AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VDI MEDIA
(Exact name of Registrant as specified in its charter)
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CALIFORNIA 7814 95-4272619
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
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6920 SUNSET BOULEVARD
HOLLYWOOD, CALIFORNIA 90028
(213) 957-5500
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
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R. LUKE STEFANKO
6920 SUNSET BOULEVARD
HOLLYWOOD, CALIFORNIA 90028
(213) 957-5500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES OF COMMUNICATIONS TO:
BARRY L. DASTIN, Esq. MARC WEINGARTEN, Esq.
Kaye, Scholer, Fierman, Hays & Schulte Roth & Zabel
Handler, LLP
1999 Avenue of the Stars, Suite 1600 900 Third Avenue
Los Angeles, California 90067 New York, New York 10022
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE DATE THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
registration statement for the same offering. / / _____________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
AMOUNT TO PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE
Common stock, no par value........ 2,645,000 $13.00 $34,385,000 $11,857
(1) Includes 345,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of determining the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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VDI MEDIA
CROSS REFERENCE SHEET
SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION
TO BE INCLUDED IN RESPONSE TO ITEMS OF FORM S-1.
FORM S-1 ITEM CAPTION(S) IN PROSPECTUS
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1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus....... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front Cover Page
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............... Prospectus Summary, Risk Factors
4. Use of Proceeds................. Use of Proceeds
5. Determination of Offering
Price.......................... Outside Front Cover Page,
Underwriting
6. Dilution........................ Dilution
7. Selling Security Holders........ Principal and Selling
Shareholders
8. Plan of Distribution............ Outside Front Cover Page,
Underwriting
9. Description of Securities to be
Registered..................... Description of Capital Stock
10. Interest of Named Experts and
Counsel........................ *
11. Information with Respect to the
Registrant..................... The Company, Dividend Policy,
Selected Financial Data,
Management's Discussion and
Analysis of Financial Condition
and Results of Operations,
Business, Management, Certain
Transactions, Principal and
Selling Shareholders,
Description of Capital Stock,
Index to Financial Statements
12. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities..... *
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*Inapplicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
SUBJECT TO COMPLETION, DATED MAY 17, 1996
PROSPECTUS
2,300,000 SHARES
VDI MEDIA
COMMON STOCK
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Of the 2,300,000 shares of Common Stock being offered hereby, 2,100,000
shares are being sold by VDI Media ("VDI" or the "Company") and 200,000 shares
are being sold by the Selling Shareholder. See "Principal and Selling
Shareholders." The Company will not receive any proceeds from the sale of shares
by the Selling Shareholder. Prior to this offering, there has been no public
market for the Common Stock of the Company. It is currently anticipated that the
initial public offering price will be between $11.00 and $13.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the trading symbol "VDIM."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDER
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Per Share...... $ $ $ $
Total (3)...... $ $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the offering estimated at $ payable by
the Company.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 345,000 additional shares of
Common Stock for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
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The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel or
reject orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the shares of Common Stock
will be made against payment on or about , 1996, at the office of
Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York,
New York 10281.
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OPPENHEIMER & CO., INC. PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus is , 1996
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) REFLECTS A THREE
HUNDRED THIRTY THREE-FOR-ONE STOCK SPLIT OF THE COMMON STOCK PRIOR TO THE
CLOSING OF THIS OFFERING AND (II) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT
OPTION WILL NOT BE EXERCISED.
THE COMPANY
VDI Media ("VDI" or the "Company") is a leading provider of broadcast
quality video duplication, distribution and related value-added services. The
Company is a leading distributor of national television spot advertising,
trailers and electronic press kits for the motion picture industry, and believes
that it is a leading distributor of national television spot advertising
overall. The Company serviced over 1,200 customers in the year ended December
31, 1995, including MCA Motion Picture Group, Columbia/TriStar Pictures, Inc.,
Fox Filmed Entertainment, Paramount Pictures Corporation, The Walt Disney Motion
Picture Group, Warner Bros. Inc., Turner Pictures, Saatchi & Saatchi and McCann
Erikson. The Company has realized significant growth in revenues, operating
income and pro forma net income over the last five years, with compound annual
growth rates of 29.5%, 47.7% and 44.7%, respectively.
The Company's services include (i) the physical and electronic delivery of
broadcast quality advertising, including spots, trailers, electronic press kits
and infomercials, and syndicated television programming to more than 945
television stations, cable companies and other end-users nationwide and (ii) a
broad range of video services including the duplication of video in all formats,
element storage, standards conversion, closed captioning and transcription
services, and video encoding for air play verification purposes. The value-added
services provided by the Company further strengthen customer relationships and
create opportunities for increased duplication and distribution business.
In 1994, to enhance its competitive position, the Company created Broadcast
One, a national distribution network which employs fiber optic and satellite
technologies in combination with traditional distribution methods to deliver
broadcast quality material throughout the United States. The Company's fiber
optic and satellite technologies provide rapid and reliable electronic
transmission of video spots and other content with a high level of quality,
accountability and flexibility to both advertisers and broadcasters. Through the
Company's state-of-the-art distribution hub in Tulsa, Oklahoma (the "Tulsa
Control Center"), Broadcast One has enabled the Company to expand its presence
in the national advertising market, allowing for greater diversification of its
customer base. The Company currently derives a small percentage of its revenue
from electronic deliveries and anticipates that this percentage will increase as
such technologies become more widely accepted. The Company has a strategic
agreement with VyVx, Inc., a subsidiary of the Williams Companies, which
provides the fiber optic capability of the Broadcast One network. The Company
intends to add new methods of distribution to Broadcast One as technologies
become both standardized and cost-effective.
The primary method of distribution by the Company, and by others in the
industry, continues to be the physical delivery of videotape to end-users. The
Company operates broadcast tape duplication facilities at its two California
locations and at the Tulsa Control Center, which together currently distribute
approximately videotapes a day. By capitalizing on Broadcast One's
capability to link instantaneously the Company's facilities through fiber optic
and satellite technologies and by leveraging the Tulsa Control Center's
proximity to the centrally located Tulsa International Airport, the Company is
able to utilize the optimal delivery method to extend its deadline for same or
next-day delivery of time-sensitive material, a service advantage not available
to many of its competitors. As the Company develops or acquires facilities in
new markets, the Broadcast One network will enable it to maximize the usage of
its network-wide duplication capacity by instantaneously transmitting video
content to facilities with available capacity. The Company's Broadcast One
network and California facilities are designed to cost-effectively serve the
time-sensitive distribution needs of the Company's clients. Management believes
that the Company's success is based on its strong customer relationships which
are maintained through the reliability, quality and cost-effectiveness of its
services, and its extended deadline for processing customer orders.
3
The broadcast video duplication industry is service-oriented, highly
fragmented and primarily comprised of numerous small regional companies. The
Company has targeted a number of these smaller regional companies as potential
acquisitions. To the extent any such companies are acquired, the Company intends
to integrate their operations into its "hub and spoke" distribution network
controlled through the Tulsa Control Center. The Company will seek to realize
margin gains through such acquisitions through (i) the elimination of
sub-contracted duplication and production work in markets in which it does not
yet have such capabilities, (ii) the elimination of redundant management and
administrative functions and (iii) the greater utilization of its existing high
volume duplication and distribution facilities.
The Company's strategy is to increase its market share within the video
duplication and distribution industry by (i) increasing the timeliness and
efficiency of its operations by exploiting new technologies as they become both
standardized and cost-effective, (ii) acquiring companies with strong customer
relationships in businesses complementary to the Company's operations, (iii)
further penetrating the marketplace by providing a broad array of high quality,
reliable value-added services and (iv) continuing to develop value-added
services such as audio encryption, electronic order entry and order status and
air play verification.
THE OFFERING (1)
Common Stock offered by the Company............ 2,100,000 shares
Common Stock offered by the Selling
Shareholder................................... 200,000 shares
Total Common Stock offered..................... 2,300,000 shares
Common Stock to be outstanding after the
offering...................................... 8,760,000 shares (2)
Estimated net proceeds to the Company.......... $ (3)
Use of proceeds by the Company................. To repay approximately $5.0 million of
indebtedness and for general corporate
purposes, including the acquisition of
businesses complementary to the Company's
operations and for capital expenditures.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... VDIM
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(1) Does not include an additional 345,000 shares which will be sold by the
Company in the event the Underwriters exercise their over-allotment option
in full. See "Underwriting."
(2) Excludes 900,000 shares of Common Stock reserved for issuance in respect of
options to be issued under the Company's 1996 Stock Incentive Plan (the
"1996 Plan"). Upon consummation of this offering, the Company intends to
grant options to purchase an aggregate of 300,000 shares of Common Stock
under the 1996 Plan, each at an exercise price per share equal to the
initial public offering price per share of Common Stock. See
"Capitalization" and "Management -- 1996 Stock Incentive Plan."
(3) After deducting the underwriting discount of $ and estimated expenses
of the offering of $ .
4
SUMMARY SELECTED FINANCIAL AND OTHER DATA
The summary selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus. The statement of operations data set
forth below with respect to the years ended December 31, 1993, 1994 and 1995,
are derived from the Company's audited Financial Statements and the Notes
thereto included elsewhere in this Prospectus. The statement of operations data
with respect to the years ended December 31, 1991 and 1992, and the interim
periods ended March 31, 1995 and 1996 and the balance sheet data as of March 31,
1996 have been derived from the Company's unaudited financial statements, which,
in the opinion of management, include all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results for the
unaudited periods.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
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1991 1992 1993 1994 (1) 1995 1995 1996
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(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Revenues.......................................... $ 6,597 $ 11,546 $ 17,044 $ 14,468 $ 18,538 $ 4,233 $ 5,837
Cost of sales (2)................................. 3,297 7,710 10,595 9,692 11,256 2,595 3,688
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 3,300 3,836 6,449 4,776 7,282 1,638 2,149
Selling, general and administrative expense....... 2,858 3,498 4,290 3,895 5,181 1,124 1,373
Costs related to establishing a new facility...... -- -- -- 981 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)........................... 442 338 2,159 (100) 2,101 514 776
Dispute settlement................................ -- -- -- 458 -- -- --
Interest expense, net............................. 38 170 241 271 333 96 70
Provision for income taxes........................ 17 -- 29 -- 26 10 18
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................. $ 387 $ 168 $ 1,889 ($ 829) $ 1,742 $ 408 $ 688
--------- --------- --------- --------- --------- --------- ---------
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PRO FORMA STATEMENT OF OPERATIONS DATA (3)
Pro forma provision (benefit) for income taxes.... $ 162 $ 67 $ 767 $ (332) $ 707 $ 167 $ 282
Pro forma net income (loss)....................... 242 101 1,151 (497) 1,061 251 424
Pro forma net income (loss) per share............. $ 0.04 $ 0.02 $ 0.17 $ (0.07) $ 0.16 $ 0.04 $ 0.06
Common shares outstanding......................... 6,660 6,660 6,660 6,660 6,660 6,660 6,660
OTHER DATA
EBITDA (4)........................................ $ 728 $ 1,059 $ 3,152 $ 2,209 $ 3,680 $ 902 $ 1,227
Capital expenditures.............................. 765 1,672 1,379 2,071 1,137 49 314
MARCH 31, 1996
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ACTUAL PRO FORMA (5) AS ADJUSTED (6)
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(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents.............................................. $ 246 $ 246 $ 17,995
Working capital (deficit).............................................. 1,672 (919) 20,206
Property and equipment, net............................................ 3,855 3,855 3,855
Total assets........................................................... 9,153 9,153 26,902
Bank borrowings........................................................ -- 2,530 --
Long-term debt, net of current portion................................. 1,963 1,963 42
Shareholders' equity................................................... 3,697 1,106 23,942
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(1) The 1994 results of operations reflect (i) the disposition of the Company's
telecine business during the first quarter of 1994, (ii) one-time start-up
costs of $1.0 million related to establishing the Tulsa Control Center,
which costs were in addition to capital expenditures of $0.9 million and
(iii) one-time costs of $0.5 million in connection with a settlement of a
dispute. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
5
(2) Includes depreciation in the years ended December 31, 1991 through December
31, 1995, and the three month periods ended March 31, 1995 and 1996, in the
amount of $242, $521, $799, $1,059, $1,347, $333 and $384, respectively.
Additional depreciation expenses are allocated to selling, general and
administrative expense.
(3) Prior to this offering, the Company has been exempt from payment of federal
income taxes and has paid certain state income taxes at a reduced rate as a
result of its S Corporation election. Pro forma statement of operations data
reflect the income tax expense that would have been recorded had the Company
not been exempt from paying taxes under the S Corporation election. As a
result of terminating the Company's S Corporation status prior to completion
of this offering, the Company will be required to record a one-time,
non-cash charge against historical earnings for additional deferred taxes
based upon the increase in the effective tax rate from the Company's S
Corporation status (1.5%) to C Corporation status (40%). This charge will
occur in the quarter ending September 30, 1996 and the year ending December
31, 1996. If this charge were recorded at March 31, 1996, the amount would
have been approximately $61,000. This amount may vary as of the closing date
of this offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 2 and 3 of Notes to Financial
Statements.
(4) EBITDA is defined herein as earnings before interest, taxes, depreciation,
amortization and non-recurring charges. EBITDA does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles ("GAAP"), is not to be considered as an alternative to
net income or any other GAAP measurements as a measure of operating
performance and is not necessarily indicative of cash available to fund all
cash needs. Management believes that EBITDA is a useful measure of cash flow
available to the Company to pay interest, repay debt, make acquisitions or
invest in new technologies.
(5) Pro forma balance sheet data reflect (i) the distribution by the Company to
its shareholders of previously taxed and undistributed earnings calculated
as of March 31, 1996, which amount is expected to increase based upon
taxable earnings for the period from April 1, 1996 to the closing date of
this offering, (ii) the additional borrowings incurred to pay such
distribution, (iii) the recording by the Company of additional deferred
taxes as if the Company were treated as a C Corporation at March 31, 1996
and (iv) the reclassification of retained earnings to paid-in capital.
(6) Adjusted to reflect the sale of 2,100,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $12.00 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization." Excludes 900,000 shares of Common Stock
reserved for issuance under the 1996 Plan. Upon consummation of this
offering the Company intends to grant options to purchase an aggregate of
300,000 shares of Common Stock under the 1996 Plan, each at an exercise
price per share equal to the initial public offering price per share of
Common Stock. See "Capitalization" and "Management -- 1996 Stock Incentive
Plan."
6
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, AS
WELL AS ALL OF THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, IN EVALUATING
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
COMPETITION
The broadcast videotape duplication and distribution industry is a highly
competitive, service-oriented business. The Company has no long-term or
exclusive service agreements with any of its customers. Business is acquired on
a purchase order basis and is based primarily on customer satisfaction with
reliability, timeliness, quality and price.
The Company competes with a variety of duplication and distribution firms,
some of which have a national presence, certain post-production companies and,
to a lesser extent, the in-house duplication and distribution operations of
major motion picture studios and ad agencies. Some of these firms, and all of
the studios, have greater financial, distribution and marketing resources and
have achieved a higher level of brand recognition than the Company. There is no
assurance that the Company will be able to compete effectively against these
competitors merely on the basis of reliability, timeliness, quality and price or
otherwise.
The Company may face competition from companies in related markets which
could offer similar or superior services to those offered by the Company. For
example, telecommunications providers could enter the market as competitors with
materially lower electronic delivery transportation costs. The Company believes
that an increasingly competitive environment could lead to a loss of market
share or price reductions, which could have a material adverse effect on the
Company's financial condition and prospects. See "Business -- Competition."
CUSTOMER AND INDUSTRY CONCENTRATION
Although the Company serviced over 1,200 customers during the year ended
December 31, 1995, 10 motion picture studios and advertising agencies accounted
for approximately 51%, including MCA Motion Picture Group, which accounted for
approximately 11%, of the Company's revenues in such period. If one or more of
these companies were to stop using the Company's services, the business of the
Company could be adversely affected. Because the Company derives substantially
all of its revenue from clients in the entertainment and advertising industries,
the financial condition and prospects of the Company could also be adversely
affected by an adverse change in conditions which impact those industries.
DEPENDENCE ON TECHNOLOGICAL DEVELOPMENTS
Although the Company intends to utilize the most efficient and
cost-effective technologies available for the delivery of video content,
including digital satellite and Internet transmission, as they develop, there is
no assurance that the Company will be able to adapt to such standards in a
timely fashion, or at all. The Company believes that its future growth will
depend, in part, on its ability to add these services and to add customers in a
timely and cost-effective manner. There is no assurance that the Company will be
successful in offering such services or obtaining new customers for these
services. The Company intends to rely on third party vendors for the development
of these technologies and there is no assurance that such vendors will be able
to develop such technologies in a manner that meets the needs of the Company and
its customers. The Company's development efforts have been focused on forming
strategic relationships in the areas of fiber optic, satellite and video
compression technology. The Company obtains its fiber optic transmission
services through VyVx, Inc. ("VyVx"), a subsidiary of the Williams Companies,
through a joint operating agreement which expires in 1999. Any material
interruption in the supply of such services could have a material adverse effect
on the Company's financial condition and prospects. The Company's ability to
successfully expand its electronic video delivery services also depends on its
ability to maintain satellite delivery capability and to obtain cost-effective
point to multi-point fiber optic distribution.
EXPANSION STRATEGY
The Company's growth strategy involves a continuing commitment to both
internal development and expansion through acquisitions. The Company currently
has no agreement or commitment to acquire any
7
company or business and there is no assurance that the Company will be able to
continue to grow, or to identify and reach mutually agreeable terms to purchase
acquisition targets, or that the Company will be able to profitably manage
additional businesses or successfully integrate such additional businesses into
the Company without substantial costs, delays or other problems. Acquisitions
may involve a number of special risks including: adverse effects on the
Company's reported operating results; diversion of management's attention;
unanticipated problems or legal liabilities; and amortization of acquired
intangible assets. In addition, the Company may require additional funding to
finance its future acquisitions. There is no assurance that the Company will be
able to secure acquisition financing on acceptable terms or at all. The Company
may use working capital (including the proceeds of this offering), or equity, or
raise financing through other equity offerings or the incurrence of debt, in
connection with the funding of any acquisition. Some or all of these risks could
have a material adverse effect on the Company's financial condition and
prospects or could result in dilution to the Company's shareholders. In
addition, to the extent that consolidation becomes more prevalent in the
industry, the prices for attractive acquisition candidates could increase
substantially. There is no assurance that the Company will be able to effect any
such transactions or that any such transactions, if consummated, will prove to
be profitable. See "Business -- Strategy."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts and abilities of certain of its
senior management, particularly those of R. Luke Stefanko, Chairman of the Board
of Directors and Chief Executive Officer. The loss or interruption of the
services of key members of management could have a material adverse effect on
the Company's financial condition and prospects if a suitable replacement is not
promptly obtained. The Company intends to obtain a $5.0 million "key man" life
insurance policy on Mr. Stefanko. Although the Company has employment agreements
with Mr. Stefanko and certain of the Company's other key executives, there is no
assurance that such executives will remain with the Company during or after the
term of his or their employment agreement. In addition, the Company's success
depends to a significant degree upon the continuing contributions of, and on its
ability to attract and retain, qualified management, sales, operations,
marketing and technical personnel. The competition for qualified personnel is
intense and the loss of any of such persons, as well as the failure to recruit
additional key personnel in a timely manner, could have a material adverse
effect on the Company's financial condition and prospects. There is no assurance
that the Company will be able to continue to attract and retain qualified
management and other personnel for the development of its business. See
"Management."
ABILITY TO MAINTAIN AND IMPROVE SERVICE QUALITY
The Company's business is dependent on its ability to meet the current and
future demands of its customers, which include reliability, timeliness, quality
and price. Any failure to do so, whether or not caused by factors within the
control of the Company, could result in losses to such clients. Although the
Company disclaims any liability for such losses, there is no assurance that
claims would not be asserted or that dissatisfied customers would refuse to make
further deliveries through the Company in the event of a significant occurrence
of lost deliveries, either of which could have a material adverse effect on the
Company's financial condition and prospects. Although the Company maintains
insurance against business interruption, there is no assurance that such
insurance will be adequate to protect the Company from significant loss in these
circumstances or that a major catastrophe (such as an earthquake or other
natural disaster) would not result in a prolonged interruption of the Company's
business. In addition, the Company's ability to make deliveries within the time
periods requested by customers depends on a number of factors, some of which are
outside of its control, including equipment failure, work stoppages by package
delivery vendors or interruption in services by fiber optic or satellite service
providers.
MANAGEMENT OF GROWTH
Since its inception, the Company has experienced rapid growth that has
resulted in new and increased responsibilities for management personnel and has
placed and continues to place increased demands on the Company's management,
operational and financial systems and resources. To accommodate this growth,
compete effectively and manage future growth, the Company will be required to
continue to implement and improve its operational, financial and management
information systems, and to expand, train, motivate and
8
manage its work force. There is no assurance that the Company's personnel,
systems, procedures and controls will be adequate to support the Company's
future operations. Any failure to do so could have a material adverse effect on
the Company's financial condition and prospects. See "Management."
In addition, with the expansion of Broadcast One, the Company has had to
subcontract an increasing amount of tape duplication and production work in
those markets in which it does not yet have such capabilities, resulting in
increased expenses and decreased operating margins. As Broadcast One grows,
there could be further decreases in the Company's operating margins. The Company
intends to acquire complementary businesses in these markets in order to
decrease the amount of work it subcontracts.
BROAD DISCRETION AS TO USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Common
Stock offered hereby to repay approximately $5.0 million of indebtedness and for
general corporate purposes, including the acquisition of businesses
complementary to the Company's operations and for capital expenditures. The
Company, however, does not have any agreement or commitment to acquire any
particular business nor has it identified particular capital expenditure
projects. The Company's management will therefore have broad discretion with
respect to the use of the proceeds of this offering and there is no assurance
that the Company will be able to consummate acquisitions or identify and arrange
projects that meet the Company's requirements. See "-- Expansion Strategy" and
"Use of Proceeds."
FLUCTUATING RESULTS; SEASONALITY
The Company's operating results have in the past and may in the future vary
depending on factors such as the volume of advertising in response to seasonal
buying patterns, the timing of new product and service introductions, increased
competition, general economic factors, and other factors. As a result, the
Company believes that period to period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as an indication of
future performance. For example, the Company's operating results have
historically been significantly influenced by the volume of business from the
motion picture industry, which is an industry that is subject to seasonal and
cyclical downturns. In any period, the Company's revenues and delivery costs are
subject to variation based on changes in the volume and mix of deliveries
performed during the period. It is possible that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. Fluctuations in sales due to
seasonality may become more pronounced if the growth rate of the Company's sales
slows. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CONTROL BY PRINCIPAL SHAREHOLDER; POTENTIAL ISSUANCE OF PREFERRED STOCK;
ANTI-TAKEOVER PROVISIONS
Upon completion of this offering, R. Luke Stefanko will beneficially own
approximately 63.9% of the outstanding Common Stock. By virtue of this stock
ownership, Mr. Stefanko will be able to determine the outcome of substantially
all matters required to be submitted to a vote of shareholders, including (i)
the election of the board of directors, (ii) amendments to the Company's
Restated Articles of Incorporation and (iii) approval of mergers and other
significant corporate transactions. The foregoing may have the effect of
discouraging, delaying or preventing certain types of transactions involving an
actual or potential change of control of the Company, including transactions in
which the holders of Common Stock might otherwise receive a premium for their
shares over current market prices. See "Principal and Selling Shareholders" and
"Description of Capital Stock." In addition, the Company's Board of Directors
has the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions thereof,
including voting rights, without any further vote or action by the Company's
shareholders. Although the Company has no current plans to issue any shares of
Preferred Stock, the rights of the holders of Common Stock would be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. Issuance of Preferred Stock could have
the effect of discouraging, delaying or preventing a change in control of the
Company. Furthermore, certain provisions of the Company's Restated Articles of
Incorporation and By-laws and of California law also could have the effect of
discouraging, delaying or preventing a change in control of the Company. See
"Management," "Principal and Selling Shareholders" and "Description of Capital
Stock."
9
NO PRIOR MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE; PRICE
VOLATILITY
Prior to this offering there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained after this offering. The initial public offering price of the Common
Stock offered hereby will be determined through negotiations among the Company
and the representatives of the Underwriters (the "Representatives") and may not
be indicative of future market prices. There can be no assurance that the market
price of the Common Stock will not decline below the initial public offering
price. The trading prices of the Company's Common Stock may be subject to wide
fluctuations in response to a number of factors, including variations in
operating results, changes in earnings estimates by securities analysts,
announcements of extraordinary events such as litigation or acquisitions,
announcements of technological innovations or new products or services by the
Company or its competitors, as well as general trends in the Company's industry
and general economic, political and market conditions. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock prevailing from time to time. The Company intends to file a registration
statement under the Securities Act of 1933, as amended (the "Securities Act")
covering approximately 900,000 shares of Common Stock reserved for issuance
under the 1996 Plan. That registration statement is expected to be filed within
90 days after the date hereof and will automatically become effective upon
filing. Upon consummation of this offering, the Company intends to grant options
to purchase an aggregate of 300,000 shares of Common stock under the 1996 Plan,
each at an exercise price per share equal to the initial public offering price.
Beginning 180 days after the date hereof shares of Common Stock will
become eligible for sale in the public market, subject to compliance with Rule
144 under the Securities Act, when certain lock-up agreements between the
Underwriters and the current shareholders of the Company and the recipients of
such options expire. Oppenheimer & Co., Inc. may, in its sole discretion, and at
any time without notice, release all or any portion of the Common Stock subject
to such lock-up agreements prior to such time. See "Management -- 1996 Stock
Incentive Plan" and "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Assuming an initial public offering price of $12.00 per share, investors
participating in this offering will incur immediate and substantial dilution in
pro forma net tangible book value per share of Common Stock of approximately
$9.27. See "Dilution."
10
THE COMPANY
VDI is a leading provider of broadcast quality video duplication,
distribution and related value-added services. The Company is a leading
distributor of national television spot advertising, trailers and electronic
press kits for the motion picture industry, and believes that it is a leading
distributor of national television spot advertising overall. The Company
serviced over 1,200 customers in the year ended December 31, 1995, including MCA
Motion Picture Group, Columbia/TriStar Pictures, Inc., Fox Filmed Entertainment,
Paramount Pictures Corporation, The Walt Disney Motion Picture Group, Warner
Bros. Inc., Turner Pictures, Saatchi & Saatchi and McCann Erikson. The Company
has realized significant growth in revenues, operating income and pro forma net
income over the last five years, with compound annual growth rates of 29.5%,
47.7% and 44.7%, respectively.
The Company operates Broadcast One, a communications network which delivers
video using a fiber optic and satellite network to link the Company's multiple
format videotape duplication facilities directly with end-users and to extend
its proximity to the hubs of air and ground couriers. The Company's distribution
network, along with its duplication and value-added services, are designed to
serve all of the distribution and duplication needs of the movie production and
advertising industries in a reliable and time-sensitive manner.
The Company's services include (i) the physical and electronic delivery of
broadcast quality advertising, including spots, trailers, electronic press kits
and infomercials, and syndicated television programming to more than 945
television stations, cable companies and other end-users nationwide and (ii) a
broad range of video services including the duplication of video in all formats,
element storage, standards conversion, closed captioning and transcription
services, and video encoding for air play verification purposes. The value-added
services provided by the Company further strengthen customer relationships and
create opportunities for increased duplication and distribution business.
The Company derives revenue primarily from major and independent motion
picture and television studios, cable television program suppliers, advertising
agencies and, on a more limited basis, national television networks, local
television stations, television program syndicators, corporations and
educational institutions. The Company receives orders with specific routing and
timing instructions provided by the customer. These orders are then entered into
the Company's computer system and scheduled for electronic or physical delivery
via the Company's Hollywood facility or the Tulsa Control Center. When a video
spot is received, the Company's quality control personnel inspect the video to
ensure that it meets applicable FCC requirements and customer specifications and
then initiate the sequence to distribute the video to the designated television
stations either electronically, over fiber optic lines and/or satellite, or via
the most suitable package carrier. The Company believes that fiber optic
delivery is superior to satellite delivery due to its transmission quality. To
the extent such technologies become standardized and cost-effective, the Company
plans to add digital satellite and Internet transmission capabilities in the
future.
The Company was incorporated in California in 1990. The Company's executive
offices are located at 6920 Sunset Boulevard, Hollywood, California 90028, and
its telephone number is (213) 957-5500.
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered hereby are estimated to be $ , after deduction of the underwriting
discount and estimated offering expenses payable by the Company. The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Shareholder. Approximately $5.0 million of the estimated net proceeds will be
used to repay certain indebtedness including (i) $2.5 million borrowed on
, 1996 in connection with the distribution to the Company's
shareholders of previously taxed and undistributed earnings calculated as of
March 31, 1996, (ii) $2.4 million of debt outstanding under its term loan
incurred primarily to acquire capital equipment and (iii) $0.1 million of
outstanding capital lease obligations. The amounts outstanding under the term
loan bear interest at the London Interbank Offering Rate plus 2.5% and are
payable in monthly installments through July 2000. In addition, the Company
intends to use a substantial portion of the net proceeds for general corporate
purposes, including the potential acquisition of businesses complementary to the
Company's
11
operations, and for capital expenditures. The Company currently has no
commitments or agreements to acquire any particular business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." Pending such uses, the Company intends to
invest the net proceeds in short-term investment grade, interest-bearing
securities and certificates of deposit.
DIVIDEND POLICY
The Company currently intends to retain any earnings for use in its business
and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future.
12
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 (i) on an actual basis, (ii) on a pro forma basis reflecting (a) the
distribution by the Company to its shareholders of previously taxed and
undistributed earnings calculated as of March 31, 1996, which amount is expected
to increase based upon taxable earnings for the period from April 1, 1996 to the
closing date of this offering, (b) the additional borrowings incurred to pay
these distributions, (c) the recording by the Company of additional deferred
taxes as if the Company were treated as a C Corporation at March 31, 1996 and
(d) the reclassification of retained earnings to paid-in capital and (iii) as
adjusted to reflect the sale by the Company of 2,100,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $12.00 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds." This information should be read in conjunction with the Financial
Statements and related Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein.
MARCH 31, 1996
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
Bank borrowings................................................................ $ -- $ 2,530 $ --
Long-term debt, net of current portion......................................... 1,963 1,963 42
Shareholders' equity(1):
Preferred Stock, no par value, 5,000,000 shares
authorized, no shares issued................................................ -- -- --
Common Stock, no par value, 50,000,000 shares
authorized, 6,660,000 shares issued and outstanding and 8,760,000 shares
issued as adjusted.......................................................... 1,015 1,106 23,942
Retained earnings............................................................ 2,682 --
--------- ----------- -----------
Total shareholders' equity................................................... 3,697 1,106 23,942
--------- ----------- -----------
Total capitalization....................................................... $ 5,660 $ 5,599 $ 23,984
--------- ----------- -----------
--------- ----------- -----------
- ------------------------
(1) Excludes 900,000 shares of Common Stock reserved for issuance under the 1996
Plan. Upon consummation of this offering the Company intends to grant
options to purchase an aggregate of 300,000 shares of Common Stock under the
1996 Plan, each at an exercise price per share equal to the initial public
offering price of the Common Stock. See "Management -- 1996 Stock Incentive
Plan."
13
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996,
after giving effect to the distribution to the Company's current shareholders
prior to the offering of previously taxed and undistributed earnings, calculated
as of March 31, 1996, was $1.1 million or approximately $0.17 per share of
Common Stock. Pro forma net tangible book value per share represents the amount
of the Company's tangible assets less total liabilities, divided by the number
of shares of Common Stock outstanding, after giving effect to (i) the
distribution by the Company to its shareholders of previously taxed and
undistributed earnings calculated as of March 31, 1996, which amount is expected
to increase based upon taxable earnings for the period from April 1, 1996 to the
closing date of this offering, (ii) the additional borrowings incurred to pay
these distributions, (iii) the recording by the Company of additional deferred
taxes as if the Company were treated as a C Corporation at March 31, 1996 and
(iv) the reclassification of retained earnings to paid-in capital. After giving
effect to the sale by the Company of 2,100,000 of the shares of Common Stock
offered hereby (at an assumed initial public offering price of $12.00 per
share), the pro forma net tangible book value of the Company as of March 31,
1996 would have been $23.9 million or approximately $2.73 per share. This
represents an immediate increase of $2.56 per share to the existing shareholders
and an immediate dilution of $9.27 per share to new investors. The following
table illustrates this per share dilution:
Assumed initial public offering price per share...................... $ 12.00
Pro forma net tangible book value per share
before the offering................................................. 0.17
Increase per share attributable to new investors..................... 2.56
---------
Pro forma net tangible book value per share
after the offering.................................................. 2.73
---------
Dilution per share to new investors.................................. $ 9.27
---------
---------
The following table summarizes, on a pro forma basis as of March 31, 1996
(after giving effect to the distribution to the Company's current shareholders
prior to the offering of previously taxed and undistributed earnings, calculated
as of March 31, 1996), the difference between the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid by the existing shareholders and by the investors
purchasing shares of Common Stock offered hereby.
SHARES TOTAL
PURCHASED CONSIDERATION
----------------------- --------------------------
NUMBER PERCENT AMOUNT PERCENT AVERAGE PRICE
---------- ----------- ------------- ----------- PER SHARE
-------------
Existing shareholders..................... 6,660,000 76% $ 995,000 4% $ 0.15
New investors............................. 2,100,000 24 25,200,000 96 12.00
---------- --- ------------- ---
Total................................. 8,760,000 100% $ 26,195,000 100%
---------- --- ------------- ---
---------- --- ------------- ---
The foregoing computations exclude 900,000 shares of Common Stock reserved
for issuance under the 1996 Plan. Upon consummation of this offering, the
Company intends to grant options to purchase an aggregate of 300,000 shares of
Common Stock under the 1996 Plan, each at an exercise price per share equal to
the initial public offering price. See "Management -- 1996 Stock Incentive
Plan."
14
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus. The statement of operations data set forth below with respect
to the years ended December 31, 1993, 1994 and 1995, and the balance sheet data
as of December 31, 1994 and 1995, are derived from the Company's audited
Financial Statements and the Notes thereto included elsewhere in this
Prospectus. The statement of operations data with respect to the years ended
December 31, 1991 and 1992, and the interim periods ended March 31, 1995 and
1996 and the balance sheet data as of December 31, 1991, 1992 and 1993 and March
31, 1996 have been derived from the Company's unaudited financial statements,
which, in the opinion of management, include all adjustments, consisting of
normal recurring adjustments, necessary for a fair statement of the results for
the unaudited periods.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 (1) 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenues......................................... $ 6,597 $ 11,546 $ 17,044 $ 14,468 $ 18,538 $ 4,233 $ 5,837
Cost of sales (2)................................ 3,297 7,710 10,595 9,692 11,256 2,595 3,688
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................................... 3,300 3,836 6,449 4,776 7,282 1,638 2,149
Selling, general and administrative expense...... 2,858 3,498 4,290 3,895 5,181 1,124 1,373
Costs related to establishing a new facility..... -- -- -- 981 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss).......................... 442 338 2,159 (100) 2,101 514 776
Dispute settlement............................... -- -- -- 458 -- -- --
Interest expense, net............................ 38 170 241 271 333 96 70
Provision for income taxes....................... 17 -- 29 -- 26 10 18
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................ $ 387 $ 168 $ 1,889 $ (829) $ 1,742 $ 408 $ 688
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA STATEMENT OF OPERATIONS DATA (3)
Pro forma provision (benefit) for income taxes... $ 162 $ 67 $ 767 $ (332) $ 707 $ 167 $ 282
Pro forma net income (loss)...................... 242 101 1,151 (497) 1,061 251 424
Pro forma net income (loss) per share............ $ 0.04 $ 0.02 $ 0.17 $ (0.07) $ 0.16 $ 0.04 $ 0.06
Common shares outstanding........................ 6,660 6,660 6,660 6,660 6,660 6,660 6,660
OTHER DATA
EBITDA (4)....................................... $ 728 $ 1,059 $ 3,152 $ 2,209 $ 3,680 $ 902 $ 1,227
Capital expenditures............................. 765 1,672 1,379 2,071 1,137 49 314
DECEMBER 31, MARCH 31, 1996
----------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA (5)
--------- --------- --------- --------- --------- --------- ---------------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents................ $ 35 $ 44 $ 33 $ 60 $ 415 $ 246 $ 246
Working capital (deficit)................ 122 (646) 392 (1,329) 1,079 1,672 (919)
Property and equipment, net.............. 1,544 3,271 3,670 4,402 3,992 3,855 3,855
Total assets............................. 3,179 5,806 7,253 8,189 9,340 9,153 9,153
Bank borrowings.......................... 350 775 525 1,644 100 -- 2,530
Long-term debt, net of current portion... 652 1,552 1,388 1,457 2,150 1,963 1,963
Shareholders' equity..................... 1,085 1,253 2,803 1,706 3,019 3,697 1,106
- ------------------------
(1) The 1994 results of operations reflect (i) the disposition of the Company's
telecine business during the first quarter of 1994, (ii) one-time start-up
costs of $1.0 million related to establishing the Tulsa Control Center,
which costs were in addition to capital expenditures of $0.9 million and
(iii) one-time costs of $0.5 million in connection with a settlement of a
dispute. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
15
(2) Includes depreciation in the years ended December 31, 1991 through December
31, 1995, and the three month periods ended March 31, 1995 and 1996, in the
amount of $242, $521, $799, $1,059, $1,347, $333 and $384, respectively.
Additional depreciation expenses are allocated to selling, general and
administrative expense.
(3) Prior to this offering, the Company has been exempt from payment of federal
income taxes and has paid certain state income taxes at a reduced rate as a
result of its S Corporation election. Pro forma statement of operations data
reflect the income tax expense that would have been recorded had the Company
not been exempt from paying taxes under the S Corporation election. As a
result of terminating the Company's S Corporation status prior to completion
of this offering, the Company will be required to record a one-time,
non-cash charge against historical earnings for additional deferred taxes
based upon the increase in the effective tax rate from the Company's S
Corporation status (1.5%) to C Corporation status (40%). This charge will
occur in the quarter ending September 30, 1996 and the year ending December
31, 1996. If this charge were recorded at March 31, 1996, the amount would
have been approximately $61,000. This amount may vary as of the closing date
of this offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 2 and 3 of Notes to Financial
Statements.
(4) EBITDA is defined herein as earnings before interest, taxes, depreciation,
amortization and non-recurring charges. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, and is not to
be considered as an alternative to net income or any other GAAP measurements
as a measure of operating performance and is not necessarily indicative of
cash available to fund all cash needs. Management believes that EBITDA is a
useful measure of cash flow available to the Company to pay interest, repay
debt, make acquisitions or invest in new technologies.
(5) Pro forma balance sheet data reflect (i) the distribution by the Company to
its shareholders of previously taxed and undistributed earnings calculated
as of March 31, 1996, which amount is expected to increase based upon
taxable earnings for the period from April 1, 1996 to the closing date of
this offering, (ii) the additional borrowings incurred to pay such
distribution, (iii) the recording by the Company of additional deferred
taxes as if the Company were treated as a C Corporation at March 31, 1996
and (iv) the reclassification of retained earnings to paid-in capital.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company generates revenues principally from duplication, distribution
and ancillary services. Duplication services are comprised of the physical
duplication of video materials from a source videotape or audiotape "Master" to
a target tape "Clone". Distribution services include the physical or electronic
distribution of video and audio materials to a customer-designated location
utilizing one or more of the Company's delivery methods. Distribution services
typically consist of deliveries of national television spot commercials and
electronic press kits and associated trafficking instructions to designated
stations and supplemental deliveries to non-broadcast destinations. Ancillary
services include video and audio editing services, closed captioning services,
standards conversion and other services related to the modifications of video
and audio content materials prior to distribution.
The Company recognizes revenue for services based on the shipment and/or
delivery of customer materials. Rates charged to customers vary based upon the
time-sensitivity of delivery, number of locations and the time at which video or
audio materials are made available to the Company to begin the duplication and
distribution process. Shorter delivery schedules and shorter lead times
typically command higher prices.
Duplication services generally are priced from $11.00 to $13.50 depending on
the format, length of source material and quantity of tapes ordered. Customers
often combine multiple commercials, or spots, on the same duplication order
("tied spots"). Tied spots are priced at a lower level reflecting the lower
variable cost of adding additional content to single duplication orders. The
Company charges $3.00 to $5.00 for each additional tied spot, depending on the
number of additional spots. Distribution services rates range from $6.00 to
$8.00 for single spots delivered the following morning and from $4 to $6 for two
day delivery. The price is determined by the number of packages and delivery
locations. Production services are typically billed at an hourly rate for use of
the Company's production facilities or on a firm price for specific services.
The Company's historical business has been concentrated in the provision of
duplication and other services to the major motion picture studios primarily
located in the Los Angeles area. This business, therefore, does not benefit from
the economies of scale inherent in the high-volume, national distribution of
broadcast materials. The Company believes the significant operating leverage
provided by the Broadcast One network and the Tulsa Control Center could provide
the Company the opportunity to grow its revenues at a rate faster than the
growth in its operating costs due to (i) lower per unit delivery expenses as
multiple orders destined for particular television stations are consolidated and
(ii) the reduction of per unit electronic delivery costs as the use of such
services increases. The Company believes that the Tulsa Control Center can
support a substantially higher volume of production and distribution with low
incremental cost increases.
The Company's cost of services includes salary expenses for personnel in the
areas of customer service, operations and shipping, as well as shipping
expenses, videotape materials, equipment maintenance and packaging supplies.
Additionally, a significant portion of fixed costs, including depreciation and
occupancy costs, are allocated to cost of sales, which creates operating
leverage at higher sales levels.
Selling, general and administrative expenses include the salary, travel
expenses and insurance of all sales and administrative personnel. The Company
believes that its current selling and administrative infrastructure will sustain
higher sales levels.
17
RESULTS OF OPERATIONS
The following table sets forth the amount, and percentage relationship to
revenues, of certain items included within the Company's Statement of Operations
for the years ended December 31, 1993, 1994 and 1995 and for the three month
periods ended March 31, 1995 and 1996.
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------------------- ----------------------
1993 1994 1995 1995
---------------------- ---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Revenues........................ $ 17,044 100.0% $ 14,468 100.0% $ 18,538 100.0% $ 4,233 100.0%
Cost of sales................... 10,595 62.2 9,692 67.0 11,256 60.7 2,595 61.3
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Gross profit.................... 6,449 37.8 4,776 33.0 7,282 39.3 1,638 38.7
Selling, general and
administrative expense......... 4,290 25.2 3,895 26.9 5,181 27.9 1,124 26.6
Costs related to establishing a
new facility................... -- -- 981 6.8 -- -- -- --
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Operating income (loss)......... 2,159 12.6 (100) (0.7) 2,101 11.4 514 12.1
Dispute settlement.............. -- -- 458 3.2 -- -- -- --
Interest expense................ 241 1.4 271 1.9 333 1.8 96 2.3
Provision for income taxes...... 29 0.1 26 0.1 10 0.2
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Net income (loss)............... $ 1,889 11.1% $ (829) (5.8%) $ 1,742 9.5% $ 408 9.6%
--------- ----------- --------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- ----------- --------- -----------
1996
----------------------
PERCENT
OF
AMOUNT REVENUES
--------- -----------
Revenues........................ $ 5,837 100.0%
Cost of sales................... 3,688 63.2
--------- -----------
Gross profit.................... 2,149 36.8
Selling, general and
administrative expense......... 1,373 23.5
Costs related to establishing a
new facility................... -- --
--------- -----------
Operating income (loss)......... 776 13.3
Dispute settlement.............. -- --
Interest expense................ 70 1.2
Provision for income taxes...... 18 0.3
--------- -----------
Net income (loss)............... $ 688 11.8%
--------- -----------
--------- -----------
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
REVENUES. Revenues increased by $1.6 million or 37.9% to $5.8 million for
the three month period ended March 31, 1996 compared to $4.2 million for the
three month period ended March 31, 1995 due to the increased use of the
Company's services by existing customers and the addition of new customers. In
addition, the three month period ended March 31, 1996 includes incremental
revenues derived from the Company's West Los Angeles duplication and
distribution facility which opened late in fiscal 1995.
GROSS PROFIT. Gross profit increased $0.5 million or 31.2% to $2.1 million
for the three month period ended March 31, 1996 compared to $1.6 million for the
three month period ended March 31, 1995. As a percentage of sales, gross profit
decreased from 38.7% to 36.8%. This decrease is primarily attributable to
increased cost of sales related to the sub-contracting of duplication services
in certain regional markets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses increased $0.2 million or 22.2% to $1.4 million for the
three month period ended March 31, 1996 compared to $1.1 million for the three
month period ended March 31, 1995. As a percentage of sales, selling, general
and administrative expenses decreased to 23.5% for the three month period ended
March 31, 1996 compared to 26.6% for the three month period ended March 31,
1995. This decrease in selling, general and administrative expenses as a percent
of sales was primarily due to the spreading of overhead over a higher sale base
in the three month period ended March 31, 1996 than in the comparable period in
1995.
OPERATING INCOME. Operating income increased $0.3 million or 51.0% to $0.8
million for the three month period ended March 31, 1996 compared to $0.4 million
for the three month period ended March 31, 1995.
INCOME TAXES. Prior to the completion of the offering, the Company operated
as an S Corporation. As such, the Company was not responsible for federal income
taxes and provided for state income taxes at reduced rates. As a result of the
change in tax status effective with the completion of this offering, the Company
will, in future periods, provide for all income taxes at higher statutory rates.
These factors are estimated to result in an effective tax rate for periods
subsequent to the offering of approximately 40%. Consequently, a 40% effective
rate has been used in the pro forma tax provision for all periods presented.
However, for the period in which the offering closes, the Company will record an
additional one-time non-cash charge for additional deferred taxes based upon an
increase in the effective tax rate for the Company's S Corporation status (1.5%)
to C Corporation status (40%) applied to the temporary differences between
18
the financial reporting and tax bases of the Company's assets and liabilities.
If this charge were recorded at March 31, 1996, the amount would have been
approximately $61,000. This amount may vary as of the closing date of this
offering.
NET INCOME. Net income for the three month period ended March 31, 1996
increased $0.3 million or 68.6% to $0.7 million compared to $0.4 million for the
three month period ended March 31, 1995. Such increase is primarily attributable
to the factors described above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Revenues increased by $4.0 million or 28.1% to $18.5 million for
the year ended December 31, 1995 compared to $14.5 million for the year ended
December 31, 1994. The primary reason for this increase was the increased use of
the Company's services by existing customers and the addition of new customers.
New customers were obtained as a result of marketing the Company's national
distribution network through the Tulsa Control Center and the Company's sales
office in New York, both of which opened in September 1994.
GROSS PROFIT. Gross profit increased $2.5 million or 52.5% to $7.3 million
for the year ended December 31, 1995 compared to $4.8 million for the year ended
December 31, 1994. As a percentage of sales, gross profit increased to 39.3% in
1995 from 33.0% in 1994. The increase in 1995 gross profit resulted from several
factors, including (i) increased sales volume being absorbed over a partially
fixed cost base (ii) decreased videotape costs through the tying of multiple
spots onto a single videotape, (iii) reduced freight costs through arrangements
made with certain package delivery carriers to consolidate shipments to common
geographic regions, and (iv) negotiation of consignment inventory agreements
with major vendors which reduced the usage of high cost "fill-in" vendors. These
factors which positively impacted 1995 gross profit were partially offset by
increased expenses associated with subcontracting duplication services in
certain regions. Furthermore, 1994 gross profit was adversely impacted by the
Company's decision to discontinue its telecine operation and the absorption of
costs related to the operations of the Tulsa Control Center which was opened in
September 1994, before the generation of associated Broadcast One revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased $1.3 million or 33.0% to $5.2 million for the
year ended December 31, 1995 compared to $3.9 million for the year ended
December 31, 1994. As a percentage of sales, selling, general and administrative
expenses increased to 27.9% from 26.9% in 1994. This increase was principally
due to increases in the number of sales, customer service and other
administrative employees and rent paid at new facilities opened during the year
in New York and Tulsa, Oklahoma. Such costs provide the Company with the ability
to increase capacity and, as a consequence, revenues.
OPERATING INCOME. Operating income was $2.1 million for the year ended
December 31, 1995 compared to an operating loss of $0.1 million for the year
ended December 31, 1994, primarily as a result of increased production volume
and greater operating leverage as fixed costs related to the Tulsa Control
Center were spread over greater revenues. In addition, the prior year included
certain expenses relating to the establishment of the Broadcast One facility.
OTHER. In 1994, management settled a dispute with an equipment lessor
regarding ownership of certain video duplication equipment. The settlement
amount of $0.5 million was recognized as a period cost in the Company's results
of operations.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1995
increased $0.1 million or 22.9% to $0.3 million as a result of increased bank
borrowings in connection with the establishment of the Tulsa Control Center.
NET INCOME (LOSS). Net income for the year ended December 31, 1995 of $1.7
million increased $2.6 million from a loss of $0.8 million for the year ended
December 31, 1994. This increase is primarily attributable to the sales and
gross profit increases described above. In addition, during the year ended
19
December 31, 1994 the Company settled a dispute with a third party equipment
lessor regarding ownership of certain video duplication equipment. The
settlement of $0.5 million was reflected in the Company's 1994 results of
operations.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
REVENUES. Revenues decreased $2.5 million or 15.1% to $14.5 million for the
year ended December 31, 1994 compared to $17.0 million for the year ended
December 31, 1993. This decrease is primarily attributable to the Company's
disposition of its telecine operation in March 1994 in order to focus on its
core business of video duplication and distribution. The Company exchanged its
telecine production equipment for previously leased video duplication equipment.
This decrease was offset in part by growth in the Company's core duplication and
distribution business.
GROSS PROFIT. Gross profit decreased $1.7 million or 25.9% to $4.8 million
for the year ended December 31, 1994 compared to $6.5 million for the year ended
December 31, 1993. As a percentage of sales, gross profit decreased to 33.0% in
1994 from 37.8% in 1993. 1994 gross profit was adversely impacted by the
Company's decision to discontinue its telecine operation and the absorption of
costs related to the operations of the Tulsa Control Center which was opened in
September 1994, before the generation of associated Broadcast One revenue.
Although telecine operations historically earned higher sales margins than the
Company's duplication and distribution business, such operations required
significantly greater capital expenditures than the Company's core duplication
and distribution business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense decreased $0.4 million or 9.2% to $3.9 million for the
year ended December 31, 1994 compared to $4.3 million for the year ended
December 31, 1993. As a percentage of sales, selling, general and administrative
expense increased to 26.9% in 1994 from 25.2% in 1993. This increase was
primarily due to the spreading of overhead over a lower sales base in 1994 as
compared to 1993.
OTHER. During 1994, the Company established the Tulsa Control Center.
Pre-operating costs incurred in connection with the establishment of this
facility, aggregating $1.0 million, have been charged to results of operations.
Such costs principally comprise payroll and other costs necessary to prepare
this facility for operations and to ensure that the quality of videotapes
produced at the facility conformed to the Company's standards.
OPERATING LOSS. The Company incurred a loss from operations of $0.8 million
for the year ended December 31, 1994 compared to income from operations of $1.9
million for the year ended December 31, 1993. The loss is principally
attributable to costs incurred in connection with the establishment of the Tulsa
Control Center and management's disposition of the Company's telecine operation
in 1994.
NET INCOME (LOSS). The Company incurred a loss of $0.8 million for the year
ended December 31, 1994 compared to net income of $1.9 million for the year
ended December 31, 1993. The loss is primarily attributable to the revenue
decrease related to disposition of the telecine operation, in addition to the
incurrence of pre-operating costs of $1.0 million related to the establishment
of the Tulsa Control Center and the settlement of a dispute in the amount of
$0.5 million.
SEASONALITY
The Company's quarterly revenues may demonstrate seasonality, due to the
impact of the Company's customer concentration in the motion picture and
advertising industries. In fiscal 1994 and 1995, revenues from motion picture
customers represented % and % of revenues, respectively, and revenues from
advertising agencies represented % and % of revenues, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through
internally generated cash flow, borrowings under lending agreements with
financial institutions and, to a lesser degree, borrowings from related parties.
At March 31, 1996, the Company's cash and cash equivalents aggregated $0.2
million.
The Company's operating activities provided cash of $2.0 million in 1993,
$1.1 million in 1994, $2.6 million in 1995 and $0.5 million in the three months
ended March 31, 1996.
The Company's investing activities used cash of $1.4 million in 1993, $2.1
million in 1994, $1.1 million in 1995 and $0.3 million in the three months ended
March 31, 1996. Such activities represent addition of capital
20
equipment related to facilities expansion to accommodate increased customer
demands for the Company's services and the establishment of the Tulsa Control
Center. Such additions were financed through a combination of
internally-generated funds, bank borrowing and capital leasing arrangements with
equipment manufacturers and leasing companies. The Company's business is
equipment intensive, requiring periodic expenditures of cash or the incurrence
of additional debt to acquire additional videotape duplication equipment in
order to increase capacity or replace existing equipment.
During the three months ended March 31, 1996, the Company made $0.3 million
of capital expenditures in tenant improvements to upgrade its archiving
facilities and increase storage capacity, as well as to build out its West Los
Angeles facility. The Company expects to use a portion of the net proceeds of
this offering to retire interest-bearing debt, of which $2.6 million was
outstanding at March 31, 1996. The Company also expects to spend approximately
$1.2 million on capital expenditures during the last three quarters of 1996 to
upgrade and replace equipment, and for management information systems upgrades.
The remaining proceeds of the offering will be used for general corporate
purposes, including potential acquisitions.
The Company's financing activities used cash of $0.6 million and $1.1
million in 1993 and 1995 and provided cash of $1.0 million in 1994. Financing
activities include distributions to the Company's shareholders, which
principally represented amounts for the payment of income tax obligations during
the period the Company was an S Corporation, and the borrowing and/or repayment
of borrowing for capital additions.
The Company believes that, subsequent to the offering, its current banking
relationship will be enhanced through the availability of a larger working
capital line of credit. Management believes that cash generated from operations,
borrowings under its bank line of credit and the net proceeds to the Company of
this offering will fund necessary capital expenditures and provide adequate
working capital for at least the next 12 months. Management is currently
negotiating with its bank to increase amounts available under, and the term of,
its credit facility.
In connection with the purchase of a portion of the Common Stock owned by
one of the Company's founders in April 1996, the Company borrowed an additional
$1.2 million under its revolving credit agreement and loaned such amount to the
Company's chief executive officer. This loan is expected to be repaid prior to
consummation of this offering from distributions to the Company's current
shareholders of previously taxed but undistributed earnings. See "Certain
Transactions."
The Company has no history of significant uncollectible accounts and
management does not believe that this will change materially in the future.
As a result of termination of its S Corporation status upon completion of
this offering, the Company will be required to record deferred taxes which
relate primarily to timing differences between financial and income tax
reporting of depreciation and certain valuation allowances that were
attributable to periods it had elected to be treated as an S Corporation. This
one-time non-cash charge is expected to be recorded in the quarter ending
September 30, 1996. As of March 31, 1996, the amount of the Company's deferred
taxes to be recorded would have been approximately $61,000. This amount may vary
through the closing date of this offering. See Notes 2 and 3 of Notes to the
Financial Statements.
IMPACT OF NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", which will be effective for the Company beginning
January 1, 1997. SFAS 123 requires expanded disclosures on stock-based
compensation arrangements with employees and encourages, but does not require,
compensation cost to be measured based upon the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will apply APB Opinion No. 25 for
stock-based compensation awards to employees pursuant to the 1996 Plan and will
disclose the required pro forma effect on its net income and earnings per share.
INFLATION
The Company does not believe that inflation will have a significant impact
on its results of operations or financial condition.
21
THE INDUSTRY
BACKGROUND
The broadcast videotape duplication and distribution industry is a
service-oriented business in which images and sound are processed from film or
videotape onto a master videotape, and then duplicated for television broadcast
and distributed, either by physical or electronic delivery, to television
stations and cable companies, and other end-users. The industry is highly
fragmented and primarily comprised of numerous small regional companies. Success
in the industry is based on strong customer relationships which are maintained
through reliability, quality, cost-effectiveness and timeliness.
The processes used to create and deliver television advertising have evolved
in conjunction with technological developments in the television industry.
Initially, television commercials were created on celluloid film and delivered
by mail to the network or individual television stations across the country
where the commercial was to air. Later, the use of videotape in the television
industry allowed commercials to be produced and duplicated more quickly and sent
to multiple destinations in a more timely fashion. As overnight courier services
developed, commercials could be delivered more rapidly across the country.
Finally, the creation of national networks, such as the Company's Broadcast One
network, has allowed for even more rapid delivery for same or next-day airing of
finished spots.
The primary users of videotape duplication and distribution services are
advertisers, including major motion picture companies, and their agencies.
Advertisers and their agencies constantly seek to increase the speed at which
advertisements are delivered to television stations and to improve the quality
of the commercial being broadcast. In addition, advertisers and agencies require
a method of rapid verification of whether and when a spot has been aired in
order to take advantage of increasingly sophisticated marketing techniques.
Advertisers seek to target ever smaller, more specific demographic groups by
advertising in select geographic markets and by producing many variations of
commercials oriented to different demographic audiences. As a consequence,
routing instructions specifying which stations are to receive particular
commercials, and the traffic instructions given to those stations specifying the
times and rotation of spot airings, have grown increasingly complex. To the
extent that spots can be released just before their scheduled broadcast,
advertising agencies have extra creative time to re-edit spots, and advertisers
gain extra time to refine the spots to respond to competitors' promotions and
shifting market demands.
The fluctuation in the number of releases by major motion picture companies
creates erratic demand for the creation, editing and duplication of publicity
and promotional materials. As a result, the studios generally out-source such
services. The studios' demand for duplication and distribution services is
further enhanced by their practice of promoting releases in part by distributing
electronic press kits which are given to television stations free of charge.
While the television broadcast industry has adopted digital technology for
much of its production processes and certain of its in-station functions, the
predominant method for distributing spot advertisements to television stations
continues to be the physical delivery of analog video tapes. While the core
business of the Company continues to involve such physical distribution,
management believes that customers will migrate to electronic delivery
technologies as they become standardized and widely accepted. These
technologies, including fiber optic and satellite transmission, reduce the time
required for transportation, giving the creators of the content additional time
in which to refine the finished product. However, management believes that use
of these technologies is not wide-spread among end-users due in part to inertia
on the part of decision-makers at television stations to change their reception
systems and concern regarding additional associated costs, quality and
reliability.
TELEVISION ADVERTISING
According to industry sources, approximately $34 billion was spent in the
United States in 1994 on television advertising. This amount includes the
production of commercials and purchase of air time for (i) advertisements to air
on national broadcast and cable network and syndicated programming, where
commercials are distributed in conjunction with the origination of the
programming, (ii) local broadcast and
22
cable television advertising, consisting of locally produced and aired
commercials, and (iii) national spot advertising, which is produced and
distributed nationally to air during commercial time slots controlled by
individual television stations and cable systems.
The market for television advertising has grown by approximately 200% since
1980, with significant expansion in all segments. The following table shows the
expenditures in the television advertising market by segment for certain years
between 1980 and 1994:
TELEVISION ADVERTISING BY SEGMENT
(IN MILLIONS)
TOTAL TV NATIONAL NATIONAL LOCAL NATIONAL CABLE
YEAR ADVERTISING NETWORK SPOT MARKET SYNDICATION ADVERTISING
- ------------------------ ----------- --------- ----------- --------- ----------- -----------
1980.................... $ 11,469 $ 5,130 $ 3,269 $ 2,967 $ 50 $ 53
1985.................... 21,022 8,060 6,004 5,714 520 724
1990.................... 28,405 9,383 7,788 7,856 1,589 1,789
1991.................... 27,402 8,933 7,110 7,565 1,853 1,941
1992.................... 29,409 10,249 7,551 8,079 1,370 2,160
1993.................... 30,584 10,209 7,800 8,435 1,576 2,564
1994.................... 34,167 10,942 8,993 9,464 1,734 3,034
- ------------------------
Source: Television Bureau of Advertising
MOTION PICTURE STUDIO ADVERTISING
According to industry sources, major and independent motion picture
companies spent in excess of $1.9 billion in 1995 on advertising. This amount
includes the purchase of air time for commercial broadcast and cable television,
as well as traditional forms of print advertisements (E.G., newspaper
advertisements and magazines), but does not include other forms of promotion
such as the production of trailers or electronic press kits. Between 1985 and
1995, advertising spending by major and independent motion picture companies has
increased by over 650%.
SYNDICATED PROGRAMMING
Syndicated television and radio programming is either produced by the
syndicator or purchased from an independent producer and licensed to a
television or radio station for broadcast. Syndicated programming may be
distributed to network-owned or affiliated stations, independent stations and,
in some cases, cable system operators. Most syndicated programming is owned and
licensed by major syndication companies and is delivered using third-party
distribution facilities such as those provided by the Company's network.
RADIO ADVERTISING
According to industry sources, approximately $10.5 billion was spent in the
United States in 1994 on radio advertising. This figure includes the production
of commercials and the purchase of air time for (i) advertisements distributed
in conjunction with syndicated and broadcast network programming, (ii) locally
produced and aired commercials, and (iii) national spot advertising. The
predominant methods for distributing national spot advertising to radio stations
are via physical delivery of analog audio tapes and electronic transmission via
telephone lines. The remainder of radio spots are produced in-house at radio
stations, delivered by local delivery services or picked up by station employees
from the originating studio. While the Company historically has not generated a
significant portion of its revenue from distribution of audio tape for radio, it
intends to explore this market as opportunities arise.
23
The following table shows the expenditures in the radio advertising market
by segment for certain years between 1985 and 1994:
RADIO ADVERTISING BY SEGMENT
(IN MILLIONS)
TOTAL RADIO NATIONAL NATIONAL LOCAL
YEAR ADVERTISING NETWORK SPOT MARKET
- ------------------------------ ----------- ----------- ----------- ---------
1985.......................... $ 6,490 $ 365 $ 1,335 $ 4,790
1990.......................... 8,726 482 1,635 6,609
1991.......................... 8,476 490 1,575 6,411
1992.......................... 8,654 424 1,505 6,725
1993.......................... 9,457 458 1,657 7,342
1994.......................... 10,529 463 1,902 8,164
- ------------------------
Source: Television Bureau of Advertising
24
BUSINESS
VDI is a leading provider of broadcast quality video duplication,
distribution and related value-added services. The Company is a leading
distributor of national television spot advertising, trailers and electronic
press kits for the motion picture industry and believes that it is a leading
distributor of national television spot advertising overall. The Company
serviced over 1,200 customers in the year ended December 31, 1995, including MCA
Motion Picture Group, Columbia/TriStar Pictures, Inc., Fox Filmed Entertainment,
Paramount Pictures Corporation, The Walt Disney Motion Pictures Group, Warner
Bros. Inc, Turner Pictures, Saatchi & Saatchi and McCann Erikson. The Company
has realized significant growth in revenues, operating income and pro forma net
income over the last five years, with compound annual growth rates of 29.5%,
47.7% and 44.7%, respectively.
The Company operates Broadcast One, a communications network which delivers
video using a fiber optic and satellite network to link the Company's multiple
format videotape duplication facilities directly with end-users and to extend
its proximity to the hubs of air and ground couriers. The Company's distribution
network, along with its duplication and value-added services, are designed to
serve all of the distribution and duplication needs of the movie production and
advertising industries in a reliable and time-sensitive manner.
The Company's services include (i) the physical and electronic delivery of
broadcast quality advertising, including spots, trailers, electronic press kits
and infomercials, and syndicated television programming to more than 945
television stations, cable companies and other end-users nationwide and (ii) a
broad range of video services including the duplication of video in all formats,
element storage, standards conversion, closed captioning and transcription
services, and video encoding for air play verification purposes. The value-added
services provided by the Company further strengthen customer relationships and
create opportunities for increased duplication and distribution business.
The Company derives revenue primarily from major and independent motion
picture and television studios, cable television program suppliers, advertising
agencies and, on a more limited basis, national television networks, local
television stations, television program syndicators, corporations and
educational institutions. The Company receives orders with specific routing and
timing instructions provided by the customer. These orders are then entered into
the Company's computer system and scheduled for electronic or physical delivery
via the Company's Hollywood facility or the Tulsa Control Center. When a video
spot is received, the Company's quality control personnel inspect the video to
ensure that it meets applicable FCC requirements and customer specifications and
then initiate the sequence to distribute the video to the designated television
stations either electronically, over fiber optic lines and/or satellite, or via
the most suitable package carrier. The Company believes that fiber optic
delivery is superior to satellite delivery due to its transmission quality. To
the extent such technologies become standardized and cost-effective, the Company
plans to add digital satellite and Internet transmission capabilities in the
future.
STRATEGY
The Company's strategy is to increase its market share within the video
duplication and distribution industry by (i) increasing the timeliness and
efficiency of its operations by exploiting new technologies as they become both
standardized and cost-effective, (ii) acquiring companies with strong customer
relationships in businesses complementary to the Company's operations, (iii)
further penetrating the marketplace by providing a broad array of high quality,
reliable value-added services and (iv) continuing to develop value-added
services such as audio encryption, electronic order entry and order status and
air play verification.
EXPLOIT NEW TECHNOLOGIES. The Company believes that timely and accurate
delivery is essential to its continued success, and intends to remain
competitive by providing complete market coverage with the most
cost-effective and reliable delivery methods available. As exemplified by
the opening of the Tulsa Control Center, the Company strives to offer
delivery systems utilizing the most current technology accepted in the
evolving marketplace. As new delivery methods become standardized and cost-
25
effective, the Company intends to rapidly position itself to offer these
services to its clients. The Company expects to remain current with such
technology by means of strategic alliances with reliable and cost-effective
vendors.
GROWTH THROUGH ACQUISITIONS. VDI intends to acquire existing content
delivery businesses with strong customer relationships that will complement
the Company's VDI/Broadcast One operations. The video duplication and
distribution industry is highly fragmented with many small regional
competitors. Management believes that, as a result of consolidation within
the entertainment and advertising agency industries, its customers would
prefer a single company with a national presence to handle all of their
media delivery needs. The Company intends to expand its points of presence
in regional markets, underserviced markets and markets in which the Company
currently outsources work. Building the Company's client base through the
acquisition of companies in different regions or with complementary business
operations will become increasingly more important and create scale
economies, which will provide a competitive advantage over regional
competitors. The Company intends to integrate these acquired operations into
its "hub and spoke" distribution network. The Company will seek to realize
margin gains at the acquired companies through the elimination of
duplicative management and administrative functions and the optimization of
duplication capacity.
INCREASE MARKET PENETRATION. The Company intends to increase its market
penetration by continuing to emphasize its reliability, superior service,
extended deadlines, value-added services and customer focused approach. By
capitalizing on Broadcast One's capability to link instantaneously the
Company's facilities through fiber optic and satellite technology and by
leveraging the Tulsa Control Center's proximity to the centrally located
Tulsa International Airport, the Company is able to utilize the optimal
delivery method and extend its deadline for next-day delivery of
time-sensitive material, a service advantage not available to many of its
competitors. In order to maintain the highest level of service, the Company
has established procedures to monitor quality, track delivery of video
instructions to the stations and verify receipt by each station.
Additionally, the Company's customer support staff is available 24 hours a
day to respond to order status and other inquiries, thus relieving the
pressure on customers to track the status of individual deliveries.
EXPAND VALUE-ADDED SERVICES. In order to satisfy unmet or underserved
market needs and to provide a broad array of services to its customers, the
Company intends to continue to expand the range of services it provides.
This expansion effort has targeted additional services such as audio
encryption, electronic order entry and order status and air play
verification. The Company may also develop additional services such as
digital indexing, archiving and on-demand distribution. To further serve its
customers, the Company is developing software products to automate the
process of order entry and verification, thereby reducing customer support
costs by providing direct interfaces to existing automation systems and
providing remote order entry software that features data validation,
verification and editing capabilities. The Company believes that the
value-added services will allow it to capture additional duplication and
distribution business and further strengthen existing customer
relationships.
DISTRIBUTION NETWORK
VDI operates a full service distribution network providing its customers
with reliable, time-sensitive and high quality distribution services. The
Company's historical customer base consists of motion picture and television
studios and post-production facilities located primarily in the Los Angeles
region. In 1994, the Company created the Broadcast One network to serve the
national distribution needs of its customers. The Company provides tape
duplication, shipping, satellite and point-to-point fiber optic transmission
services at its California facilities, which process video that is both received
from and distributed within the Los Angeles region, and at the Tulsa Control
Center, the distribution hub of the Broadcast One network.
Commercials, trailers, electronic press kits and related distribution
instructions emanating from Los Angeles based clients are collected at the
Company's Hollywood facility where they are processed locally or transmitted
over Broadcast One's fiber optic or satellite network for processing at the
Tulsa Control Center. Video content collected from Broadcast One's clients is
generally transmitted via Broadcast One's fiber optic network directly to the
Tulsa Control Center for processing. Orders are routinely received into the
26
evening hours for delivery the next morning. The Company has the ability to
process customer orders from receipt to transmission in less than one hour. Upon
receipt of an order, the Company creates a master by completing the required
production services, such as closed-captioning, local market customization or
value-added editing services. Once complete, the master is distributed to
television stations either physically or electronically.
For electronic distribution, the master is digitized and delivered by fiber
optic or satellite transmission to television stations equipped to receive such
transmissions. The Company's Hollywood and Tulsa facilities have 24-hour access
to its fiber optic network, allowing it to transmit finished projects to
end-users upon completion. The Company has a joint operating agreement with
VyVx, a subsidiary of the Williams Companies, which provides the fiber optic
capability of the Broadcast One network. The Company currently derives
approximately 2% of its revenue from electronic delivery to television stations
and anticipates that this level will increase as fiber optic and satellite
technologies become more widely accepted.
For television stations desiring physical distribution, the master is
duplicated onto specific tape formats and, in most cases, shipments of multiple
spots are combined, or tied, onto one tape, then sorted and consolidated into
packages by destination. This provides the Company with a significant cost
advantage because the majority of deliveries contain multiple customer orders at
a fixed cost per package. The increase in the Company's volume has historically
provided a decreasing delivery cost per order due to order consolidation and the
volume discount structure inherent in air courier pricing.
The Tulsa Control Center, through which the majority of VDI's overnight
deliveries are made, currently distributes as many as spots a day.
Strategically located near the Tulsa International Airport, the Tulsa Control
Center extends the Company's deadline for processing next-day delivery orders by
several hours. A significant portion of the operating expenses of the Tulsa
Control Center are fixed and the facility contains ample space in which to
expand operations, providing the opportunity for improved operating margins as
the Company's business grows. By utilizing the Tulsa Control Center's full
capacity, the Company believes it can further increase its duplication and
distribution capacity without significant additional capital expenditures.
The Company's Hollywood facility has 150 videotape duplication machines, and
distributes as many as spots a day. The Hollywood facility operates 24
hours a day, seven days a week.
Traffic instructions that detail air play information accompany all
deliveries. For fiber optic and satellite deliveries, the traffic instructions
are telecopied to network stations and arrive with or prior to the video
content. For physical deliveries, a printed copy of the traffic instructions is
included with the tape duplications. The Company's customer service staff
contacts television stations each morning to verify receipt of the prior night's
distribution, allowing timely retransmission of any unconfirmed deliveries. Tape
deliveries are verified electronically through an on-line interface with the
Company's air courier services.
VALUE-ADDED SERVICES
VDI maintains video and audio post-production and editing facilities as a
component of its full service, value-added approach to its customers. Production
services are performed in the Company's offices in Hollywood and West Los
Angeles, California, and at the Tulsa Control Center. The Hollywood and West Los
Angeles facilities also enable the Company to provide duplication and
post-production services for local customers, which include MCA Motion Picture
Group, Columbia/TriStar Pictures, Inc., Fox Filmed Entertainment, Paramount
Pictures Corporation, The Walt Disney Motion Pictures Group, Warner Bros. Inc.,
Turner Pictures, Saatchi & Saatchi and McCann Erikson.
27
The following summarizes the value-added post-production services that the
Company provides to its customers:
STANDARDS CONVERSION
Throughout the world there are several different broadcasting
"standards" in use. To permit a program recorded in one standard to be
broadcast in another, it is necessary for the recorded program to be
converted to the applicable standard. This process involves changing the
number of video lines per frame, the number of frames per second, and color
system. VDI's headquarters in Hollywood, California has facilities for the
conversion of videotape between all international formats, including NTSC,
PAL and SECAM.
VIDEOTAPE EDITING
VDI provides digital editing services at its West Los Angeles and Tulsa
locations. The editing suites are equipped with (i) state-of-the-art digital
editing equipment that provides precise and repeatable electronic transfer
of video and/or audio information from one or more sources to a new master
videotape and (ii) large production switchers to effect complex transitions
from source to source while simultaneously inserting titles and/or digital
effects over background video. Videotape is edited into completed programs
such as television shows, infomercials, commercials, movie trailers,
electronic press kits, specials, and corporate and educational
presentations.
ENCODING
VDI provides encoding services, known as "veil encoding," in which a
code is placed within the video portion of an advertisement or an electronic
press kit. Such codes can be monitored from standard television broadcasts
to determine which advertisements or portions of electronic press kits are
shown on or during specific television programs, providing customers direct
feedback on allotted air time. The Company provides veil encoding services
for a number of its motion picture studio clients to enable them to
customize their promotional material. The Company has recently acquired an
"ice encoding" system which will enable it to place codes within the audio
portion of a videotape thereby enhancing the overall quality of the encoded
videotape.
ANCILLARY AUDIO SERVICES
VDI provides videotape audio editing and rerecording services for motion
pictures and television programming in addition to commercial and other
non-broadcast purposes. VDI owns one of a limited number of Sonic Systems,
or non-linear audio editing systems which allow sound to be generated,
processed, modified, digitized and manipulated to the artistic requirements
of the client. Other audio services available through VDI include voice
overs, live sound effects, digital audio recording with pulse code
modulation equipment and an "automated dialog replacement" system which
enables the Company to reproduce and recreate synchronized dialog.
ELEMENT STORAGE
The Company provides its clients with storage space for their master
tapes and is well positioned to receive follow-on orders for duplication and
distribution requests with respect to those tapes. The Company currently
stores more than 100,000 masters and believes that as a result of growth in
its Broadcast One network it will have the opportunity to increase revenue
from this service.
NEW MARKETS
The Company believes that the development of the Broadcast One network and
its array of value-added services will provide the Company with the opportunity
to enter or significantly increase its presence in several new or expanding
markets.
INTERNATIONAL. The Company believes that the growth in the distribution of
domestic content into international markets will create increased demand for
services currently provided by the Company such as standards conversions and
audio and digital mastering. As electronic distribution methods become
standardized and cost-effective for the international market, the Company
believes it will also have an opportunity to enter the international market for
its core distribution business.
28
RADIO. The Company believes the growth of Broadcast One will strengthen its
relationships with advertisers who make spot market purchases of both television
and radio advertising, resulting in the expansion of its presence in the
distribution of radio advertisements. The Company presently provides spot radio
advertising distribution for a small number of its Broadcast One clients.
CABLE. The Company believes that continued consolidation of cable system
ownership among multiple system operators will attract increasing national spot
advertising on local cable systems, especially in major markets, increasing the
volume of advertisements which could be distributed by the Broadcast One network
to cable operators.
SALES AND MARKETING
Historically, the Company has marketed its services almost exclusively
through industry contacts and referrals and has engaged in very limited formal
advertising. While VDI intends to continue to rely primarily on its reputation
and business contacts within the industry for the marketing of its services, the
Company has recently expanded its direct sales force to communicate the
capabilities and competitive advantages of the Company's distribution network to
potential new customers. In addition, the Company's sales force solicits
corporate advertisers who may be in a position to influence agencies in
directing deliveries through the Company. The Company currently has sales
representatives located in New York and Los Angeles. The Company's marketing
programs are directed toward communicating its unique capabilities and
establishing itself as the predominant value-added distribution network for the
motion picture and advertising industries.
CUSTOMERS
Since its inception in 1990, VDI has added customers and increased its sales
based on a combination of reliability, timeliness, quality and price. The
integration of the Tulsa Control Center with the Company's regional facilities
has given its customers a time advantage in the ability to deliver broadcast
quality material. The Company markets its services to major and independent
motion picture and television production companies, cable television program
suppliers, advertising agencies and, on a more limited basis, national
television networks, local television stations, television program syndicators,
corporations and educational institutions. The Company's clients include, among
others, MCA Motion Picture Group, Columbia/TriStar Pictures Inc., Fox Filmed
Entertainment, Paramount Pictures Corporation, The Walt Disney Motion Picture
Group, Warner Bros. Inc., Turner Pictures, Saatchi & Saatchi and McCann Erikson.
The Company solicits the motion picture and television industries, other
advertisers and their agencies to generate distribution revenues. In the year
ended December 31, 1995 the Company serviced more than 1,200 customers, of which
the 10 largest accounts generated approximately 51% of the Company's revenues in
that year. The eight major motion picture studios accounted for approximately
42%. including MCA Motion Picture Group which accounted for approximately 11%,
of the Company's revenue for the year ended December 31, 1995.
The Company has no long-term or exclusive agreements with any of its
clients. Because clients generally do not make arrangements with the Company
until shortly before its facilities and services are required, the Company
usually does not have any significant backlog of service orders. The Company's
services are generally offered on an hourly or per unit basis based on volume.
CUSTOMER SERVICE
VDI has built its reputation in the market with a strong commitment to
customer service. The customer service staff develops strong relationships with
clients within the studios and advertising agencies and are trained to emphasize
the Company's ability to confirm delivery, meet difficult delivery time frames
and provide reliable and cost-effective service. Several studios are customers
because of the Company's ability to meet often-changing or rush delivery
schedules.
The Company has a customer service staff of 13 people, at least one member
of which is available 24 hours a day. This staff serves as a single point of
problem resolution and supports not only the Company's customers, but also the
television stations and cable systems to which the Company delivers.
29
COMPETITION
The videotape duplication and distribution industry is a highly competitive
service-oriented business. Certain competitors (both independent companies and
divisions of large companies) provide all or most of the services provided by
the Company, while others specialize in one or several of these services.
Substantially all of the Company's competitors have a presence in the Los
Angeles area, currently the principal market for the Company's services. Due to
the current and anticipated future demand for videotape duplication and
distribution services in the Los Angeles area, the Company believes that both
existing and new competitors may expand or establish videotape post-production
service facilities in this area.
The Company believes that it maintains a competitive position in its market
by virtue of the quality of the value-added service it provides, its customer
service and scheduling personnel, engineering expertise and state-of-the-art
equipment. The Company believes that prices for its services are competitive
within its industry, although some competitors may offer certain of their
services at lower rates than the Company.
The principal competitive factors affecting this market are reliability,
timeliness, quality and price. The Company competes with a variety of
duplication and distribution firms, some of which have a national presence,
certain post-production companies and, to a lesser extent, the in-house
duplication and distribution operations of major motion picture studios and ad
agencies, that have traditionally distributed taped advertising spots via
physical delivery. Some of these competitors have long-standing ties to clients
that will be difficult for the Company to change. Several companies have systems
for delivering video content electronically. Moreover, some of these
distribution and duplication firms and post-production companies have greater
financial, distribution and marketing resources and have achieved a higher level
of brand recognition than the Company. As a result, there can be no assurance
that the Company will be able to compete effectively against these competitors
merely on the basis of reliability, timeliness, quality and price or otherwise.
See "Risk Factors -- Competition."
PROPERTIES AND EQUIPMENT
The Company's 30,000 square foot headquarters in Hollywood, California
houses facilities for its duplication services, a vault utilized for storage of
master videotapes, approximately 5,000 square feet of space which is utilized by
the Company's management, administrative and accounting personnel and standards
conversion equipment. The Tulsa Control Center is a 20,000 square foot facility
utilized by the Company as the Broadcast One network control center as well as
VDI's nationwide physical duplication and distribution center. The Company also
maintains an 8,000 square foot facility in West Los Angeles, California utilized
for film-to-tape transfers, video tape editing and audio services.
The Company's leases for its Hollywood and Tulsa facilities expire in 1999.
The Company's lease for the West Los Angeles facility expires in December 1997.
The Company's aggregate rental cost in 1995 was approximately $0.7 million.
Except for approximately 5% of the Company's equipment which is leased on a
long-term basis for terms ranging through 1999, all of the Company's equipment
has been purchased either for cash, on an installment basis or through a
like-kind exchange.
EMPLOYEES
The Company had 130 full-time employees as of March 31, 1996. The Company's
employees are not represented by any collective bargaining organization, and the
Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.
LEGAL PROCEEDINGS
There are currently no legal proceedings to which the Company is a party,
other than routine matters incidental to the business of the Company. From time
to time, the Company may become a party to various legal actions and complaints
arising in the ordinary course of business.
30
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information concerning each person who is
presently an executive officer or director of the Company. All officers and
directors hold office until their respective successors are elected and
qualified, or until their earlier resignation or removal.
NAME POSITION AGE
- ----------------- ---------------------------------------- ---
R. Luke Stefanko Chairman of the Board, Chief Executive 35
Officer, President and Director
Donald R. Stine* Chief Financial Officer and Director 34
Steve Terry Vice President and General Manager of 48
Operations
Russell Ruggieri Vice President of Engineering 47
Eric Bershon Vice President and General Manager of 30
Broadcast One
Tom Ennis Vice President of Sales and Marketing 37
- ------------------------
* Member of the Audit Committee
R. Luke Stefanko has been Chief Executive Officer and Director since he
co-founded the Company in 1990. Mr. Stefanko was elected to the newly-created
position of Chairman of the Board in May 1996. Mr. Stefanko has more than 17
years of experience in the videotape duplication and distribution industry,
including serving as a director and Vice President/Operations of A.M.E., Inc.
("AME"), a video duplication company, from 1979 to January 4, 1990. Mr. Stefanko
is Mr. Stine's brother-in-law.
Donald R. Stine has been Chief Financial Officer of the Company since he
joined the Company in August, 1994 and became a Director in 1996. Mr. Stine was
a Director of Finance for The Walt Disney Company from 1988 to 1994. Mr. Stine
is Mr. Stefanko's brother-in-law.
Steve Terry has been Vice President and General Manager of Operations since
he joined the Company in 1990. Mr. Terry has 27 years of experience in the video
duplication and distribution industry, including positions held at Vidtronics,
Compact Video and AME.
Russell Ruggieri joined the Company in 1990 as Director of Engineering and
is currently serving as Vice President of Engineering. Mr. Ruggieri has over 23
years of experience in the television broadcasting and video duplication and
distribution business.
Eric Bershon joined the Company in 1993 as Vice President of Sales and is
currently Vice President and General Manager of Broadcast One. Prior to joining
the Company, Mr. Bershon worked at MediaTech West as Vice President and General
Manager from 1988 to 1992.
Tom Ennis joined the Company as a consultant in August 1995 and has been
Vice President of Sales and Marketing since March 1996. Prior to joining the
Company, Mr. Ennis served as Vice President of Sales and Infomercial Services at
Starcomm Television Services from 1990 to 1995.
The Company intends to add two persons to the Board of Directors as
independent directors prior to the consummation of this offering.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company is paid a fee of $1,000
for each meeting of the Board of Directors attended. Members of the Board of
Directors who are not employees of the Company receive stock option grants upon
election or re-election. See "-- 1996 Stock Incentive Plan." Directors are
reimbursed for travel and other reasonable expenses relating to meetings of the
Board of Directors.
31
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation, including bonuses and
deferred compensation, paid for the year ended December 31, 1995 by the Company
to (i) its Chief Executive Officer and (ii) each of the Company's other most
highly compensated individuals who were serving as officers on December 31, 1995
and whose salary plus bonus exceeded $100,000 for such year (the persons
described in (i) and (ii) above, the "Named Executives"). No bonuses or long
term compensation awards were granted to any of the foregoing persons for the
year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR SALARY
- --------------------------------------------------------------------------- --------- ----------
R. Luke Stefanko, Chief Executive Officer.................................. 1995 $ 273,000
Robert Semmer, then President.............................................. 1995 $ 200,000
Donald Stine, Chief Financial Officer...................................... 1995 $ 120,000
Robert Bajorek, then Vice President........................................ 1995 $ 273,000
OPTION GRANTS IN LAST FISCAL YEAR
No stock option or stock appreciation rights were granted to the Named
Executives during the fiscal year ended December 31, 1995.
1996 STOCK INCENTIVE PLAN
PLAN SUMMARY
The 1996 Stock Incentive Plan (the "1996 Plan" or the "Plan") authorizes the
granting of awards to officers and key employees of the Company, as well as to
third parties providing valuable services to the Company, e.g., independent
contractors, consultants and advisors to the Company. Members of the Board of
Directors who are also officers or employees of the Company are eligible to
receive awards under the 1996 Plan. Non-employee directors are only eligible for
the non-discretionary stock option awards described below. At May 15, 1996,
there were approximately 150 persons eligible to receive awards. Awards can be
Stock Options ("Options"), Stock Appreciation Rights ("SARs"), Performance Share
Awards ("PSAs") and Restricted Stock Awards ("RSAs"). The 1996 Plan is
administered by a committee appointed by the Board of Directors and consisting
of two or more members, each of whom must be disinterested or, in the absence of
a committee, the Board of Directors (the "Committee"). The Committee determines
the number of shares to be covered by an award, the term and exercise price, if
any, of the award and other terms and provisions of awards. Members of the Board
of Directors who are not also employees of the Company receive, at such time as
they are appointed, elected or re-elected to serve as members of the Board of
Directors, non-discretionary annual awards of stock options to purchase 3,000
shares of Common Stock at the fair market value on the date the stock option is
granted. The Company has reserved 900,000 shares for issuance in respect of
options exercisable under the 1996 Plan. The number and kind of shares available
under the 1996 Plan are subject to adjustment in certain events. Shares relating
to Options or SARs which are not exercised, shares relating to RSAs which do not
vest and shares relating to PSAs which are not issued will again be available
for issuance under the 1996 Plan.
The Company has reserved 900,000 shares of Common Stock for issuance under
the Plan. Upon consummation of this offering the Company intends to grant
options to purchase 300,000 shares of Common Stock at an exercise price per
share equal to the initial public offering price per share of Common Stock.
An Option granted under the 1996 Plan may be an incentive stock option
("ISO") or a non-qualified Option. ISOs will only be granted to employees of the
Company. The exercise price for Options is to be determined by the Committee,
but in the case of an ISO is not to be less than fair market value of the Common
Stock on the date the Option is granted (110% of fair market value in the case
of an ISO granted to any person who owns more than 10% of the voting power of
the Company). In general, the exercise price is payable in any combination of
cash, shares of Common Stock already owned by the participant for at least six
months, or, if authorized by the Committee, a promissory note secured by the
Common Stock issuable upon exercise. In addition, the award agreement may
provide for "cashless" exercise and payment. The aggregate fair market
32
value (determined on the date of grant) of the shares of Common Stock for which
ISOs may be granted to any participant under the 1996 Plan and any other plan by
the Company or its affiliates which are exercisable for the first time by such
participant during any calendar year may not exceed $100,000.
The Options granted under the 1996 Plan become exercisable on such dates as
the Committee determines in the terms of each individual Option, provided
however, that such date may not be earlier that six months after the award date.
A Director who is not also an employee of the Company will, upon appointment,
election or re-election to the Board of Directors, automatically be granted a
nonqualified option to purchase 3,000 shares, vesting in equal tranches over
four years, at an exercise price equal to the fair market value of Common Stock
on the date of grant. Options become immediately exercisable in full in the
event of a disposition of all or substantially all of the assets or capital
stock of the Company by means of a sale, merger, consolidation, reorganization,
liquidation or otherwise, unless the Committee arranges for the optionee to
receive new Options covering shares of the corporation purchasing or acquiring
the assets or stock of the Company, in substitution of the Options granted under
the plan (which Options shall thereupon terminate). The Committee in any event
may, on such terms and conditions as it deems appropriate, accelerate the
exercisability of Options granted under the Plan. An ISO to a holder of more
than 10% of the voting power of the Company must expire no later than five years
from the date of grant. A non-qualified Option must expire no later than ten
years from the date of the grant.
The Options granted under the 1996 Plan are not transferable other than by
will or the laws of descent and distribution. Options which have become
exercisable by the date of termination of employment or of service on the
Committee must be exercised within certain specified periods of time from the
date of termination, the period of time to depend on the reason for termination.
Such Options generally lapse three months after termination of employment other
than by reason of retirement, total disability or death, in which case they
generally terminate one year thereafter. If a participant is discharged for
cause, all Options will terminate immediately. Options which have not yet become
exercisable on the date the participant terminates employment or service on the
Committee for a reason other than retirement, death or total disability shall
terminate on that date.
An SAR is the right to receive payment based on the appreciation in the fair
market value of Common Stock from the date of grant to the date of exercise. In
its discretion, the Committee may grant an SAR concurrently with the grant of an
Option. Such SAR is only exercisable at such time, and to the extent, that the
related Option is exercisable. Upon exercise of an SAR, the holder receives for
each share with respect to which the SAR is exercised an amount equal to the
difference between the exercise price under the related Option and the fair
market value of a share of Common Stock on the date of exercise of the SAR. The
Committee in its discretion may pay the amount in cash, shares of Common Stock
or a combination thereof.
Each SAR granted concurrently with an Option will have the same termination
provisions and exercisability periods as the related Option. In its discretion,
the Committee may also grant SARs independently of any Option, subject to such
conditions consistent with the terms of the Plan as the Committee may provide in
the award agreement. Upon the exercise of an SAR granted independently of any
Option, the holder receives for each share with respect to which the SAR is
exercised an amount in cash based on the percentage specified in the award
agreement of the excess, if any, of fair market value of a share of Common Stock
on the date of exercise over such fair market value on the date the SAR was
granted. The termination provisions and exercisability periods of an SAR granted
independently of any Option will be determined by the Committee.
An RSA is an award of a fixed number of shares of Common Stock subject to
transfer restrictions. The Committee specifies the purchase price, if any, the
recipient must pay for such shares. Shares included in an RSA may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered until they
have vested. These restrictions may not terminate earlier than six months after
the award date. The recipient is entitled to dividend and voting rights
pertaining to such RSA shares even though they have not vested, so long as such
shares have not been forfeited.
A PSA is an award of a fixed number of shares of Common Stock, the issuance
of which is contingent upon the attainment of such performance objectives, and
the payment of such consideration, if any, as is specified by the Committee.
Issuance shall in any case not be earlier than six months after the award date.
The 1996 Plan permits a participant to satisfy his tax withholding with
shares of Common Stock instead of cash if the Committee agrees.
33
Upon the date a participant is no longer employed by the Company for any
reason, shares subject to the participant's RSAs which have not become vested by
that date or shares subject to a participant's PSAs which have not been issued
shall be forfeited in accordance with the terms of the related award agreements.
The exercisability of all of the outstanding awards may be accelerated,
subject to the discretion of the Committee, upon the occurrence of an "Event",
(defined in the Plan) to include approval by the shareholders of the dissolution
on liquidation of the Company, certain mergers, consolidations, sale of
substantially all of the Company's business and/or assets and a "change in
control". The 1996 Plan defines a change in control to have occurred (i) if a
"person," as defined in Section 13(d) and 14(d) under the Exchange Act acquires
20% or more of the voting power of the then outstanding securities of the
Company and (ii) if during any two consecutive year periods there is a change of
a majority of the members of the Board of Directors, unless the election or
nomination of the new directors is approved by at least three-fourths of the
members still in office from the beginning of the two year period.
The 1996 Plan provides for anti-dilution adjustments in the event of a
reorganization, merger, combination recapitalization, reclassification, stock
dividend, stock split or reverse stock split. Upon the dissolution or
liquidation of the Company, or upon a reorganization, merger or consolidation of
the Company as a result of which the Company is not the surviving entity, the
Plan will terminate, and any outstanding awards will terminate and be forfeited,
subject to the Committee's ability to provide for (i) certain payments to
participants in cash or Common Stock in lieu of such outstanding awards, and
(ii) the assumption by the successor corporation of either the Plan or the
awards outstanding under the Plan.
The Board of Directors may, at any time, terminate or suspend the 1996 Plan.
The 1996 Plan currently provides that the Board of Directors or the Committee
may amend the 1996 Plan at any time; provided, however, that no amendment may
operate to increase the maximum number of aggregate shares issuable, materially
increase the benefits accruing to participants or change the classes of eligible
persons under the 1996 Plan without the approval of the holders of a majority of
the shares of Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 1995. As a result,
Messrs. Stefanko and Stine participated in deliberations concerning executive
officer compensation. The Board of Directors will establish a Compensation
Committee prior to the consummation of this offering.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the liability of directors for
monetary damages to the maximum extent permitted by California law. Such
limitation of liability has no effect on the availability of equitable remedies,
such as injunctive relief or rescission.
The Company's By-laws provide that the Company will indemnify its directors
and officers and may indemnify its employees and agents (other than officers and
directors) against certain liabilities to the fullest extent permitted by
California law. The Company is also empowered under its By-laws to enter into
indemnification agreements with its directors and officers and to purchase
insurance on behalf of any person whom it is required or permitted to indemnify.
The Company has entered into indemnification agreements with each of its current
directors and officers, which provide for indemnification of, and advancement of
expenses to, such persons to the greatest extent permitted by California law,
including by reason of action or inaction occurring in the past and
circumstances in which indemnification and advances of expenses are
discretionary under California law.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
34
CERTAIN TRANSACTIONS
Pursuant to a stock purchase agreement dated as of April 1, 1996 (the
"Agreement"), Mr. Stefanko and Mr. Stine purchased 2,264,400 and 666,000 shares
of Common Stock, respectively, from Robert Bajorek, the co-founder of the
Company, for a total of $6.7 million. Pursuant to the Agreement, Mr. Stefanko
paid Mr. Bajorek $1.1 million on April 1, 1996. The Company extended Mr.
Stefanko a demand loan bearing interest at an annual rate of 6.0% to make that
cash payment. Mr. Stefanko has agreed to repay this loan with a portion of the
proceeds of his S Corporation distribution. Mr. Stefanko and Mr. Stine executed
non-recourse notes in the amount of $4.0 million and $1.6 million, respectively,
in favor of Mr. Bajorek for the balance of the aggregate purchase price. These
notes amortize commencing in 1998, reach maturity in 2006 and bear interest at a
rate of 4.5%. The notes are secured by the Common Stock purchased and contain
acceleration provisions which require Mr. Stefanko or Mr. Stine, as the case may
be, to apply one-half of the proceeds of a sale of his Common Stock or the sale
of substantially all of the assets of VDI towards the prepayment of the amount
then outstanding under such note. In connection with his sale of Common Stock,
Mr. Bajorek agreed not to compete with the Company in California for a period of
three years.
Upon its formation in 1990 the Company elected to be treated as an S
Corporation for federal income tax purposes which resulted in the taxable income
of the Company being taxed directly to its shareholders rather than to the
Company. As a consequence of this offering the Company will no longer qualify as
an S corporation. The Company maintains an accumulated adjustments account (the
"AAA account") which currently holds its taxed but undistributed earnings.
Immediately prior to the consummation of this offering, VDI will distribute the
balance of the amount in the AAA account, at March 31, 1996 approximately $2.5
million, to the Company's current shareholders. Purchasers of Common Stock in
the offering will not be entitled to any portion of such distribution.
A relative of Mr. Stefanko loaned the Company $300,000 in 1991 and an
additional $300,000 in 1995. These loans bear interest at an annual rate of 9%
and 13%, respectively. The aggregate balance of these notes as of March 31, 1996
was $235,000. The Company intends to repay these loans in full prior to the
consummation of the offering. In 1994 the Company loaned Robert Semmer, a former
executive officer of the Company, $253,000, of which $200,000 remained
outstanding as of March 31, 1996. This loan bears interest at an annual rate of
10% and amortizes over five years beginning in June 1996. The Company expects
that this loan will be repaid prior to the closing of this offering.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of the date of this
Prospectus, as adjusted to reflect the sale of the shares offered by this
Prospectus, by (i) the Selling Shareholder, (ii) each person who is known by the
Company to beneficially own more than five percent of the Company's outstanding
Common Stock, (iii) each of the Company's directors, (iv) each of the Named
Executives, and (v) all current directors and executive officers as a group. The
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
PERCENTAGE OF COMMON
STOCK
COMMON STOCK BENEFICIALLY OWNED
COMMON STOCK TO BE SOLD -------------------------
BENEFICIALLY IN THE BEFORE THE AFTER THE
BENEFICIAL OWNERS OWNED OFFERING OFFERING OFFERING
- --------------------------------------------------------- ----------------- -------------- ----------- ------------
R. Luke Stefanko (1)..................................... 5,594,400 -- 84.0% 63.9%
Donald Stine (1)......................................... 666,000 -- 10.0% 7.6%
Robert Semmer............................................ -- -- -- --
Robert Bajorek........................................... 399,600 200,000 6.0% 2.3%
All current directors and executive officers as a group
(2 persons)............................................. 6,260,400 -- 94.0% 71.5%
The address of each of these shareholders is 6920 Sunset Boulevard, Hollywood,
California 90028.
- ------------------------
(1) Of such shares, 2,644,400 held by Mr. Stefanko and all of Mr. Stine's shares
are pledged to Mr. Bajorek. See "Certain Transactions."
35
DESCRIPTION OF CAPITAL STOCK
GENERAL
At the closing of this offering, the authorized capital stock of the Company
will consist of 50,000,000 shares of Common Stock, without par value, and
5,000,000 shares of Preferred Stock, without par value.
COMMON STOCK
As of April 1, 1996, there were 6,660,000 shares of Common Stock outstanding
held of record by three shareholders. Holders of Common Stock are entitled to
one vote per share on all matters to be voted upon by the shareholders. Subject
to preferences that may be applicable to any outstanding Preferred Stock, the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefore. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable, and the shares of Common Stock to be outstanding upon completion of
the offering contemplated by this Prospectus will be fully paid and
non-assessable.
PREFERRED STOCK
As of the date of the sale of shares offered by this Prospectus, 5,000,000
shares of Preferred Stock will be authorized and no shares will be outstanding.
The Board of Directors has the authority to issue the shares of Preferred Stock
in one more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any unissued shares of Preferred Stock
and to fix the number of shares constituting any series and the designations of
such series, without any further vote or action by the shareholders. Although it
presently has no intention to do so, the Board of Directors, without shareholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may have the effect of discouraging, delaying, or
preventing a change in control of the Company. The Company has no present plans
to issue any of the Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS
Certain provisions of law and the Company's Articles of Incorporation and
By-laws could make the acquisition of the Company by means of a tender offer, a
proxy contest or otherwise and the removal of incumbent officers and directors
more difficult. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company to first negotiate with the
Company.
The Company's Articles of Incorporation also provide that so long as the
Company shall have a class of stock registered pursuant to the Exchange Act as
amended, shareholder action can be taken only at an annual or special meeting of
shareholders and may not be taken by written consent. In addition, upon
qualification of the Company as a "listed corporation" as defined in the
California Corporations Code, cumulative voting will be eliminated.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chemical Mellon.
36
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company and there is no assurance a significant public market for the Common
Stock will develop or be sustained after the offering. Therefore, future sales
of substantial amounts of Common Stock in the public market could adversely
affect market prices prevailing from time to time. Furthermore, since only a
limited number of shares will be available for sale shortly after this offering
because of certain contractual and legal restrictions on resale (described
below), sales of substantial amounts of Common Stock of the Company in the
public market after the restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of this offering, 8,760,000 shares of Common Stock (assuming
no exercise of options to be granted under the 1996 Plan concurrently with the
closing of this offering) will be outstanding. Of these shares, the 2,300,000
shares sold in this offering will be freely tradeable without restriction under
the Securities Act. The remaining 6,460,000 shares of Common Stock held by
existing shareholders are "restricted" securities within the meaning of Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 promulgated under the Securities Act, which rule is summarized below.
All shareholders, officers and directors of the Company have entered into
contractual "lock-up" agreements providing that they will not directly or
indirectly publicly offer, sell, assign, encumber or otherwise transfer or
dispose of any shares of Common Stock of the Company, or any other securities
convertible into or exchangeable for shares of Common Stock into or of the
Company, for 180 days after the effective date of this offering without the
prior written consent of Oppenheimer & Co., Inc. Taking into account the lock-up
agreements, shares will be available for sale in the public market
beginning 180 days after the effective date of this offering. The approximately
6,460,000 remaining restricted shares will not be eligible for sale pursuant to
Rule 144 until the expiration of the applicable two-year holding periods. See
"Underwriting."
In general, under Rule 144 as currently in effect, if two years have elapsed
since the date of acquisition of beneficial ownership of restricted shares of
Common Stock from the Company or any affiliate, the acquiror or subsequent
holder thereof is entitled to sell within any three-month period a number of
such shares that does not exceed the greater of 1% of the then outstanding
shares of the same series of Common Stock or the reported average weekly trading
volume of the Common Stock on national securities exchanges during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. If three years
have elapsed since the date of acquisition of restricted shares of Common Stock
from the Company or any affiliate and the acquiror or subsequent holder is not
deemed to have been an affiliate of the Company for at least 90 days prior to a
proposed transaction, such person would be entitled to sell such shares under
Rule 144 without regard to the limitations described above.
At May 15, 1996, the Company had reserved 900,000 shares of Common Stock for
issuance pursuant to the 1996 Plan. The Company intends to file a registration
statement on Form S-8 under the Securities Act approximately 90 days after the
date of this Prospectus to register shares to be issued pursuant the 1996 Plan.
Shares of Common Stock issued under the 1996 Plan after the effective date of
such registration statement will be freely tradeable in the public market,
subject to lock-up agreements and, in the case of sales by affiliates, to the
amount, manner of sale, notice and public information requirements of Rule 144.
37
UNDERWRITING
Subject to the terms and conditions in the Underwriting Agreement among the
Company, the Selling Shareholder and the Underwriters named below, for whom
Oppenheimer & Co., Inc. and Prudential Securities Incorporated are acting as
representatives (the "Representatives"), each of the Underwriters named below
have severally agreed to purchase from the Company and the Selling Shareholder,
and the Company and the Selling Shareholder have agreed to sell to the
Underwriters, the shares of Common Stock set forth opposite its name below:
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
Oppenheimer & Co., Inc. ...................................................
Prudential Securities Incorporated.........................................
-----------------
Total.................................................................... 2,300,000
-----------------
-----------------
Of such shares of Common Stock, 2,100,000 shares are being sold by the
Company and 200,000 shares are being sold by the Selling Shareholder.
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all of the above shares
of Common Stock if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $ per share
to certain dealers, of which a concession not in excess of $ may be
reallowed to certain other dealers. After the public offering, the public
offering price, allowances, concessions, and other selling terms may be changed
by the Representatives.
The Underwriters have advised the Company that they do not intend to confirm
sales of Common Stock offered hereby to accounts over which they exercise
discretionary authority.
The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase from the Company up to an
aggregate of 345,000 additional shares of Common Stock to cover over-allotments,
if any, at the public offering price less the underwriting discount set forth on
the cover page of this Prospectus. If the Underwriters exercise the
over-allotment option, then each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof as the number of shares of Common Stock to be purchased by
it, as shown on the above table, bears to the 2,300,000 shares of Common Stock
offered hereby. The Company will be obligated, pursuant to the over-allotment
option, to sell such shares to the Underwriters to the extent such over-
allotment option is exercised. The Underwriters may exercise such over-allotment
option only to cover over-allotments made in connection with the sale of the
shares of Common Stock offered hereby.
All of the shareholders, officers and directors of the Company have agreed
that they will not, without the prior written consent of the Representatives,
directly or indirectly, publicly offer, sell, assign, encumber or otherwise
transfer or dispose of any shares of Common Stock, or any other securities
convertible into or exchangeable for shares of Common Stock, until 180 days
after the date of this offering, except for the shares offered hereby, or
pursuant to a will or the laws of interstate succession, provided the transferee
agrees in writing to be bound by such restrictions.
The Company has agreed not to publicly offer, sell, assign, encumber or
otherwise transfer or dispose of any shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of
Oppenheimer & Co., Inc.; provided, however, that the Company may issue shares or
options to purchase shares of Common
Stock (i) in connection with this offering or the Underwriters' over-allotment
option (ii) pursuant to the 1996 Plan or (iii) in connection with acquisitions
of publicly-held companies.
38
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, losses and expenses, including
liabilities under the Securities Act, and to contribute to the payment that the
Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock offered hereby
will be determined by negotiation between the Company and the Representatives.
The factors to be considered in determining the initial public offering price
will include the history of and prospects for the industry in which the Company
competes, the ability of the Company's management, the past and present
operations of the Company, the historical results of the operations of the
Company, the prospects for future earnings of the Company, the general condition
of the securities markets at the time of the offering, the prices of similar
securities of generally comparable companies and other factors deemed relevant.
The anticipated offering price set forth on the cover page of this
Prospectus should not be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors and no assurance can be given that the Common Stock can be
resold at the offering price.
LEGAL MATTERS
The validity of the shares of Common Stock being sold in the offering will
be passed upon for the Company by Kaye, Scholer, Fierman, Hays & Handler, LLP,
Los Angeles, California. Certain legal matters in connection with this offering
will be passed upon for the Underwriters by Schulte Roth & Zabel, New York, New
York.
EXPERTS
The financial statements as of December 31, 1995 and 1994 and for each of
the three years in the period ended December 31, 1995 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as part
thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and, in
each instance, if such contract or document is filed as an exhibit, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference to such exhibit. A copy of the Registration Statement, and the
exhibits and schedules thereto, may be inspected without charge at the public
reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission.
The Company intends to furnish to its shareholders annual reports containing
financial statements audited by independent auditors and quarterly reports
containing unaudited financial data for the first three quarters of each fiscal
year.
39
VDI MEDIA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants................................ F-2
Balance Sheet at December 31, 1994 and 1995 and March 31, 1996
(Unaudited)..................................................... F-3
Statement of Operations for each of the three years in the period
ended December 31, 1995 and for the (Unaudited) three months
ended March 31, 1995 and 1996................................... F-4
Statement of Shareholders' Equity for each of the three years in
the period ended December 31, 1995 and for the (Unaudited) three
months ended March 31, 1996..................................... F-5
Statement of Cash Flows for each of the three years in the period
ended December 31, 1995 and for the (Unaudited) three months
ended March 31, 1995 and 1996................................... F-6
Notes to Financial Statements.................................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of VDI Media
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of VDI Media at December 31, 1994 and
1995, and the results of its operations and its cash flows for the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
May 15, 1996
F-2
VDI MEDIA
BALANCE SHEET
ASSETS
DECEMBER 31, MARCH 31,
---------------------- MARCH 31, 1996
1994 1995 1996 -----------
---------- ---------- ----------- PRO FORMA
(UNAUDITED) (UNAUDITED
NOTE 3)
Current assets:
Cash................................................................ $ 60,000 $ 415,000 $ 246,000 $ 246,000
Accounts receivable, net of allowances for doubtful accounts of
$103,000 and $284,000, respectively................................ 2,974,000 4,398,000 4,558,000 4,558,000
Amounts receivable from employees (Note 4).......................... 383,000 207,000 227,000 227,000
Inventories......................................................... 252,000 178,000 117,000 117,000
Prepaid expenses and other current assets........................... 28,000 52,000 17,000 17,000
---------- ---------- ----------- -----------
Total current assets.............................................. 3,697,000 5,250,000 5,165,000 5,165,000
Property and equipment, net (Note 5)................................ 4,402,000 3,992,000 3,855,000 3,855,000
Other assets, net................................................... 90,000 98,000 133,000 133,000
---------- ---------- ----------- -----------
$8,189,000 $9,340,000 $9,153,000 $9,153,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $1,763,000 $2,237,000 $1,741,000 $1,741,000
Accrued expenses.................................................... 451,000 843,000 848,000 848,000
Accrued settlement obligation (Note 9).............................. 458,000 41,000
Bank borrowings (Note 6)............................................ 1,644,000 100,000 2,530,000
Current portion of notes payable (Note 7)........................... 524,000 773,000 764,000 764,000
Current portion of subordinated notes payable to related party (Note
7)................................................................. 60,000 30,000 25,000 25,000
Current portion of capital lease obligations (Note 8)............... 126,000 147,000 115,000 115,000
Deferred income taxes............................................... 61,000
---------- ---------- ----------- -----------
Total current liabilities......................................... 5,026,000 4,171,000 3,493,000 6,084,000
---------- ---------- ----------- -----------
Notes payable, less current portion (Note 7).......................... 1,307,000 1,821,000 1,656,000 1,656,000
---------- ---------- ----------- -----------
Subordinated notes payable to related party, less current portion
(Note 7)............................................................. 30,000 225,000 210,000 210,000
---------- ---------- ----------- -----------
Capital lease obligations, less current portion (Note 8).............. 120,000 104,000 97,000 97,000
---------- ---------- ----------- -----------
Commitments and contingencies (Note 9)
Shareholders' equity:
Common stock -- no par value; 33,300,000 shares authorized;
6,660,000 shares issued and outstanding............................ 1,015,000 1,015,000 1,015,000 1,106,000
Retained earnings................................................... 691,000 2,004,000 2,682,000
---------- ---------- ----------- -----------
Total shareholders' equity........................................ 1,706,000 3,019,000 3,697,000 1,106,000
---------- ---------- ----------- -----------
$8,189,000 $9,340,000 $9,153,000 $9,153,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
See accompanying notes to financial statements.
F-3
VDI MEDIA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------------- ----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
Revenues......................................................... $17,044,000 $14,468,000 $18,538,000 $4,233,000 $5,837,000
Cost of goods sold............................................... 10,595,000 9,692,000 11,256,000 2,595,000 3,688,000
----------- ----------- ----------- ---------- ----------
Gross profit..................................................... 6,449,000 4,776,000 7,282,000 1,638,000 2,149,000
Selling, general, and administrative expense..................... 4,290,000 3,895,000 5,181,000 1,124,000 1,373,000
Costs related to establishing a new facility (Note 5)............ 981,000
----------- ----------- ----------- ---------- ----------
Operating income (loss).......................................... 2,159,000 (100,000) 2,101,000 514,000 776,000
Dispute settlement (Note 9)...................................... 458,000
Interest expense................................................. 254,000 284,000 375,000 103,000 70,000
Interest income.................................................. (13,000) (13,000) (42,000) (7,000)
----------- ----------- ----------- ---------- ----------
Income (loss) before income taxes................................ 1,918,000 (829,000) 1,768,000 418,000 706,000
Provision for income taxes....................................... 29,000 26,000 10,000 18,000
----------- ----------- ----------- ---------- ----------
Net income (loss)................................................ $ 1,889,000 $ (829,000) $ 1,742,000 $ 408,000 $ 688,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Unaudited pro forma data (Note 3):
Income (loss) before income taxes.............................. $ 1,918,000 $ (829,000) $ 1,768,000 $ 418,000 $ 706,000
Pro forma provision for (benefit from) income taxes............ 767,000 (332,000) 707,000 167,000 282,000
----------- ----------- ----------- ---------- ----------
Pro forma net income (loss).................................... $ 1,151,000 $ (497,000) $ 1,061,000 $ 251,000 $ 424,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Pro forma net income (loss) per share.......................... $ 0.17 $ (0.07) $ 0.16 $ 0.04 $ 0.06
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Weighed average number of shares............................... 6,660,000 6,660,000 6,660,000 6,660,000 6,660,000
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
See accompanying notes to financial statements.
F-4
VDI MEDIA
STATEMENT OF SHAREHOLDERS' EQUITY
COMMON STOCK TOTAL
---------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ----------- ----------- -------------
Balance at December 31, 1992..................................... 6,660,000 $ 1,015,000 $ 238,000 $ 1,253,000
Net income....................................................... 1,889,000 1,889,000
Distributions to shareholders.................................... (338,000) (338,000)
--------- ----------- ----------- -------------
Balance at December 31, 1993..................................... 6,660,000 1,015,000 1,789,000 2,804,000
Net loss......................................................... (829,000) (829,000)
Distributions to shareholders.................................... (269,000) (269,000)
--------- ----------- ----------- -------------
Balance at December 31, 1994..................................... 6,660,000 1,015,000 691,000 1,706,000
Net income....................................................... 1,742,000 1,742,000
Distributions to shareholders.................................... (429,000) (429,000)
--------- ----------- ----------- -------------
Balance at December 31, 1995..................................... 6,660,000 1,015,000 2,004,000 3,019,000
Unaudited information:
Net income....................................................... 688,000 688,000
Distributions to shareholders.................................... (10,000) (10,000)
--------- ----------- ----------- -------------
Balance March 31, 1996........................................... 6,660,000 $ 1,015,000 $ 2,682,000 $ 3,697,000
--------- ----------- ----------- -------------
--------- ----------- ----------- -------------
See accompanying notes to financial statements.
F-5
VDI MEDIA
STATEMENT OF CASH FLOWS
DECEMBER 31, MARCH 31,
------------------------------------- --------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- --------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss).............................................. $ 1,889,000 $ (829,000) $ 1,742,000 $ 408,000 $ 688,000
Adjustments to reconcile net income (loss) to net cash provided
by operating activities --
Depreciation and amortization................................ 993,000 1,328,000 1,579,000 388,000 451,000
Provision for doubtful accounts.............................. 43,000 40,000 181,000 22,000 72,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................. (1,131,000) 12,000 (1,616,000) (861,000) (232,000)
Decrease (increase) in other receivable.................... 51,000 (281,000) 176,000 (13,000) (20,000)
(Increase) decrease in inventories......................... (73,000) 52,000 74,000 (56,000) 61,000
(Increase) in prepaid expenses and current other assets.... (28,000) (24,000) 35,000
(Increase) decrease in other assets........................ (19,000) 39,000 (8,000) 3,000 (35,000)
(Decrease) increase in accounts payable.................... (57,000) 661,000 474,000 (424,000) (496,000)
Increase (decrease) in accrued expenses.................... 307,000 (331,000) 392,000 405,000 5,000
Increase (decrease) in accrued settlement obligation....... 458,000 (417,000) (42,000) (41,000)
----------- ----------- ----------- --------- ---------
Net cash provided by (used in) operating activities...... 2,003,000 1,121,000 2,553,000 (170,000) 488,000
----------- ----------- ----------- --------- ---------
Cash used in investing activities:
Capital expenditures........................................... (1,379,000) (2,071,000) (1,137,000) (49,000) (314,000)
----------- ----------- ----------- --------- ---------
Cash flows from financing activities:
Distributions to shareholders.................................. (338,000) (269,000) (429,000) (69,000) (10,000)
Change in revolving credit agreement........................... (250,000) 1,119,000 (1,544,000) (49,000) (100,000)
Proceeds from notes payable.................................... 387,000 750,000 877,000 13,000
Repayment on notes payable..................................... (192,000) (177,000) (114,000) (146,000) (174,000)
Proceeds from subordinated notes payable to related parties.... 60,000 195,000 284,000
Repayment on subordinated notes payable to related parties..... (122,000) (110,000) (30,000) (20,000)
Repayment on capital lease obligations......................... (180,000) (336,000) (16,000) 126,000 (39,000)
----------- ----------- ----------- --------- ---------
Net cash (used in) provided by financing activities...... (635,000) 977,000 (1,061,000) 159,000 (343,000)
----------- ----------- ----------- --------- ---------
Net (decrease) increase in cash.................................. (11,000) 27,000 355,000 (60,000) (169,000)
Cash at beginning of period...................................... 44,000 33,000 60,000 60,000 415,000
----------- ----------- ----------- --------- ---------
Cash at end of period............................................ $ 33,000 $ 60,000 $ 415,000 $ -- $ 246,000
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest..................................................... $ 274,000 $ 294,000 $ 375,000 $ 103,000 $ 71,000
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Income tax................................................... $ 5,000 $ 30,000 $ (6,000) $ -- $ --
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
See accompanying notes to financial statements.
F-6
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
VDI Media (the "Company") is a leading provider of broadcast quality video
duplication, distribution and related value added services. The Company's
services consists of (i) the physical and electronic delivery of broadcast
quality advertising, syndicated television programming, electronic press kits
and infomercials to television stations, cable television and other end-users
nationwide, (ii) a broad range of video services, including the duplication of
video in all formats, elements storage, standards conversions, closed captioning
and transcription services, and video encoding for air play verification. The
Company also provides its customers value-added post-production and editing
services. The Company's principal administrative facility is located in
Hollywood, California. Additional duplication and distribution facilities are
located in Culver City, California and Tulsa, Oklahoma.
In April 1996, the Company commenced implementation of a plan to sell a
portion of its common shares in an initial public offering. Prior to the
offering, the Company had elected S Corporation for federal and state income tax
purposes. As a result of the offering, the S Corporation status of the Company
will terminate. Thereafter the Company will pay federal and state income taxes
as a C Corporation (Notes 2 and 3).
On May 15, 1996, the Board of Directors approved a 333-for-1 common stock
split. All share and per share amounts in the accompanying financial statements
have been retroactively restated to reflect this split.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL DATA
The interim financial data is unaudited; however, in the opinion of the
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results of the
interim periods.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUES AND RECEIVABLES
The Company records revenues and receivables at the time products are
delivered to customers. Although sales and receivables are concentrated in the
entertainment industry, credit risk is limited due to the financial stability of
the customer base. The Company performs on-going credit evaluations and
maintains reserves for potential credit losses. Such losses have historically
been within management's expectations.
INVENTORIES
Inventories comprise raw materials, principally tape stock, and are stated
at the lower of cost or market. Cost is determined using the average cost
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for additions and
major improvements are capitalized. Maintenance, repairs and minor renewals are
expensed as incurred. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets. Amortization of leasehold
improvements is computed using the straight-line method over the lesser of the
estimated useful lives of the improvements or the remaining lease term. The
estimated useful life of the property and equipment and leasehold improvements
is five years.
F-7
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
The Company has elected to be taxed as an S Corporation for both federal and
state income tax purposes, and, as a result, is not subject to federal taxation
and is subject to state taxation on income at a reduced rate (1.5%). Therefore,
no asset or liability for federal income taxes has been included in the
historical financial statements. The shareholders are liable for individual
federal and state income taxes on their allocated portions of the Company's
taxable income.
The provision for income taxes includes state taxes currently payable and
deferred taxes arising from the expected future tax consequences of temporary
differences between the carrying amount and the tax bases of certain assets and
liabilities, primarily, property, plant and equipment.
Upon completion of the public offering discussed in Note 1, the Company's S
Corporation status for federal and state income tax purposes will terminate.
This will result in the establishment of a net deferred tax liability calculated
at normal federal and state income tax rates, causing a one-time non-cash charge
against earnings for additional income tax expense equal to the amount of the
net change in the deferred tax liability. As of March 31, 1996, the amount of
the current deferred tax liability which would have been recorded had the
Company's S Corporation status terminated on that date was $483,000 (Note 3).
The deferred tax liability comprises certain asset valuation allowances and
excess tax over book depreciation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of SFAS No. 107 ("Disclosures about Fair
Value of Financial Instruments"), the Company calculates the fair value of
financial instruments and includes this additional information in the notes to
financial statements when the fair value is different than the book value of
those financial instruments. When the fair value is equal to the book value, no
additional disclosure is made. The Company uses quoted market prices whenever
available to calculate these fair values.
NOTE 3 -- PRO FORMA INFORMATION:
PRO FORMA STATEMENT OF OPERATIONS INFORMATION (UNAUDITED)
As discussed in Note 2, the Company has elected treatment as an S
Corporation for federal and state income tax purposes. Upon completion of the
offering discussed in Note 1, the S Corporation status will terminate. The
accompanying statement of operations includes unaudited pro forma income tax
provisions, using a tax rate of 40%, to reflect the estimated income tax expense
of the Company as if it had been subject to normal federal and state income
taxes for the periods presented.
Pro forma net income per share is calculated using the weighted average
number of common shares outstanding.
PRO FORMA BALANCE SHEET INFORMATION (UNAUDITED)
The pro forma information presented in the accompanying balance sheet as of
March 31, 1996 reflects (i) the distribution by the Company to its shareholders
of its previously taxed and undistributed earnings calculated as of March 31,
1996, which amount is expected to increase based upon the Company's taxable
earnings for the period from April 1, 1996 through the closing date of the
proposed initial public offering and (ii) an increase in the Company's deferred
tax liability of $483,000 calculated in accordance with SFAS 109 as if the
termination of the Company's S corporation status occurred on March 31, 1996
(Note 2).
NOTE 4 -- AMOUNTS RECEIVABLE FROM EMPLOYEES:
Amounts loaned to employees are unsecured and bear interest at rates
approximating 10%.
F-8
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31,
------------------------
1994 1995
----------- -----------
Machinery and equipment............................................... $ 6,233,000 $ 7,146,000
Leasehold improvements................................................ 645,000 742,000
Equipment under capital lease......................................... 538,000 687,000
Vehicles.............................................................. 212,000 210,000
Computer equipment.................................................... 105,000 106,000
----------- -----------
7,733,000 8,891,000
Less: Accumulated depreciation and amortization....................... (3,331,000) (4,899,000)
----------- -----------
$ 4,402,000 $ 3,992,000
----------- -----------
----------- -----------
Depreciation expense aggregated $993,000, $1,328,000 and $1,579,000 for the
three years in the period ended December 31, 1995, respectively.
In August 1994, the Company established a distribution facility in Tulsa,
Oklahoma. Equipment and leasehold improvements were capitalized. Costs incurred
in establishing this facility, such as employee costs and initial facility
rental and tape stock, were charged against 1994 results of operations.
In March 1994, the Company entered into a noncash exchange of production
equipment with a net book value of $433,000 for substantially similar assets.
NOTE 6 -- BANK LINE OF CREDIT:
The Company has a $2,000,000 revolving credit agreement with a bank. Amounts
available pursuant to this agreement are determined by eligible accounts
receivable, as defined, and are secured by substantially all of the Company's
assets. In addition, repayment of amounts borrowed is guaranteed by the
Company's shareholders. Interest accrues at the London Interbank Offering Rate
(LIBOR) (5.69% at December 31, 1995) plus 2.25%. The terms of the revolving
credit agreement include covenants regarding the maintenance of various
financial ratios. The Company was in compliance with these covenants as of
December 31, 1995. The revolving credit agreement expires on June 30, 1996. The
Company is in the process of negotiating a new agreement with the bank.
NOTE 7 -- LONG-TERM DEBT AND NOTES PAYABLE:
TERM LOAN
The Company also has a $2,825,000 term loan with a bank which is secured by
the assets of the Company. The term loan is to be repaid in monthly installments
of principal and interest through July 2000. Interest accrues at LIBOR plus
2.5%. The terms of the loan agreement include covenants regarding the
maintenance of various financial ratios. The Company was in compliance with
these covenants as of December 31, 1995.
F-9
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- LONG-TERM DEBT AND NOTES PAYABLE: (CONTINUED)
SUBORDINATED NOTES PAYABLE TO RELATED PARTY
Subordinated notes payable comprise the following:
DECEMBER 31,
------------------
1994 1995
-------- --------
Note payable, unsecured, payable in December 1998 along with interest
accrued at a rate of 13%............................................. $225,000
Note payable, unsecured, bearing interest at 9% per annum, payable in
monthly installments of $5,000....................................... $ 90,000 30,000
-------- --------
90,000 255,000
Less current portion.................................................. (60,000) (30,000)
-------- --------
$ 30,000 $225,000
-------- --------
-------- --------
The subordinated notes arise from an agreement between the Company and a
relative of one of the Company's principal stockholders. Such notes payable are
subordinated to amounts borrowed under the revolving credit agreement and term
loan. Interest expense aggregated $21,000, $13,000 and $20,000 for the three
years in the period ended December 31, 1995, respectively.
EQUIPMENT FINANCING
The Company has financed the purchase of certain equipment through the
issuance of notes payable. Certain of these notes bear interest at rates ranging
from 11.5% to 12.0% and are payable in monthly installments through August 1996.
Certain other notes are also payable in monthly installments through September
1997, however, such notes do not contain a stated interest rate. For financial
statement presentation purposes, interest has been imputed at rates ranging from
10.1% to 12.5%.
Annual maturities for all long-term debt and notes payable are as follows:
YEAR ENDING DECEMBER 31,
---------------------------
1996........................................................... $ 803,000
1997........................................................... 948,000
1998........................................................... 547,000
1999........................................................... 447,000
2000........................................................... 104,000
----------
$2,849,000
----------
----------
F-10
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment under capital lease arrangements.
Future minimum lease commitments are as follows:
YEAR ENDING DECEMBER 31,
---------------------------
1996........................................................... $ 163,000
1997........................................................... 37,000
1998........................................................... 37,000
1999........................................................... 37,000
2000........................................................... 9,000
---------
283,000
Less: Amount representing interest.................................... (32,000)
---------
Present value of future minimum lease payments........................ 251,000
Less: Current portion................................................. (147,000)
---------
Long-term portion..................................................... $ 104,000
---------
---------
NOTE 9 -- COMMITMENTS AND CONTINGENCIES:
The Company leases office and production facilities in California and
Oklahoma under operating leases which expire in May and July 1999, respectively.
The Oklahoma lease provides for a renewal option of five years; the California
lease has no renewal option. Approximate minimum annual rentals under these
noncancellable operating leases are as follows:
YEAR ENDING DECEMBER 31,
---------------------------
1996........................................................... $ 553,000
1997........................................................... 553,000
1998........................................................... 553,000
1999........................................................... 244,000
----------
Total.......................................................... $1,903,000
----------
----------
Total rental expense was approximately $396,000, $447,000 and $595,000 for
the three years in the period ended December 31, 1995, respectively.
In February 1995, the Company settled a dispute arising out of the asset
exchange described in Note 5. In consideration of a mutual release from further
liability, including threatened litigation, the Company paid $458,000. This
amount has been recorded as of December 31, 1994, as the agreement represents
the culmination of events occurring prior to that date.
In March 1994, the Company entered into a five year agreement with a
telecommunications company to provide access to its fiber optic network. The
Company utilizes this network to deliver audio and video products to its
customers. In consideration for access to the fiber optic network, the Company
shares 50% of revenues arising from point to multi-point delivery services
utilizing this network with the telecommunications company. No such revenues
have been earned pursuant to this agreement as of December 31, 1995.
NOTE 10 -- SALES TO MAJOR CUSTOMERS:
For the year ended December 31, 1993, sales to two customers amounted to
$2,686,000 and $1,775,000. Sales to a single customer amounted to $1,735,000 and
$2,066,000 for the years ended December 31, 1994 and 1995, respectively.
NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION:
As described in Note 5, the Company engaged in a noncash exchange of assets.
F-11
VDI MEDIA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION: (CONTINUED)
The Company has financed the acquisition of certain equipment through
capital lease obligations. For the year ended December 31, 1995, assets
aggregating $149,000 were acquired.
NOTE 12 -- SUBSEQUENT EVENTS:
Effective April 1, 1996, the Company's co-founder and chief executive
officer purchased 2,264,400 shares of common stock of the Company from its
co-founder for total consideration of approximately $5.1 million. In order to
effect this transaction, the chief executive officer borrowed $1.1 million from
the Company and issued notes payable in the amount of approximately $4 million.
This note is to be repaid in April 2006 and bears interest at a rate of 4.5%.
This note is secured by the common stock purchased.
Concurrently, the co-founder agreed to sell 666,000 shares of common stock
of the Company to the Company's chief financial officer. In exchange, the chief
financial officer also executed a note payable to the co-founder in the amount
of $1.6 million; the terms of the chief financial officer's note are identical
to those issued by the chief executive officer. These notes also contain
acceleration provisions which require that the chief executive officer and chief
financial officer prepay one-half of the proceeds from the sale of any of such
shares of common stock or the sale of substantially all of the assets of VDI.
The chief executive officer expects to repay amounts borrowed from the
Company with the proceeds from a final S Corporation distribution and future
borrowings collateralized by their common stock holdings.
In May 1996, the Board of Directors approved the 1996 Stock Incentive Plan.
The Plan provides for the award of options to purchase up to 900,000 shares of
the Company's common stock, as well as stock appreciation rights, performance
share awards and restricted stock awards.
The Board has also authorized the issuance of up to 5,000,000 shares of
preferred stock. The voting rights, liquidation preferences and other privileges
inuring to the benefit of preferred stockholders have not yet been established.
As of May 15, 1996, no such shares had been issued.
F-12
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS FURNISHED.
-------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary.................................... 3
Risk Factors.......................................... 7
The Company........................................... 11
Use of Proceeds....................................... 11
Dividend Policy....................................... 12
Capitalization........................................ 13
Dilution.............................................. 14
Selected Financial Data............................... 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 17
The Industry.......................................... 22
Business.............................................. 25
Management............................................ 31
Certain Transactions.................................. 35
Principal and Selling Shareholders.................... 35
Description of Capital Stock.......................... 36
Shares Eligible for Future Sale....................... 37
Underwriting.......................................... 38
Legal Matters......................................... 39
Experts............................................... 39
Additional Information................................ 39
Index to Financial Statements......................... F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,300,000 SHARES
VDI MEDIA
[LOGO]
COMMON STOCK
-----------------
P R O S P E C T U S
-----------------
OPPENHEIMER & CO., INC.
PRUDENTIAL SECURITIES INCORPORATED
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the offering of the Common Stock being
registered herein are estimated as follows:
SEC registration fee.............................................. $ 11,857
Legal fees and expenses........................................... 240,000
NASD filing fees.................................................. 3,939
Accounting fees and expenses...................................... 185,000
Blue sky fees and expenses........................................ 10,000
Printing.......................................................... 90,000
Transfer agent fee................................................ 9,000
Nasdaq listing fee................................................ 39,400
Miscellaneous..................................................... 10,904
---------
Total........................................................... $ 600,000
---------
---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317(b) of the California Corporations Code (the "Corporations Code")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any "proceeding" (as defined in Section 317(a)
of the Corporations Code), other than an action by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person is or was a director, officer, employee or other agent of the corporation
(collectively, an "Agent"), against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
proceeding if the Agent acted in good faith and in a manner the Agent reasonably
believed to be in the best interest of the corporation and, in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful.
Section 317(c) of the Corporations Code provides that a corporation shall
have power to indemnify any agent who was or is a party or is threatened to be
made a party to any threatened, pending or completed action by or in the right
of the corporation to procure a judgment in its favor by reason of the fact that
such person is or was an Agent, against expenses actually and reasonably
incurred by the Agent in connection with the defense or settlement of such
action if the Agent acted in good faith and in a manner such Agent believed to
be in the best interest of the corporation and its shareholders.
Section 317(c) further provides that no indemnification may be made
thereunder for any of the following: (i) in respect of any matter as to which an
Agent shall have been adjudged to be liable to the corporation, unless the court
in which such proceeding is or was pending shall determine that such Agent is
fairly and reasonably entitled to indemnity for expenses (ii) of amounts paid in
settling or otherwise disposing of a pending action without court approval and
(iii) of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
Section 317(d) of the Corporations Code requires that an Agent be
indemnified against expenses actually and reasonably incurred to the extent the
Agent has been successful on the merits in the defense of proceedings referred
to in subdivisions(b) or (c) of Section 317.
Except as provided in Section 317(d), and pursuant to Section 317(e),
indemnification under Section 317 shall be made by the corporation only if
specifically authorized and upon a determination that indemnification is proper
in the circumstances because the Agent has met the applicable standard of
conduct, by any of the following: (i) a majority vote of a quorum consisting of
directors who are not parties to the proceeding, (ii) if such a quorum of
directors is not obtainable, by independent legal counsel in a written opinion,
(iii) approval of the shareholders, provided that any shares owned by the Agent
may not vote thereon, or (iv) the court in which such proceeding is or was
pending.
II-1
Pursuant to Section 317(f) of the Corporations Code, the corporation may
advance expenses incurred in defending any proceeding upon receipt of an
undertaking by the Agent to repay such amount if it is ultimately determined
that the Agent is not entitled to be indemnified.
Section 317(h) provides, with certain exceptions, that no indemnification
shall be made under Section 317 where it appears that it would be inconsistent
with a provision of the corporation's articles, bylaws, a shareholder resolution
or any agreement which prohibits or otherwise limits indemnification, or where
it would be inconsistent with any condition expressly imposed by a court in
approving a settlement.
Section 317(i) authorizes a corporation to purchase and maintain insurance
on behalf of an Agent for liabilities arising by reason of the Agents' status,
whether or not the corporation would have the power to indemnify the Agent
against such liability under the provisions of Section 317.
Reference is also made to Section 8 of the Underwriting Agreement between
the Representatives, the Selling Shareholder and the Registrant (see Exhibit
1.1), which provides for indemnification of the Registrant under certain
circumstances.
Article III of the Restated Articles of Incorporation of the Registrant
provides for the indemnification of the officers and directors of the Registrant
to the fullest extent permissible under California law.
In addition, Article IV of the Bylaws of the Registrant authorizes the
Registrant to enter into agreements with agents of the Registrant providing for
or permitting indemnification in excess of that permitted under Section 317 of
the Corporations Code, to the extent permissible under California law, and to
purchase and maintain insurance to the extent provided by Section 3.17(i).
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation of VDI Media (formerly, VDI)
3.2 By-laws of VDI Media
4.1* Specimen Certificate for Common Stock
4.2* 1996 Stock Incentive Plan of VDI Media
5.1* Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP with respect to legality
10.1* Employment Agreement between VDI Media and Luke Stefanko
10.2* Employment Agreement between VDI Media and Donald Stine
10.3* Employment Agreement between VDI Media and Eric Bershon
10.4* Employment Agreement between VDI Media and Dolly Rosell
10.5 Revolving Credit Agreement between VDI Media (formerly, VDI) and Union Bank dated
June 30, 1994.
10.6* Joint Operating Agreement effective as of March 1, 1994, between VDI Media
(formerly, VDI) and VyVx, Inc.
10.7 Lease Agreement between VDI Media (formerly, VDI) and 6920 Sunset Boulevard
Associates dated May 17, 1994 (Hollywood facility).
10.8 Lease Agreement between VDI Media (formerly, VDI) and 3767 Overland Associates,
LTD dated April 25, 1996 (West Los Angeles facility).
II-2
10.9 Lease Agreement between VDI Media (formerly, VDI) and The Bovaird Supply Company
dated June 3, 1994 (Tulsa facility).
10.10 Loan Agreement between VDI Media (formerly, VDI) and R. Luke Stefanko dated as of
April 1, 1996.
10.12* Term Loan Agreement between VDI Media (formerly, VDI) and Union Bank.
23.1* Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit 5.1)
23.2 Consent of Price Waterhouse LLP
24.1 Power of Attorney (included on page II-4)
27 Financial Data Schedule
- ------------------------
* To be filed by amendment
b. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows:
(a) To provide to the Underwriters at the closing date specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to provide prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable In the event that a claim
for indemnification against such liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of such Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act will be deemed to be part of this registration statement as of the
time it was declared effective.
(d) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus will be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles and State of
California, on the 17th day of May, 1996.
VDI MEDIA
By /s/ DONALD R. STINE
------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that, the undersigned directors and officers
of VDI Media, a California corporation (the "Corporation"), hereby constitute
and appoint R. Luke Stefanko and Donald Stine, each with full power of
substitution and resubstitution, their true and lawful attorneys and agents to
sign the names of the undersigned directors and officers in the capacities
indicated below to the registration statement to which this Power of Attorney is
filed as an exhibit, and all amendments (including post-effective amendments)
and supplements thereto, and all instruments or documents filed as a part
thereof or in connection therewith, and to file the same, with all exhibits
thereto, and all other instruments or documents in connection therewith, with
the Securities and Exchange Commission; and each of the undersigned hereby
ratifies and confirms all that said attorneys, agents, or any of them, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
- ----------------------------------- ------------------------- --------------
/s/ R. LUKE STEFANKO Chief Executive Officer,
- ----------------------------------- President Chairman of May 17, 1996
R. Luke Stefanko the Board and Director
Chief Financial Officer,
/s/ DONALD R. STINE Director
- ----------------------------------- (principal financial May 17, 1996
Donald R. Stine officer)
II-4
EXHIBIT 10.10
Entered into this 1st day of April, 1996.
Luke Stefanko and VDI hereby enter into an agreement whereby Luke Stefanko
will borrow $1,200,000 one million two hundred thousand dollars secured by this
note agreement and subject to the following terms:
-- Amount $1,200,000
-- Term 5 years*
Interest 6%
-- Rate
* Or, if earlier, the date (A) VDI enters into an agreement to offer securities
for sale to the public markets, or (B) the date VDI distributes previously
taxed and unpaid distributions to its shareholders, in which case this loan
shall become due and payable within 30 days thereafter.
Luke Stefanko agrees that this loan is subject to all terms, conditions and
covenants which have been previously imposed on VDI by its creditors.
/s/ R. LUKE STEFANKO
R. Luke Stefanko
EXHIBIT INDEX
EXHIBIT NO. TITLE
- ------------- ----------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation of VDI Media (formerly, VDI)
3.2 By-laws of VDI Media (formerly, VDI)
4.1* Specimen Certificate for Common Stock
4.2* 1996 Stock Incentive Plan of VDI Media
5.1* Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP with respect to legality
10.1* Employment Agreement between VDI Media and Luke Stefanko
10.2* Employment Agreement between VDI Media and Donald Stine
10.3* Employment Agreement between VDI Media and Eric Bershon
10.4* Employment Agreement between VDI Media and Dolly Rosell
10.5 Revolving Credit Agreement between VDI Media (formerly, VDI) and Union Bank dated June 30,
1994
10.6* Joint Operating Agreement, effective as of March 1, 1994, between VDI (formerly, VDI) and
VyVx, Inc.
10.7 Lease Agreement between VDI Media (formerly, VDI) and 6920 Sunset Boulevard Associates dated
May 17, 1994 (Hollywood facility)
10.8 Lease Agreement between VDI Media (formerly, VDI) and 3767 Overland Associates, Ltd. dated
April 25, 1996
(West Los Angeles facility)
10.9 Lease Agreement between VDI Media (formerly, VDI) and The Bovaird Supply Company dated June 3,
1994 (Tulsa facility)
10.10 Loan Agreement between VDI Media and R. Luke Stefanko dated as of April 1, 1996
10.12* Term Loan Agreement between VDI Media (formerly, VDI) and Union Bank
23.1* Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit 5.1)
23.2 Consent of Price Waterhouse LLP
24.1 Power of Attorney (included on page II-4)
27 Financial Data Schedule
- ------------------------
* To be filed by amendment