1998 and 1999, respectively. The increase in cash provided by
financing activities in 1999 is attributed to amounts borrowed on our new credit
facility and funding received from the sale of 10.2 million shares of our common
stock to Warburg, Pincus Equity Partners, L.P. and certain of its affiliates in
April 1999. As of August 1, 1999, we had borrowed $169.0 million under the
credit agreement. The funds from the credit facility and Warburg transaction
were used to repay our outstanding debt (including the repayment of most of
Encore's outstanding debt), fund the Encore, TVP, TVi, and DSP acquisitions,
purchase a building in Burbank, fund capital expenditures and for working
capital purposes.
20
<PAGE>
Capital Expenditures. Since our inception in 1993, we have made
substantial investments to convert its infrastructure from analog to digital,
develop management information systems, consolidate various operations, expand
into the Asian market, design and build broadcast facilities in exchange for
long-term contractual commitments from clients, acquire and create new
businesses, and convert maturing or short term lease obligations into ownership
on certain properties in which we conduct our principal operations. We expect
to continue to make substantial capital investments particularly with respect to
new digital infrastructure for recently acquired operations, incremental
capacity investments to support the anticipated growth in demand for our
services and certain projects associated with new long term contracts primarily
in our broadcast and syndication division. The following table sets forth
capital expenditures in each business division as well as capital expenditures
associated with new management information systems, real estate purchases and
businesses acquired by amount and percentage of total capital expenditures for
the periods indicated.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------------------------------------
August 3, 1997 August 2, 1998 August 1, 1999
-------------- -------------- --------------
Percentage Percentage Percentage
Amount Of Total Amount of Total Amount of Total
------ ------ -------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital expenditures (1):
Television ...................... $24,745 51.4% $28,690 54.7% $45,995 54.5%
Mastering and distribution ...... 7,812 16.2 5,025 9.6 7,572 9.0
Broadcast and syndication ....... 2,215 4.6 1,814 3.5 9,504 11.3
Film and animation................ 774 1.6 4,627 8.8 693 0.8
Management information systems.... 822 1.7 681 1.3 1,244 1.5
Land and building................. 11,811 24.5 11,563 22.1 19,352 22.9
------- ----- ------- ----- ------- -----
Total capital expenditures ... $48,179 100.0% $52,400 100.0% $84,360 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- ---------------------------------
(1) Includes assets acquired from the acquisition of Anderson Video ($5.6
million) in 1997, POP ($11.7 million), and VSI ($2.0 million) in 1998
and Encore ($28.5 million), TVP ($1.0 million), TVi ($2.8 million),
and DSP ($2.1 million) in 1999.
Credit Agreements. On February 27, 1998, we entered into a financing
agreement representing $200.0 million in credit facilities from a group of
banks, including Canadian Imperial Bank of Commerce ("CIBC"). The facilities
include two $75.0 million term loans (the "Term A loan" and the "Term B loan")
and a $50.0 million revolver (the "Revolver"). The Term A loan and the Revolver
both mature on January 31, 2004 and are reduced by quarterly amounts beginning
April 30, 2000, as specified in the financing agreement. The Term A loan and
the Revolver bear interest at Libor (5.24% at August 1, 1999) plus a margin
ranging from 1.5% to 2.5%, based upon our leverage ratios. In addition, we must
pay a commitment fee of 0.50% on the unused portions of the Term A loan and
Revolver commitments. At August 1, 1999, $75.0 million and $20.0 million were
outstanding on the Term A loan and the Revolver, respectively. The Term B loan
matures on July 31, 2004 and is reduced quarterly by amounts specified in the
financing agreement beginning April 30, 1998. The Term B loan bears interest at
Libor plus a margin ranging from 1.75% to 2.75% based upon our leverage ratios.
At August 1, 1999, $73.9 million was outstanding on the Term B loan.
Since August 1, 1999, we have borrowed $6.0 million under the Revolver for
capital expenditures and other working capital requirements. At October 15,
1999 total borrowings under the credit facilities were approximately $175.0
million.
We believe that the cash flow from operations combined with amounts
available under the credit facilities and our other borrowing capabilities, will
be sufficient to meet our anticipated working capital and capital expenditure
requirements through the end of 2000. We would have to obtain other financing,
either debt or equity, if we were to acquire additional businesses for cash.
Given recent capital market volatility, we believe it may not be possible to
increase our current bank facilities, obtain financing through equipment notes
and leases, private equity financing or high yield debt financing at acceptable
prices until markets become more stabilized and receptive.
21
<PAGE>
Quarterly Fluctuations
We have experienced significant quarterly fluctuations in operating results
and anticipate that these fluctuations will continue. These fluctuations have
been caused by a number of factors, including:
. with respect to our television division, the unpredictability of
television production schedules;
. with respect to our mastering and distribution 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
our control (for example, changes in customers' production schedules),
and unanticipated production downtime due to equipment failure, work
stoppages or the absence of key personnel;
. with respect to our broadcast and syndication division, the expiration
of month-to-month service contracts, the unpredictable use of our
facilities for the broadcast of news stories and special events, and
our inability to remarket our unused transponder capacity
consistently; and
. with respect to our film and animation division, our absorption of
cost overruns in fixed price contracts and delays in meeting
completion deadlines (for reasons other than the fault of our
company). We therefore believe that quarter-to-quarter comparisons of
our results of operations are not necessarily meaningful and should
not be relied upon as indications of future performance.
Year 2000 Compliance Issue
State of Readiness. We are currently working to resolve the potential
impact of the Year 2000 problem on our computer systems and computerized
equipment. The Year 2000 problem is a result of computer programs having been
written using two rather than four digits to identify an applicable year. Any
information technology systems that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. The problem also
extends to non-information technology systems that rely on embedded chip
systems.
We have divided the Year 2000 readiness task by the following functional
areas: IT infrastructure, business systems, operational systems, facilities, and
third party business partners. IT infrastructure includes our wide area
networks, local area networks, servers, desktop computers, and telephone
systems. Business systems include mainframe and midrange computer hardware and
applications. Operational systems include equipment used for our day-to-day
operations in the post-production business including telecine machines,
satellite broadcasting systems, editing and graphics equipment. Facilities
include fire, life, and safety equipment, elevators, alarm systems, and
environmental monitoring equipment. Business partners include suppliers and
vendors, financial institutions, benefit providers, payroll services, and
customers. We have appointed a task force chaired by our chief technology
officer and coordinated by our information systems manager. Representatives of
each of our divisions are included on the task force, as well as an attorney
from our legal department.
We have developed a four phase approach to resolving the Year 2000 issues
that is reasonably within our control. The four phases of the program include
inventory, assessment, remediation and testing, and implementation. The
inventory phase consists of a company wide inventory of computer hardware,
software, business applications, and operational and facilities equipment. The
inventory is then used to generate a master assessment list and identify
equipment vendors. The assessment phase consists of identifying at-risk systems
and products and ranking the products by criticality to the business. Each
product is then assigned to a task force member to determine whether the product
is in compliance and, if not, whether the system should be upgraded or replaced.
The remediation and testing phase consists of developing a project plan,
defining and implementing steps required to bring the systems or products into
compliance, defining a test plan to verify compliance, and documenting the test
results. The final phase is implementing remediation on systems and products
company wide.
We have been in the process of analyzing and upgrading our information
technology ("IT") systems (i.e., our IT infrastructure and business systems)
since early 1998, including upgrading all of our PC hardware, operating systems,
and office automation software. Our business applications, which include human
resources and financial
22
<PAGE>
software, as well as the software used for inventory, scheduling, work orders
and job management, has been fully upgraded to a Year 2000 compliant release.
With respect to the remaining IT systems, we have completed our inventory,
assessment, and testing phases. Implementation on IT systems is approximately
80% complete. We have targeted November 30, 1999 for completion of all phases of
our compliance program for our IT systems. With respect to our operational
systems, we have completed our inventory, assessment, and testing phases and
have completed the implementation phase for all but a few of our operational
systems. We anticipate that we will complete implementation for these remaining
systems by mid-November 1999. We anticipate completion of all phases of our
compliance program for our facilities equipment by November 30, 1999.
Third Parties. Like every other business, we are at risk from potential
Year 2000 failures on the part of our major business counterparts, including
suppliers, vendors, financial institutions, benefit providers, payroll services,
and clients, as well as potential failures in public and private infrastructure
services, including electricity, water, transportation, and communications. We
initially requested information from significant third party businesses
regarding their efforts in addressing Year 2000 issues in early 1999. Second
and third requests for information were sent in May and August 1999,
respectively. We will continue to follow up where questions remain with respect
to Y2K readiness of our business partners. The process of determining our
vulnerability if these third parties fail to remediate their Year 2000 problems
is ongoing. There can be no guarantee that the systems of third parties will be
timely remediated, or that such parties' failure to remediate Year 2000 issues
would not have a material adverse effect on us.
Costs. We have incurred approximately $138,998 to date in addressing the
Year 2000 issue. These costs are being funded through operating cash flows. We
anticipate that we will incur an additional $25,000 to $50,000 by the end of the
1999 calendar year. In addition, we have and anticipate that we will continue
to incur additional costs in the form of redeployment of internal resources from
other activities. We do not expect these redeployments to have a material
adverse effect on other ongoing business operations.
Risks. System failures resulting from the Year 2000 problem could
potentially affect operations and financial results in all aspects of our
business. For example, failures could affect all aspects of our television,
film and animation, mastering and distribution, and broadcast and syndication
operations, as well as inventory records, payroll operations, security, billing,
and collections. At this time we believe that its most likely worst case
scenario involves potential disruption in areas in which our operations must
rely on third parties whose systems may not work properly after January 1, 2000.
As a result of Year 2000 related failures of our or third parties' systems, we
could suffer a reduction in its operations. Such a reduction may result in a
fluctuation in the price of our common stock.
Contingency Plan. We do not currently have a comprehensive contingency
plan with respect to the Year 2000 problem. However, we have created a task
force comprised of accounting, legal, and technical employees that is prepared
to address any Year 2000 issues as they arise. We will continue to develop our
contingency plan during 1999 as part of our ongoing Year 2000 compliance effort.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risks
As of August 1, 1999, we had fixed interest rate debt of approximately $7.2
million and floating interest rate debt of approximately $177.1 million. The
floating interest rates are based upon the prevailing LIBOR rate. For floating
rate debt, interest rate changes do not generally effect the market value of
debt but do impact future earnings and cash flows, assuming other factors are
held constant. Conversely, for fixed rate debt, interest rate changes do effect
the market value of debt but do not impact earnings or cash flows. A
hypothetical one percentage change in the prevailing LIBOR rate would impact our
earnings by $1.8 million per year. A similar change in the interest rate would
impact the total fair value of our fixed rate debt by less than $0.8 million.
23
<PAGE>
Foreign Currency Risk
Substantially all of our foreign transactions are denominated in foreign
currencies, including the liabilities of our foreign subsidiaries, 4MC Asia,
TVP, and Tvi. Although our foreign transactions are not generally subject to
foreign exchange transactions gains or losses, the financial statements of our
foreign subsidiaries are translated into United States dollars as part of our
consolidated financial reporting. Fluctuations in the exchange rate therefore
will affect our consolidated balance sheets and statements of operations. Until
the recent Asian economic difficulties, the Singapore dollar and British pound
have been stable relative to the United States dollar. However, during fiscal
1998, the Singapore dollar lost approximately 20% of its value relative to the
US dollar. Our total revenues denominated in a currency other than US dollars
for the fiscal year ended August 1, 1999 were approximately 7.8% of total
revenues. Our net assets maintained in a functional currency other than US
dollars for the fiscal year ended August 1, 1999 were approximately 5.2% of
total net assets.
Item 8. Financial Statements and Supplementary Data
The Financial Statements required to be filed hereunder are set forth on
pages F-1 to F-22 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On April 9, 1999, the Audit Committee of our Board of Directors voted to
dismiss PricewaterhouseCoopers LLP as our accountants and retain the accounting
firm of Ernst & Young LLP. On April 9, 1999, we retained Ernst & Young as our
accountants for the fiscal year ending August 1, 1999. Our decision to retain
Ernst & Young was not motivated by any disagreements between us and
PricewaterhouseCoopers LLP concerning any accounting principles or practices,
financial statement disclosure or auditing scope or procedure, but rather by our
desire to use the same accounting firm as Warburg, Pincus, our principal
stockholder.
Since our inception, PricewaterhouseCoopers LLP's report on our financial
statements has not contained an adverse opinion or a disclaimer of opinion, nor
were any opinions qualified or modified as to uncertainty, audit scope or
accounting principles, nor were there any events of the type requiring
disclosure under Item 304(a)(1)(v) of Regulation S-K under the Securities Act.
In addition, from our inception to April 9, 1999, we did not consult with Ernst
& Young LLP with respect to the matters described in Item 304(a)(2) of
Regulation S-K.
PART III
Items 10, 11 and 12
The information required by Items 10, 11 and 12 is hereby incorporated by
reference from the Registrant's definitive proxy statement for the Annual
Meeting of Stockholders to be held in January 2000 which relates to the election
of directors and which will be filed with the Commission within 120 days after
the close of the Registrant's fiscal year.
Item 13. Certain Relationships and related Transactions
Preferred Stock Conversion
In connection with the Warburg, Pincus transaction, pursuant to a
conversion agreement (the "Conversion Agreement"), Fleming US Discovery Fund
III, L.P. and Fleming US Discovery Offshore Fund III, L.P. (collectively, the
"Fleming Funds") converted the 150,000 shares of our Series A Convertible
Preferred Stock owned by such Funds into an aggregate of 2,250,000 shares of our
common stock (subject to adjustment). For so long as the Fleming Funds own at
least 50% of the common stock issued pursuant to the Conversion Agreement, the
Funds will, collectively, have the right to nominate one person to our Board.
The Fleming Funds elected Eytan Shapiro, a general partner of Fleming US
Discovery Fund III, L.P. and a director of Fleming Capital Management, to our
Board in connection with the Warburg, Pincus transaction.
Certain Voting Agreements
In connection with the Warburg, Pincus transaction, Warburg, Pincus entered
into (i) a voting agreement, dated as of January 18, 1999, with Robert T.
Walston, our Chief Executive Officer (the "Walston Voting Agreement"), and (ii)
a voting agreement dated as of January 18, 1999 with the Fleming Funds (the
"Fleming Voting Agreement"). Under the terms of the Walston Voting Agreement,
for so long as Warburg, Pincus is entitled to nominate directors to our Board,
Mr. Walston has agreed to vote all of the shares of common stock he owns in
favor of any of Warburg, Pincus' nominees to our Board. In exchange for Mr.
Walston's voting covenant, Warburg, Pincus has agreed to vote all of the shares
of common stock it owns in favor of Mr. Walston for election to the Board for so
long as he remains our Chief Executive Officer pursuant to the terms of his
employment agreement.
Under the terms of the Fleming Voting Agreement, for so long as Warburg,
Pincus is entitled to nominate directors to our Board under the securities
purchase agreement, the Fleming Funds have agreed to vote all of the shares of
common stock they own in favor of any of Warburg, Pincus' nominees to our Board.
In exchange for this voting covenant, Warburg, Pincus has agreed to vote of the
shares of common stock it owns in favor of the Fleming Funds' nominees to our
Board for so long as they are entitled to nominate a director to our Board.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
<TABLE>
<CAPTION>
Exhibit
Number Description
----- -----------
<S> <C>
2.1 Letter of Intent dated October 29, 1999 by and among Four Media Company, Liberty Media
Corporation Technical Services Partners, L.P. and Warburg, Pincus Equity Partners, L.P.,
Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity
Partners II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V. (18)
3.1 Certificate of Incorporation of the Company. (1)
3.2 Certificate of Designations of Series A Convertible Preferred Stock filed with the Delaware
Secretary of State on February 26, 1998.(7)
3.3 By-Laws of the Company. (6)
4.1 Specimen Common Stock Certificate. (3)
10.1 Four Media Company 1997 Stock Plan and Stock Option Agreement. (11)*
10.2 First Amendment to Four Media Company Stock Plan and Stock Option Agreement. (12)*
10.3 Four Media Company 1997 Director Option Plan and Director Stock Plan Stock Option Agreement, as
amended. (11)*
10.4 Form of Amended and Restated Indemnity Agreement between the Company and each of its officers
and directors. (6)*
10.5 Agreement dated as of February 13, 1995 between MTV Asia LDC and Four Media Company Asia PTE.
Ltd. (2)+
10.6 Guaranty by Viacom International, Inc of MTV Asia's of obligations of Four Media Company Asia
PTE. Ltd. dated February 13, 1995. (1)
10.7 Guaranty by Four Media Company of obligations of Four Media Company Asia PTE. Ltd. dated
February 13, 1995. (1)
10.8 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)+
10.9 August 1, 1996 Amendment Letter re Agreement dated as of February 13, 1995 between MTV Asia and
Four Media Company Asia PTE. Ltd. (2)+
10.10 Satellite Services Agreement dated April 12, 1996 re Transponder 7 between Global Access
Telecommunications Services, Inc. and Four Media Company. (1)
10.11 Satellite Services Agreement dated April 12, 1996 re Transponder 5 between Global Access
Telecommunications Services, Inc. and Four Media Company. (1)
10.12 Global Access Telecommunications Services, Inc. Standard Terms and Conditions. (1)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
----- -----------
<S> <C>
10.13 August 28, 1996 Letter Agreement to the Satellite Services Agreement re Transponder 5 dated
April 12, 1996 and to the Satellite Service Agreement re Transponder 7 dated April 12, 1996. (1)
10.14 Financing Agreement dated October 17, 1996 between the CIT Group/Business Credit, Inc., The CIT
Group/Equipment Financing, Inc., 4MC-Burbank, Inc. and Digital Magic Company. (2)
10.15 Lease between Singapore Telecommunications Limited and Four Media Company Asia PTE. Ltd.
commencing December 15,1 994. (1)
10.16 Office Building Lease between Ford Motor Credit Company and Four Media Company dated August 1,
1994. (1)
10.17 Purchase and Sale Agreement dated July 29, 1996 and Escrow Instructions between C.P. Private
Partners, L.P.I. and Four Media Company. (1)
10.18 Term Loan Agreement dated December 5, 1996 between Tokai Bank of California and Four Media
Company. (3)
10.19 Letter Agreement dated February 24, 1997 between Anderson Film Industries Corp. d/b/a/ Anderson
Video and Four Media Company. (5)
10.20 Asset Purchase and Sale Agreement dated March 7, 1997 between Earle Hagen, Assignee for the
Benefit of Creditors of Anderson Film Industries Corp. d/b/a/ Anderson Video and AV Acquisition
Corp. (5)
10.21 Agreement dated March 10, 1997 between AV Acquisition Corp. and Anderson Graphics, LLC. (5)
10.22 Employment Agreement dated March 10, 1997 between Four Media Company and Darrell L. Anderson. (5)
10.23 Consulting Agreement dated March 10, 1997 between Four Media Company and Darrell A. Anderson. (5)
10.24 Credit Agreement dated as of February 27, 1998 among Four Media Company, the several lenders
from time to time parties thereto, Bank of America NT&SA, as Syndication Agent, Union Bank of
California, N.A., as Documentation Agent, Societe Generale, as Co-Agent, and Canadian Imperial
Bank of Commerce as Administrative Agent. (7)
10.25 Stockholders' Agreement dated February 27, 1998 among Four Media Company, Fleming US Discovery
Fund III, L.P., Fleming U.S. Discovery Offshore Fund III, L.P., Robert T. Walston, John Donlon,
Gavin Schutz and Robert Bailey.(7)
10.26 Stock Purchase Agreement dated November 14, 1997 between Alan Kozlowski, Sandra Hay, Jerry
Kramer, Rena Kramer, Andrew Ungerlerdes, Joan Hay and James Fancher who are the shareholders of
Visualize d/b/a POP and Four Media Company. (8)
10.27 Amendment to Stock Purchase Agreement dated January 30, 1998 between the shareholders of
Visualize d/b/a POP and Four Media Company.(8)
10.28 Employment Agreement dated February 2, 1998 between Four Media Company and Alan Kozlowski.(8)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
----- -----------
<S> <C>
10.29 Consulting Agreement dated February 2, 1998 between Four Media Company and Jerry Kramer.(8)
10.30 Consulting Agreement dated February 2, 1998 between Four Media Company and Sandra Hay.(8)
10.31 Asset Purchase Agreement and Plan of Reorganization dated April 27, 1998 by and among Video
Symphony, Inc., Digital Doctors, Inc., Four Media Company and VSDD Acquisition Corp. (9)
10.32 Stock Purchase Agreement dated September 15, 1998 by and among Four Media Company, MSCL, Inc.,
Charles H. Chubak and Patricia A. Chubak, Trustees of the Chubak Family Trust dated January 10,
1992, John S. McCoy and Elaine L. McCoy, Trustees of the McCoy Family Trust dated November 11,
1991, Larry E. Chernoff and Deborah H. Chernoff, Trustees of the Chernoff Family Trust dated
October 31, 1991, Robert Solomon and Pamela Solomon, Trustees of the Solomon Family Trust dated
January 23, 1997, Paul Norling and Douglas Walker who are the shareholders of MSCL, Inc.(10)
10.33 Agreement of Purchase and Sale and Escrow Instructions dated September 10, 1998 between John S.
McCoy and Elaine L. McCoy Trustees of the McCoy Family Trust dated November 11, 1991, Larry E.
Chernoff and Deborah H. Chernoff, Trustees of the Chernoff Family Trust dated October 31, 1991,
Charles H. Chubak and Patricia A. Chubak, Trustees of the Chubak Family Trust dated January 10,
1992, Robert Solomon and Pamela Solomon, Trustees of the Solomon Family Trust dated January 23,
1997, collectively, as Sellers, and Four Media Company, as Purchaser.(10)
10.34 Employment Agreement dated as of September 18, 1998 between Four Media Company and Lawrence
Chernoff.(10)
10.35 Employment Agreement dated as of September 18, 1998 between Four Media Company and Robert
Solomon.(10)
10.36 Employment Agreement dated as of September 18, 1998 between Four Media Company and Charles
Chubak.(10)
10.37 Employment Agreement dated as of September 18, 1998 between Four Media Company and John Stephen
McCoy.(10)
10.38 Securities Purchase Agreement, dated as of January 18, 1999, among Four Media Company and
Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V.,
Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands Equity
Partners III, C.V., as Purchasers. (12)
10.39 Stock Purchase Agreement, dated as of January 18, 1999, among Technical Services Partners, L.P.
and Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V.,
Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands Equity
Partners III, C.V., as Purchasers. (12)
10.40 Stock Purchase Agreement, dated as of January 18, 1999, among John H. Donlon, Gavin W. Schutz,
Robert Bailey and The Estate of John H. Sabin and Warburg, Pincus Equity Partners, L.P.,
Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners
II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V., as Purchasers. (12)
10.41 Preferred Stock Conversion and Stockholders Agreement, dated as of January 18, 1999 among Four
Media Company, Fleming US Discovery Fund III, L.P. and Warburg, Pincus Equity Partners, L.P.,
Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners
II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V., as Purchasers. (12)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
----- -----------
<S> <C>
10.42 Voting Agreement, dated as of January 18, 1999 among Fleming US Discovery Fund III, L.P.,
Fleming US Discovery Offshore Fund III, L.P. and Warburg, Pincus Equity Partners, L.P., Warburg,
Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V.
and Warburg, Pincus Netherlands Equity Partners III, C.V., as Purchasers. (12)
10.43 Voting Agreement, dated as of January 18, 1999 among Robert T. Walston, Technical Services
Partners, L.P. and Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity
Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus
Netherlands Equity Partners III, C.V., as Purchasers. (12)
10.44 Voting and Option Agreement, dated as of January 18, 1999, among Technical Services Partners,
L.P. and Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I,
C.V., Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands
Equity Partners III, C.V., as Purchasers. (12)
10.45 Employment Agreement dated January 1, 1999 by and between Four Media Company and Robert T.
Walston. (16)*
10.46 Employment Agreement dated January 1, 1999 by and between Four Media Company and Jeffrey J.
Marcketta. (16)*
10.47 Employment Agreement dated February 1, 1999 by and between Four Media Company and Christopher
Phillips. (16)*
10.48 Employment Agreement dated January 1, 1999 by and between Four Media Company and John H. Donlon.
(16)*
10.49 Employment Agreement dated January 1, 1999 by and between Four Media Company and Gavin W.
Schutz. (16)*
10.50 Employment Agreement dated January 1, 1999 by and between Four Media Company and Robert Bailey.
(16)*
10.51 Share Capital Sale and Purchase Agreement, dates as of April 29, 1999, by and between Four Media
Company (UK) Limited and TVP Group Plc. (14)
10.52 Service Agreement, dated as of April 29, 1999, by and between TVP Group Plc and Simon Paul Kay.
(14)
10.53 Service Agreement, dated as of April 29, 1999, by and between TVP Group Plc and Nicholas Paul
Pannaman. (14)
10.54 Share Purchase Agreement, dated as of May 25, 1999, by and between TVP Group Plc and Carlton
Communications Plc. (15)
10.55 Asset Purchase Agreement, dated as of June 22, 1999, by and among Four Media Company, 4MC Ross
Acquisition Co., Ross Digital Sound & Picture, Inc., Michael John Ross and Nancy Elaine Ross.
(17)
10.56 Origination, Uplink and Post-Production Services Agreement dated May 28, 1999 by and between
4MC-Burbank, Inc. and TVN Entertainment Corporation (filed herewith).
10.57 Services Agreement entered into on October 19, 1999 by and between Four Media Company Asia Pte Ltd
and MTV Asia LDC (filed herewith)
16.1 Letter from PricewaterhouseCoopers LLP (13)
21. Subsidiaries of Four Media Company (filed herewith).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
----- -----------
<S> <C>
23.1 Consent of Ernst & Young LLP Independent Auditors (filed herewith)
23.2 Consent of PricewaterhouseCoopers LLP. (filed herewith)
27.1 Financial Data Schedule. (filed herewith)
- --------------------------------------
* Management contract, compensatory plan or arrangement.
+ Portions of this exhibit have been deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidentiality.
(1) Incorporated herein by reference to the Company's Registration Statement on Form S-1 filed
October 8, 1996.
(2) Incorporated herein by reference to Amendment No. 1 to the Company's Registration Statement
filed December 27, 1996.
(3) Incorporated herein by reference to Amendment No. 2 to the Company's Registration Statement
filed February 4, 1997.
(4) Incorporated herein by reference to Amendment No. 3 to the Company's Registration Statement
filed February 5, 1997.
(5) Incorporated herein by reference to the Company's Current Report on Form 8-K filed March 24,
1997.
(6) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended August 3, 1997.
(7) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended February 1, 1998.
(8) Incorporated herein by reference to the Company's Current Report on Form 8-K filed February 17,
1998.
(9) Incorporated herein by reference to the Company's Current Report on Form 8-K filed May 18, 1998.
(10) Incorporated herein by reference to the Company's Current Report on Form 8-K filed October 5,
1998.
(11) Incorporated herein by reference to the Company's Registration Statement on Form S-8 filed July
28, 1998.
(12) Incorporated herein by reference to the Company's Current Report on Form 8-K filed January 21,
1999.
(13) Incorporated herein by reference to the Company's Current Report on Form 8-K/A filed April 21,
1999.
(14) Incorporated herein by reference to the Company's Current Report on Form 8-K filed April 23,
1999.
(15) Incorporated herein by reference to the Company's Current Report on Form 8-K filed May 14, 1999.
(16) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended May 2, 1999.
(17) Incorporated herein by reference to the Company's Current Report on Form 8-K filed July 7, 1999.
(18) Incorporated by reference to the Company's Current Report on Form 8-K filed November 1, 1999.
</TABLE>
(b) Reports on Form 8-K.
(i) Current report on Form 8-K filed with the Commission on
July 7, 1999 announcing the Company's acquisition of
DSP.
(c) The exhibits required by Item 601 of Regulation S-K have been listed
above.
(d) Financial Statement Schedules.
See attached index on page F-1.
29
<PAGE>
Four Media Company
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Report of Independent Accountants................................................... F-3
Consolidated Balance Sheets at August 2, 1998 and August 1, 1999.................... F-4
Consolidated Statements of Income for the fiscal years ended August 3, 1997
August 2, 1998 and August 1, 1999............................................... F-5
Consolidated Statements of Stockholders' Equity for the fiscal years ended,
August 3, 1997, August 2, 1998 and August 1, 1999............................... F-6
Consolidated Statements of Cash Flows for the fiscal years ended
August 3, 1997, August 2, 1998 and August 1, 1999............................... F-7
Notes to Consolidated Financial Statements.......................................... F-8
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts..................................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Four Media Company
We have audited the accompanying consolidated balance sheet of Four Media
Company as of August 1, 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Four Media Company
at August 1, 1999 and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles. Also, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
October 25, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Four Media Company
Burbank, California
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of Four Media
Company (the "Company") and its subsidiaries at August 2, 1998, and the results
of their operations and their cash flows for each of the two years in the period
ended August 2, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the index presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Los Angeles, California
October 21, 1998
F-3
<PAGE>
Four Media Company
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
August 2, August 1,
1998 1999
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash................................................................................ $ 3,301 $ 9,841
Trade accounts receivable, net of allowance for doubtful accounts of $1,258
(1998) and $1,618 (1999)......................................................... 31,657 34,777
Inventory........................................................................... 1,263 1,793
Prepaid expenses and other current assets........................................... 2,442 4,692
Property held for sale.............................................................. -- 10,654
-------- --------
Total current assets.......................................................... 38,663 61,757
Property, plant and equipment, net................................................... 124,230 173,266
Deferred income taxes................................................................ 7,526 8,582
Long-term receivable................................................................. 3,276 4,103
Goodwill, less accumulated amortization of $529 (1998) and $3,343 (1999)............. 37,507 88,952
Note receivable from officer......................................................... -- 2,000
Other assets......................................................................... 6,096 4,883
-------- --------
Total assets....................................................................... $217,298 $343,543
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations.................. $ 6,184 $ 12,975
Accounts payable.................................................................... 10,781 19,593
Accrued and other liabilities....................................................... 5,980 12,510
Deferred income taxes............................................................... 2,569 2,173
-------- --------
Total current liabilities........................................................ 25,514 47,251
Long-term debt and capital lease obligations......................................... 124,671 171,321
-------- --------
Total liabilities................................................................ 150,185 218,572
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, 150,000 Series A
Convertible shares issued and outstanding; liquidation preference $15,000,000.... 2 --
Common stock, $.01 par value; 50,000,000 shares authorized, 9,876,770 (1998)
and 19,693,629 (1999) shares issued and outstanding.............................. 99 196
Additional paid-in capital.......................................................... 59,577 112,441
Retained earnings................................................................... 9,002 13,940
Accumulated other comprehensive loss................................................ (1,567) (1,606)
-------- --------
Total stockholders' equity....................................................... 67,113 124,971
-------- --------
Total liabilities and stockholders' equity....................................... $217,298 $343,543
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Four Media Company
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------
August 3, August 2, August 1,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Television.................................................................... $30,768 $ 60,405 $125,491
Mastering and distribution.................................................... 26,658 35,633 41,571
Broadcast and syndication..................................................... 23,694 22,701 22,609
Film.......................................................................... 3,407 10,429 7,313
------- -------- --------
Total revenues............................................................. 84,527 129,168 196,984
------- -------- --------
Operating costs:
Direct operating costs........................................................ 53,184 81,144 115,983
Depreciation and amortization................................................. 13,175 18,191 27,476
Sales, general and administrative............................................. 12,899 18,504 34,901
------- -------- --------
Total operating costs...................................................... 79,258 117,839 178,360
------- -------- --------
Income from operations.................................................. 5,269 11,329 18,624
Other income (expense):
Interest income............................................................. -- 12 1,425
Interest expense............................................................ (3,887) (8,151) (14,178)
Other expense................................................................. -- -- (933)
------- -------- --------
Total other income (expense)............................................... (3,887) (8,139) (13,686)
------- -------- --------
Income before extraordinary item........................................ 1,382 3,190 4,938
Extraordinary loss on early extinguishment of debt............................. -- (2,449) --
------- -------- --------
Net income.............................................................. $ 1,382 $ 741 $ 4,938
======= ======== ========
Earnings per common share - Basic:
Income before extraordinary item............................................ $ 0.17 $ 0.33 $ 0.37
Extraordinary item.......................................................... -- (0.25) --
------- -------- --------
Net income per common share............................................. $ 0.17 $ 0.08 $ 0.37
======= ======== ========
Earnings per common share - Diluted:
Income before extraordinary item............................................ $ 0.16 $ 0.29 $ 0.34
Extraordinary item.......................................................... -- (0.22) --
------- -------- --------
Net income per common share............................................. $ 0.16 $ 0.07 $ 0.34
======= ======== ========
Weighted average number of common shares outstanding:
Basic....................................................................... 7,971 9,634 13,271
======= ======== ========
Diluted..................................................................... 8,563 10,898 14,729
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
Four Media Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance, August 4, 1996 ................................. -- $ -- 1 $ -- $ 15,010
Comprehensive Income:
Net income
Foreign currency translation
adjustments, net of tax
Comprehensive income
Reorganization and stock dividend......................... 6,474 65 (65)
Issuance of common stock.................................. 3,078 31 26,705
------ ------ ------ -- ------
Balance, August 3, 1997................................... -- -- 9,553 96 41,650
Comprehensive Income (loss):
Net income
Foreign currency translation
adjustments, net of tax
Comprehensive income (loss)
Issuance of preferred stock, net of costs................. 150 2 14,830
Issuance of common stock.................................. 324 3 3,097
------ ------ ------ -- ------
Balance, August 2, 1998................................... 150 2 9,877 99 59,577
Comprehensive Income:
Net income
Foreign currency translation adjustments, net of tax.
Comprehensive income
Issuance of common stock - Encore
acquisition............................................ 486 4 2,126
Issuance of common stock - Warburg
transaction............................................ 6,583 65 50,595
Issuance of common stock - exercise
of stock options....................................... -- -- 498 5 164
Convert preferred stock to common
stock.................................................. 150 (2) 2,250 23 (21)
------ ------ ------ ------ --------
Balance, August 1, 1999................................... -- $ -- 19,694 $196 $112,441
====== ====== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Retained Stockholder's
Loss Earnings Equity
---- -------- ------
<S> <C> <C> <C>
Balance, August 4, 1996............................................. $ 254 $ 6,879 $ 22,143
Comprehensive Income:
Net income........................................................ 1,382 1,382
Foreign currency translation
adjustments, net of tax........................................... (523) (523)
----
Comprehensive income................................................ 859
Reorganization and stock dividend
Issuance of common stock............................................ 26,736
------ ------ ------
Balance, August 3, 1997............................................. (269) 8,261 49,738
Comprehensive Income (loss):
Net income........................................................ 741 741
Foreign currency translation
adjustments, net of tax........................................... (1,298) (1,298)
------
Comprehensive income (loss)......................................... (557)
Issuance of preferred stock, net of costs........................... 14,832
Issuance of common stock............................................ 3,100
------ ------ ------
Balance, August 2, 1998............................................. (1,567) 9,002 67,113
Comprehensive Income:
Net income........................................................ 4,938 4,938
Foreign currency translation adjustments, net of tax.............. (39) (39)
------
Comprehensive income................................................ 4,899
Issuance of common stock - Encore
acquisition...................................................... 2,130
Issuance of common stock - Warburg
transaction...................................................... 50,660
Issuance of common stock - exercise
of stock options................................................. -- -- 169
Convert preferred stock to common
stock............................................................ --
------- ------- --------
Balance, August 1, 1999............................................. $(1,606) $13,940 $124,971
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
Four Media Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------
August 3, August 2, August 1,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................................ $ 1,382 $ 741 $ 4,938
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................................................ 13,175 18,191 27,476
Amortization of debt issuance costs.................................................... -- 230 576
Provision for doubtful accounts ...................................................... 871 794 954
Extraordinary loss on early extinguishment of debt..................................... -- 2,449 --
Deferred taxes ....................................................................... -- 438 (234)
Gain on sale of equipment.............................................................. -- -- 62
Changes in operating assets and liabilities, net of
Acquisitions of businesses:
Decrease in restricted cash ....................................................... -- 625 --
(Increase) decrease in trade and long-term receivables ............................ (11,305) (8,836) 5,888
Increase in inventory ............................................................. -- (174) (157)
(Increase) decrease in prepaid expenses and other assets .......................... (1,796) 346 (3,491)
Increase (decrease) in accounts payable ........................................... 5,277 (1,263) (1,855)
Increase (decrease) in accrued and other liabilities................................ 304 (8,273) 327
-------- -------- ---------
Net cash provided by operating activities ....................................... 7,908 5,268 34,484
Cash flows from investing activities:
Cash paid for capital expenditures (1) .................................................. (30,720) (29,561) (42,404)
Proceeds from sale of equipment........................................................... -- -- 1,172
Acquisitions of businesses, net of cash acquired ........................................ (9,422) (25,344) (70,128)
-------- -------- ---------
Net cash used in investing activities ........................................... (40,142) (54,905) (111,360)
Cash flows from financing activities:
Net proceeds from Warburg transaction..................................................... -- -- 50,660
Proceeds from exercise of stock options................................................... -- -- 169
Proceeds from preferred stock............................................................. -- 14,832 --
Proceeds from public offering of common stock............................................. 26,736 -- --
Proceeds from long term borrowings........................................................ 28,983 118,699 45,000
Repayments of long term borrowings ...................................................... (27,842) (84,485) (25,076)
Net proceeds from revolving credit facility............................................... 5,287 1,713 13,000
Payment of debt issuance costs............................................................ -- (3,412) (345)
-------- -------- ---------
Net cash provided by (used in) financing activities ............................. 33,164 47,347 83,408
Effect of exchange rate changes on cash ................................................... (153) (498) 8
-------- -------- ---------
Net increase (decrease) in cash ........................................................... 777 (2,788) 6,540
Cash at beginning of year ................................................................. 5,312 6,089 3,301
-------- -------- ---------
Cash at end of year ....................................................................... $ 6,089 $ 3,301 $ 9,841
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the fiscal year for:
Interest .............................................................................. $ 4,305 $ 8,086 $ 13,528
Income taxes .......................................................................... -- 378 28
Non cash investing and financing activities:
Capital lease obligations incurred .................................................... $ 9,915 $ 9,050 $ 967
Notes issued to sellers in connection with POP purchase................................. -- 1,257 --
Stock issued in connection with VSI purchase............................................ -- 3,100 --
Stock issued in connection with Encore acquisition...................................... -- -- 2,130
(1) Cash paid for capital expenditures............................................... $30,720 $29,561 $42,404
Change in accounts payable related to capital expenditures....................... -- -- 6,572
------- ------- -------
Total capital expenditures............................................................. $30,720 $29,561 $48,976
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Four Media Company (the "Company") is a provider of technical and creative
services to producers and distributors of television programming, television
commercials, feature films and other entertainment content, as well as to owners
of film and television libraries. These services include the processing,
enhancement, storage and distribution of film and video from the point it leaves
the camera until it is shown, in various formats, to audiences around the world.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of Four Media Company and its wholly owned and majority owned
subsidiaries. All intercompany accounts and transactions have been eliminated.
Results of operations include the results of businesses acquired from the date
of acquisition.
Fiscal Year. The Company's fiscal year is the 52-53 week period ending on
the Sunday closest to July 31. The fiscal years ended August 3, 1997, August 2,
1998 and August 1, 1999 each consisted of 52 weeks.
Reclassifications. Certain amounts in previously issued financial
statements have been reclassified to conform to the 1999 presentation.
Revenue Recognition. Revenues are recognized when a product is shipped or
a service is provided.
Foreign Currency Translation. All balance sheet accounts of Four Media
Company Asia ("4MC Asia"), TVP and TVi are translated at the current exchange
rate as of the end of the year. Statement of income items are translated at
average currency exchange rates. The resulting translation adjustment is
recorded as a separate component of stockholders' equity. The functional
currency in which 4MC Asia transacts business is the Singapore dollar and in
which TVP and TVi transact business is the UK pound. Transaction gains and
losses included in operations were not significant in fiscal 1997, 1998, or
1999.
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 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 10 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. Interest
costs incurred during construction totaling $1,229,000, $940,000 and
$1,566,000, were capitalized for the years ended August 3, 1997, August 2, 1998
and August 1, 1999 respectively, and are being amortized over the related
assets' estimated useful lives.
Goodwill. Goodwill represents the excess of cost over the fair value of
net assets acquired and is amortized using the straight-line method over 20 to
40 years, with a weighted average life of 28 years. Goodwill amortization
expense was $0, $529,000 and $2,814,000 for fiscal 1997, 1998 and 1999,
respectively. Useful lives are determined on a case by case basis for each
business acquired. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on estimated undiscounted
cash flows of the Company over the remaining amortization period, the Company's
carrying value would be reduced by the estimated shortfall of discounted cash
flows. No impairment charges have been recognized to date.
Other Assets. Other assets include costs incurred relating to obtaining
the credit facility in February 1998. Such costs are being amortized over the
term of the respective agreement.
2. Summary of Significant Accounting Policies, Continued
F-8
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates. The preparation of financial statements in accordance
with generally accepted accounting principles 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.
Long Lived Assets. 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" requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Stock Based Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and to adopt the disclosure-only provisions of SFAS No. 123.
Earnings Per Share. Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS No. 128") establishes standards for computing and
presenting earnings per share and requires dual presentation of basic and
diluted earnings per share on the face of the income statement.
Advertising. Advertising costs are expensed as incurred and included in
sales, general and administrative expenses. Advertising expenses amounted to
$225,000, $365,000 and $852,000 in the years ended August 3, 1997, August 2,
1998 and August 1, 1999, respectively.
Other Comprehensive Income/(Loss). As of August 3, 1998, the Company
adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS No. 130 requires foreign currency translation adjustments
to be included in other comprehensive income/(loss).
Recently Issued Accounting Standards. During the year ended August 1, 1999,
the Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information". SFAS No.
131 requires publicly-held companies to report financial and descriptive
information about its operating segments in financial statements issued to
shareholders for interim and annual periods. The statement also requires
additional disclosure with respect to products and services, geographic areas of
operation, and major customers.
In June 1998 and June 1999, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." These Statements require companies to recorded
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The new rules will be effective the
first quarter of 2001. The Company is in the process of determining the impact
of this new standard and anticipates that it will not have a material impact on
the Company's financial results when effective.
3. Business Acquisitions
On February 2, 1998, the Company acquired all the outstanding shares of
capital stock of Visualize d/b/a Pacific Ocean Post ("POP"). The purchase price
of the transaction was $30,100,000, of which $25,400,000 was paid in cash,
$1,200,000 was represented by promissory notes, and $3,500,000 represented
transaction costs. The acquisition was accounted for using the purchase method
of accounting. The purchase price was allocated to the fair value of the assets
and liabilities acquired as follows: $4,700,000 to current assets, $11,700,000
to property, plant and equipment, $31,400,000 to goodwill, $2,900,000 to
deferred taxes, $700,000 to other assets, $5,000,000 to
F-9
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounts payable and accrued liabilities, and $16,300,000 to debt and capital
lease obligations. Immediately following the closing, the Company extinguished
$8,500,000 of POP's debt, capital lease obligations, and certain operating lease
obligations.
On September 18, 1998, the Company acquired all the outstanding shares of
capital stock of MSCL, Inc. ("Encore") and the real estate occupied by Encore.
The purchase price of the transaction was approximately $45.0 million. This
amount includes $41.9 million paid in cash to the Encore shareholders (including
$11.2 million for the purchase of real estate), $1.0 million in estimated
transaction costs, and the issuance of 486,486 shares of Company common stock
valued at $4.38 per share. The acquisition was accounted for using the purchase
method of accounting. The purchase price was allocated to the fair value of the
assets and liabilities acquired as follows: $7,300,000 to current assets,
$28,500,000 to property, plant and equipment, $34,100,000 to goodwill,
$1,200,000 to deferred taxes, $900,000 to other assets, $7,400,000 to accounts
payable and accrued liabilities, and $19,600,000 to debt and capital lease
obligations. Immediately following the closing, the Company extinguished
$18,900,000 of Encore's debt and capital lease obligations.
On April 29, 1999, the Company acquired all of the outstanding shares of
capital stock of TVP Group Plc ("TVP"), a London based provider of post
production services for approximately $10.3 million in cash, including the
repayment of debt and $0.3 in estimated transaction costs. In addition, the
Company is required to pay the former shareholders of TVP up to an additional
$0.8 million (the "Deferred Consideration" if, within the first twelve months
following the TVP acquisition, (1) the Company acquires another U.K. company
engaged in a line of business similar to that of TVP, or (2) TVP achieves
certain operating results. The acquisition was accounted for using the purchase
method of accounting. The purchase price was allocated to the fair value of the
assets and liabilities acquired as follows: $3,000,000 to current assets,
$1,100,000 to property, plant and equipment, $7,400,000 to goodwill, and
$1,200,000 to accounts payable and accrued liabilities.
On May 25, 1999, the Company acquired all of the outstanding shares of
capital stock of TVi Limited ("TVi") from Carlton Communications Plc, a London
based provider of post production services, for approximately $11.7 million in
cash, including $0.3 in estimated transaction costs. Upon completion of the TVi
acquisition, the Company paid out approximately $0.4 million of the Deferred
Consideration. The acquisition was accounted for using the purchase method of
accounting. The purchase price was allocated to the fair value of the assets
and liabilities acquired as follows: $3,600,000 to current assets, $2,800,000 to
property, plant and equipment, $7,000,000 to goodwill, and $1,700,000 to
accounts payable and accrued liabilities.
On June 22, 1999, the Company acquired all of the outstanding shares of
capital stock of Ross Digital Sound and Picture, Inc. ("DSP") for approximately
$7.7 million in cash, including $0.5 million in estimated transaction costs.
The acquisition was accounted for using the purchase method of accounting. The
purchase price was allocated to the fair value of the assets and liabilities
acquired as follows: $377,000 to current assets, $2,100,000 to property, plant
and equipment, $5,300,000 to goodwill, and $77,000 to accounts payable and
accrued liabilities.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and POP, VSI, Encore, TVP, TVi and DSP, as if the
acquisitions had occurred at the beginning of fiscal 1998, after giving effect
to certain adjustments, including adjustments to depreciation, amortization,
interest and taxes. The pro forma summary does not necessarily reflect the
results of operations as they would have been if the Company and POP, VSI,
Encore, TVP, TVi and DSP, had constituted a single entity during such periods
(in thousands except per share data):
F-10
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Revenues............................................................................. $226,516 $224,928
Income before extraordinary item................................................. 2,543 5,832
Net income........................................................................... 94 5,832
Earnings per common share - Basic:
Income before extraordinary item.................................................. 0.25 0.44
Net income........................................................................ 0.01 0.44
Earnings per common share - Diluted:
Income before extraordinary item.................................................. 0.22 0.39
Net Income........................................................................ 0.01 0.39
</TABLE>
4. 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 years ended
August 3, 1997, August 2, 1998, and August 1, 1999, no single customer accounted
for a significant amount of the Company's total revenues.
In August 1997, the Company revised a long term agreement for services with
a customer and as a part of the agreement, the parties agreed to defer payment
in the amount of $4,400,000. This amount is payable over five years in monthly
installments of principal and interest at 10%. The balance at August 1, 1999 is
$3,600,000 of which $870,000 is reflected as a current asset and $2,730,000 as a
non-current asset. In addition, in May 1999, the Company further revised the
agreement with this customer and deferred additional amounts owed from this
customer of $2,200,000. This amount is payable over five years in monthly
installments of principal and interest at 6%. The balance at August 1, 1999 is
$1,800,000 of which $400,000 is reflected as a current asset and $1,400,000 as a
non-current asset. In addition, the Company is contractually committed to a
maximum $15,000,000 capital expenditure limit in order to redesign the facility
per the design specifications of the customer. Of this amount, any expenditures
in excess of $10,000,000 will be repaid to the Company over the initial term of
the contract. The Company incurred approximately $8,000,000 of those capital
expenditures during fiscal 1999.
5. Property Held for Sale
Property held for sale consists of a building in Santa Monica, California
comprised of approximately 44,000 square feet. The property is no longer used
in the Company's operations and is stated at cost which is less than estimated
net realizable value. Management anticipates the sale of the building to occur
during fiscal 2000.
F-11
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Property, Plant and Equipment
The following is a summary of property, plant and equipment (in thousands):
<TABLE>
<CAPTION>
August 2, August 1,
1998 1999
---- ----
<S> <C> <C>
Land........................................................................... $ 17,508 $ 18,419
Buildings and building improvements............................................ 11,020 23,446
Machinery and equipment........................................................ 126,249 167,563
-------- --------
154,777 209,428
Less, accumulated depreciation and amortization................................ 46,610 68,837
-------- --------
108,167 140,591
Construction in progress....................................................... 16,063 32,675
-------- --------
Property, plant and equipment, net........................................ $124,230 $173,266
======== ========
Included above is property and equipment under capital leases of:
Machinery and equipment................................................... $ 12,150 $ 14,040
Less, accumulated amortization............................................ 2,730 4,714
--------- --------
Machinery and equipment under capital leases, net......................... $ 9,420 $ 9,326
========= ========
</TABLE>
7. 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.
The income tax provision (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
Current:
<S> <C> <C> <C>
Federal ................... $ -- $ -- $ 179
State ..................... -- -- 55
Deferred
Federal ................... -- -- (219)
State ..................... -- -- (15)
------ ------- ------
Total ................... $ -- $ -- $ --
====== ======= ======
</TABLE>
F-12
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes, Continued
The significant components of the deferred tax assets and liabilities
consisted of the following (in thousands):
<TABLE>
<CAPTION>
August 2, August 1,
1998 1999
---- ----
Deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts...................... $ 377 $ 606
Property, plant and equipment........................ 4,679 3,646
Intangible assets.................................... 32 204
Accrued vacation..................................... 496 781
Acquisition expenses................................. 694 --
Other................................................ 84 86
Net operating loss carryforward...................... 3,800 3,738
------- ------
Total deferred tax assets.............................. 10,162 9,061
Valuation allowance.................................. (2,636) (479)
------- ------
7,526 8,582
Deferred tax liabilities:
Loan origination fees................................ 1,268 1,175
Loss on early extinguishment of debt................. 975 --
Prepaid assets....................................... 326 998
------- ------
Total deferred tax liabilities......................... 2,569 2,173
------- ------
Net deferred tax assets............................ $ 4,957 $6,409
======= ======
</TABLE>
At August 2, 1998 and August 1, 1999 the Company had a net deferred tax
asset before valuation allowance of $7,593,000 and $6,888,000, respectively.
Acquisitions in 1998 and 1999 resulted in an increase in the Company's deferred
tax assets of approximately $2,900,000 and $1,219,000, respectively. These
increases are attributed to differences between the book and tax bases of the
acquired company's fixed assets.
The Company has evaluated 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 $6,409,000 of deferred tax
assets will be realized. The remaining valuation allowance of $479,000 is
maintained on deferred assets which the Company has not determined to be more
likely than not realizable at August 1, 1999. The Company will continue to
review this valuation allowance on a quarterly basis and make adjustments, as
appropriate.
A reconciliation of the statutory federal income tax rate to the
effective tax rate, as a percentage of income before income tax, is as follows:
F-13
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes, Continued
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal tax at statutory rate................................. 34% 34% 34%
Non-deductible expenses....................................... 4 13 21
Foreign income not subject to taxes........................... (76) (22) (14)
Change in valuation allowance................................. 38 (22) (43)
Other......................................................... -- (3) 2
---- ---- ----
-- % -- % -- %
==== ==== ====
</TABLE>
As of August 1, 1999, the Company has net operating loss carryforwards of
approximately $10,265,000 and $2,800,000 for Federal and California tax
purposes, respectively. The net operating loss carryforwards begin to expire in
2009 and 2001 for Federal and California income tax purposes, respectively.
At August 1, 1999, foreign earnings of $10,560,000 have been retained
indefinitely by the Company's Singapore subsidiary for reinvestment, on which no
additional U.S. tax has been provided. The Company has tax holiday status on
its operations in Singapore, which expires in 2002. Income before income taxes
for the foreign operations was $3,248,000, $2,090,000 and $3,173,000 for fiscal
1997, 1998 and 1999, respectively.
8. Long Term Debt
The following is a summary of long-term debt (in thousands):
<TABLE>
<CAPTION>
August 2, August 1,
1998 1999
---- ----
<S> <C> <C>
CIBC term loans................................ $104,625 $148,875
CIBC revolving credit facility................. 7,000 20,000
CIBC letter of credit.......................... 117 117
Real property loan............................. 8,220 8,096
Notes payable.................................. 1,121 1,916
Capital lease obligations...................... 9,772 5,292
-------- --------
130,855 184,296
Less, current maturities....................... 6,184 12,975
-------- --------
$124,671 $171,321
======== ========
</TABLE>
F-14
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Long Term Debt, Continued
Aggregate capital lease obligations and loan maturities subsequent to
August 1, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Lease Principal Payments
Payments On Loans and Notes Total
-------- ------------------ -----
Fiscal years ending
<S> <C> <C> <C>
2000................................................ $ 3,865 $ 9,725 $ 13,590
2001................................................ 1,529 16,314 17,843
2002................................................ 643 15,919 16,562
2003................................................ 8 35,904 35,912
2004................................................ -- 101,142 101,142
--------- -------- --------
Total............................................ $ 6,045 $179,004 $185,049
Less: amounts representing interest.................. 753 -- 753
-------- -------- --------
Total............................................ $ 5,292 $179,004 $184,296
======== ======== ========
</TABLE>
On February 27, 1998, the Company entered into a financing agreement
representing $200,000,000 in credit facilities from a group of banks, including
Canadian Imperial Bank of Commerce ("CIBC"). The facilities include two
$75,000,000 term loans ("Term A" and "Term B") and a $50,000,000 revolver
("Revolver"). At closing, the Company borrowed $104,000,000 (including a
$2,000,000 letter of credit) to refinance most of its then outstanding debt,
fund the POP acquisition (including the refinancing of most of POP's then
outstanding debt) and pay loan fees and other transaction costs. Both Term A
and the Revolver mature on January 31, 2004 and are reduced by quarterly amounts
beginning April 30, 2000, as specified in the financing agreement. Term A and
the Revolver bear interest at Libor (5.24% at August 1, 1999) plus a margin
ranging from 1.5% to 2.5%, based upon the Company's leverage ratios. In
addition, the Company must pay a commitment fee of 0.50% on the unused portions
of the Term A and Revolver commitments. At August 2, 1998 and August 1, 1999,
$30,000,000 and $75,000,000 were outstanding on Term A and $7,000,000 and
$20,000,000 was outstanding on the Revolver, respectively. Term B matures July
31, 2004 and is reduced quarterly by amounts specified in the financing
agreement beginning April 30, 1998. Term B bears interest at Libor plus a
margin ranging from 1.75% to 2.75% based upon the Company's leverage ratios. At
August 2, 1998 and August 1, 1999, $74,625,000 and $73,875,000 was outstanding
on Term B. Borrowings under the agreement are collateralized by substantially
all of the assets held by the Company. The agreement contains certain
restrictive covenants and ratios, as defined, including minimum amounts of
operating cash flow, limitations on capital expenditures, minimum ratios of
interest coverage and fixed charge coverage, and maximum ratios of leverage. In
addition, the Company's bank line of credit prohibits the payment of cash
dividends on capital stock without the bank's prior written consent.
The Company also entered into an interest rate swap agreement with a bank
that fixed the interest rate on $75,000,000 of the facilities debt at 5.74% plus
the Company's margin (see above). The swap agreement terminates in 2001, but is
subject to extension through 2004 at the bank's option. The Company entered
into a second swap agreement with a bank that fixed the interest rate on
$50,000,000 of the facilities debt at 4.89% plus the Company's margin. The swap
agreement terminates in October 2000.
In December 1996, the Company borrowed $8,400,000 under a real property
loan for the purchase of a 90,000 square foot building. 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 collateralized by the building and
any improvements thereon. 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 has entered into various capital leases and equipment notes
related to the purchase of equipment. These leases and notes are due at various
times through 2004 and bear interest at rates of 8.3% to 13.0%. The capital
leases and equipment notes are collateralized by the assets acquired under such
leases and notes.
F-15
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies
The Company and certain subsidiaries have employment agreements with
certain members of their management and creative staff to retain their services
for up to five years at amounts approximating their current levels of
compensation. At August 1, 1999, the Company's remaining aggregate commitment
under such contracts is approximately $32.1 million.
The Company leases its production and office facilities under non-
cancelable operating leases with initial terms up to ten years through 2009.
Most leases contain renewal options and require additional payments for property
taxes, utilities, insurance and maintenance costs. Some leases are subject to
periodic escalation charges. Facilities rent expense amounted to $3,757,000,
$3,729,000 and $5,736,000 for the fiscal years ended August 3, 1997, August 2,
1998 and August 1, 1999, respectively, and is net of sublease income totaling
$563,000, $1,254,000 and $1,659,000, respectively. At August 1, 1999 the annual
commitment under these facilities leases is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal years ending in:
<S> <C>
2000..................... 7,275
2001..................... 6,027
2002..................... 5,575
2003..................... 3,668
2004..................... 2,134
Thereafter............... 9,303
-------
Total.................... $33,982
=======
</TABLE>
The Company leases approximately 45,000 square feet of one of its buildings
to a third party at approximately $55,000 per month through January 2000. In
addition, the company subleases approximately 44,000 square feet of a leased
building to a third party at approximately $93,000 per month with initial terms
expiring between February 2003 and March 2005.
The Company leases certain office equipment under operating leases
which expire through 2002. Rent expense related to equipment amounted to
$286,000, $1,329,000 and $1,452,000 for the fiscal years ended August 3, 1997,
August 2, 1998 and August 1, 1999, respectively. At August 1, 1999 the annual
commitment under various leases is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal years ending in:
<S> <C>
2000...................... $ 997
2001...................... 396
2002...................... 39
2003...................... 9
2004...................... 3
------
Total..................... $1,444
======
</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.
F-16
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stockholders' Equity
Preferred Stock. On February 27, 1998, the Company completed a
$15,000,000 preferred equity private placement of 150,000 share of Series A
Convertible Preferred Stock ("Preferred Stock"). On April 8, 1999, in
connection with the Warburg transaction, the preferred stockholder converted all
of its preferred shares into 2,250,000 shares of common stock.
Warburg Transaction. On April 8, 1999, Warburg, Pincus Equity Partners,
L.P. and certain affiliates ("Warburg, Pincus") acquired 10.2 million shares of
the Company's common stock, comprised of both newly issued shares and existing
shares, for approximately $80.0 million. Under the terms of the Agreement,
Warburg, Pincus acquired approximately 6.6 million common shares from the
Company for $52.7 million and received a seven year warrant to purchase an
additional 1.1 million shares with an exercise price of $15.00 per share. In
addition, Warburg, Pincus acquired 3.6 million of the outstanding shares held by
certain shareholders for approximately $23.2 million. Concurrently with the
closing of the transaction, the holder of all outstanding shares of the
Company's preferred stock converted all of its preferred shares into 2,250,000
shares of common stock.
Stock Options. The Company has two option plans and a series of
executive option agreements (collectively "Plans") which reserve shares of
common stock for issuance to executives, key employees and directors. These
Plans provide that shares granted come from the Company's authorized but
unissued or reacquired common stock. The price of the options granted pursuant
to these Plans will not be less than 100 percent of the fair market value of the
shares on the date of grant. An option may not be exercised within one year
from the date of grant and no option will be exercisable after ten years from
the date granted. Options vest over a 3 to 6 year period from date of grant.
The following table sets forth stock option information relative to all
plans:
<TABLE>
<CAPTION>
August 3, 1997 August 2, 1998 August 1, 1999
-------------- -------------- --------------
Weighted- Weighted- Weighted-
Number Average Average Average
of Exercise Number Exercise Number Exercise
-- ------- Of Options -------- Of Options --------
Options Price ---------- Price ---------- Price
------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 615,125 $0.34 1,615,125 $5.70 2,125,125 $6.47
Granted 1,000,000 9.00 510,000 8.92 4,491,667 8.14
Expired or cancelled -- -- (100,000) 7.00
Exercised -- -- -- -- (497,766) 0.34
--------- ----- --------- ----- --------- -----
Outstanding at end of year 1,615,125 $5.70 2,125,125 $6.47 6,019,026 $7.99
========= ========= =========
Options exercisable at end of year 410,082 826,035 900,501
========= ========= =========
</TABLE>
The following table summarizes information on fixed stock options
outstanding at August 1, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------ ---------------------------------
Weighted-average
Ranges of Number remaining contractual life Weighted-average Number Weighted-average
exercise prices Outstanding (in years) exercise price exercisable exercise price
- --------------- ----------- -------------------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$0.34 117,359 7.2 $0.34 97,799 $0.34
$6.50-$10.00 5,901,667 9.1 8.14 802,702 8.06
--------- --- ----- ------- -----
6,019,026 9.1 $7.99 900,501 $7.22
========= =======
</TABLE>
As permitted under current accounting standards, no compensation cost was
recognized for the Plans. Had compensation cost for the Company's Plans been
recognized ratably over the options' vesting periods, the Company's pro forma
net income (loss) and net income (loss) per common share would have been
$858,000 and $0.11, respectively for 1997, ($1,074,000) and ($0.11),
respectively for 1998 and $1,690,000 and $0.13, respectively for 1999. Net
income (loss) per share, assuming dilution, would have been $0.10, ($0.11) and
$0.11 for 1997, 1998, and 1999, respectively.
F-17
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average fair value of options granted during 1997, 1998 and
1999 were $4.77, $4.05, and $4.47, respectively. Option grant date fair values
were determined using a Black-Scholes option pricing value. The underlying
assumptions used were as follows:
<TABLE>
<CAPTION>
August 3, 1997 August 2, 1998 August 1, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Risk-free interest rate 6.16% 5.49% 6.00%
Expected stock price volatility 53.89% 56.20% 65.00%
Expected dividend yield 0.00% 0.00% 0.00%
Expected life (in years) 5 4 5
</TABLE>
11. Earnings Per Share
The Company adopted the earnings per share calculation and disclosure
requirements of Financial Accounting Standards Statement 128. The tables below
demonstrate the earnings per share calculations for the periods presented.
<TABLE>
<CAPTION>
(in thousands, except per share data)
---------------------------------------------------------------------------------------------------------
August 3, 1997 August 2, 1998 August 1, 1999
---------------------------------------------------------------------------------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income before
extraordinary item.......... $1,382 -- $3,190 -- $4,938 --
Basic EPS.................... 1,382 7,971 $0.17 3,190 9,634 $0.33 4,938 13,271 $0.37
===== ===== =====
Effects of Dilutive Securities:
Options and convertible
preferred stock............. -- 592 -- 1,264 -- 1,458
------ ----- ------ ------ ------ ------
Diluted EPS.................. $1,382 8,563 $0.16 $3,190 10,898 $0.29 $4,938 14,729 $0.34
====== ===== ===== ====== ====== ===== ====== ====== =====
Options omitted.............. 700 1,035 5,902
===== ====== ======
</TABLE>
The Company incurred an extraordinary loss on early extinguishment of debt
of $2,449,000 for the year ended August 2, 1998 resulting in a net income for
the year of $741,000. Basic EPS and diluted EPS after the extraordinary loss
was $0.08 and $0.07, respectively, for the year ended August 2, 1998.
Certain options were omitted in 1997, 1998 and 1999 because the exercise
prices exceeded the average traded price during the periods.
12. 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. In addition, the Company's POP and Encore
subsidiaries had their own plans. Effective January 1, 1999, these plans were
discontinued. The Company expensed $219,000, $265,000 and $712,000 related to
the plans for the years ended August 3, 1997, August 2, 1998 and August 1, 1999,
respectively.
13. Related Parties
The Company paid professional fees to a partnership that a member of the
Board of Directors of the Company is a partner of approximately $27,000 $54,000
and $349,000 for fiscal years 1997, 1998 and 1999, respectively.
On April 8, 1999 the Company loaned its chief executive officer, on an
unsecured basis, $2,000,000 at an interest rate of 4.59% per annum, compounded
semi-annually. The loan, plus interest, is due within 30 days of April 8, 2004,
or becomes immediately due and payable in the event he incurs a Termination With
Cause. The loan will automatically be fully forgiven and he will have no payment
obligation if (i) he incurs a Termination Without Cause or a Termination With
Good Reason during his employment term, (ii) a change in control of the Company
occurs during his employment term, (iii) the Company achieves $327 million or
more in Gross Operating Revenues (as defined) during the period beginning on the
fourth anniversary of his employment agreement and ending on the fifth
anniversary of his employment agreement (the "Measurement Period"), (iv) the
Company achieves $87 million or more in Consolidated EBITDA (as defined) during
the Measurement Period, or (v) following the Measurement Period, the Board
determines the loan will be forgiven.
F-18
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Segment and Geographic Information
The Company has organized its activities into four divisions; television,
mastering and distribution, broadcast and syndication, and film and animation.
The television division, located in Burbank, Hollywood, Universal City, Culver
City, Santa Monica and San Francisco, California, assembles film or video
principal photography into a form suitable for network, syndicated, cable or
foreign television. The mastering and distribution division located in Burbank
and Universal City, California and London, England, manages, formats and
distributes content worldwide. The broadcast and syndication 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 film and animation division, located in Santa Monica, digitally
creates and manipulates images in high-resolution formats for use in feature
films. The Company evaluates performance and allocates resources based on
several factors, of which the primary financial measure is EBITDA, or earnings
before interest, taxes, depreciation and amortization. The Company excludes
unusual charges from EBITDA. Accounting policies of the operating segments are
the same as those described in the summary of significant accounting policies in
Note 1. Assets of the operating segments are the owned assets used in the
operations of each division. The corporate components of EBITDA include general
and administrative expenses. Corporate assets primarily consist of corporate
cash, fixed assets and investments in subsidiaries.
F-19
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial data for the Company's operating segments is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
REVENUES
<S> <C> <C> <C>
Television $30,768 $ 60,405 $125,491
Mastering and distribution 26,658 35,633 41,571
Broadcast and syndication 23,694 22,701 22,609
Film and Animation 3,407 10,429 7,313
------- -------- --------
Total reportable segments $84,527 $129,168 $196,984
======= ======== ========
EBITDA
Television $ 2,136 $ 9,491 $ 23,898
Mastering and distribution 5,188 9,230 10,142
Broadcast and syndication 8,363 7,383 8,524
Film and Animation (951) (792) (842)
-------- -------- --------
Total reportable segments 14,736 25,312 41,722
Corporate and other 3,708 4,208 4,378
-------- -------- --------
$ 18,444 $ 29,520 $ 46,100
======== ======== ========
DEPRECIATION AND AMORTIZATION
Television $ 4,266 $ 9,171 $ 15,898
Mastering and distribution 3,262 3,824 4,629
Broadcast and syndication 3,739 3,402 3,621
Film and Animation 518 1,178 1,028
-------- -------- --------
Total reportable segments 11,785 17,575 25,176
Corporate and other 1,390 616 2,300
-------- -------- --------
$ 13,175 $ 18,191 $ 27,476
======== ======== ========
CAPITAL EXPENDITURES (1)
Television $ 24,745 $ 28,690 $ 45,995
Mastering and distribution 7,812 5,025 7,572
Broadcast and syndication 2,215 1,814 9,504
Film and Animation 774 4,627 693
-------- -------- --------
Total reportable segments 35,546 40,156 63,764
Corporate and other 12,633 12,244 20,596
-------- -------- --------
$ 48,179 $ 52,400 $ 84,360
======== ======== ========
TOTAL ASSETS
Television $ 66,010 $130,957 $189,076
Mastering and distribution 20,056 26,519 34,363
Broadcast and syndication 28,801 23,425 61,239
Film and Animation 3,000 9,675 11,141
-------- -------- --------
Total reportable segments 117,867 190,576 295,819
Corporate and other 14,370 25,768 46,933
-------- -------- --------
$132,237 $216,344 $342,752
======== ======== ========
</TABLE>
(1) Includes assets acquired from the acquisition of Anderson Video ($5.6
million) in 1997, POP ($11.7 million), and VSI ($2.0 million) in 1998 and
Encore ($28.5 million), TVP ($1.0 million), TVi ($2.8 million), and DSP
($2.1 million) in 1999.
F-20
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic Information
The Company operates in the United States, Asia, and the UK. Information about
the Company's operations in the different geographic areas is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
REVENUES
<S> <C> <C> <C>
United States $70,702 $118,635 $181,590
Asia 13,825 10,533 11,237
UK -- -- 4,157
------- -------- --------
$84,527 $129,168 $196,984
======= ======== ========
LONG-LIVED ASSETS
United States $81,361 $115,771 $161,631
Asia 12,311 8,459 7,813
UK -- -- 3,822
------- -------- --------
$93,672 $124,230 $173,266
======= ======== ========
</TABLE>
F-21
<PAGE>
Four Media Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data (in thousands, except per
share data) for fiscal 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Quarter (1)
------------------------------------------------ Fiscal
First Second Third Fourth Year
----- ------ ----- ------ ------
1998
- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues............................................. $27,267 $28,649 $39,101 $34,151 $129,168
Income before extraordinary item..................... 225 693 1,127 1,145 3,190
Extraordinary loss on early extinguishment of debt... -- -- (2,449) -- (2,449)
Net Income (loss).................................. 225 693 (1,322) 1,145 741
Earnings per common share - Basic:
Income before extraordinary item.................... 0.02 0.07 0.12 0.12 0.33
Extraordinary item.................................. -- -- (0.26) -- (0.25)
Net Income (loss)................................... 0.02 0.07 (0.14) 0.12 0.08
Earnings per common share - Diluted:
Income before extraordinary item.................... 0.02 0.07 0.10 0.10 0.29
Extraordinary item.................................. -- -- (0.22) -- (0.22)
Net Income.......................................... 0.02 0.07 (0.12) 0.10 0.07
1999
Revenues..............................................$49,596 $47,880 $51,508 $48,000 $196,984
Net Income (loss)..................................... 1,984 2,313 2,685 (2,044) 4,938
Earnings per common share:
Basic............................................... 0.19 0.22 0.21 (0.10) 0.37
Diluted............................................. 0.16 0.19 0.19 (0.10) 0.34
</TABLE>
(1) Based upon the fiscal year followed by the Company, each quarter presented
above includes 13 weeks.
16. Event Subsequent to the Date of Auditors' Report (Unaudited)
On November 1, 1999 the Company announced that it has entered into a letter
of intent to sell 100% of its issued and outstanding common stock to Liberty
Media Corporation (NYSE: LMG,A). As contemplated by the letter of intent, one
hundred percent (100%) of the Company's issued and outstanding stock will be
acquired in exchange for approximately 6.35 million shares of Class A Liberty
Media Group stock, par value $1.00 (LMG.A shares(s)"). One LMG.A share will be
issued for each 3.1 shares of the Company's common stock outstanding.
Warburg, Pincus Equity Partners, L.P., Fleming Asset Management USA and Robert
T. Walston, collectively holders of approximately 70% of the issued and
outstanding shares of the Company, are expected to enter into agreements with
Liberty Media to vote in favor of the transaction. The transaction is subject to
execution of definitive documentation, expiration of applicable waiting periods
under pre-notification regulations, Company stockholder and Board of Director
approval, and other customary closing conditions, including other appropriate
corporate approvals. The parties contemplate that a definitive agreement will be
signed in mid-November 1999 and closing is anticipated to occur in first quarter
of 2000.
F-22
<PAGE>
FOUR MEDIA COMPANY
SCHEDULE II
Valuation and Qualifying Accounts
(Amounts in thousands)
<TABLE>
<CAPTION>
Additions Charged Additions Charged
Balance at to to Balance at End
Year Ended Description Beginning of year Costs and Expenses Other Accounts (1) Deductions (2) of Year
- ---------- ----------- ----------------- -------------------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
August 3, 1997 Allowance for doubtful accounts $ 823 $871 $179 $ -- $1,873
August 2, 1998 Allowance for doubtful accounts 1,873 794 218 (1,627) 1,258
August 1, 1999 Allowance for doubtful accounts 1,258 954 264 (858) 1,618
</TABLE>
(1) Amounts assumed in connection with the acquisitions of Anderson, POP, VSI,
Encore, TVP, TVi and DSP.
(2) Uncollectable accounts written off.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 29th day of
October 1999.
FOUR MEDIA COMPANY
By: /s/ Robert T. Walston
--------------------------------------------
Robert T. Walston, Chairman of the Board and Chief Executive
Officer
By: /s/ Christopher M. R. Phillips
--------------------------------------------
Christopher M.R. Phillips, Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities indicated on this 29th day of October 1999.
S-1
<PAGE>
By: /s/ Robert T. Walston
----------------------------
Robert T. Walston,
Chairman of the Board and
Chief Executive Officer
By: /s/ Jeffrey J. Marcketta
----------------------------
Jeffrey J. Marcketta
President and Chief Operating Officer
By: /s/Sidney Lapidus
----------------------------
Sidney Lapidus
Director
By: /s/David E. Libowitz
----------------------------
David E. Libowitz
Director
By: /s/ William C. Scott
----------------------------
William C. Scott
Director
By: /s/ William Amon
----------------------------
William Amon
Director
By: /s/ Eytan Shapiro
----------------------------
Eytan Shapiro
Director
S-2
<PAGE>
EXHIBIT 10.56
ORIGINATION, UPLINK AND POST-PRODUCTION SERVICES AGREEMENT
BETWEEN 4MC-BURBANK, INC.
AND
TVN ENTERTAINMENT CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Identification.................................................................................... 1
2. Recitals.......................................................................................... 1
3. Payment of Outstanding 1999 Arrearages and Delivery of Notes...................................... 3
4. Original Services and Interim Services............................................................ 3
5. Determination of Actual Commencement Date......................................................... 4
5.1 TVN's Right to Inspect and Approve Facility............................................ 4
5.2 Approval Process....................................................................... 5
5.3 Failure to Satisfy..................................................................... 6
5.4 SeaChange System....................................................................... 7
6. New Services, Facility, Personnel and Equipment................................................... 8
6.1 Description of New Services............................................................ 8
6.2 Execution of Sublease; New Services Facility........................................... 8
6.3 New Services Personnel................................................................. 11
6.4 Equipment for New Services............................................................. 13
6.5 Supervision and Control By TVN......................................................... 13
6.6 Availability of Certain Rooms Within Facility.......................................... 13
6.7 TVN's Right to Locate or Relocate Certain Equipment.................................... 14
6.8 Location of Certain Antennae........................................................... 14
</TABLE>
48
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
7. Term; Renewal Terms............................................................................... 14
8. Consideration..................................................................................... 15
8.1 Consideration for Services............................................................. 15
8.2 Equipment Budget....................................................................... 16
8.3 Additional Equipment................................................................... 19
8.4 Additional Personnel................................................................... 20
8.5 Overtime, Weekend and Holiday Hours.................................................... 20
8.6 Additional Services.................................................................... 20
9. Default and Remedies; Termination................................................................. 21
9.1 Payment Default........................................................................ 21
9.2 Other TVN Default...................................................................... 21
9.3 4MC Default; TVN Termination........................................................... 22
9.4 Disputed Amounts....................................................................... 23
9.5 Duty to Mitigate....................................................................... 23
9.6 TVN's Option to Acquire Equipment Upon 4MC Default..................................... 23
10. Facility Security................................................................................. 25
10.1 Generally.............................................................................. 25
10.2 Additional Security Measures........................................................... 25
</TABLE>
49
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
11. Maintenance....................................................................................... 25
12. Service Interruption.............................................................................. 26
12.1 Service Interruptions.................................................................. 26
12.2 Service Interruption Credit............................................................ 26
12.3 Continuous Service Failure............................................................. 27
12.4 Exception for SeaChange System; Other Causes of Service Interruptions.................. 28
13. Playboy Services Severable........................................................................ 28
14. Representations, Warranties and Covenants......................................................... 29
14.1 Of TVN................................................................................. 29
14.2 Of 4MC................................................................................. 29
15. Limitation of Liability........................................................................... 30
15.1 Limitation of Liability................................................................ 30
15.2 Force Majeure Event.................................................................... 30
15.3 Warranties Disclaimed.................................................................. 31
16. Indemnification................................................................................... 31
16.1 Indemnification by 4MC................................................................. 31
16.2 Indemnification by TVN................................................................. 31
16.3 Indemnification Procedure.............................................................. 32
17. Non-Hire.......................................................................................... 32
</TABLE>
50
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
18. Confidential Information.......................................................................... 32
19. Options Upon Expiration of Term................................................................... 33
19.1 Reduced Monthly Fee During Renewal Term(s)............................................. 33
19.2 TVN's Option to Purchase Equipment..................................................... 33
19.3 Reduction of Services During Renewal Term(s)........................................... 34
19.4 Equipment Purchase Option Upon Expiration.............................................. 35
19.5 Best Efforts to Provide Stand-Alone Generator.......................................... 35
20. Restrictions Regarding Provision of Certain Services.............................................. 35
21. Miscellaneous..................................................................................... 35
21.1 Assignment and Subcontracting.......................................................... 35
21.2 Notices................................................................................ 36
21.3 Governing Law.......................................................................... 37
21.4 Entire Agreement....................................................................... 37
21.5 Waiver of Breach....................................................................... 38
21.6 Independent Contractor................................................................. 38
21.7 Confidentiality........................................................................ 38
21.8 Disputed Matters; Arbitration.......................................................... 38
21.9 Severability........................................................................... 39
21.10 Counterparts........................................................................... 39
21.11 Definitions............................................................................ 39
</TABLE>
51
<PAGE>
46
EXHIBITS
--------
<TABLE>
<CAPTION>
Exhibit Description
<S> <C>
A Form of Fiscal 1997 Note
B Form of Fiscal 1998 Note
C-1 Description of Original Services
C-2 Description of Interim Services
D Description of New Services
E Basement Space to be Provided by 4MC
F Basement Floor Plan
G Sixth Floor Space Plans
H Rack Elevation Drawings
I New Services Personnel
J Equipment and Equipment Expenditures
K Equipment, Information, Programming Materials and Services
To Be Provided By TVN
L Schedule of Increases in Monthly Fee Based on Additional
Capital Equipment
M Implementation Schedule
N Form of Sublease
O Rates for Overtime, Weekends and Holidays
P Rate Card for Additional Services
</TABLE>
<PAGE>
ORIGINATION, UPLINK AND POST-PRODUCTION SERVICES AGREEMENT
----------------------------------------------------------
1. Identification
--------------
This Origination, Uplink and Post-Production Services Agreement is entered
into on May 28, 1999 by and between 4MC-Burbank, Inc., a Delaware corporation
("4MC"), and TVN Entertainment Corporation, a Delaware corporation ("TVN").
2. Recitals
--------
2.1 On or about November 11, 1989, TVN and Compact Video Services, Inc.
("Compact") entered into that certain Uplink-Playback Service Deal Memorandum,
as amended from time to time (the "Memorandum"), whereby Compact agreed to
provide certain network origination, playback, uplink, post-production and
related services to TVN for TVN's analog and certain digital signal programming
transmitted from the Galaxy III R and Galaxy IX satellites and previously from
other satellites. On August 4, 1993, Compact's rights and obligations under the
Memorandum were assigned to, and assumed by, 4MC. Since then, 4MC has been
providing these services (the "Original Services," as hereinafter defined) to
TVN pursuant to the Memorandum. 4MC is a wholly-owned subsidiary of Four Media
Company, a Delaware corporation.
2.2 In August 1996, 4MC supplied to TVN an additional approximately 1100
square feet of space for TVN's compression system services, with a build-out at
an approximate cost of $469,264. On June 11, 1997, 4MC commenced the provision
of certain additional services to TVN for TVN's digital signal programming
transmitted from the Galaxy IX satellite based upon interim server equipment
which was purchased by 4MC for approximately One Million One Hundred Thousand
One Hundred Sixty Dollars ($1,100,160) in order to provide such services to TVN
at TVN's request (the "Interim Services"). In addition, 4MC hired seven
additional personnel to provide the Interim Services.
2.3 Pursuant to that certain Letter Agreement dated August 19, 1997 by and
between TVN and 4MC, TVN agreed to pay certain amounts to 4MC representing
arrearages due and owing to 4MC on account of the Original Services and Interim
Services performed by 4MC to and including August 3, 1997 (the "1997
Arrearages"). An aggregate of Two Million Three Hundred Thousand Dollars
($2,300,000) of the 1997 Arrearages was to be paid in cash on or prior to
December 31, 1997, and such amount was timely paid, and the remaining amount of
the 1997 Arrearages was to be represented by a promissory note in the principal
amount of Four Million Four Hundred Thirty-Six Thousand Three Hundred Thirty-
Seven Dollars ($4,436,337), with interest to accrue from September 1, 1997
through February 28, 1998 at 10% per annum equaling Two Hundred Twenty-One
Thousand Eight Hundred Seventeen Dollars ($221,817), with no principal or
interest payments to be payable until March 31, 1998, at which time principal
and interest aggregating Four Million Six Hundred Fifty-Eight Thousand One
Hundred Fifty-Four Dollars ($4,658,154) was to be payable in sixty (60) equal
monthly installments of Ninety-Eight Thousand Nine Hundred Seventy-Two Dollars
and One
1
<PAGE>
Cent ($98,972.01). Although the promissory note described above was not
executed on August 19, 1997, TVN commenced making monthly payments of
Ninety-Eight Thousand Nine Hundred Seventy-Two Dollars and One Cent ($98,972.01)
on March 31, 1998 and has made five such monthly installments, leaving an
outstanding principal balance of Four Million Three Hundred Fifty Two Thousand
Three Hundred Twenty-Nine Dollars and Nine Cents ($4,352,329.09) as of July 31,
1998. A copy of the promissory note dated March 1, 1998 (the "Fiscal 1997 Note")
is attached hereto as Exhibit "A".
2.4 Pursuant to an oral agreement by and between TVN and 4MC, TVN agreed
to pay certain amounts to 4MC representing arrearages due and owing to 4MC on
account of the Original Services, the Interim Services, and other post
production services performed by 4MC to and including August 2, 1998 totaling
Five Million Five Hundred Eighty-Two Thousand Dollars ($5,582,000) (the "1998
Arrearages"), which were to be paid by TVN on or prior to October 31, 1998, and
such amounts were timely paid by TVN.
2.5 For the period from August 3, 1998 to April 30, 1999, TVN owes the
following amounts to 4MC:
(a) For 4MC's continuing provision of the Original Services, the
Interim Services and other post-production services through January 31, 1999, a
monthly fee equal to Four Hundred Twenty-Four Thousand Dollars ($424,000) (the
"Interim Monthly Fee") for a period of six (6) months from August 3, 1998
through January 31, 1999, for an aggregate of Two Million Five Hundred
Forty-Four Thousand Dollars ($2,544,000);
(b) For the period from February 1, 1999 through April 30, 1999, a
reduced Interim Monthly Fee (the "Reduced Interim Monthly Fee") equal to Three
Hundred Twenty-Six Thousand Dollars ($326,000) per month for a period of three
(3) months for an aggregate of Nine Hundred Seventy-Eight Thousand Dollars
($978,000);
(c) Nine (9) monthly payments under the Fiscal 1997 Note (from August
31, 1998 to April 30, 1999), or an aggregate of Eight Hundred Ninety Thousand
Seven Hundred Forty-Eight Dollars and Nine Cents $(890,748.09).
(d) Eight (8) monthly payments under the Fiscal 1998 Note (from
September 1, 1998 through April 1, 1998), or an aggregate of Three Hundred
Thirty-Four Thousand Three Hundred Eighty Dollars and Sixteen Cents
($334,380.16); and
(e) Additional post-production and related services for an aggregate
2
<PAGE>
amount totaling Two Hundred Thirty One Thousand Two Hundred Seventy Two Dollars
($231,272). The amounts owing under subparagraphs (a), (b), (c), (d) and (e)
total Four Million Nine Hundred Seventy Eight Thousand Four Hundred Dollars and
Twenty-Five Cents ($4,978,400.25) and shall be collectively referred to as the
"1999 Arrearages").
2.6 4MC anticipates that on or about August 1, 1999 (or such earlier or
later date as the New Services can be fully provided by 4MC to TVN, as mutually
determined by 4MC and TVN in accordance with Section 5 below), 4MC will be able
to provide TVN with new network origination, playback, uplink, monitoring and
post-production services based on certain new technology, as more particularly
described in Section 6.1 below (the "New Services"). On May 21, 1999, TVN paid
to 4MC an amount equal to Two Million Five Hundred Thousand Dollars ($2,500,000)
in partial payment of the 1999 Arrearages.
2.7 The parties desire to enter into this Agreement to provide for (a)
TVN's payment of the outstanding 1999 Arrearages to 4MC, (b) the terms and
conditions of 4MC's provision of the Original Services and Interim Services to
TVN, and (c) the terms and conditions of 4MC's provision of the New Services to
TVN, all as hereinafter set forth.
3. Payment of Outstanding 1999 Arrearages and Delivery of Notes.
------------------------------------------------------------
Concurrently with the execution hereof, TVN shall deliver to 4MC a check in
the amount of One Million Four Hundred Thousand Dollars ($1,400,000),
representing partial payment of the outstanding balance of the 1999 Arrearages;
and shall deliver the executed Fiscal 1997 Note and the executed "Fiscal 1998
Note" (as hereinafter defined) to 4MC. On or before July 2, 1999, TVN shall
deliver to 4MC a check in the amount of One Million Seventy Eight Thousand Four
Hundred Dollars and Twenty Five Cents ($1,078,400.25), representing payment in
full of the outstanding balance of the 1999 Arrearages.
4. Original Services and Interim Services
--------------------------------------
From and after the date of this Agreement, and continuing until the Actual
Commencement Date (as hereunder defined), 4MC shall provide (a) the Original
Services it has provided to TVN, including: uplinking; playback, monitoring and
control of one-inch videotape systems; duplication; editing services; and
certain personnel necessary to provide the Original Services (the "Original
Services Personnel"), as well
3
<PAGE>
as (b) the Interim Services it is now providing to TVN: namely, the additional
services for TVN's digital signal programming transmitted from the Galaxy IX
satellite using digital server equipment; and certain personnel necessary to
provide the Interim Services ("Interim Services Personnel"); all (including a
list of Interim Services Personnel) as more particularly described on Exhibits
"C-1" and "C-2", respectively, attached hereto and incorporated herein by this
reference. On the Actual Commencement Date, 4MC shall cease to provide the
Original Services and the Interim Services for TVN, because 4MC shall commence
providing the New Services for TVN. TVN's execution of this Agreement shall be
deemed TVN's approval of (a) the description of the Original Services and the
Interim Services and (b) the number, description and identity of the Original
Services Personnel and Interim Services Personnel, all as described on Exhibits
"C-1" and "C-2," respectively. 4MC acknowledges that TVN shall have the right to
supervise and direct all Original Services Personnel and Interim Services
Personnel in connection with the Original Services and the Interim Services,
respectively, provided by 4MC, and 4MC shall provide the Original Services and
Interim Services under TVN's direct supervision and control. The Memorandum
shall be of no further force or effect from and after the date of this Agreement
and this Agreement shall supersede and replace any and all previous agreements
between the parties, other than the Fiscal 1997 Note and the Fiscal 1998 Note.
5. Determination of Actual Commencement Date.
-----------------------------------------
4MC anticipates that the New Services can be fully provided to TVN at the
"Facility" (as hereinafter defined) on or about August 1, 1999, subject to the
terms of this Section 5.
5.1 TVN's Right to Inspect and Approve Facility. Subject to the terms of
-------------------------------------------
Section 5.2 below, TVN shall have the right to inspect and approve or disapprove
the Facility prior to the "Actual Commencement Date" (as defined in Section 5.2
below) to determine 4MC's compliance with subsections (a), (b) and (c) of this
Section 5.1. The Actual Commencement Date shall be the day on which TVN
determines in good faith the following and delivers a confirmation notice to 4MC
stating that 4MC has complied with subsections (a), (b) and (c) of this Section
5.1 or is deemed to have confirmed compliance with said subsections as set forth
in Section 5.2 below:
(a) The Facility has been renovated and reconstructed by 4MC in
compliance with the Floor Plans;
(b) All of the Equipment (as hereinafter defined) has been installed
and
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is operational, the Facility is operational for the provision of the New
Services for TVN, and 4MC is capable of providing the New Services for TVN with
the New Services Personnel; and
(c) The Facility may be lawfully occupied and is useable for 4MC's
provision of the New Services for TVN as described herein.
5.2 Approval Process. TVN shall determine in good faith whether the
----------------
conditions set forth in Section 5.1 have been satisfied in accordance with the
following procedures:
(a) 4MC shall notify TVN in writing that the Facility is in
compliance with subsections (a), (b) and (c) of Section 5.1 (the "First
Commencement Notice");
(b) TVN shall have six (6) business days from its receipt of the
First Commencement Notice to notify 4MC in writing that TVN confirms 4MC's
compliance with subsections (a), (b) and (c) of Section 5.1, or does not confirm
such compliance, and the specific reasons therefor (the "Response Notice").
TVN's failure to respond in writing to the First Commencement Notice within six
(6) business days after receipt thereof shall be deemed TVN's disagreement with
4MC's assertion of compliance with subsections (a), (b) and (c) of Section 5.1.
If the Response Notice indicates non-confirmation of compliance or if TVN fails
to deliver the Response Notice, the parties, within six (6) business days after
the expiration of such six (6) business-day period, shall meet and confer to
identify the problems causing non-compliance, if any. If after such meeting or,
if there has been no meeting because of TVN's failure to meet and confer to
identify the problems causing non-compliance, after the expiration of such six
(6) business-day period, 4MC still believes that it has complied with
subsections (a), (b) and (c) of Section 5.1, 4MC shall send a second notice of
compliance to TVN (which addresses such non-compliance problems as have been
identified by TVN, if any) (the "Second Commencement Notice"), which notice may
not be sent earlier than twelve (12) business days after 4MC's delivery of the
First Commencement Notice. TVN's failure to respond in writing to the Second
Commencement Notice within six (6) business days after receipt thereof shall be
deemed TVN's confirmation of 4MC's compliance with subsections (a), (b) and (c)
of Section 5.1 and, in such event, the Actual Commencement Date will be six (6)
business days after TVN's receipt of the Second Commencement Notice. If, after
the parties have met and conferred, 4MC acknowledges that additional steps are
required to comply with subsections (a), (b) and/or (c) of Section 5.1, 4MC
shall promptly implement any actions necessary to bring the Facility into such
compliance and, at such time as 4MC believes that the Facility is in compliance
with subsections (a), (b) and (c) of Section 5.1, 4MC shall deliver to TVN the
Second Commencement Notice. TVN shall have six (6) business days from the
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date of receipt of the Second Commencement Notice to then deliver an additional
Response Notice (or if TVN requires more than six (6) business days to deliver a
Response Notice to 4MC, TVN shall request an additional six (6) days in which to
deliver a Response Notice). This approval process shall continue until TVN has
delivered a Response Notice to 4MC which indicates confirmation of 4MC's
compliance with subsections (a), (b) and (c) of Section 5.1, in which event the
date of such Response Notice shall be deemed the Actual Commencement Date, or if
TVN fails to respond in writing to a Second Commencement Notice within six (6)
days of its receipt thereof, such failure to respond shall be deemed TVN's
confirmation of 4MC's compliance and the Actual Commencement Date will be six
(6) business days after TVN's receipt of the Second Commencement Notice.
The foregoing notwithstanding, at any time and from time to time, 4MC may
request that TVN inspect and/or test, as appropriate, a particular piece of
equipment or sub-system. TVN shall conduct such test or inspection within the
ten (10) business days thereafter and all of the same time periods and
procedures contained in Section 5.2(b) above shall be applicable to the subject
test and/or inspection. Once a particular piece of equipment or sub-system has
been approved or deemed approved by TVN on a stand-alone basis, TVN shall no
longer have the right to disapprove the same on a stand-alone basis (unless such
piece of equipment or sub-system subsequently fails), but may disapprove the
same as part of a full system or as part of the fully integrated and operating
Facility. In connection with the approval process described in this Article 5,
TVN shall (a) timely evaluate any particular piece of equipment and/or system
and/or subsection upon 4MC's request and (b) state all of TVN's known objections
thereto in TVN's applicable Response Notice. Moreover, TVN acknowledges that
each applicable Response Notice shall contain only those items of non-compliance
which would (a) negatively impact 4MC's ability to provide the New Services to
TVN or (b) delay the Actual Commencement Date.
5.3 Failure to Satisfy. In the event that the Facility and/or 4MC does not
------------------
comply with subsections (a), (b) or (c) of Section 5.1 above, and such failure
to comply (a "Facility Failure") exists on or after December 1, 1999 (for
purposes of this Section 5.3, the "Liquidated Damages Date") (which shall not
include a Facility Failure that is directly caused by either (a) a Force Majeure
event, or (b) TVN's request for modifications to the Basement Floor Plan, the
Sixth Floor Space, the Equipment, the New Services and the staffing of such
services, if and only if such modification delays the build-out and/or the
staffing of the Facility or otherwise causes a delay, or (c) any unreasonable
act or failure to act by TVN which constitutes a violation of TVN's obligations
under this Agreement, including without limitation and for illustration purposes
only, a Facility Failure caused by TVN's failure to timely approve as set forth
in Sections 6.2, 6.3, 6.4 and/or 8.2 below or (d) any other event not within
4MC's
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<PAGE>
control (including without limitation and for illustration purposes only, (i)
delays in the delivery of any Equipment listed on Exhibit "J" so long as 4MC has
timely ordered all such Equipment and has taken all other necessary action to
obtain timely delivery of such Equipment, or (ii) delays in the granting of
appropriate required licenses, approvals, and/or permits by the appropriate
authorities or third parties, so long as 4MC has taken all necessary actions to
obtain such required licenses, approvals and permits in a timely manner, or
(iii) TVN's rejection of the "SeaChange System" (as hereinafter defined) and
acceptance of an "Alternate Server System" (as hereinafter defined), or (iv)
access to the Sixth Floor Space (as hereinafter defined) for construction is
denied to 4MC by TVN on the date the Sublease is executed by TVN and 4MC)), then
from and after the Liquidated Damages Date, the following sums shall be paid by
4MC to TVN for each day that the Facility is not in compliance with subsections
(a), (b) and/or (c) of Section 5.1:
Liquidated Damages
Days of Delay Payment Amount
------------- --------------
1st-10th day $ 2,500 per day
11th-15th day $ 5,000 per day
16th-20th day $10,000 per day
21st-25th day $15,000 per day
Each day thereafter $20,000 per day.
THE SUMS PAYABLE TO TVN AS SET FORTH ABOVE SHALL BE DEEMED LIQUIDATED
DAMAGES FOR 4MC'S FAILURE TO TIMELY SATISFY ITS OBLIGATIONS UNDER SECTION 5.1,
THE PARTIES HAVING RECOGNIZED THAT IT WOULD BE EXTREMELY DIFFICULT TO FORECAST
OR DETERMINE IN ADVANCE THE AMOUNT OF DAMAGE TVN WOULD INCUR AS A RESULT OF SUCH
DELAY.
TVN's initials:__________ 4MC's initials:__________
The sums payable to TVN as set forth above shall be applied as a credit
against the Monthly Fee due and payable on the first day of the month after the
Actual Commencement Date (and any subsequent Monthly Fees, until the entire
credit has been applied). If the Facility Failure continues to and including
December 31, 1999, TVN shall have the right to terminate this Agreement by
written notice to 4MC without
7
<PAGE>
further liability or obligation hereunder except for immediate payment to 4MC of
any amounts owing hereunder up to such termination date for services theretofore
rendered by 4MC (and 4MC shall immediately pay to TVN all sums owing under this
Section 5.3 and shall use its best efforts to assist TVN to transition to
another facility and another provider of the New Services). TVN acknowledges
that 4MC has taken possession of the Sixth Floor Space from the "Master
Landlord" (as hereinafter defined).
5.4 SeaChange System. The parties acknowledge that the basic configuration
----------------
of the SeaChange System consists of two SeaChange digital servers to be utilized
by 4MC in providing the New Services, such that some Program Channels (as
hereinafter defined) of the first (primary) server shall be protected by a
Program Channel of the second (back-up) server (the "SeaChange System"). If, as
of June 30, 1999 (the "SeaChange Compliance Date"), the SeaChange System does
not substantially comply with the performance requirements as set forth in
Exhibit D (as determined by TVN in its sole discretion) and 4MC and TVN have
developed a mutually acceptable specification for an "Alternate Server System"
as of the SeaChange Compliance Date, TVN may reject the SeaChange System and
accept the Alternate Server System in place of the SeaChange System. 4MC
estimates that the cost of the Alternate Server System may exceed Six Million
Dollars ($6,000,000), which cost (a) will be covered by, and subject to the
limitations of, 4MC's Fifteen Million Dollar ($15,000,000) maximum Equipment
Expenditure commitment, (b) will replace the cost of the SeaChange System as a
line item in the Equipment Budget, and (c) will result in an increase in the
Monthly Fee as calculated in accordance with Section 8.2. 4MC further estimates
that the implementation period for the Alternate Server System may exceed eight
(8) months from the SeaChange Compliance Date, and the Actual Commencement Date
may be delayed as a result thereof. Further, pursuant to a purchase agreement
between 4MC and SeaChange dated April 10, 1998 (the "Purchase Agreement"), 4MC
has incurred approximately Two Million Seventy Thousand Four Hundred Fifty Four
Dollars and Thirty Five Cents ($2,070,454.35) in connection with the purchase,
installation and implementation of the SeaChange System and, if such system is
rejected and SeaChange fails to refund such sum to 4MC, TVN shall reimburse 4MC,
no later than August 1, 1999, for fifty percent (50%) of the amount of any
uncollected refund of such sum. One-half of any additional refund received by
4MC from SeaChange shall be paid to TVN as and when received. TVN shall also
share equally with 4MC all additional charges actually incurred and required to
be paid by 4MC to SeaChange for cancellation of the Purchase Agreement between
4MC and SeaChange.
6 New Services, Facility, Personnel and Equipment
-----------------------------------------------
8
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6.1 Description of New Services. From and after the Actual Commencement
---------------------------
Date, 4MC shall provide to TVN the New Services, including uplink, downlink,
feature and interstitial programming origination (including server control,
video server playout and server loading and storage), event programming
origination (including downlink, event monitoring and control, live insertions
and delayed broadcast), pass-through programming origination, digital music
service, monitoring and control, editing, audio and graphics, MPEG 2 encoding,
and other services and space such as library space, supervisor meetings, and
creative and technical support, all as more particularly described on Exhibit
"D" attached hereto and incorporated herein by this reference.
6.2 Execution of Sublease; New Services Facility. Concurrently with the
--------------------------------------------
execution of this Agreement, 4MC's parent, Four Media Company, shall enter into
a Sublease (the "Sublease") with TVN for the entire sixth floor of the building
located at 2901 West Alameda Avenue Burbank, California (the "Building"). The
form of the Sublease is attached hereto as Exhibit "N". TVN understands and
agrees that the Sublease requires the consent of the landlord under 4MC's lease
of the sixth floor of the Building ("Master Landlord"). Immediately upon
execution of the Sublease, 4MC shall deliver the Sublease to the Master Landlord
and obtain its approval, if required. If the Master Landlord fails to approve
the Sublease, then the Sublease shall be null and void and 4MC and TVN shall
either: (x) obtain such other space, including certain basement space in the
Building, as may be mutually agreed upon, and 4MC shall deliver said space as
soon as reasonably possible with leasehold improvements in accordance with a
floor plan reasonably consistent with the Sixth Floor Space Plans, as may be
agreed upon in good faith between 4MC and TVN, or (y) expand the New Services to
make available certain space on the sixth floor of the Building for TVN's use
and occupancy, subject to TVN's approval, to administer and supervise the New
Services, in which event the Monthly Fee shall be increased accordingly by an
amount appropriate for such expansion of the New Services to encompass such
sixth floor space to be made available for TVN's use and occupancy. The New
Services facility shall be located in (a) certain basement space in the Building
("Basement Space") and, (b) certain TVN-provided space on the sixth floor of the
Building consisting of approximately 7,400 square feet (the "Sixth Floor
Space"), which space is shown on the Floor Plans (as defined below) and shall be
suitable for all uses described in Exhibits "F" and "G" (the Basement Space and
the Sixth Floor Space (or other mutually approved space as described in Section
6.2(x)) together shall constitute the "Facility"). The Basement Space is
described on Exhibit "E" attached hereto, and the floor plan of such
reconfigured basement space is set forth on Exhibit "F" attached hereto (the
"Basement Floor Plan"). The Sixth Floor Space, including the floor plan thereof,
is described on Exhibit "G" attached hereto (the "Sixth Floor Space Plans"). The
Basement Floor Plan and the Sixth Floor Space Plans shall be together referred
to as the "Floor Plans". The rack elevation drawings for the Facility are
attached hereto as
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<PAGE>
Exhibit "H." TVN's execution of this Agreement shall be deemed TVN's approval of
the Floor Plans and the rack elevation drawings. TVN shall deliver possession of
the Sixth Floor Space to 4MC, for construction purposes only, upon the later of
(i) the commencement date of the Sublease or (ii) the Master Landlord's consent
thereto. No later than the Actual Commencement Date, 4MC shall make available to
TVN certain areas in the basement of the Building for TVN's use in accordance
with the provisions of 4MC's lease of such space, which areas are denoted as
"Office Space" and "Expansion Space" on the Basement Floor Plan (collectively,
the "Office Space"). Demolition and construction of the Basement Space and the
Sixth Floor Space in compliance with the mutually approved Floor Plans ("TVN
Improvements") shall commence upon receipt by 4MC of (i) approval by the Master
Landlord of the TVN Improvements, and (ii) all required building permits and
approvals for the TVN Improvements, which shall be 4MC's responsibility to
obtain. Promptly after execution of this Agreement, 4MC shall have a licensed
architect approved by TVN prepare plans and specifications for the TVN
Improvements, and upon completion thereof, shall request approval from the
Master Landlord and any and all applicable governmental agencies, as well as
approval from TVN, which approval shall not be withheld provided such plans and
specifications comply with the approved Floor Plans. Upon receipt of such
approvals and issuance of the required building permits, 4MC shall engage a
contractor acceptable to TVN and shall commence the TVN Improvements. With
respect to any and all material modifications to the TVN Improvements which TVN
desires to make with respect to either of the Floor Plans, the following
procedures shall apply:
(a) TVN shall submit to 4MC a request for a modification to either or
both of the Floor Plans;
(b) Within ten business days of 4MC's receipt of such request, 4MC
shall provide to TVN a written estimate of the anticipated increase or decrease,
if any, in the Equipment Budget based upon such request (the "Buildout Cost
Estimate"), and, if applicable, the amount of additional time necessary to build
out the Facility due to such modification ("Revised Buildout Schedule");
(c) TVN shall provide a written acceptance or rejection of the
Buildout Cost Estimate and the Revised Buildout Schedule within five business
days of its receipt of the Buildout Cost Estimate and Revised Buildout Schedule;
(d) If such acceptance or rejection is not received within five
business days of TVN's receipt of the Buildout Cost Estimate and Revised
Buildout Schedule, then such request shall not be implemented and 4MC shall
continue to build out the Facility in accordance with the unmodified Floor
Plans; or
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<PAGE>
(e) If TVN accepts the Buildout Cost Estimate and the Revised
Buildout Schedule (by delivering a written notice of such acceptance within such
five business day period), then 4MC shall promptly implement such requested
modifications to the Floor Plans. If TVN rejects the Buildout Cost Estimate
and/or the Revised Buildout Schedule (and delivers timely written notice of such
rejection to 4MC), then the parties shall meet and confer in an attempt to
arrive at a mutually acceptable Buildout Cost Estimate and Revised Buildout
Schedule. However, if the parties cannot resolve such issues within seven (7)
business days after TVN's delivery of the written rejection notice to 4MC, then
TVN's request for modification shall not be implemented and 4MC shall continue
to buildout the Facility in accordance with the unmodified Floor Plans. 4MC may
relocate all facilities and services to be provided hereunder to different
premises in Burbank so long as: (i) 4MC delivers reasonably sufficient advance
written notice to TVN specifying the nature of the planned move, the new
location, the floor plan and engineering plan for such premises, with all
equipment and rack elevations, (ii) such premises will be substantially
equivalent in utility to the Facility for providing the New Services to TVN,
(iii) the New Services can continue to be provided to TVN as described in this
Agreement and (iv) TVN approves of such relocation in writing. Notwithstanding
the foregoing, 4MC shall have the right to relocate the two uplink antennae (as
described in Section 1.1 of Exhibit "D") and the four downlink antennae (as
described in Section 3.1 of Exhibit "D") (or substitute equivalent antennae),
earth station equipment, generators, UPS, interconnect circuits and equipment,
all of which are utilized in connection with the New Services, to other
locations within the "4MC Campus" (i.e., the Building and its associated parking
structure, 2813 W. Alameda, 2820 W. Olive and all contiguous exterior space)
with TVN's prior written consent, which consent may not be unreasonably
withheld. If, however, such relocation results in a Service Interruption (as
hereinafter defined), TVN shall be entitled to liquidated damages in an amount
based on Twenty Five Thousand Dollars ($25,000) per day for each full day, or a
prorated portion thereof for any partial day, of such Service Interruption until
full service is restored, and if there is a Continuous Service Failure (as
defined in Section 12.3), TVN may immediately terminate this Agreement upon
written notice to 4MC. In connection with the Interim Services, 4MC currently
provides TVN with certain technical and office space located in the basement of
the Building. TVN acknowledges that in order for 4MC to provide the New Services
to TVN, TVN will be required to vacate and remove equipment and property from a
mutually agreed portion of such space in order to allow 4MC to reconfigure and
reallocate such space in accordance with the Basement Floor Plan. TVN shall
deliver such space to 4MC and shall remove any and all of TVN's property and
equipment from such space no later than August 1, 1999.
6.3 New Services Personnel. The personnel to be employed by 4MC to
----------------------
11
<PAGE>
perform the New Services shall be referred to herein as the "New Services
Personnel". Exhibit "I" attached hereto and incorporated herein by reference
sets forth the position (including job description and qualifications) of each
New Services Personnel and the individual (by job description) and aggregate
budget for the New Services Personnel (the "Personnel Budget"). For each
individual position, the Personnel Budget includes base compensation, benefits
and taxes. TVN's execution of this Agreement shall be deemed TVN's approval of
the positions and persons included within the New Services Personnel (including
job description and qualifications) and the Personnel Budget. From time to time
after the execution of this Agreement but in any event no less than thirty (30)
days prior to the Actual Commencement Date, 4MC and TVN shall jointly determine
the individuals to be employed by 4MC for each position listed on Exhibit "I".
TVN may recommend a prospective employee to be hired by 4MC, and subject to 4MC
complying with its normal hiring practices (including background checks on all
prospective employees), 4MC shall employ such recommended individual. If TVN
recommends a prospective employee whose total compensation exceeds the amount
set forth for such position on Exhibit "I", such individual shall be employed by
4MC, so long as the aggregate compensation for all New Services Personnel does
not exceed the Personnel Budget. If the total compensation of such individual
would cause the Personnel Budget to be exceeded, any overage will be billed pro
rata to TVN monthly.
(a) TVN shall have the right, but not the obligation, to
supervise and direct all New Services Personnel (except for earth station and
engineering personnel other than those listed on Exhibit "I"), as well as 4MC
personnel (except for earth station and engineering personnel other than those
listed on Exhibit "I") performing any other broadcast services for TVN. With
respect to earth station personnel dealing with TVN's transponders, 4MC and TVN
shall create mutually approved procedures for such personnel. Such personnel
shall be under TVN's direction and control with respect to their services
related to TVN's transponders; TVN shall not knowingly compromise security
within the Facility.
(b) At any time during the Term, TVN may request in writing the
removal of any or all of the New Services Personnel. 4MC shall remove and
replace such staff within forty eight (48) hours of such request, subject to
availability of suitable staff replacements. Notwithstanding the foregoing, if
any New Services Personnel has committed an act of gross negligence or
misconduct, fraud or theft, or willful disobedience of TVN's direction, then
such staff member shall be removed immediately.
(c) TVN acknowledges that from time to time it may be necessary
for 4MC to hire or assign temporary or interim personnel. 4MC shall use its best
efforts to ensure that such temporary or interim personnel shall be qualified in
accordance with Exhibit "I" for the position to which such personnel are
assigned, and TVN shall have
12
<PAGE>
the right to approve the hiring of all such temporary or interim personnel,
which approval shall not be unreasonably withheld.
(d) TVN acknowledges that from time to time it may be necessary for
4MC to hire replacement New Services Personnel. In such event, 4MC shall deliver
to TVN a notice containing the name of the proposed replacement personnel and a
statement that such personnel is qualified under Exhibit "I" (a "Replacement
Notice"). TVN shall have the right to approve or disapprove such replacement
personnel for any lawful reason. If TVN has not approved or disapproved such
replacement personnel within three (3) business days after receipt of the
Replacement Notice, TVN shall be deemed to have approved such replacement
personnel. TVN's notice to 4MC of TVN's disapproval of any particular
replacement personnel shall state the particular reason for TVN's disapproval.
(e) From time to time during the Term, TVN may request that 4MC
increase the compensation (or pay a bonus) to a particular New Services
Personnel. If such increased compensation or bonus would not cause the aggregate
Personnel Budget to be exceeded, then 4MC shall implement such compensation
increase and/or bonus, as applicable. However, if such increase and/or bonus,
when added to the aggregate actual total compensation of New Services Personnel,
exceeds the amount of the Personnel Budget, then TVN shall be responsible for
payment of the amount of any such excess.
(f) If TVN directs either Interim Services Personnel and/or New
Services Personnel to perform a task and the performance of such task causes
such Interim Services Personnel and/or New Services Personnel not to perform the
Interim Services and/or the New Services, as applicable, in accordance with the
terms hereunder, 4MC shall not be liable for any problems and/or failure of the
Interim Services and/or New Services, as applicable, caused by such direction to
perform such task or any required redeployment of personnel.
6.4 Equipment for New Services. Upon the execution of this Agreement, 4MC
--------------------------
shall commence the development, design, construction and/or installation of the
equipment necessary to provide the New Services to TVN at the Facility. During
the first thirty (30) days following the execution of this Agreement, 4MC shall
place orders for the equipment to be utilized by 4MC to provide the New
Services, which list of equipment is set forth on Exhibit "J" attached hereto
and incorporated herein (the "Equipment"); provided, however, that certain items
of Equipment for which technical specifications require more time shall be
ordered within sixty (60) days following the execution of this Agreement. TVN's
execution of this Agreement shall be deemed TVN's approval of the Equipment
necessary the provide the New Services. TVN shall provide certain equipment and
other property for 4MC's use in performing the New
13
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Services for TVN, at TVN's expense and in conformance with 4MC's implementation
schedule, which equipment and other such property is set forth in Exhibit "K"
hereto. TVN's execution of this Agreement shall be deemed TVN's approval of such
Exhibit "K" equipment and property to be used in connection with the New
Services, as well as the implementation schedule prepared by 4MC, and attached
hereto as Exhibit "M" (the "Implementation Schedule"). Such Exhibit "K"
equipment and Exhibit "K" property shall remain the property of TVN, and TVN
shall provide 4MC with access to and use of such equipment and property in good
working order during the Term. The two (2) Sony FlexiCart systems owned by TVN
shall be used by TVN as it sees fit, and shall not be part of the equipment
provided by TVN in order for 4MC to provide the New Services, nor shall 4MC be
responsible for the operation and maintenance of these two (2) systems.
6.5 Supervision and Control By TVN. Notwithstanding any other provision of
------------------------------
this Agreement to the contrary, 4MC acknowledges that TVN shall have the right
to supervise and direct the selection, integration, installation, maintenance
and any redesign and/or redeployment of the Facility, the New Services, the New
Services Personnel, the Interim Services, the Interim Services Personnel and the
Equipment, and 4MC shall provide all of such services and manage such personnel
under TVN's direct supervision and control, consistent with the terms of this
Agreement.
6.6 Availability of Certain Rooms Within Facility. The edit bays, graphic
---------------------------------------------
rooms, sound rooms and other similar facilities within the Facility shall be
available to TVN twenty-four (24) hours each day, seven (7) days a week.
Notwithstanding the foregoing, TVN acknowledges that although all such rooms
shall be available twenty-four (24) hours each day, 4MC's staff and support with
respect to such rooms within the Facility shall only be available for forty (40)
hours per week to provide the applicable New Services, as more particularly set
forth on Exhibits "D" and "I" attached hereto. If TVN staffs any of such rooms
with its own personnel during periods when 4MC's staff is not present, TVN shall
be responsible for any operator error that occurs during such periods, and for
any damage caused by TVN's use of the Equipment in such rooms during such
periods. All other rooms in the Facility will be available to TVN twenty-four
(24) hours each day, and staffed in accordance with Exhibit "D," to provide the
applicable New Services.
6.7 TVN's Right to Locate or Relocate Certain Equipment. During the Term
---------------------------------------------------
or any Renewal Term, TVN shall have the right to request the location or
relocation of the editing, audio and graphics facilities, together with all
equipment related thereto. With respect to TVN's request for the original
location of any such facilities, 4MC shall timely accommodate such request and
implement such location. If TVN desires to relocate any such editing, audio
and/or graphics facilities, TVN shall obtain 4MC's prior
14
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written consent to such relocation, which consent shall not be unreasonably
withheld. TVN will bear all direct actual increased costs incurred as a result
of such location, and shall bear the entire cost of the relocation, including,
without limitation, moving costs, installation, buildout, increased travel costs
associated with affected New Services Personnel, other mutually approved costs
relating to affected New Services Personnel, and increased maintenance and
support costs of such relocated facilities, such payment to be received no later
than 30 days after TVN's receipt of the applicable invoice, with supporting
documentation.
6.8 Location of Certain Antennae. TVN acknowledges that 4MC shall have the
----------------------------
right to locate the four (4) receive-only antennae necessary to provide the New
Services to any location on the 4MC Campus so long as (a) such antennae provide
the same functionality as they would provide if located on the roof of the
Building, (b) TVN incurs no cost in connection with such location and (c) no
Service Interruption occurs during, or as result of, such location.
7. Term; Renewal Terms
-------------------
The term of this Agreement shall commence on the execution hereof and shall
continue until November 30, 2004 (the "Term"). TVN shall have the right to renew
this Agreement, in its sole discretion, for two (2) additional two (2)-year
periods (each a"Renewal Term"), upon TVN's delivery to 4MC of a renewal notice
(a "Renewal Notice") at least nine (9) months prior to the expiration of the
Term, or at least three (3) months prior to the expiration of the first Renewal
Term, as applicable. Upon TVN's exercise of the first two (2)-year Renewal Term,
the term of the Sublease shall expire on January 30, 2010 rather than January
30, 2005.
8. Consideration
-------------
8.1 Consideration for Services. In full and complete consideration for
--------------------------
4MC's provision of the Original Services, the Interim Services, the New Services
and other technical and engineering design services, TVN shall pay to 4MC and
4MC shall accept from TVN payments in the following amounts:
(a) Two Million One Hundred Sixty-Two Thousand Dollars ($2,162,000)
for technical and engineering design services performed by 4MC to and including
August 2, 1998 in connection with the buildout of the Facility, which TVN agreed
to pay to 4MC subject to the execution of this Agreement. TVN's obligation to
pay is represented by a promissory note for such amount with interest accruing
at the
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rate of six percent (6%) per annum compounded monthly from August 2, 1998 with
principal and interest payable in sixty (60) equal monthly installments of
Forty-One Thousand Seven Hundred Ninety-Seven Dollars and Fifty-Two Cents
($41,797.52) commencing on September 1, 1998 and the first day of each month
thereafter. A copy of the Promissory Note dated August 2, 1998 (the "Fiscal 1998
Note") is attached hereto as Exhibit "B".
(b) For the period from the date of execution of this Agreement
through July 31, 1999, TVN shall pay to 4MC for the Original Services and the
Interim Services a monthly fee equal to the Reduced Interim Monthly Fee,
prorated for any partial month. For the period commencing August 1, 1999 until
the Actual Commencement Date or November 1, 1999, whichever occurs earlier, the
Reduced Interim Monthly Fee shall increase to Three Hundred Seventy-Five
Thousand Dollars ($375,000) per month, pro rated for any partial month. Such
rate shall continue in effect from November 1, 1999 until the Actual
Commencement Date.
(c) For the period from the Actual Commencement Date to the
expiration of the Term, TVN shall pay to 4MC for the New Services and 4MC shall
accept from TVN a monthly fee equal to Four Hundred Seventy-Nine Thousand Two
Hundred Dollars ($479,200) (the "Monthly Fee"), prorated for any partial month.
(d) If this Agreement is renewed by TVN, then the Monthly Fee for the
year commencing on the first day of the first Renewal Term shall be Five Hundred
Fourteen Thousand Dollars ($514,000), subject to reduction in accordance with
Section 19.1. Each year thereafter during the Renewal Term, the Monthly Fee
shall increase by Ten Thousand Dollars ($10,000), subject to reduction in
accordance with Section 19.1.
(e) For each increase in the number of transponders in excess of
fifteen (15) to which 4MC uplinks hereunder, and for each decrease in the number
of transponders below fifteen (15) to which 4MC uplinks hereunder, in response
to a written request by TVN for such increase or decrease, as applicable, the
Monthly Fee shall increase (or decrease, as applicable) by Eight Thousand
Dollars ($8,000). Such Monthly Fee increase (or decrease, as applicable) shall
be effective as of the date the increased (or decreased) uplink service
commences (prorated for any partial month) and shall remain in effect for so
long as such increased (or decreased) uplink service is in effect.
(f) Unless otherwise expressly set forth in this Agreement, any costs
that are incurred by 4MC in order for 4MC to perform its obligations under this
Agreement shall be the sole and exclusive responsibility of 4MC, except that TVN
shall be responsible for the payment of any federal, state and/or municipal
sales tax and/or
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Universal Service telecommunications surcharge imposed for the performance of
the New Services, should any such tax be imposed and become due and payable
during the Term.
(g) 4MC shall send invoices to TVN for the Interim Monthly Fee, the
Reduced Interim Monthly Fee, or the Monthly Fee (all such fees collectively, the
"Fees"), as applicable, fourteen (14) days prior to the commencement of each
such month. Such fees shall be due on the first day of each month during the
Term. Any additional or occasional services requested by TVN (as described in
Section 8.6) shall be billed separately at the completion of such service and
shall be due within thirty (30) days from the date of invoice. All payments to
4MC hereunder shall be paid by check or via wire transfer to 4MC's bank account
at Tokai Bank ABA #122034268, 300 South Grand Avenue, Los Angeles, CA 90071,
Account #015-507276, 4MC-Burbank, Inc., or any other bank account designated by
4MC in writing.
8.2 Equipment Budget
----------------
(a) Attached hereto as Exhibit "J" is a detailed schedule of the
budgeted initial capital expenditures 4MC will make for the Equipment and the
wiring, installation and build-out of the Facility, including taxes and shipping
charges (the "Equipment Expenditures"), in the amount of approximately Ten
Million Dollars ($10,000,000) (the "Equipment Budget"). TVN's execution of this
Agreement shall be deemed TVN's approval of the Equipment Budget and all items
of Equipment shown thereon, and, following such execution, 4MC shall place
orders for all Equipment not heretofore ordered by 4MC in accordance with
Section 6.4 and so notify TVN in writing (together with copies of all such
orders). Within one hundred eighty (180) days after the Actual Commencement
Date, 4MC shall notify TVN of 4MC's actual Equipment Expenditures, which notice
shall be accompanied by reasonably detailed written evidence of such
expenditures by 4MC. If 4MC's aggregate actual documented costs of the Equipment
Expenditures (i) are lower than the Equipment Budget, then for each One Thousand
Dollar ($1,000) decrease in actual documented costs of the Equipment
Expenditures from the Equipment Budget, the Monthly Fee shall decrease by Twenty
Six Dollars ($26) (it being understood and agreed that the calculation of any
decrease in the Monthly Fee in accordance with this Section 8.2(a) (i) shall be
based on such One Thousand Dollars ($1,000) to Twenty Six Dollars ($26)
proportion), or (ii) are higher than the Equipment Budget, than for each One
Thousand Dollar ($1,000) increase in actual documented costs of the Equipment
Expenditures over the Equipment Budget (up to a maximum Fifteen Million Dollars
($15,000,000) in Equipment Expenditures), the Monthly Fee shall increase by
Twenty One Dollars and Twenty Six Cents ($21.26) (it being understood and agreed
that the calculation of any increase in the Monthly Fee in accordance with this
Section 8.2(a)(ii) shall be based on
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<PAGE>
such One Thousand Dollars ($1,000) to Twenty One Dollars and Twenty Six Cents
($21.26) proportion). For illustration purposes only, assume that within one
hundred eight (180) days after the Commencement Date, 4MC delivers documentation
to TVN which demonstrates that the aggregate actual documented costs of the
Equipment Expenditures total Nine Million Nine Hundred Thousand Dollars
($9,900,000), resulting in a decrease of One Hundred Thousand Dollars ($100,000)
from the Equipment Budget. In such example, an amount equal to Two Thousand Six
Hundred Dollars ($2,600) would be deducted from the Monthly Fee. If, on the
other hand, 4MC delivers documentation to TVN which demonstrates that the
aggregate actual documented costs of the Equipment Expenditures total Eleven
Million Dollars ($11,000,000), resulting in an increase of One Million Dollars
($1,000,000) over the Equipment Budget, then, in such example, the Monthly Fee
would increase by Twenty One Thousand Two Hundred Sixty Dollars ($21,260).
During the period from the Actual Commencement Date to the date of completion of
the reconciliation of the actual Equipment Expenditures (the "Calculation
Date"), TVN shall pay to 4MC the full Monthly Fee. If the calculation of the
actual Equipment Expenditures results in a decrease or an increase of the
Monthly Fee, then the difference between (x) the total Monthly Fees paid from
the Actual Commencement Date to the Calculation Date, and (y) the amount of
Monthly Fees that should have been paid from the Actual Commencement Date to the
Calculation Date shall be determined. Such amount (the "Difference") shall then
be divided by the number of months remaining during the Term, and the resulting
amount shall be deducted from (or added to) each Monthly Fee payment owing
through the remainder of the Term, as applicable.
(b) Notwithstanding the provisions contained in subparagraph (a)
above, if TVN submits to 4MC a request for changes and/or additions to the
Equipment that would result in an increase or decrease in the Equipment
Expenditures and/or delays in the Implementation Schedule and/or the Actual
Commencement Date, then within ten (10) business days of 4MC's receipt of such
notice 4MC shall provide to TVN written notification of the following: (i) a
written estimate of the anticipated increase or decrease in the Equipment
Expenditures based on such request (the "Cost Estimate") and, (ii) if
applicable, revisions to the Implementation Schedule and the Actual Commencement
Date necessitated by such changes and/or additions ("Revised Implementation
Schedule"). TVN shall provide a written acceptance or rejection of such change
and/or addition within ten (10) business days of its receipt of the Cost
Estimate and Revised Implementation Schedule, if any. As and when TVN delivers
such written acceptance to 4MC, 4MC shall promptly implement the requested
change. If such acceptance or rejection is not received within ten (10) business
days of TVN's receipt of the Cost Estimate and Revised Implementation Schedule,
then such request shall not be implemented and 4MC may purchase the original
Equipment as provided hereunder. TVN acknowledges that any additions to the
Equipment must be technically
18
<PAGE>
compatible with 4MC's existing systems and Equipment. Notwithstanding the
foregoing, 4MC acknowledges that, during the period commencing after the Actual
Commencement Date up to the fourth anniversary of the Actual Commencement Date,
TVN shall have the right to request that 4MC purchase additional equipment up to
a maximum aggregate amount of Fifteen Million Dollars ($15,000,000) (including
the Equipment Expenditures) (the "Additional Capital Equipment") for TVN's use,
whether or not used to provide the New Services, so long as (a) such Additional
Capital Equipment is financable by 4MC and (b) if any such Additional Capital
Equipment is to be located anywhere other than the Facility, TVN shall obtain
4MC's prior written consent to such location, which consent shall not be
unreasonably withheld. Upon any such request from TVN, 4MC shall purchase such
Additional Capital Equipment after following the procedures described in this
subparagraph (b), and the Monthly Fee shall be increased by the amount of
dollars per $1,000 increase set forth on Exhibit "L", depending upon the date of
acquisition of the particular piece of Additional Capital Equipment, which
increase shall be effective as of the date set forth in Exhibit "L".
(c) The parties acknowledge that any changes to the SeaChange System
or routing switcher must be mutually approved in writing prior to the date on
which 4MC places the order for such systems, which approximate date is set forth
on the Implementation Schedule attached hereto as Exhibit "M". Changes to other
subsystems listed on the Implementation Schedule must be requested prior to the
date on which 4MC implements the migration from the existing one-inch
videotape-based facility and interim server to the SeaChange System or the
Alternate Server System, as more particularly described on Exhibit "M".
(d) TVN acknowledges that 4MC has committed to spending no more than
Fifteen Million Dollars ($15,000,000) in actual Equipment Expenditures
(including any Additional Capital Equipment) in connection with 4MC's
implementation and provision of the New Services.
(e) 4MC acknowledges that the Facility, the Equipment and any
Additional Capital Equipment shall be used by 4MC solely to provide the Interim
Services and/or New Services for TVN, and may not be used, or made available for
use, by any third party without TVN's prior written consent.
(f) The Equipment Budget includes, and is not in addition to, the
"Sublessee's Improvements" (as defined in the Sublease) to be provided by 4MC
(or provided by TVN and reimbursed by 4MC) pursuant to the terms of the
Sublease.
8.3 Additional Equipment. At TVN's request and according to TVN's need,
--------------------
4MC shall use its best efforts to provide supplementary rental equipment from an
outside source as requested throughout the Term, so long as such supplementary
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equipment is reasonably available, and the parties mutually agree on the rate to
be charged to TVN for such equipment.
(a) In the event TVN so elects, and with the exception of uplink
service equipment, TVN shall have the right to rent or lease additional
equipment (i.e., other than the equipment supplied by 4MC pursuant to this
Agreement) (the "Additional Equipment") from a source other than 4MC; provided,
however that, upon written notice to 4MC, TVN shall grant 4MC a first right to
bid on the securing of the Additional Equipment for TVN on terms and conditions
that are no less favorable than those offered to TVN by such other sources and
provided further that 4MC notifies TVN that 4MC elects to exercise such option
within three (3) business days of its grant (or if TVN has an immediate need for
certain Additional Equipment, 4MC shall have the same period of time as other
sources to provide such Additional Equipment, and if 4MC fails to provide such
Additional Equipment within such specified period of time, TVN may obtain such
Additional Equipment from another source). So long as 4MC can provide such
Additional Equipment to TVN on terms and conditions no less favorable than those
offered by other sources, TVN shall obtain the Additional Equipment from 4MC (or
any source for which 4MC is acting as an agent or representative), and 4MC shall
use its best efforts to supply the same and TVN shall pay 4MC an amount not less
than the rate that would have been charged by a third party. 4MC shall give TVN
or its designee 24-hour per day access to such Additional Equipment.
(b) If 4MC elects not to secure the Additional Equipment for TVN,
with the exception of uplink service equipment, TVN may then rent or lease the
Additional Equipment from any outside source engaged by TVN, provided such
Additional Equipment is reasonably compatible with the existing Equipment
located at the Facility and is delivered to 4MC in good and proper working
order. Any Additional Equipment installed from an outside source engaged by TVN
shall be installed and maintained at TVN's expense and liability or, if TVN
elects, TVN may engage 4MC to install and maintain such Additional Equipment.
Notwithstanding the foregoing, if any Additional Equipment to be installed in
the Facility relates to network origination services, then 4MC shall timely
install and maintain such Additional Equipment. 4MC shall have the right to
inspect the Additional Equipment prior to installation to confirm that such
Additional Equipment is not defective and is reasonably compatible with the
existing Equipment required pursuant to this Agreement. TVN shall be solely
responsible for any damages to the Additional Equipment and/or any materials
supplied by TVN hereunder which are a direct result of any installation of
Additional Equipment by a person or an entity other than 4MC or 4MC's designee.
Further, TVN shall be liable to 4MC for any damages to 4MC's equipment,
personnel and/or the Facility which are directly caused by such installation by
a person or an entity other than 4MC or 4MC's designee.
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8.4 Additional Personnel. TVN may request that additional personnel
--------------------
be added to the New Services Personnel complement provided by 4MC at any time
and from time to time. 4MC shall comply with the provisions of Section 6.3(e)
(which deals with replacement personnel) in connection with providing additional
New Services Personnel pursuant to TVN's request (except that the Notice shall
include the proposed total compensation of such additional personnel). If the
proposed total compensation for any additional New Services Personnel falls
within the Personnel Budget, then TVN shall not be required to make any
additional payments to 4MC on account of such additional personnel. To the
extent that any or all of the total compensation of such additional personnel,
when added to the aggregate existing compensation of New Services Personnel, is
in excess of the Personnel Budget, any such excess amount shall be billed to,
and payable by, TVN.
8.5 Overtime, Weekend and Holiday Hours. TVN shall pay overtime hours
-----------------------------------
for services worked by any or all Editors and MPEG Encoding Operators (as
defined in Exhibit "I") in excess of their regular hours in accordance with the
schedule attached hereto as Exhibit "O." The fee for any overtime hours, weekend
hours or holiday hours shall be prorated to the quarter-hour.
8.6 Additional Services. From and after the Commencement Date, TVN shall
-------------------
have the right, but not the obligation, to use all other services and/or
equipment and/or facilities of 4MC and/or its affiliates, including without
limitation, editing, titling, duplication, sound editing, graphics, production
and post-production services, not otherwise provided hereunder in connection
with TVN's production, post-production and network origination activities. TVN
shall be given scheduling priority over other customers of 4MC and its
affiliates (i.e., if TVN and another customer simultaneously request the same
services and/or equipment and/or facilities, TVN shall be given priority).
Notwithstanding the foregoing, 4MC shall have no obligation to "bump" a customer
that has previously scheduled services and/or equipment and/or facilities in
favor of TVN. In consideration for 4MC's provision of such additional services
and/or equipment and/or facilities, 4MC shall charge TVN the prices set forth on
the rate card attached hereto as Exhibit "P."
9. Default and Remedies; Termination.
---------------------------------
9.1 Payment Default. In the event of TVN's failure to pay any amounts
---------------
hereunder when due, TVN shall be in default of this Agreement and 4MC shall
deliver to TVN written notice of TVN's payment default (the "Payment Notice").
TVN shall then have five (5) business days from the date of receipt of such
Payment Notice to pay
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such delinquent amounts. A "Payment Default" shall be deemed to exist if such
payment is not received by 4MC within five (5) business days after TVN's receipt
of the Payment Notice, and upon such Payment Default, interest shall accrue on
any delinquent amounts due hereunder at the rate of one and one-half percent
(1-1/2 %) per month, and 4MC shall have the right to terminate this Agreement by
written notice to TVN and, in 4MC's sole option, cease all Original and Interim
Services, or New Services (if they have begun), for TVN without incurring any
liability on 4MC's part, and terminate the Sublease. In the event of a
termination of this Agreement pursuant to a Payment Default, TVN shall remain
liable for any unpaid Fees and charges and all Fees and charges that would have
been due for the remainder of the Term, or the applicable Renewal Term, had no
Payment Default occurred, subject to (a) the provisions of Section 9.5 herein,
and (b) application of a present value discount at the rate of six percent (6%).
All such Fees and charges shall be due and payable within seven (7) days after
TVN's receipt of the termination notice.
9.2 Other TVN Default. Upon the occurrence of the following: (a) any
-----------------
material breach of TVN's warranties or covenants in Section 14.1 herein or any
other representation, warranty or covenant contained herein; or (b) any default
under the Fiscal 1997 Note, the Fiscal 1998 Note or the Sublease; or (c) if TVN
or any parent or subsidiary of TVN shall seek relief under any applicable
bankruptcy statute, is placed in receivership, makes an assignment for the
benefit of creditors or commences a winding up or termination of its business
(each, a "TVN Default" hereunder), 4MC shall deliver written notice to TVN of
such TVN Default (the "TVN Default Notice"). TVN shall have five (5) business
days from the date of receipt of the TVN Default Notice to cure such TVN
Default, or if such TVN Default is not capable of cure within such five (5)
business day period, TVN shall have an additional ten (10) business days to cure
such default. If TVN fails to cure such TVN Default within such five (5)
business day period (or, if applicable, within the additional ten (10) business
day period), 4MC, at its sole option, may terminate this Agreement by written
notice to TVN and cease all Interim Services and New Services to TVN without
incurring any liability on 4MC's part, and terminate the Sublease. TVN
acknowledges that any payment default described in Section 9.2(b) is curable
within five (5) business days of receipt of the TVN Default Notice.
Notwithstanding the foregoing, upon a TVN Default under Section 9.2(c), 4MC may
immediately terminate this Agreement upon written notice to TVN and cease all
Original and Interim Services, or New Services (if they have begun) for TVN.
Upon termination of this Agreement due to a TVN Default, TVN shall remain liable
for any unpaid Fees and charges and all Fees and charges that would have been
due for the remainder of the Term, or the applicable Renewal Term, had no TVN
Default occurred, subject to (a) the provisions of Section 9.5 herein, and (b)
application of a present value discount at the rate of six percent (6%). All
such Fees and charges shall be due and payable within seven (7) days after TVN's
receipt of the termination notice.
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9.3 4MC Default; TVN Termination. In addition to any other termination
----------------------------
rights TVN may have under this Agreement, upon the occurrence of the following:
(a) any material breach of 4MC's warranties or covenants in Section 14.2 or any
other representation, warranty or covenant of 4MC contained herein, or (b) if
4MC or its parent shall seek relief under any applicable bankruptcy statute, is
placed in receivership, makes an assignment for the benefit of creditors or
commences a winding up or termination of its business (each a "4MC Default"),
TVN shall deliver written notice to 4MC of such 4MC Default (the "4MC Default
Notice"). 4MC shall have five (5) business days from the date of receipt of the
4MC Default Notice to cure such 4MC Default, or if such 4MC Default is not
capable of cure within such five (5) business day period, 4MC shall have an
additional ten (10) business days to cure such default. 4MC acknowledges that
nothing in this Section 9.3 shall (a) limit the performance standards and
specifications with which 4MC must comply pursuant to Article 12 herein and the
credits and termination rights contained therein or (b) limit or affect the
penalty provisions contained in Section 5.3. If 4MC fails to cure such 4MC
Default within such five (5) business day period (or, if applicable, within the
additional ten (10) business day period), TVN may, at its sole option,
immediately terminate this Agreement upon written notice to 4MC, in which event
(a) TVN shall have the right to acquire the Equipment in accordance with the
provisions of Section 9.6 herein, and (b) TVN shall remain liable for any unpaid
Fees and charges owing to the date of termination (less any damages, including
moving costs, incurred by TVN). Notwithstanding TVN's termination of this
Agreement under this Section 9.3, (x) the Sublease shall not automatically
terminate, but may be terminated at TVN's sole discretion, provided that TVN
delivers written notice to 4MC at least four (4) months prior to the date TVN
desires to terminate the Sublease, and (y) if TVN desires to acquire the
Equipment as provided in Section 9.6 and assumes responsibility for the New
Services, 4MC shall use its best efforts to permit TVN to continue to occupy the
Sixth Floor Space and the Basement Space for a period of time equal to the
remainder of the Term (or, if such termination occurs during a Renewal Term, the
remainder of such Renewal Term), either by requesting that the Master Landlord
enter into a direct lease with TVN for such space or by subleasing the Sixth
Floor Space and the Basement Space to TVN. If TVN terminates this Agreement in
accordance with the provisions of this Section 9.3 or Sections 5.3, 6.2(e), 12.3
or 15.2, TVN shall remain liable for any unpaid Fees and charges for services
rendered by 4MC prior to the date of such termination (less any damages,
including moving costs, incurred by TVN), which Fees and charges shall be due
and payable within seven (7) days after the date of TVN's termination notice,
but shall not be liable for any Fees and charges that would have been due for
services for the remainder of the Term. If TVN terminates this Agreement for any
other reason, TVN shall remain liable for any unpaid Fees and charges and all
Fees and charges that would have been due for the remainder of the Term, or the
applicable Renewal Term, subject to : (a) the provisions
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of Section 9.5 herein, and (b) application of a present value discount at the
rate of six percent (6%). All such fees and charges shall be due and payable
within seven (7) days after the date TVN terminates this Agreement. If TVN
terminates this Agreement by reason of a 4MC Default, 4MC will cooperate with,
and use its best efforts to assist, TVN to achieve the least disruptive
transition, over a reasonable period of time, to another facility and another
services provider of TVN's choice (unless TVN opts to acquire the Equipment,
remain at the Facility and assume responsibility to provide its own comparable
services), and 4MC shall continue to supply as many of the New Services as it is
capable of continuing to provide, at a pro rata Monthly Fee rate, until the move
to another facility is completed by TVN (which date shall in no event be later
than twelve [12] months after the date of 4MC's receipt of TVN's termination
notice).
9.4 Disputed Amounts. With respect to any adjustments based upon Equipment
----------------
Expenditures as described in Section 8.2 or other payments owed by TVN to 4MC
pursuant to invoices prepared by 4MC hereunder, TVN shall have the right to
reasonably contest any such invoices (within thirty [30] days of receipt of such
invoices) by requiring 4MC to provide written documentation substantiating any
such invoices. To the extent the parties cannot agree on a particular invoice,
both parties shall submit the relevant calculations and any relevant
documentation to a mutually approved independent third party accounting firm of
national standing who shall promptly render its decision as to the appropriate
payment obligation in writing, which decision shall be final and binding on the
parties. The fees and costs of such accounting firm shall be shared equally by
4MC and TVN. Payment of any contested amount shall be made within ten (10) days
of TVN's receipt of the independent third party accounting firm's written
decision, such payment to be in the amount specified in such written decision.
Notwithstanding the foregoing, TVN acknowledges that it shall have no offset
rights with respect to the Interim Monthly Fee and the Monthly Fee.
9.5 Duty to Mitigate. If either party terminates this Agreement due to the
----------------
other party's default or for any other reason, the non-defaulting party's rights
and remedies shall be subject to such party's obligation to use reasonable
efforts to mitigate such party's damages, including without limitation, 4MC
using reasonable efforts to secure replacement customers to utilize the
Facility, the Equipment and/or the New Services during the period remaining
under the Term and/or using reasonable efforts to sell the Equipment and/or TVN
finding replacement service providers to provide services substantially
equivalent to the New Services, as applicable.
9.6 TVN's Option to Acquire Equipment Upon 4MC Default. If TVN delivers a
--------------------------------------------------
termination notice to 4MC based upon a 4MC Default, then TVN shall have the
right and option to acquire the Equipment listed on Exhibit "J", as amended from
time to time, and the Additional Capital Equipment by TVN's delivery of written
notice to 4MC,
24
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within five (5) days after the date of the termination notice, of TVN's desire
to exercise such option to acquire the Equipment.
(a) If 4MC owns the Equipment, then the purchase price for the
Equipment and the Additional Capital Equipment shall be the undepreciated net
book value of the Equipment and the Additional Capital Equipment as of the date
of purchase (based upon straight line depreciation calculated over sixty [60]
months (without reference to salvage value)) plus the fourteen percent (14%)
residual value of the Equipment and the Additional Capital Equipment.
Concurrently with TVN's delivery of such sum to 4MC, 4MC shall assign and
deliver to TVN a bill of sale in form acceptable to TVN conferring good and
marketable title to all of the Equipment and the Additional Capital Equipment,
free and clear of all liens and encumbrances (it being understood that 4MC's
delivery of the Equipment and the Additional Capital Equipment free and clear of
encumbrances shall occur as soon as practicable after 4MC's lender has released
its lien on the Equipment and the Additional Capital Equipment, which release it
shall be 4MC's responsibility to obtain from such lender).
(b) If 4MC leases the Equipment and the Additional Capital Equipment
under equipment leases and/or other financing documents, then 4MC shall use its
best efforts to cause all such equipment leases to be assigned to TVN. If the
applicable equipment lessors will not permit such assignment, then 4MC shall
keep all such leases in full force and effect if and only if TVN timely pays all
monthly lease fees (and any other applicable fees in connection with such lease)
to 4MC, at which time 4MC will timely forward all such fees to the applicable
equipment lessor. TVN will assume any and all obligations under the applicable
equipment leases with respect to maintenance of the Equipment and the Additional
Capital Equipment. At the end of the applicable lease term, TVN shall timely pay
the residual value of the Equipment and the Additional Capital Equipment to 4MC,
at which time 4MC will timely forward such amount to the applicable equipment
lessor. Upon 4MC's acquisition of the Equipment and the Additional Capital
Equipment upon payment of such residual value, 4MC will timely transfer title to
the Equipment and the Additional Capital Equipment to TVN by delivery of a bill
of sale in form acceptable to TVN, free and clear of all liens and encumbrances
(it being understood that 4MC's delivery of the Equipment and the Additional
Capital Equipment free and clear of encumbrances shall occur as soon as
practicable after 4MC's lender has released its lien on the Equipment and the
Additional Capital Equipment, which release it shall be 4MC's responsibility to
obtain from such lender).
(c) The parties acknowledge that if TVN exercises its option
to acquire the Equipment and the Additional Capital Equipment pursuant to this
Section 9.6, TVN shall acquire all of the Equipment listed on Exhibit "J (except
for the generator, which shall be excluded from such acquisition unless the
provisions of Section 19.5 are
25
<PAGE>
applicable), and shall not have the right to acquire less than all of the
Equipment and Additional Capital Equipment.
10. Facility Security
-----------------
10.1 Generally. In order to secure the Facility, 4MC shall issue a badge
---------
or other form of identification to all personnel authorized to access the
technical, non-business office sections of the Facility. The badge or other form
of identification shall display the name and photograph of the authorized
person. TVN acknowledges that certain escorted guests of 4MC and/or its
affiliates may be issued temporary badges and may be allowed limited access to
the Facility (subject to TVN's prior approval, which shall not be unreasonably
withheld). 4MC acknowledges that TVN's refusal to permit access either (a) to
persons engaged in competitive activity with TVN or (b) during periods of heavy
activity within the Facility shall be deemed reasonable. All Facility access
doors shall be protected by key card locks or a security key pad system. An
access log reporting all access activity and all persons entering the Facility
will be available to TVN. Notwithstanding the foregoing, under no circumstances
shall TVN and/or its personnel interfere in any manner with 4MC's provision of
services, facilities, personnel and equipment to other customers of 4MC. TVN
further covenants that (a) neither it nor any of its personnel shall utilize
such right of access for any purposes other than in connection with the terms
and conditions of this Agreement and (b) TVN and its personnel shall be subject
to all security measures implemented by 4MC pursuant to the terms of this
Agreement, including, without limitation, those security measures described in
this Section 10. Visitors will only be permitted after sign-in and with security
badges; notwithstanding the foregoing, no visitors shall be permitted to visit
or tour the Facility without TVN's prior approval.
10.2 Additional Security Measures. As soon as practicable after this
----------------------------
Agreement is executed, the entire Building shall be fully secured, with access
only to employees, clients, vendors of TVN and 4MC, as well as guests approved
by TVN and 4MC, respectively.
11. Maintenance
-----------
4MC shall maintain the Equipment at a level of performance that is, at a
minimum, consistent with the relevant Equipment manufacturer's specifications. A
mutually agreed-upon maintenance schedule will be documented and implemented by
4MC during the Term. TVN acknowledges that portions of the New Services may be
temporarily interrupted for brief 4MC maintenance periods for all support
equipment
26
<PAGE>
operating on a full-time basis, in accordance with such maintenance schedule.
Notwithstanding the foregoing, in no event will TVN be taken off the air or
sustain a Service Interruption as a result of such maintenance.
12. Service Interruption
--------------------
12.1 Service Interruptions. A "Transmission Service Interruption" is
---------------------
defined as a loss of signal in a transmission (uplink) channel where the
transmitted radio frequency signal is absent or significantly degraded (without
regard to the number of programs on a particular transmission channel). A
"Program Channel Service Interruption" is defined as a loss of signal in a
Program Channel (as defined in Exhibit "D") where the video and/or audio
associated with the Program Channel is absent or significantly degraded. A
Transmission Service Interruption and a Program Channel Service Interruption are
each defined as a "Service Interruption." 4MC shall immediately notify TVN in
writing of a suspected or actual Service Interruption (the "Interruption
Notice"). Within two (2) business days after 4MC's delivery of the Interruption
Notice, 4MC shall deliver a "discrepancy report" to TVN, which shall state the
nature of the discrepancy, the estimated duration, date and time thereof (or,
actual, if known), and the steps taken by 4MC to remedy such discrepancy.
Subject to Sections 12.2 and 12.4, if (a) there exists a greater than .01%
Transmission Service Interruption per Digital Transmission Channel (as defined
in Exhibit "D") in any given month, and/or (b) if there exists a greater than
.10% Transmission Service Interruption per Analog Transmission Channel (as
defined in Exhibit "D") in any given month, and/or (c) if there exists a greater
than .01% Program Channel Service Interruption per Program Channel in any given
month (with respect to those Program Channels that are protected by a Program
Channel of the second (back-up) SeaChange Server (or other digital server))
and/or (d) if there exists a greater than .10% Program Channel Service
Interruption per Program Channel in any given month (with respect to those
Program Channels that are not protected by a Program Channel of the second (
back-up) SeaChange Server (or other digital server)), then TVN shall be entitled
to a credit for such Service Interruption (a "Service Interruption Credit") as
calculated below. All Service Interruption Credits shall be set forth in the
next billed invoice that follows the Service Interruption.
12.2 Service Interruption Credit. If a Service Interruption occurs, 4MC
---------------------------
shall issue a Service Interruption Credit to TVN based on the following table:
- --------------------------------------------------------------------------------
NUMBER OF MINUTES FOR EACH FOR EACH PROGRAM
OF SERVICE TRANSMISSION CHANNEL
INTERRUPTION CHANNEL
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
1-5 minutes $50 per minute $20 per minute
- --------------------------------------------------------------------------------
6-10 minutes $75 per minute $30 per minute
- --------------------------------------------------------------------------------
11-30 minutes $150 per minute $60 per minute
- --------------------------------------------------------------------------------
31-45 minutes $200 per minute $80 per minute
- --------------------------------------------------------------------------------
46-60 minutes $250 per minute $100 per minute
- ---------------------------------------- ---------------------------------------
61-90 minutes $300 per minute $120 per minute
- ---------------------------------------- ---------------------------------------
over 90 minutes $400 per minute $160 per minute
- ---------------------------------------- ---------------------------------------
The above table sets forth the amount of credit for the incremental minutes
of a Service Interruption shown in the column labeled "Number of Minutes of
Service Interruption". For example, if a Service Interruption of one
Transmission Channel occurs for eighteen (18) minutes in duration, then the
Service Interruption Credit would be calculated as follows: five (5) minutes at
Fifty Dollars ($50) per minute, equaling Two Hundred Fifty Dollars ($250); five
(5) minutes at Seventy-Five Dollars ($75) per minute, equaling Three Hundred
Seventy-Five Dollars ($375); and eight (8) minutes at One Hundred Fifty Dollars
($150) per minute, equaling One Thousand Two Hundred Dollars ($1,200), for a
total Service Interruption Credit of One Thousand Eight Hundred Twenty-Five
Dollars ($1,825).
In addition to the Service Interruption Credit, 4MC shall credit TVN an
amount equal to the actual monetary damages and demonstrable lost revenue due to
such Service Interruption, for which TVN must provide to 4MC reasonable
documentation within thirty (30) days after such damage or loss. Any credit
granted to TVN shall be first applied to the current Monthly Fee.
Notwithstanding the foregoing, TVN shall be limited to a maximum aggregate
credit hereunder (including Service Interruption Credits and lost revenue
credits) of One Hundred Fifty Thousand Dollars ($150,000) in any twelve-month
period during the Term.
12.3 Continuous Service Failure. If at any time during the Term (a) there
--------------------------
shall be a Service Interruption which continues for a period of two (2)
consecutive days or (b) if in any twelve (12)-month period there shall be two
(2) or more non-continuous Service Interruptions, each of which interruption
continues for a period of twelve (12) hours or (c) if in any twelve (12)-month
period there shall be three (3) or more non-continuous Service Interruptions,
each of which interruption continues for a period of three (3) or more hours
(any of (a), (b) or (c), a "Continuous Service Failure"), then TVN shall have
the right to immediately terminate this Agreement upon written notice to 4MC.
12.4 Exception for SeaChange System; Other Causes of Service
-------------------------------------------------------
Interruptions. The parties acknowledge and agree that the SeaChange System which
- -------------
4MC is currently attempting to implement as part of the New Services is new and
untested
28
<PAGE>
technology; therefore, TVN shall not be entitled to any Service Interruption
Credit due to Service Interruptions caused by or involving the SeaChange System
or the Alternate Server System, until the parties agree that a fully operative
digital server system has been implemented. In addition, TVN shall not be
entitled to any Service Interruption Credit nor to terminate this Agreement in
the event of a Continuous Service Failure if (a) there has been a significant
server system upgrade requested by TVN or required by the manufacturer and such
Service Interruption or Continuous Service Failure occurs as a result of such
significant server system upgrade during the ninety (90)-day period following
the implementation of such significant system upgrade, or (b) if there has been
a manufacturer's software upgrade or any other upgrade other than an upgrade
described in subparagraph (a) of this Section 12.4 and such Service Interruption
or Continuous Service Failure occurs as a result of the manufacturer's software
upgrade or such other upgrade during the thirty (30) day period following the
implementation of such upgrade. TVN shall be entitled to terminate this
Agreement in the event of a Continuous Service Failure caused by the failure of
such digital server system, if such Continuous Service Failure occurs at any
time after the Actual Commencement Date, subject to the terms of the prior
sentence. In addition, TVN shall have no right to Service Interruption Credits
and/or termination of this Agreement if a Service Interruption or a Continuous
Service Failure is caused by TVN's actions or omissions to act where such
actions or omissions are required hereunder, or by any equipment provided by
TVN, or any equipment or material provided by third parties who have contracted
with TVN, and were not provided by 4MC. TVN shall have no right to Service
Interruption Credits and/or termination of this Agreement, nor shall 4MC be
deemed in default hereunder, if a Service Interruption and/or a Continuous
Service Failure is caused by the failure of any equipment or other property
provided by TVN to 4MC under this Agreement, including the equipment set forth
on Exhibit "K", as well as the satellite receivers and any other equipment and
property of TVN located at the Facility, to be "Year 2000 Compliant" (as
hereinafter defined).
13. Playboy Services Severable
--------------------------
The Playboy AdultVision origination playback and monitoring service (the
"Playboy Service") provided to TVN shall be included as part of the New Services
at no increase in the Monthly Fee; provided, however, that the Playboy Service
-------- -------
is terminable by TVN upon forty-five (45) days prior written notice. In the
event the Playboy Service is cancelled by TVN, the Monthly Fee shall be reduced
by $10,000 per month. Any termination of the Playboy Service by TVN hereunder
shall be independent of the rights and duties of the parties hereunder, and this
Agreement shall continue in full force and effect notwithstanding such
termination.
29
<PAGE>
14. Representations, Warranties and Covenants
-----------------------------------------
14.1 Of TVN. TVN hereby represents, warrants and covenants to 4MC as
------
follows:
(a) TVN is in compliance and will continue to comply with all
applicable governmental laws, rules, regulations and administrative requirements
relating to this Agreement, possesses all licenses, permits or other
authorizations or exemptions necessary to effectuate the terms of this
Agreement, and shall maintain all such licenses, permits and other similar
authorizations in good standing as may be required by the appropriate
governmental authorities.
(b) To the best of TVN's knowledge, (i) the material to be
transmitted, received or otherwise processed by 4MC for TVN shall not infringe
upon the rights of third parties; (ii) TVN has and will continue to have all
necessary consents, approvals, licenses and other rights from third parties
(including governmental agencies) required for the transmission, reception and
other processing of such material; and (iii) such material will not be
defamatory.
(c) TVN has the full power and authority to enter into this
Agreement.
14.2 Of 4MC. 4MC represents, warrants and covenants to TVN as follows:
------
(a) 4MC is in compliance and will continue to comply with all
applicable governmental laws, rules, regulations and administrative requirements
relating to this Agreement, possesses all licenses, permits or other
authorizations or exemptions necessary to effectuate the terms of this
Agreement, and shall maintain all such licenses, permits and other similar
authorizations in good standing with the appropriate governmental authorities.
(b) 4MC has the full power and authority to enter into this
Agreement.
(c) The Equipment complies with all applicable manufacturers
specifications, and will continue to so comply during the Term.
(d) Any unionization of 4MC (or any of its affiliates) will
not adversely affect nor interfere with 4MC's performance of the New Services,
or any of TVN's rights hereunder.
(e) 4MC has the full and complete right and authority to provide
the
30
<PAGE>
Interim Services and New Services at the Facility.
(f) All Equipment, Additional Capital Equipment (if such
equipment is being used to provide the New Services) and other equipment and
property utilized by 4MC to provide the New Services (except for the equipment
and property provided by TVN for 4MC's use hereunder), any of which constitutes,
contains, or relies upon computer software, computer firmware, computer hardware
(whether general or special purpose or imbedded) and other similar or related
items of automated, computerized and/or software systems, are "Year 2000
Compliant". As used in this Agreement, the term "Year 2000 Compliant" means that
the equipment and property is able to perform all of the following functions:
(i) handle date information before, during and after January 1, 2000, including
but not limited to accepting date input, providing date output, and performing
calculations on dates or portions of dates; (ii) function accurately and without
interruption before, during and after January 1, 2000, without any change in
operations associated with the advent of the new century; (iii) respond to
two-digit year-date input in a way that resolves the ambiguity as to century in
a disclosed, defined, and predetermined manner; and (iv) store and provide
output of date information in ways that are unambiguous as to century.
15. Limitation of Liability
-----------------------
15.1 Limitation of Liability. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH
-----------------------
HEREIN, EACH PARTY'S LIABILITY FOR ANY DAMAGES ARISING OUT OF, RESULTING FROM,
OR RELATED TO THE PROVISION OR USE OF THE NEW SERVICES, INCLUDING WITH
LIMITATION, LIABILITIES ARISING OUT OF NEGLIGENCE, MISTAKES AND OMISSIONS,
INTERRUPTIONS, DELAYS, ERRORS OR OTHER DEFECTS IN THE NEW SERVICES OR FAILURE TO
FURNISH THE NEW SERVICES, WHETHER CAUSED BY ACTS OF COMMISSION OR OMISSION,
SHALL BE LIMITED TO THE CHARGE ALLOCABLE TO, OR THE MONTHLY FEE FOR, SUCH FAULTY
OR DEFECTIVE NEW SERVICE, UNLESS SUCH DAMAGE IS THE RESULT OF GROSS NEGLIGENCE,
RECKLESSNESS OR WILLFUL MISCONDUCT. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
ANY INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES.
15.2 Force Majeure Event. NOTWITHSTANDING THE PROVISIONS OF SECTION 15.1
-------------------
ABOVE, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY LOSS OF, DEFECTS IN OR
ANY INABILITY TO FURNISH THE ORIGINAL, INTERIM OR NEW SERVICES DUE TO ACTS OF
GOD; NATURAL DISASTER OR CATASTROPHE; ACTS OF GOVERNMENT; WARS; RIOTS; STRIKES,
LOCKOUTS OR OTHER LABOR DIFFICULTY INVOLVING OR DIRECTED AT ANY PARTY
31
<PAGE>
OTHER THAN 4MC, ITS PARENT COMPANY AND/OR ANY OF ITS AFFILIATES; OR ANY OTHER
CAUSES BEYOND THAT PARTY'S CONTROL (EACH OF THE ABOVE EVENTS TO BE REFERRED TO
AS A "FORCE MAJEURE" EVENT), NOR SHALL TVN BE LIABLE FOR PAYMENT OF THE MONTHLY
FEE DURING A FORCE MAJEURE EVENT. NOTWITHSTANDING THE FOREGOING, IF A FORCE
MAJEURE EVENT CONTINUES FOR A MINIMUM OF TWENTY (20) DAYS AND 4MC IS UNABLE TO
PERFORM ITS OBLIGATIONS HEREUNDER DURING SUCH TIME, THEN TVN, IN ITS SOLE
DISCRETION, MAY TERMINATE THIS AGREEMENT UPON WRITTEN NOTICE TO 4MC.
15.3 Warranties Disclaimed. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH
---------------------
HEREIN, ANY AND ALL EXPRESS AND IMPLIED WARRANTIES RELATING TO THE NETWORK
ORIGINATION, UPLINK AND POST-PRODUCTION SERVICES, INCLUDING WITHOUT LIMITATION,
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A SPECIFIC PURPOSE OR USE, ARE
EXPRESSLY DISCLAIMED.
16. Indemnification
---------------
16.1 Indemnification by 4MC. 4MC shall defend, indemnify and hold
----------------------
harmless TVN, its affiliates and their respective officers, directors,
shareholders, employees, agents and successors from and against any and all
claims, demands, suits, judgments, losses, damages or expenses of any nature
whatsoever (including reasonable attorneys' fees) (collectively, "Claims") of
any sort for which TVN may be liable to any third party which relate to or arise
or result from (a) the interference by the operations of 4MC hereunder with any
third-party satellite user (b) 4MC's failure to maintain necessary licenses, (c)
injury to persons, damage to property or other claims resulting from any act or
omission of 4MC in connection with 4MC's provision of services hereunder, and
(d) 4MC's breach of any material representation, warranty or covenant contained
herein. This indemnification obligation shall survive any termination of this
Agreement.
16.2 Indemnification by TVN. TVN shall defend, indemnify and hold harmless
----------------------
4MC, its affiliates and their respective officers, directors, shareholders,
employees, agents and successors from and against any and all Claims of any sort
for which 4MC may be liable to any third party which relate to or arise or
result from (a) the content of any programming transmitted, received or
otherwise processed by 4MC pursuant to this Agreement, including without
limitation, any claim for libel, slander, copyright infringement,(b) any other
claims resulting from any act or omission of TVN or patrons, suppliers or
clients of TVN relating to the services to be performed hereunder , and (c)
TVN's breach of any material representation, warranty or covenant contained
herein.
32
<PAGE>
This indemnification obligation shall survive any termination of this Agreement.
16.3 Indemnification Procedure. In any case where either party seeks
-------------------------
indemnification, the indemnified party shall notify the indemnifying party as
promptly as possible of any claim, litigation, or threatened claim or litigation
for which the indemnified party seeks indemnification; provided, however, that
the failure by the indemnified party to promptly notify the indemnifying party
of any such claim, litigation or threatened claim or litigation shall not affect
indemnifying party's indemnification obligations unless indemnifying party can
demonstrate actual prejudice caused by the delay in providing notice. The
indemnifying party shall afford indemnified party the opportunity to participate
in, and, at the indemnifying party's option, control, compromise, settle,
defend, or otherwise resolve the claim or litigation (and neither party shall
effect any such compromise or settlement without the prior written consent of
the indemnifying party, which consent shall not be reasonably withheld), and the
indemnified party shall cooperate with indemnifying party in the defense of such
claim.
17. Non-Hire.
--------
During the Term and for a period of one year thereafter, without the other
party's express prior written approval, neither TVN nor 4MC shall, directly or
indirectly, employ, attempt to employ, solicit for employment by others, or
induce or attempt to influence a termination of employment by, any employee of
the other party; or induce or attempt to induce a consultant or other
independent contractor to sever that person's relationship with the other party;
or assist any other person, firm or entity in the solicitation of any such
consultant or employee.
18. Confidential Information
------------------------
18.1 4MC and TVN acknowledge that in the course of 4MC's provision of
the New Services to TVN hereunder, either party may become acquainted with
certain "Confidential Information" of the other party. "Confidential
Information" of either party shall mean any information relating to such party's
business, business concepts, and/or ideas relating to programming and/or other
products, including all intellectual property pertaining to the foregoing
(regardless of the stage of development of such) (collectively the "Products"),
which is not generally known other than by such party. Confidential Information
may include, without limitation, the concepts, ideas, designs, formats, and
contents of the New Services and the overall marketing and business plan with
respect to the New Services; and may include, without limitation, engineering
designs, technologies, designs, devices, outlines, sketches, videos, copyrights,
and any actual
33
<PAGE>
or contemplated trademark, trade name or service mark. Each party agrees that it
shall not use, disclose, disseminate or otherwise communicate, directly or
indirectly, in whole or in part, during the term of this Agreement, any
Confidential Information of the other party, except as necessary to implement
the terms of this Agreement, without the other party's prior written consent,
nor shall either party permit any of its representatives, subsidiaries, parent
entity, or any third party person acting for or on its behalf, to do any of the
foregoing. In addition, neither party shall reproduce or copy or summarize any
Confidential Information of the other party without such other party's prior
written consent in each instance. 4MC shall cause each and every staff member
employed by 4MC pursuant to this Agreement, as well as any other 4MC employee
who may have access to TVN's Confidential Information, to agree to be bound in
writing by this Section 18. The obligations set forth in this Section 18 shall
survive the termination or cancellation of this Agreement.
18.2 Upon termination of the Term or any earlier termination of this
Agreement pursuant to the terms hereunder, each party shall promptly return to
the other party all manuals, documents, files, reports, programming,
Confidential Information and any other data, materials or property belonging to
such other party.
18.3 TVN shall cause all of its employees who may have access to 4MC's
Confidential Information to agree to be bound in writing by this Section 18.
19. Options Upon Expiration of Term
-------------------------------
19.1 Reduced Monthly Fee During Renewal Term(s). Notwithstanding any
------------------------------------------
other provision of this Agreement to the contrary, the Monthly Fee during
the Renewal Term(s) shall be reduced by an amount equal to the sum of (a) the
actual aggregate documented Equipment Expenditures (incurred to the date ninety
[90] days from and after the Commencement Date) divided by sixty (60) and (b)
Sixteen Thousand Dollars ($16,000). By way of example, if the Monthly Fee during
the first year of the first Renewal Term is Five Hundred Fourteen Thousand
Dollars ($514,000) and the actual aggregate documented Equipment Expenditures
total Ten Million Dollars ($10,000,000), then the Monthly Fee during the first
year of the first Renewal Term would be Three Hundred Thirty-One Thousand Three
Hundred Thirty Four Dollars ($331,334) ($514,000 minus the sum of $166,666
[$10,000,000 divided by 60] and $16,000).
19.2 TVN's Option to Purchase Equipment. Within five (5) business days
----------------------------------
after the commencement of the first Renewal Term, TVN shall have the right to
purchase all, but not less than all, of the Equipment listed on Exhibit "J", as
amended from time to
34
<PAGE>
time, and the Additional Capital Equipment (except for the generator, which
shall be excluded from such purchase unless the provisions of Section 19.5 are
applicable), from 4MC for a purchase price of One Dollar ($1). Concurrently with
TVN's delivery of such sum to 4MC (which shall occur within ten [10] business
days after the commencement of the Renewal Term), 4MC shall assign and deliver
to TVN a bill of sale in form acceptable to TVN conferring good and marketable
title to all of the Equipment and the Additional Capital Equipment free and
clear of all liens and encumbrances (it being understood that 4MC's delivery of
the Equipment and the Additional Capital Equipment free and clear of
encumbrances shall occur as soon as practicable after 4MC's lender has released
its lien on the Equipment and the Additional Capital Equipment , which release
it shall be 4MC's responsibility to obtain from such lender). From and after the
date of TVN's purchase of the Equipment and the Additional Capital Equipment
until the expiration of the Renewal Term(s), 4MC shall have the right to utilize
the Equipment and the Additional Capital Equipment at the Facility in order to
continue rendering the New Services for TVN hereunder, if TVN has renewed this
Agreement for full service.
19.3 Reduction of Services During Renewal Term(s). TVN shall have the
--------------------------------------------
right to limit the services to be provided by 4MC during the Renewal Term(s) to
uplink services performed using two 4MC uplink antennae and downlink services
performed using two 4MC downlink antennae (which reduced services are more
particularly described in Section 1.4 of Exhibit D), in which event the Monthly
Fee shall be reduced to One Hundred Twenty-Five Thousand Dollars ($125,000) (for
15 uplink Transmission Channels) during the Renewal Term(s). TVN acknowledges
that the reduced Monthly Fee shall cover 4MC's cost of providing the earth
stations, UPS, and generator, but shall not cover the cost of air conditioning,
electricity and the space to be occupied by TVN in the basement. TVN and 4MC
shall negotiate the rental rate to be paid by TVN for such basement space. TVN
shall be billed monthly for air conditioning and electricity costs. TVN
acknowledges that its right to limit the services to be provided by 4MC during
the Renewal Term(s) and to pay the reduced Monthly Fee as described in this
Section 19.3 (the "Reduced Services Option") shall only be available if (a) TVN
delivers written notice to 4MC at least six (6) months prior to the expiration
of the Term of TVN's exercise of the Reduced Services Option, and (b) TVN
purchases all, but not less than all, of the Equipment listed on Exhibit "J", as
amended from time to time, and the Additional Capital Equipment (except for the
generator, which shall be excluded from such purchase unless the provisions of
Section 19.5 are applicable), from 4MC for a purchase price equal to (a)
fourteen percent (14%) of the aggregate actual Equipment Expenditures (including
all Additional Capital Equipment) up to the first Ten Million Dollars
($10,000,000) of such Equipment Expenditures, plus (b) One Dollar ($1.00) for
all Equipment Expenditures (including Additional Capital Equipment), if any, in
excess of Ten Million Dollars ($10,000,000) and up to Fifteen Million Dollars
($15,000,000)
35
<PAGE>
(together, the "Equipment Buyout Price"). Concurrently with TVN's delivery of
the Equipment Buyout Price to 4MC (which shall occur within ten [10] business
days after the commencement of the first Renewal Term), 4MC shall assign and
deliver to TVN a bill of sale in form acceptable to TVN, conferring good and
marketable title to all of the Equipment and the Additional Capital Equipment
free and clear of all liens and encumbrances (it being understood that 4MC's
delivery of the Equipment and the Additional Capital Equipment free and clear of
encumbrances shall occur as soon as practicable after 4MC's lender has released
its lien on the Equipment and the Additional Capital Equipment, which release it
shall be 4MC's responsibility to obtain from such lender).
19.4 Equipment Purchase Option Upon Expiration. Upon the expiration of
-----------------------------------------
the Term or any Renewal Term, TVN shall have the option to purchase all, but not
less than all, of the Equipment and the Additional Capital Equipment (except for
the generator, which shall be excluded from such purchase unless the provisions
of Section 19.5 are applicable) for the Equipment Buyout Price, so long as TVN
delivers written notice to 4MC no later than four (4) months prior to the
expiration of the Term or the applicable Renewal Term of its desire to exercise
such option. TVN acknowledges that all costs of removal of the Equipment from
the Facility, if any, shall be borne by TVN.
19.5 Best Efforts to Provide Stand-Alone Generator. 4MC shall use its best
---------------------------------------------
efforts to provide a stand-alone electrical generator capable of providing
sufficient power for the New Services. If 4MC is successful in providing such a
generator, then such generator shall be included in the Equipment to be
purchased by TVN under Sections 9.6, 19.2, 19.3 and 19.4.
20. Restrictions Regarding Provision of Certain Services
----------------------------------------------------
4MC acknowledges that, with respect to any and/or all "Digital Services"
(as hereinafter defined) to be provided at the Facility, 4MC shall not provide
any Digital Services to an unaffiliated third party ("Third Party") at the
Facility unless such Digital Services are performed in conjunction with TVN (if
4MC desires to provide such Digital Services), on terms to be negotiated in good
faith between 4MC and TVN for such joint provision of Digital Services
(including the allocation of certain fees and the obligation to share payment
(as mutually agreed) of any new capital expenditures which 4MC must incur in
connection with the provision of such Digital Services). For purposes of this
Section 20, "Digital Services" shall mean (a) playback of audio and video from a
digital server, (b) digital compression services, and (c) satellite uplink
services.
36
<PAGE>
21. Miscellaneous
-------------
21.1 Assignment and Subcontracting. Except as otherwise provided herein,
-----------------------------
this Agreement is personal to each party and shall not be assigned or
subcontracted in whole or in part without the prior written consent of the
other, such consent not to be unreasonably withheld. Notwithstanding the
foregoing, each party may assign this Agreement to its parent corporation, any
other entity owned or controlled by such parent corporation, or any entity
acquiring substantially all of the assets of a party, provided the assigning
party remains liable for all obligations incurred hereunder prior to the
effective date of any such permitted assignment. In addition, 4MC shall have the
right to utilize third party subcontractors in connection with uplink and
interconnect services, subject to TVN's approval, which approval shall not be
unreasonably withheld.
21.2 Notices. Any notice given under this Agreement, unless specifically
-------
stated otherwise, shall be in writing and shall either be delivered in person or
sent by overnight mail or express courier service, by registered or certified
mail, postage prepaid, or by facsimile or telecopy transmission, direct to the
attention of the party intended as the recipient at the address listed below. If
delivered by messenger, service conclusively shall be deemed received on the
date signed for delivery. If sent by registered or certified mail, postage
prepaid and correctly addressed, service conclusively shall be deemed received
three (3) business days after deposit with the United States postal service. If
sent by overnight mail or express courier service, service shall conclusively be
deemed received one (1) business day after prepaid dispatch, with a signed
receipt, by a recognized overnight mail or express courier service. If sent by
facsimile or telecopy transmission, service shall conclusively be deemed
received on the date and at the time imprinted on any such notice by the
receiving facsimile or telephone machine, with a copy also sent via overnight
mail or express courier service. Either party may change its address by written
notice to the other party.
If to 4MC: 4MC-Burbank, Inc.
2813 W. Alameda Avenue
Burbank, CA 91505
Attn: James T. Conlon
Tel. No.: (818) 840-7156
Fax No.: (818) 846-5197
With a copy to: Four Media Company
c/o POP
625 Arizona Avenue
Santa Monica, CA 90401
37
<PAGE>
Attn: William E. Niles, Esq.
Vice President and General Counsel
Tel. No.: (310) 587-1279
Fax No.: (310) 587-1277
and: Greenberg Glusker Fields Claman
& Machtinger LLP
1900 Avenue of the Stars
Suite 2100
Los Angeles, CA 90067
Attn: Jill A. Cossman, Esq.
Tel. No.: (310) 201-7420
Fax No.: (310) 553-0687
If to TVN: TVN Entertainment Corporation
2901 West Alameda Avenue, 7th Floor
Burbank, CA 91505
Attn: Stuart Z. Levin
Tel. No.: (818) 526-5010
Fax No.: (818) 526-5001
With copies to: TVN Entertainment Corporation
[same address as above]
Attn: Arthur Fields, General Counsel
Tel. No.: (818) 526-5020
Fax No.: (818) 526-5001
and: TVN Entertainment Corporation
[same address as above]
Attn: Gregory Pasetta, Senior Vice President
Tel. No.: (818) 526-5050
Fax No.: (818) 526-5001
21.3 Governing Law. The validity, interpretation and performance of this
-------------
Agreement, and any dispute hereunder, shall be determined in accordance with the
laws of the State of California, without regard to choice of law principles.
21.4 Entire Agreement. This Agreement and all exhibits, which are
----------------
incorporated herein and made part hereof, contain the entire agreement of the
parties with respect to its subject matter and supersedes all prior agreements,
negotiations, representations and proposals, written or oral, relating to its
subject matter. Each party hereby acknowledges that any and all representations,
warranties, covenants and
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agreements made by such party and contained in any exhibit to this Agreement are
hereby expressly binding upon such party. This Agreement may not be modified
except by an agreement in writing signed by both parties. Neither party shall be
bound by or liable to the other party for any representation, promise or
inducement made by an agent or person in the other party's employment which is
not embodied in this Agreement.
21.5 Waiver of Breach. No forbearance by either party to enforce any
----------------
provision or to give notice of the breach of any provision of this Agreement
shall constitute a waiver of such provision or right or be deemed to effect an
amendment or modification of this Agreement.
21.6 Independent Contractor. The parties hereto acknowledge that 4MC is
----------------------
an independent contractor and nothing contained herein shall be deemed to
create, and the parties hereto do not intend to create, any relationship of
employer/employee, partnership, joint venture or agency, nor shall any similar
relationship be deemed to exist between them.
21.7 Confidentiality. The rates, terms and conditions of this Agreement
---------------
are confidential to the parties and their respected affiliates, attorneys,
agents and major lenders and, except as required by law, shall not be disclosed
by either party to any other entity or individual without the prior written
consent of the other party, which consent may be withheld in the sole and
absolute discretion of such other party. Either party may, however, disclose the
existence of this Agreement.
21.8 Disputed Matters; Arbitration. Any controversy, claim or dispute
-----------------------------
arising out of or in any way relating to this Agreement or the alleged breach
thereof shall be determined by binding arbitration by a retired California
Superior Court or Court of Appeal Judge selected by the American Arbitration
Association under its Commercial Arbitration Rules ("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 (SS)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
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respective rights and remedies hereunder without waiving any right to
arbitration. However, if any party seeks or obtains such provisional remedy, an
arbitration hereunder shall also be commenced and, if necessary, the merits of
the controversy or claim and/or the determination of an appropriate permanent
remedy shall be settled by arbitration in accordance with this Agreement.
21.9 Severability. If any provision of this Agreement is void or
------------
unenforceable or violates any applicable law, rule or regulation, such provision
shall in no way affect any other provision of this Agreement, or the validity or
enforceability of this Agreement.
21.10 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one agreement.
21.11 Definitions. The following terms are defined in the sections
-----------
indicated below:
(a) "4MC" is defined in Article I.
(b) "4MC Campus" is defined in Section 6.2(e).
(c) "4MC Default" is defined in Section 9.3.
(d) "4MC Default Notice" is defined in Section 9.3.
(e) "Actual Commencement Date" is defined in Section 5.2.
(f) "Additional Capital Equipment" is defined in Section 8.2(b).
(g) "Additional Equipment" is defined in Section 8.3(a).
(h) "Alternate Server System" is defined in Section 5.4.
(i) "Analog Transmission Channel" is defined in Exhibit "D."
(j) "Basement Floor Plan" is defined in Section 6.2.
(k) "Building" is defined in Section 6.2.
(l) "Buildout Cost Estimate" is defined in Section 6.2(b).
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<PAGE>
(m) "Calculation Date" is defined in Section 8.2(a).
(n) "Claims" is defined in Section 16.1.
(o) "Compact" is defined in Section 2.1.
(p) "Confidential Information" is defined in Section 18.1.
(q) "Continuous Service Failure" is defined in Section 12.3.
(r) "Cost Estimate" is defined in Section 8.2(b).
(s) "Difference"is defined in Section 8.2(a).
(t) "Digital Services" is defined in Section 20.
(u) "Digital Transmission Channel" is defined in Exhibit "D."
(v) "Equipment" is defined in Section 6.4.
(w) "Equipment Budget" is defined in Section 8.2.
(x) "Equipment Buyout Price" is defined in Section 19.3.
(y) "Equipment Expenditures" is defined in Section 8.2.
(z) "Facility" is defined in Section 6.2.
(aa) "Facility Failure" is defined in Section 5.3.
(ab) "Fee" is defined in Section 8.1(g).
(ac) "First Commencement Notice" is defined in Section 5.2.
(ad) "Fiscal 1997 Note" is defined in Section 2.3.
(ac) "Fiscal 1998 Note" is defined in Section 8.1(a).
(af) "Floor Plans" is defined in Section 6.2.
(ag) "Force Majeure Event" is defined in Section 15.2.
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(ah) "Implementation Date" is defined in Section 5.4.
(ai) "Implementation Schedule" is defined in Section 6.4.
(aj) "Interim Monthly Fee" is defined in Section 2.5(a).
(ak) "Interim Services" is defined in Section 2.2.
(al) "Liquidated Damages Date" is defined in Section 5.3.
(am) "Master Landlord" is defined in Section 6.2.
(an) "Memorandum" is defined in Section 2.1.
(ao) "Monthly Fee" is defined in Section 8.1(c).
(ap) "New Services" is defined in Section 2.6.
(aq) "New Services Personnel" is defined in Section 6.3.
(ar) "Office Space" is defined in Section 6.2.
(as) "Original Services" is defined in Section 2.1.
(at) "Original Services Personnel" is defined in Article 4.
(au) "Overpayment" is defined in Section 8.2.
(av) "Payment Notice" is defined in Section 9.1.
(aw) "Payment Default" is defined in Section 9.1.
(ax) "Personnel Budget" is defined in Section 6.3.
(ay) "Playboy Service" is defined in Article 13.
(az) "Products" is defined in Section 18.1.
(ba) "Program Channel Service Interruption" is defined in Section
12.1.
(bb) "Program Channel" is defined in Exhibit "D."
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<PAGE>
(bc) "Reduced Interim Monthly Fee" is defined in Section 2.5(b).
(bd) "Reduced Services Option" is defined in Section 19.3.
(be) "Renewal Notice" is defined in Article 7.
(bf) "Renewal Term" is defined in Article 7.
(bg) "Replacement Notice" is defined in Section 6.3(d).
(bh) "Response Notice" is defined in Section 5.2.
(bi) "Revised Implementation Schedule" is defined in Section 8.2(b).
(bj) "Revised Buildout Schedule" is defined in Section 6.2(b).
(bk) "Rules" is defined in Section 21.8.
(bl) "SeaChange Compliance Date" is defined in Section 5.4.
(bm) "SeaChange System" is defined in Section 5.4.
(bn) "Second Commencement Notice" is defined in Section 5.2.
(bo) "Service Interruption Credit" is defined in Section 12.1.
(bp) "Service Interruption" is defined in Section 21.1.
(bq) "Sixth Floor Space Plans" is defined in Section 6.2.
(br) "Sixth Floor Space" is defined in Section 6.2.
(bs) "Sublease" is defined in Section 6.2.
(bt) "Term" is defined in Article 7.
(bu) "Third Party" is defined in Section 20.
(bv) "Transmission Service Interruption" is defined in Section 12.1.
(bw) "TVN" is defined in Article I.
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<PAGE>
(bx) "TVN Default Notice" is defined in Section 9.2.
(by) "TVN Default" is defined in Section 9.2.
(bz) "TVN Improvements" is defined in Section 6.2.
(ca) "Upgrade Implementation Date" is defined in Section 5.4.
(cb) "Year 2000 Compliant" is defined in Section 14.2(f).
(cc) "1997 Arrearages" is defined in Section 2.3.
(cd) "1998 Arrearages" is defined in Section 2.4.
(ce) "1999 Arrearages" is defined in Section 2.5.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
4MC-BURBANK, INC.,
a Delaware corporation
By: /s/ John H. Donlon
---------------------------------
Its: Vice President
--------------------------------
TVN ENTERTAINMENT CORPORATION,
a Delaware corporation
By: /s/ Anthony Fields
---------------------------------
Its: Senior Executive Vice President
--------------------------------
The undersigned shall cause 4MC, its wholly owned subsidiary, to perform all of
4MC's obligations under
44
<PAGE>
this Agreement.
FOUR MEDIA COMPANY, a Delaware corporation
By: /s/ Christopher M.R. Phillips
------------------------------------
Its: Executive Vice President and Chief
-----------------------------------
Financial Officer
-----------------------------------
45
<PAGE>
Exhibit 10.57
SERVICES AGREEMENT
------------------
1. Identification
--------------
This Services Agreement (the "Agreement") is entered into as of October
19, 1999 by and between Four Media Company Asia Pte Ltd. ("4MCA") and MTV Asia
LDC ("MTVA").
2. Recitals
--------
2.1 Pursuant to the terms of an Agreement dated as of February 13, 1995
between 4MCA and MTVA (the "Original Agreement"), 4MCA has been providing
various services, including without limitation, production, studio and control
room, online and offline editing, audio mixing, graphic, subtitling,
duplication, standards conversion, origination and videotape library services,
on the fourth floor and certain other space at 4MCA's facilities at 30 Choon
Guan Street, City South Exchange Building, Singapore (the "Building").
2.2 Although the term of the Original Agreement extends through April 14,
2002, pursuant to the terms of the Original Agreement, MTVA was granted an
option to cancel the Original Agreement as of April 15, 2000, by delivering
written notice to 4MCA no less than six months prior to such date. MTVA has not
delivered such notice to 4MCA.
2.3 The parties desire to enter into this Agreement in order to formally
terminate the Original Agreement effective as of December 31, 1999 and to
delineate the terms and conditions under which 4MCA shall deliver production,
post-production, origination, duplication and library services to 4MCA
commencing January 1, 2000, all on the terms and conditions hereinafter set
forth.
3. Original Agreement
------------------
3.1 Termination of Original Agreement; Waiver of Notice of Cancellation
-------------------------------------------------------------------
Option; Waiver of Cancellation Fee. Notwithstanding any provision of Section 2
- ----------------------------------
of the Original Agreement to the contrary, the Original Agreement shall
terminate on December 31, 1999. In partial consideration for MTVA's execution
of this Agreement, (a) MTVA's obligation to deliver written notice of its
exercise of the "Cancellation Option" (as defined in the Original Agreement) is
hereby waived by 4MCA, and (b) the "Cancellation Fee" (as defined in the
Original
1
<PAGE>
Agreement) is hereby waived by 4MCA, and MTVA shall have no obligation with
respect to payment of such fee to 4MCA. In addition, 4MCA shall have no
obligation to mitigate the effects of the termination of the Original Agreement,
as set forth in Sections 2.3 through 2.6 of the Original Agreement.
3.2 Waiver of Management Fees under Original Agreement. In partial
--------------------------------------------------
consideration for MTVA's execution of this Agreement, any and all outstanding
fees payable by MTVA pursuant to Section 12 of the Original Agreement (which
4MCA values at an amount equal to Five Hundred Twenty Seven Thousand Three
Hundred Singapore Dollars (S$527,300 )) are hereby waived in their entirety, and
MTVA shall have no further obligation with respect to the payment of any fees
under Section 12 of the Original Agreement.
3.3 Outstanding Payments Remain Due. Notwithstanding the termination of
-------------------------------
the Original Agreement on December 31, 1999, except as set forth in Sections 3.1
and 3.2 above, MTVA shall remain obligated to pay to 4MCA any and all monthly
fees and other amounts owing in consideration for 4MCA's provision of services
to MTVA under the Original Agreement for the period to and including December
31, 1999, in accordance with the payment terms set forth in the Original
Agreement.
4. Services
--------
4.1 Production and Post-Production Services. 4MCA shall provide to MTVA
---------------------------------------
insert studio, online and offline editing, audio and graphics services, all as
more specifically described in Exhibit "A" attached hereto and incorporated
herein by this reference (collectively, the "Production and Post-Production
Services"). The Production and Post-Production Services shall be provided
Monday through Friday, exclusive of Singapore public holidays during the time
periods set forth in Section 5.1. Notwithstanding the fact that the term of
this Agreement ends on December 31, 2004, the Production and Post-Production
Services shall be provided from the "Commencement Date" (as hereinafter defined)
to and including December 31, 2000 (the "Production Services Term"). 4MCA
irrevocably grants MTVA an option to extend the Production Services Term for a
further one (1)-year period, exercisable by MTVA's written
2
<PAGE>
notice to 4MCA at least one month prior to the end of the Production Services
Term. Such extension option shall be irrevocably granted by 4MCA to MTVA on the
same terms for successive one (1)-year periods throughout the Term. In addition,
throughout the Term, from and after the termination of the Production Services
Term, MTVA shall grant to 4MCA certain rights with respect to the provision of
any of the Production and Post-Production Services, as more particularly
described in Section 8 below.
4.2 Origination, Duplication and Library Services. 4MCA shall provide to
---------------------------------------------
MTVA network origination, videotape duplication, standards conversion, satellite
backhaul record, library storage and ancillary support services, all as more
specifically described in Exhibit "B" attached hereto and incorporated herein by
this reference (collectively, the "Origination, Duplication and Library
Services"). The Origination, Duplication and Library Services shall be provided
during the time periods set forth in Exhibit "B", it being understood that the
Origination Services (as described in Exhibit "B") shall be provided 365 days a
year, and the Duplication and Library Services (as described in Exhibit "B")
shall be provided exclusive of Singapore public holidays. The Production and
Post-Production Services and the Origination, Duplication and Library Services
are together sometimes referred to as the "Services". 4MCA acknowledges that the
Origination Services require, as an integral part thereof, the Philips
compression systems. 4MCA is committed to providing such compression system to
suit MTVA's needs and will use all commercial efforts to reach a reasonable
arrangement with Viacom Inc. regarding such compression system. 4MCA's monthly
charge for support of such compression system shall not exceed Two Thousand
United States Dollars ($2,000) (based upon the current configuration of such
system).
4.3 MTVA Obligations. In addition to any other representations,
----------------
warranties, covenants and agreements of MTVA set forth herein, MTVA acknowledges
and agrees to fulfill all of MTVA's obligations in connection with the Services,
which obligations are set forth in Exhibit "C" hereto and incorporated herein by
this reference.
4.4 Staffing. The following provisions relate to staffing for various
--------
Services:
(a) "Edit One" (as described in Exhibit "A") shall be staffed with a
Senior Editor and an Assistant Editor during all hours of operation. MTVA shall
have approval rights
3
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with respect to such personnel.
(b) "Edit Two" (as described in Exhibit "A") shall be staffed with an
Editor and an Assistant Editor during all hours of operation. MTVA shall have
approval rights with respect to such personnel.
(c) "Non-linear Edit" (as described in Exhibit "A") shall be staffed
with an Editor during all hours of operation. MTVA shall have approval rights
with respect to such personnel.
(d) All other staffing requirements shall be as set forth in Exhibits
"A" and "B."
5. Pricing and Payments
--------------------
5.1 Charges.
-------
(a) Origination, Duplication and Library Services. In consideration
---------------------------------------------
for 4MCA's provision of the Origination, Duplication and Library Services, MTVA
shall pay to 4MCA a monthly fee of Five Hundred Twenty-Five Thousand Singapore
Dollars (S$525,000) (the "Monthly Origination Fee"), exclusive of taxes. The
Monthly Origination Fee shall be increased annually over the prior year's
Monthly Origination Fee commencing January 1, 2000 and on each January 1
thereafter, by five percent (5%) over the prior year's Monthly Origination Fee.
(b) Production and Post-Production Services. In consideration for
---------------------------------------
4MCA's provision of the Production and Post-Production Services, MTVA shall pay
to 4MCA the following:
(i) For Insert Studio Services (as more particularly described on
Exhibit "A"), based on 40 hours of service per month, a monthly fee of Thirty
Two Thousand
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Singapore Dollars (S$32,000) (the "Studio Service Fee"), exclusive of taxes.
Insert Studio Services in excess of 40 hours per month will be provided for at
Eight Hundred Singapore Dollars (S$800) per hour.
(ii) For Edit One Services (as described in Exhibit "A"), based
on a 40-hour week, a monthly fee of Seventy-Four Thousand Singapore Dollars
(S$74,000) (the "Edit One Fee"), exclusive of taxes.
(iii) For Edit Two Services (as described in Exhibit "A"), based
on a 40-hour week, a monthly fee of Sixty-Three Thousand Singapore Dollars
(S$63,000) (the "Edit Two Fee"), exclusive of taxes.
(iv) For Nonlinear Edit Services (as described in Exhibit "A"),
based on a 40-hour week, a monthly fee of Forty-Two Thousand Singapore Dollars
(S$42,000) (the "Nonlinear Edit Fee"), exclusive of taxes.
(v) For Audio Services (as described in Exhibit "A"), based on a
25-hour week), a monthly fee of Thirty-Six Thousand Singapore Dollars (S$36,000)
(the "Audio Fee"), exclusive of taxes.
(vi) For Graphics Services (as described in Exhibit "A"), based
on a 40-hour week, a monthly fee of Forty-Six Thousand Six Hundred Singapore
Dollars (S$46,600) (the "Graphics Fee"), exclusive of taxes.
(vii) For Off-Line Edit Services (as described in Exhibit "A"),
such services shall be provided to MTVA free of charge.
The Studio Service Fee, the Edit One Fee, the Edit Two Fee, the
Nonlinear Edit Fee, the Audio Fee and the Graphics Fee shall sometimes
collectively be referred to as the "Monthly Production and Post-Production Fee".
5.2 Payment Terms. Payment for the Origination, Duplication and
-------------
Library Services
5
<PAGE>
shall be due and payable in advance on the first day of each month during the
Term, with the first payment of the Monthly Origination Fee due on the
Commencement Date and on the first day of each month thereafter during the Term.
Payment for the Production and Post-Production Services shall be due and payable
in advance on the first day of each month during the Production Services Term,
with the first payment of the Monthly Production and Post-Production Fee due on
the Commencement Date and on the first day of each month thereafter during the
Production Services Term. The Monthly Origination Fee and the Monthly Production
and Post-Production Fee shall be paid one-half in Singapore Dollars and one-half
in United States Dollars, using a conversion rate of $1: S$1.70 (the "Conversion
Rate") for the calculation of the applicable U.S. Dollar amount. The Conversion
Rate shall be utilized throughout the Term. All portions of the Monthly
Origination Fee payments and Monthly Production and Post-Production Fee payments
payable to 4MCA in Singapore dollars hereunder shall be made via wire transfer
to 4MCA's bank account at HSBC Limited, 10 Collier Quay #01-01 Ocean Building,
Singapore 049315, Telephone: (65) 530-5000 (the "Bank"), Account No. 141-373977-
001 (SGD Current A/C). All portions of the Monthly Origination Fee payments and
Monthly Production and Post-Production Fee payments payable to 4MCA in United
States dollars hereunder shall be made via wire transfer to 4MCA's bank account
at the Bank, Account No. 260-241229-178 (USD Current A/C). If MTVA fails to
deliver any Monthly Origination Fee payments or Monthly Production and Post-
Production Fee payments to 4MCA within thirty (30) days after the due date for
such payment(s), 4MCA shall deliver written notice to MTVA of such non-payment.
MTVA's failure to deliver such payment to 4MCA within five (5) business days
after MTVA's receipt of such notice shall constitute a default hereunder. All
other payments to 4MCA hereunder shall be made in Singapore dollars, shall be
payable within thirty (30) days after MTVA's receipt of the applicable invoice,
and shall be made via wire transfer to 4MCA's account at the Bank, Account No.
141-373977-001 (SGD Current A/C). If MTVA fails to make such payment within such
30-day period, 4MCA shall deliver written notice to MTVA of such non-payment.
MTVA's failure to deliver such payment within five (5) business days after
MTVA's receipt of such notice shall constitute a default hereunder (unless the
payment amount is in dispute and payment for all undisputed amounts are timely
made).
5.3 Pricing for Production and Post-Production Services during Extension
--------------------------------------------------------------------
Periods. In
- -------
6
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the event MTVA exercises the option(s) to extend the Production Services Term
for an additional year or years hereunder pursuant to the provisions of Section
4.1, the Monthly Production and Post-Production Fee shall not be increased
annually during any such extension periods, i.e., the Monthly Production and
Post-Production Fee shall remain as set forth in Section 5.1(b) herein.
5.4 Overtime Pricing. If 4MCA provides Services (except for Insert Studio
----------------
Services) during periods in excess of the hours set forth in Exhibit "B" and/or
Section 5.1 herein, as applicable, the charges for such additional time shall be
based on commercially reasonable rates as shall be agreed upon by MTVA and 4MCA
in good faith. The charges for Insert Studio Services provided by 4MCA in excess
of the hours set forth in Section 5.1(b)(i) shall be as set forth in Section
5.1(b)(i). Notwithstanding the foregoing, MTVA shall not be obligated to use
4MCA for the provision of services in excess of the hours set forth in Exhibits
"A" and/or "B," and shall be free to utilize any other vendor for such services.
5.5 Taxes. MTVA shall be responsible for the payment of all existing and
-----
new sales and services taxes and other similar taxes applicable to the Services.
6. Term; Cancellation Option
-------------------------
6.1 Term. 4MCA shall commence the provision of Production and Post-
----
Production Services and Origination, Duplication and Library Services on January
1, 2000 (the "Commencement Date"), shall continue to provide the Origination,
Duplication and Library Services until December 31, 2004 (the "Term"), and shall
continue to provide the Production and Post-Production Services until the end of
the Production Services Term, as such term may be extended from time to time.
6.2 Failure to Obtain Lease Extension. Notwithstanding any other
---------------------------------
provision of this Agreement to the contrary, if 4MCA is unable to obtain an
extension of its lease of the Building from 4MCA's landlord upon terms
acceptable to 4MCA and 4MCA delivers written notice to MTVA no later than April
1, 2004 of such failure to obtain such lease extension, this Agreement shall
terminate on September 30, 2004 (the "Early Termination Date"), without
liability to
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<PAGE>
4MCA. In such event, MTVA shall not be liable for any Monthly Origination Fee
payments for October, November and December of 2004, nor for any Monthly
Production and Post-Production Fee payments covering such period (if the
Production Services Term has been extended).
6.3 Cancellation Option. MTVA shall have the option, in its sole
-------------------
discretion, to cancel this Agreement (the "Cancellation Option") effective
December 31, 2003 (the "Cancellation Date"), exercisable by written notice to
4MCA (the "Cancellation Notice") no less than six (6) months prior to the
Cancellation Date. If MTVA fails to deliver the Cancellation Notice to 4MCA at
least six (6) months prior to the Cancellation Date, MTVA shall be deemed to
have waived the Cancellation Option. If MTVA exercises the Cancellation Option,
MTVA shall be obligated to pay to 4MCA a cancellation fee in an amount equal to
One Million Seven Hundred Fifty Thousand Singapore Dollars (S$1,750,000) (the
"New Cancellation Fee"), due and payable on or prior to the Cancellation Date.
6.4 Amelioration Measures. If and when MTVA delivers the Cancellation
---------------------
Notice to 4MCA of its exercise of the Cancellation Option in accordance with
Section 6.3 above, 4MCA shall be obligated to use all reasonable efforts during
the six (6)-month period prior to the Cancellation Date to ameliorate 4MCA's
potential business losses as a result of MTVA's exercise of the Cancellation
Option, including without limitation, using all reasonable efforts to secure
replacement customers to utilize the Origination Services during the one (1)-
year period following the Cancellation Date. If 4MCA is successful in finding a
replacement customer or customers who pay substantially the same fee that MTVA
would have paid hereunder during the one (1)-year period following the
Cancellation Date, then, no later than thirty (30) days after the end of the one
(1)-year period following the Cancellation Date, 4MCA shall refund to MTVA the
New Cancellation Fee. 4MCA shall negotiate in good faith with, and use all
reasonable efforts to contact, all potential customers in order to accomplish
the amelioration measures set forth in this Section 6.4.
7. Location and Relocation of Provision of Services
------------------------------------------------
7.1 Production and Post-Production Services. On the Commencement Date,
---------------------------------------
the
8
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Production and Post-Production Services shall be provided in the Building.
Thereafter and throughout the Term, 4MCA shall have the right to relocate the
facility in which the Production and Post-Production Services are being provided
to MTVA, provided that (a) at least three (3)-months prior written notice is
given to MTVA, (b) the new location will not materially increase MTVA's
operating costs, and (c) the new location is approved by MTVA (such approval not
to be unreasonably withheld). If MTVA fails to respond in writing to 4MCA within
thirty (30) days after MTVA's receipt of written notice from 4MCA requesting
such relocation, such failure to respond shall be deemed MTVA's approval of such
relocation. If as a result of such relocation, MTVA's operating costs materially
increase, MTVA shall notify 4MCA in writing of such increased operating costs,
and 4MCA shall reimburse MTVA for the increase in such operating costs.
7.2 Origination Services. On the Commencement Date, the Origination
--------------------
Services shall be provided in the Building. Thereafter and throughout the Term,
4MCA shall have the right to relocate the facility in which the Origination
Services are being provided to MTVA, provided that (a) such new location will
not materially increase MTVA's operating costs nor materially impact MTVA's
operations, (b) at least three (3) months' prior written notice is given to
MTVA,(c) the new location is approved by MTVA (such approval not to be
unreasonably withheld) and (d) the Origination Services continue to be provided
without interruption during the relocation process. If MTVA fails to respond in
writing to 4MCA within thirty (30) days after MTVA's receipt of written notice
from 4MCA requesting such relocation, such failure to respond shall be deemed
MTVA's approval of such relocation. If a relocation pursuant to this Section
7.2 results in a material increase in MTVA's operating costs, MTV shall notify
4MCA in writing of such increased operating costs, and 4MCA shall reimburse MTV
for the increase in such operating costs. If, during the relocation process, a
"Service Interruption" (as defined in Section 11.3) occurs and lasts for more
than twenty-four (24) hours, MTVA shall have the right to terminate this
Agreement with respect to the Origination Services, without compensation to 4MCA
(except for any fees owed for Services provided prior to the date of termination
hereof), and the provisions of Section 11.3 shall apply.
8. Certain Rights with Respect to Production and Post-Production Services
----------------------------------------------------------------------
9
<PAGE>
From and after the termination of the Production Services Term, MTVA shall
have the right to procure the provision of any or all of such services from a
source other than 4MCA; provided, however, that, by written notice to 4MCA (the
"Option Notice"), MTVA shall grant 4MCA a first option to bid on the provision
of any and/or all of the Production and Post-Production Services for MTVA on
terms and conditions that are acceptable to MTVA, in its sole discretion, and
provided further, that 4MCA notifies MTVA that 4MCA elects to exercise such
option within five (5) business days after 4MCA's receipt of the Option Notice
from MTVA. If MTVA determines to procure the Production and Post-Production
Services from 4MCA pursuant to this Section 8, MTVA shall pay 4MCA an amount
mutually determined by the parties in good faith. If either (a) 4MCA notifies
MTVA that 4MCA elects not to exercise such option or (b) the parties cannot
agree in good faith on the terms and conditions under which 4MCA shall provide
any or all of the Production and/or Post-Production Services to MTVA (including
the pricing of any of such services), then MTVA may procure such services from
any outside source engaged by MTVA, without liability to 4MCA.
9. Maintenance
-----------
9.1 Generally. 4MCA shall maintain the equipment necessary to provide the
---------
Services at a level of performance that is consistent with the relevant
equipment manufacturer's specifications, recommendations and good engineering
practices. MTVA acknowledges that the Services may be interrupted for
maintenance periods for all equipment operating on a full-time basis. The
interruptions shall be as brief as practicable. A mutually agreed-upon
maintenance schedule, setting forth any interruptions, and plans for alternate
provision of Services during such interruptions, will be implemented during the
Term.
9.2 Certain Equipment. 4MCA acknowledges that the equipment listed in
-----------------
Exhibit "D" (the "Exhibit D Equipment') belongs to and is the property of MTVA.
4MCA further consents to the Exhibit D Equipment being housed at 4MCA's premises
and agrees to provide preventive maintenance to insure proper working of the
Exhibit D Equipment without charge to MTVA. For and in consideration thereof,
4MCA may use some or all of the Exhibit D
10
<PAGE>
Equipment (where required) in the provision of Origination Services without
payment to MTVA.
10. Representations, Warranties and Covenants
-----------------------------------------
10.1 Of MTVA. MTVA hereby represents, warrants and covenants to 4MCA as
-------
follows:
(a) MTVA is in compliance and will continue to comply with all
applicable governmental laws, rules, regulations and administrative requirements
relating to this Agreement, including those relating to the material to be
received, processed or transmitted by 4MCA for MTVA, to the extent necessary to
perform MTVA's obligations hereunder without any material adverse effect on
4MCA's rights or obligations hereunder.
(b) The material to be received, processed or transmitted by 4MCA for
MTVA shall not infringe upon the rights of third parties (including by way of
illustration and not as a limitation, slander or copyright infringement); MTVA
owns, licenses or otherwise has the right to use all such material; MTVA (or its
distributors and agents) has and will continue to have all necessary consents,
approvals, licenses and other rights from third parties (including governmental
agencies) required for the transmission and reception of such material; and such
material will not be defamatory.
(c) MTVA has the full power and authority to enter into this
Agreement.
(d) MTVA has procured a valid broadcasting license issued by the
appropriate governmental authorities prior to the Commencement Date, and all
other material licenses, permits or other similar authorizations or exemptions
necessary for carrying on its broadcasting business (collectively, "Broadcasting
Licenses") (other than those to be provided by 4MCA pursuant to Section 10.2(c))
and otherwise to effectuate the terms of this Agreement. MTVA shall maintain
the Broadcasting Licenses and all other licenses, permits and other similar
authorizations in good standing with the appropriate governmental authorities.
MTVA shall not be deemed to be in breach of any warranty contained herein on
account of any withdrawal or
11
<PAGE>
revocation of the Broadcasting License so long as the revocation or withdrawal
was beyond the reasonable control of MTVA.
10.2 Of 4MCA. 4MCA represents, warrants and covenants to MTVA as follows:
-------
(a) 4MCA is in compliance and will continue to comply with all
applicable governmental laws, rules, regulations and administrative requirements
relating to this Agreement to the extent necessary to perform 4MCA's obligations
hereunder without any material adverse effect on MTVA's rights or obligations
hereunder.
(b) 4MCA has the full power and authority to enter into this
Agreement.
(c) Prior to the Commencement Date, 4MCA shall procure all licenses,
permits or other authorizations or exemptions necessary for performing its
obligations hereunder from the appropriate government authorities (unless the
failure to obtain such licenses, permits or other authorizations or exemptions
would not have any material adverse effect on MTVA's rights or 4MCA's
obligations hereunder). 4MCA shall maintain such licenses, permits and other
authorizations and/or exemptions in good standing with the appropriate
governmental authorities.
(d) Insofar as 4MCA's provision of the Services affects or impacts
MTVA's material licenses, permits or consents, 4MCA shall use all reasonable
commercial efforts to comply with, and shall insure that its employees use all
reasonable commercial efforts to comply with, all reasonable instructions and
requests from MTVA which are necessary to insure compliance with the conditions
of the licenses, permits and consents, so long as 4MCA is not obligated to incur
any costs with respect to such compliance.
(e) Notwithstanding any other term hereof, all equipment and systems
necessary for 4MCA's provision of the Services shall function and operate in the
manner in which they are intended to and without error when (a) referencing
specific dates or (b) calculating a span of dates or (c) performing functions or
operations which are affected by such date data during the year 2000 and beyond,
throughout the duration of the Term.
12
<PAGE>
Notwithstanding the foregoing, 4MCA makes no representation or warranty
whatsoever with respect to the Exhibit D Equipment, and/or such equipment's
impact on 4MCA's provision of the Services.
11. Limitation of 4MCA's Liability; Force Majeure
---------------------------------------------
11.1 Limitation of Liability. IN NO EVENT SHALL 4MCA BE LIABLE FOR ANY
-----------------------
INCIDENTAL OR CONSEQUENTIAL DAMAGES, EXCEPT FOR DAMAGES RELATED TO WILLFUL
MISCONDUCT, NEGLIGENCE OR ARISING FROM A RELOCATION PURSUANT TO SECTION 7.2, IN
WHICH EVENT THE PROVISIONS OF SECTION 11.3 SHALL BE APPLICABLE.
11.2 Force Majeure. NOTWITHSTANDING ANY OTHER PROVISION OF THIS
-------------
AGREEMENT, 4MCA SHALL NOT BE LIABLE TO MTVA FOR ANY LOSS OF, DEFECTS IN OR ANY
INABILITY TO FURNISH THE SERVICES DUE TO ACTS OF GOD; NATURAL DISASTER OR
CATASTROPHE; ACTS OF GOVERNMENT; WARS; RIOTS; OR STRIKES, LOCKOUTS OR OTHER
LABOR DIFFICULTY BEYOND 4MCA'S REASONABLE CONTROL (EACH OF THE ABOVE EVENTS TO
BE REFERRED TO AS A "FORCE MAJEURE" EVENT). NOTWITHSTANDING THE FOREGOING, IF A
FORCE MAJEURE EVENT CONTINUES AND 4MCA IS UNABLE TO PERFORM ITS ORIGINATION,
DUPLICATION AND LIBRARY SERVICES OBLIGATIONS FOR FOURTEEN (14) DAYS OR ITS
PRODUCTION AND POST-PRODUCTION SERVICES OBLIGATIONS FOR THIRTY (30) DAYS,
HEREUNDER DURING SUCH TIME, THEN MTVA, IN ITS SOLE DISCRETION, MAY TERMINATE
THIS AGREEMENT. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT TO THE
CONTRARY, MTVA SHALL NOT BE LIABLE TO 4MCA FOR ANY LOSS OR COMPENSATION DUE TO
AN INABILITY TO PERFORM ITS OBLIGATIONS DUE TO "FORCE MAJEURE" EVENTS (AS
DEFINED ABOVE, MUTATIS MUTANDIS). GOVERNMENTAL ACTION WHICH PROHIBITS MTVA FROM
BROADCASTING ANY OR ALL OF ITS PROGRAMMING, IF SUCH ACTION IS BEYOND THE
REASONABLE CONTROL OF MTVA, SHALL BE DEEMED A FORCE MAJEURE EVENT.
13
<PAGE>
11.3 SERVICE INTERRUPTIONS DUE 4MCA'S NEGLIGENCE OR WILLFUL MISCONDUCT.
-----------------------------------------------------------------
FOR PURPOSES OF THIS SECTION 11.3 AND SECTION 7.2, A "SERVICE INTERRUPTION" IS
DEFINED AS A LOSS OF SIGNAL IN A PROGRAM CHANNEL SUCH THAT THE VIDEO AND AUDIO
ASSOCIATED WITH THE PROGRAM CHANNEL ORIGINATED BY 4MCA UP TO THE POINT OF
DEMARCATION IS ABSENT OR SIGNIFICANTLY DEGRADED. SUBJECT TO THE LIMITATIONS OF
4MCA'S LIABILITY AS SET FORTH IN THIS ARTICLE 11, IF, AS A DIRECT RESULT OF A
SERVICE INTERRUPTION CAUSED BY 4MCA'S NEGLIGENCE OR WILLFUL MISCONDUCT OR A
RELOCATION PURSUANT TO SECTION 7.2, MTVA CAN DEMONSTRATE THAT IT HAS INCURRED
ACTUAL MONETARY DAMAGES, THEN 4MCA SHALL CREDIT MTVA FOR A LIKE AMOUNT (A
"SERVICE INTERRUPTION CREDIT") UP TO A MAXIMUM AGGREGATE AMOUNT OF THREE HUNDRED
THOUSAND SINGAPORE DOLLARS (S$300,000) DURING EACH CONSECUTIVE TWELVE (12)-MONTH
PERIOD DURING THE TERM, IF AND ONLY IF (A) MTVA OR A THIRD PARTY PROVIDES NOTICE
TO 4MCA THAT SUCH SERVICE INTERRUPTION HAS OCCURRED, (B) SUCH SERVICE
INTERRUPTION OCCURRED WITHIN THE BOUNDARIES OF 4MCA'S POINT OF DEMARCATION, AND
(C) MTVA PROVIDES TO 4MCA WRITTEN DOCUMENTATION, CERTIFIED BY A RESPONSIBLE
EXECUTIVE OFFICER OF MTVA, OF THE MONETARY DAMAGES AND OF MTVA'S MITIGATION
MEASURES (AS SET FORTH BELOW) WITHIN NINETY (90) DAYS OF SUCH SERVICE
INTERRUPTION. ANY SERVICE INTERRUPTION CREDIT GRANTED TO MTVA HEREUNDER SHALL,
TO THE EXTENT POSSIBLE, BE OFFSET AGAINST THE MONTHLY ORIGINATION FEE. MTVA
SHALL USE ALL REASONABLE COMMERCIAL EFFORTS TO MITIGATE ANY DAMAGES CAUSED BY A
SERVICE INTERRUPTION, INCLUDING WITHOUT LIMITATION, MITIGATING DAMAGES ARISING
FROM UNAIRED ADVERTISING TIME BY SUBSTITUTING "MAKE GOOD" ADVERTISING TIME WITH
RESPECT TO ANY SUCH UNAIRED ADVERTISEMENTS SUBJECT, AT ALL TIMES, TO MTVA'S
CLIENTS AGREEING TO SUCH SUBSTITUTE "MAKE GOOD" ADVERTISING TIME AND PROVIDED
THAT MTVA SHALL NOT BE REQUIRED TO FORFEIT PAID OR BONUS ADVERTISING AIRTIME FOR
THE "MAKE GOOD" ADVERTISING TIME. IN NO EVENT SHALL 4MCA BE LIABLE FOR, OR
14
<PAGE>
SHALL MTVA RECEIVE, A SERVICE INTERRUPTION CREDIT FOR ANY SERVICE INTERRUPTION
OCCURRING OUTSIDE OF 4MCA'S POINT OF DEMARCATION.
12. Insurance
---------
12.1 Fire, Theft and Comprehensive General Personal and Property Liability
---------------------------------------------------------------------
Insurance. _4MCA shall maintain fire, theft and comprehensive general personal
- ---------
and property liability insurance in a form and in amounts satisfactory to MTVA,
which insurance shall also cover all personnel and property utilized in
connection with the Services, naming MTVA and its parent companies, Viacom
International Inc. and Viacom Inc. as additional insureds.
12.2 Comprehensive General Liability Insurance and All Risk Property
---------------------------------------------------------------
Insurance. In addition, 4MCA shall maintain Comprehensive General Liability
- ---------
insurance and All Risk Property insurance, covering the liability of 4MCA to
third parties, including MTVA's personnel, arising out of the furnishing by 4MCA
of the Services. 4MCA will maintain such coverage in a form satisfactory to MTVA
and in the amounts set forth below. The policies obtained by 4MCA in accordance
herewith shall remain in effect throughout the Term.
Workman's Compensation and employer's liability
Coverage A - Statutory
Coverage B - Minimal Amount of $1,000,000 (U.S.)
Comprehensive General Liability
Combined Single Limit-Per Occurrence $1,000,000 (U.S.)
Umbrella Liability
$3,000,000 (U.S.) in excess of Primary Insurance
With respect to the Comprehensive General Liability, Umbrella
Liability and All Risk Property Damage coverages scheduled above, MTVA and its
parent companies, Viacom International Inc. and Viacom Inc., shall be named as
additional insureds.
15
<PAGE>
12.3 Policy Requirements. 4MCA shall ensure that each insurance company
-------------------
providing coverage under Sections 12.1 and 12.2 shall be licensed to do business
in the Republic of Singapore and shall be authorized to issue the polices listed
hereunder. All of the policies referred to above shall be written as primary
insurance coverage only, and shall not be deemed to be in excess of, or to
contribute to any, coverage carried by MTVA, Viacom International Inc., Viacom
Inc. or any other direct or indirect subsidiary or affiliate thereof with
respect to the same risks. 4MCA shall ensure that each insurer providing
coverage hereunder shall provide MTVA with written notice of any change in such
insurer, coverage, material change or reduction thereof (including limits, loss
of coverage, provisions or forms, notice of termination, cancellation or non-
renewal or of aggregate erosion thereon) at least thirty (30) days prior to the
proposed effective date thereof. 4MCA represents and warrants that it will
secure liability insurance and workman's compensation insurance of the type and
in the amounts set forth above with Continental (HSBC Insurance-Singapore
representative). 4MCA shall deliver to MTVA certificates of insurance prior to
or upon the execution of this Agreement evidencing that the coverages identified
in Sections 12.1 and 12.2 are in full force and effect (and also indicating the
additional insureds and loss payees as required herein). MTVA will be provided
with renewal certificates upon request.
12.4 MTVA Workman's Compensation Insurance. MTVA will provide 4MCA with a
-------------------------------------
Workman's Compensation certificate for its employees and shall obtain liability
insurance covering its employees, of the same type and in the same amounts as
set forth in Sections 12.1 and 12.2, and with respect to such liability
insurance, naming 4MCA and Four Media Company as additional insureds.
13. Indemnification
---------------
13.1 Indemnification. Except as set forth in Section 11.1, 4MCA, on the
---------------
one hand, and MTVA, on the other hand, shall each defend, indemnify and hold
harmless the other, their affiliates and their respective officers, directors,
employees, shareholders, agents and representatives from and against any and all
claims, demands, suits, judgments, losses, damages
16
<PAGE>
or expenses of any nature whatsoever (including reasonable attorneys' fees)
(collectively, "Claims") of any sort arising from a material breach of the
respective representations, warranties and covenants set forth herein. This
indemnification obligation shall survive any termination of this Agreement.
13.2 Indemnification Procedure. In any case where either party seeks
-------------------------
indemnification, the indemnified party shall notify the indemnifying party as
promptly as possible of any claim, litigation, or threatened claim or litigation
for which the indemnified party seeks indemnification; provided, however, that
the failure by the indemnified party to promptly notify the indemnifying party
of any such claim, litigation or threatened claim or litigation shall not affect
indemnifying party's indemnification obligations unless indemnifying party can
demonstrate actual prejudice caused by the delay in providing notice. The
indemnifying party shall afford indemnified party the opportunity to participate
in, and, at the indemnifying party's option, control, compromise, settle,
defend, or otherwise resolve the claim or litigation (and neither party shall
effect any such compromise or settlement without the prior written consent of
the indemnifying party, which consent shall not be reasonably withheld), and the
indemnified party shall cooperate with indemnifying party in the defense of such
claim. Any attorneys selected by the indemnifying party in connection with any
such claim shall be reasonably satisfactory to the indemnified party.
14. Non-Solicitation
----------------
During the Term and for a period of two years thereafter, without the other
party's express prior written approval, neither party shall, directly or
indirectly, employ, attempt to employ, solicit for employment by others, or
induce or attempt to influence a termination of employment by, any employee of
the other party; or induce or attempt to induce a consultant or other
independent contractor to sever that person's relationship with the other party;
or assist any other person, firm or entity in the solicitation of any such
consultant or employee.
15. Proprietary Information and Copyright
-------------------------------------
15.1 Proprietary Information. 4MCA and MTVA acknowledge that in the
-----------------------
course of 4MCA's provision of the Services to MTVA hereunder, either party may
become acquainted
17
<PAGE>
with certain "Proprietary Information" of the other party. "Proprietary
Information" of either party shall mean any information relating to such party's
business, business concepts, and/or ideas relating to programming and/or other
products, including all intellectual property pertaining to the foregoing
(regardless of the stage of development of such) (collectively, "the Products"),
which is not generally known other than by such party and designated as
Proprietary Information by the relevant party. Proprietary Information may
include, without limitation, the concepts, ideas, designs, formats and contents
of the Products and the overall marketing and business plan with respect to the
Products; and may include, without limitation, designs, devices, characters,
stories, treatments, outlines, sketches, videos, copyrights, and any actual or
contemplated trademark, trade name or service mark, computer hardware and
software, and technical specifications. Each party agrees that it shall not use,
disclose, disseminate or otherwise communicate, directly or indirectly, in whole
or in part, during the Term, any Proprietary Information of the other party,
except as necessary to implement the terms of this Agreement, without the other
party's prior written consent, nor shall either party permit any of its
representatives, subsidiaries, parent entity, or any third party acting for or
on its behalf, to do any of the foregoing. In addition, neither party shall
reproduce or copy or summarize any Proprietary Information of the other party
without such other party's prior written consent in each instance. The
obligations set forth in this Section 15 shall survive the termination of this
Agreement for a period of one year. Upon the expiration of the Term or any
earlier termination of this Agreement pursuant to the terms hereunder, each
party shall promptly return to the other party all manuals, documents, files,
reports, programming, videotapes, Proprietary Information and any other data,
materials or property belonging to such other party.
15.2 Copyright. 4MCA and its employees hereby acknowledge and agree that
---------
(a) all artistic, literary, dramatic, musical and other materials created by
4MCA hereunder, together with the results and proceeds of 4MCA's provision of
the Services ("Materials"), are works commissioned by MTVA, and (b) MTVA is the
owner of the Materials under copyright, in and for all means of exploitation now
known or hereinafter devised, upon creation of such Materials. To the extent
that any of the Materials are not deemed works commissioned by MTVA, 4MCA hereby
assigns to MTVA all rights for all purposes throughout the world for the full
period of copyright and all extensions and renewals thereof in and for all means
of exploitation now
18
<PAGE>
known or hereinafter devised. 4MCA acknowledges and agrees that neither it nor
any third party or person (other than MTVA) has any copyrights in the Materials
and any copyright resides in MTVA as the sole owner of such rights, and 4MCA
hereby quitclaims and assigns any rights in the copyright and hereby waives any
and all moral rights with respect thereto. If requested by MTVA, 4MCA shall
execute and deliver to MTVA an acknowledgment, quitclaim and assignment
necessary to give effect to the foregoing in a form approved by MTVA.
16. Miscellaneous
-------------
16.1 Assignment and Subcontracting. Except as otherwise provided herein,
-----------------------------
this Agreement is personal to each party and shall not be assigned or
subcontracted in whole or in part without the prior written consent of the
other, such consent not to be unreasonably withheld. Notwithstanding the
foregoing, each party may assign this Agreement to its parent corporation, any
other entity owned or controlled by such parent corporation, or any entity
acquiring substantially all of the assets of a party, provided the assigning
party remains liable for all obligations incurred hereunder prior to the
effective date of any such permitted assignment. In addition, 4MCA shall not
assign or transfer any rights hereunder to any person or entity that is directly
or indirectly engaged in the production and/or distribution of television
programming in competition with MTVA.
16.2 Notices. Any notice given under this Agreement, unless specifically
-------
stated otherwise, shall be in writing and shall either be delivered in person or
sent by overnight courier, telecopy or telegram, direct to the attention of the
party intended as the recipient at the address listed below. Any such notice
shall be deemed given on the date of service if served personally, or 24 hours
after transmission if sent other than by person as provided in this paragraph.
Either party may change its address by written notice to the other party.
If to 4MCA: Four Media Company Asia Pte. Ltd.
30 Choon Guan Street, # 04-00
City South Exchange Building
Singapore 079809
Tel. No.: (65) 220-8407
Fax No.: (65) 420-2732
19
<PAGE>
With a copy to: Four Media Company
2813 W. Alameda Avenue
Burbank, CA 91505
Attn: James T. Conlon
Tel. No.: 818-840-7156
Fax No.: 818-846-5197
And: Greenberg Glusker Fields Claman
& Machtinger LLP
1900 Avenue of the Stars
Suite 2100
Los Angeles, CA 90067
Attn: Jill A. Cossman, Esq.
Tel. No.: 310-201-7420
Fax No.: 310-553-0687
If to MTVA: MTV Asia LDC
8 Shenton Way #01-01
Temasek Tower
Singapore 068811
Attn: Steven Tan, Vice President, Finance and
Administration
Tel. No.: (65) 420-7315
Fax No.: (65) 221-9795
With copies to: MTV International Law & Business Affairs
1515 Broadway
New York, N.Y. 10036
Attn: Gil Aronow, Senior V.P., Deputy General
Counsel
Tel. No.: 212-846-8542
Fax No.: 212-846-1792
16.3 Governing Law. The validity, interpretation and performance of this
-------------
Agreement shall be determined by the laws of the State of New York without
regard to choice of law principles.
16.4 Entire Agreement. This Agreement and all exhibits, which are
----------------
incorporated herein and made part hereof, contain the entire agreement of the
parties with respect to its subject
20
<PAGE>
matter and supersedes all Original Agreements, negotiations, representations and
proposals, written or oral, relating to its subject matter. Each party hereby
acknowledges that any and all representations, warranties, covenants and
agreements made by such party and contained in any exhibit to this Agreement are
hereby expressly binding upon such party. This Agreement may not be modified
except by an agreement in writing signed by both parties. Neither party shall be
bound by or liable to the other party for any representation, promise or
inducement made by an agent or person in the other party's employment which is
not embodied in this Agreement.
16.5 Waiver of Breach. No forbearance by either party to enforce any
----------------
provision or to give notice of the breach of any provision of this Agreement
shall constitute a waiver of such provision or right or be deemed to effect an
amendment or modification of this Agreement.
16.6 Independent Contractor. The parties hereto acknowledge that 4MCA is
----------------------
an independent contractor and nothing contained herein shall be deemed to
create, and the parties hereto do not intend to create, any relationship of
employer/employee, partnership, joint venture or agency, nor shall any similar
relationship be deemed to exist between them.
16.7 Confidentiality. The rates, terms and conditions of this Agreement
---------------
are confidential to the parties and their respected affiliates, attorneys and
agents and, except as required by law, shall not be disclosed by either party to
any other entity or individual without the prior written consent of the other
party, which consent may be withheld in the sole and absolute discretion of such
other party. Either party may, however, disclose the existence of this
Agreement.
16.8 Attorneys' Fees. In the event of any action for breach of, to
---------------
enforce the provisions of, or otherwise involving this Agreement, the court in
such action shall award a reasonable sum as attorneys' fees and costs to the
party who, in the light of the issues litigated and the court's decision on
those issues, was more successful in the action. The more successful party need
not be the party who recovers a judgment in the action. Any party in whose favor
a judgment has been entered shall also be entitled to recovery of its attorneys'
fees and costs in enforcing such judgment.
21
<PAGE>
16.9 Severability. If any provision of this Agreement is void or
------------
unenforceable or violates any applicable law, rule or regulation, such provision
shall in no way affect any other provision of this Agreement, or the validity or
enforceability of this Agreement.
16.10 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one agreement.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
FOUR MEDIA COMPANY ASIA PTE. LTD.
By: /s/ Robert T. Walston
-----------------------------
Its: Managing Director
------------------------
MTV ASIA LDC
By: /s/ Frank A. Brown
-----------------------------
Its: Senior Vice President -
------------------------
Finance
---------
22
<PAGE>
EXHIBIT LIST
------------
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT "A" Description of Production and Post-Production Services
EXHIBIT "B" Description of Origination, Duplication and Library Services
EXHIBIT "C" MTVA's Obligations
EXHIBIT "D" MTVA Equipment
</TABLE>
23
<PAGE>
EXHIBIT 21
FOUR MEDIA COMPANY
Subsidiaries
------------
The following subsidiaries are owned 100% by Four Media Company:
1. 4MC-Burbank, Inc., a Delaware corporation
2. Four Media Company Asia PTE Ltd., a limited liability company
organized under the laws of Singapore
3. Digital Magic Company, a Delaware corporation
4. Anderson Video Company, a Delaware corporation
5. VSDD Acquisition Corp., a Delaware corporation (dba Digital Symphony)
6. 4MC Company 3, Inc., a Delaware corporation
7. Visualize, a California corporation (dba POP, POP Sound, and POP Film)
8. MSCL, Inc., a California corporation (dba Encore Video / dba Riot)
9. FilmCore Editorial San Francisco LLC, a California limited liability
company/1/
10. FilmCore Editorial Los Angeles LLC, a California limited liability
company/1/
11. Company 11 Productions, a California corporation
12. 4MC Radiant, Inc., a Delaware corporation (fka POP Technology, Inc.)
(dba Radiant Software)
13. Four Media Company (UK) Limited, a company organized under the laws of
England and Wales
14. Digital Sound & Picture, Inc., a Delaware corporation
The following subsidiaries are owned 100% by 4MC-Burbank:
1. Meridian Sound Corp., a Delaware corporation
2. Catalina Transmission Corp., a Delaware corporation
The following subsidiaries are owned 100% by Visualize:
1. 10 Moons at POP, Inc., a California corporation
2. Santa Monica Financial, Inc., a California corporation
The following subsidiary is owned 100% by Four Media Company (UK) Limited:
1. TVP Group Plc, a company organized under the laws of England and Wales
_______________________________________
/1/ Ownership interests are as follows:
MSCL, Inc. - 75%
Four Media Company - 25%
<PAGE>
The following subsidiaries are owned 100% by TVP Group Plc:
1. TVI Limited, a company organized under the laws of England and Wales
2. TVP Videodubbing Limited, a company organized under the laws of
England and Wales
3. Post Box Golden Square Limited, a company organized under the laws of
England and Wales
4. Television Presentations Limited, a company organized under the laws
of England and Wales/2/
5. TVP Broadcast Limited, a company organized under the laws of England
and Wales/2/
6. The Edit Box Limited, a company organized under the laws of England
and Wales/2/
7. The Original Video Dubbing Limited, a company organized under the laws
of England and Wales/2/
8. TVP Doublevision Limited, a company organized under the laws of
England and Wales/2/
The following subsidiaries are owned 100% by TVI Limited:
1. Video Time Limited, a company organized under the laws of England and
Wales/2/
2. Video Time 1999 Limited, a company organized under the laws of England
and Wales/2/
VSDD Acquisition Corp. has a 100% interest in the following limited liability
companies:
1. Symphonic Video LLC, a Delaware limited liability company (dba Digital
Symphony)
2. Digital Doctors LLC, a Delaware limited liability company
The following subsidiary is owned 89% by Visualize/3/:
1. POP Animation, a California corporation
Visualize has a 49% interest in the following limited liability company/4/:
1. Cinram-POP DVD Center LLC, a California limited liability company
_____________________________
/2/ Dormant.
/3/ The shareholders of POP Animation are as follows:
Visualize (dba POP) - 88.885%
Buzz F/X, a California corporation - 11.115%
/4/ Cinram POP DVD Center LLC is a joint venture between:
Visualize (dba POP) - 49%
Cinram U.S. Holdings, Inc., a Delaware corporation - 51%
ii
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 333-60009) of our report dated October 25, 1999, with respect to
the consolidated financial statements and schedule of Four Media Company,
included in this Annual Report (Form 10-K) for the year ended August 1, 1999.
Los Angeles, California
October 28, 1999
<PAGE>
PAGE 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Four Media Company (the "Company") on Form S-8 (file No. 333-60009) of our
report dated October 21, 1998, on our audits of the consolidated financial
statements of the Company as of August 3, 1997, and for the years ended August
3, 1997 and August 3, 1998, which report is included in this Annual Report on
Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, CA
October 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> AUG-02-1998 AUG-01-1999
<PERIOD-START> AUG-04-1997 AUG-03-1998
<PERIOD-END> AUG-02-1998 AUG-01-1999
<CASH> 3,301 9,841
<SECURITIES> 0 0
<RECEIVABLES> 31,657 34,777
<ALLOWANCES> 1,258 1,618
<INVENTORY> 1,263 1,793
<CURRENT-ASSETS> 38,663 61,757
<PP&E> 124,230 173,266
<DEPRECIATION> 46,610 68,837
<TOTAL-ASSETS> 217,298 343,543
<CURRENT-LIABILITIES> 25,514 47,251
<BONDS> 0 0
0 0
2 0
<COMMON> 99 196
<OTHER-SE> 67,012 124,775
<TOTAL-LIABILITY-AND-EQUITY> 217,298 343,543
<SALES> 129,168 196,984
<TOTAL-REVENUES> 129,168 196,984
<CGS> 117,839 178,360
<TOTAL-COSTS> 117,839 178,360
<OTHER-EXPENSES> 0 933
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,139 12,753
<INCOME-PRETAX> 3,190 4,938
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 3,190 4,938
<DISCONTINUED> 0 0
<EXTRAORDINARY> (2,449) 0
<CHANGES> 0 0
<NET-INCOME> 741 4,938
<EPS-BASIC> 0.08 0.37
<EPS-DILUTED> 0.07 0.34
</TABLE>
