NEWS

by Maureen Flanagan

The L.A. Studios, Inc. will use $3.25 million in financing from American Capital Strategies (NASDAQ Symbol: "ACAS") towards building a new state-of-the-art facility. This new studio, located in Santa Monica, Calif., will enable The L.A. Studios to retain its leading position in the industry and grow its customer base. The new location will provide the most technologically advanced audio post-production services in the western United States for the television, advertising and film trailer markets.

Founded in 1980, The L.A. Studios has prospered for almost 20 years. It expanded to three locations, hired top engineering talent called "mixers", and attracted clients such as Disney, Warner Brothers, the major television networks, as well as the majority of national advertising agencies and film editors. Forty-one percent owned by its employees since 1994, this well-managed, high-margin studio holds the leading position in its market. However, recent geographical changes in the industry threatened to undermine its premier position - and without the financial resources to implement an expansion, its prospects for continued growth and market dominance appeared less certain.

The company's first facility, L.A. Studios, is located across from Universal Studios. It focuses on animation, television and radio voice-overs, radio production, and remote recording services. Disney, now the biggest customer at this location, uses the facility to produce the recording and dialogue replacement for such animated features as The Lion King II, Beauty and the Beast, and Pooh's Thanksgiving Special in addition to Saturday morning Disney TV shows.

In 1990, to meet excess demand at the L.A. Studios facility, the company opened Margarita Mix in the Hollywood film district. Three-quarters of its work is done for advertising agencies and the rest for the network and movie preview markets. Margarita Mix has produced ads for such products as Pentium computers, Mercedez-Benz, McDonalds, American Express, Nike, and Coca-Cola, and trailers for films such as the Academy award winner Titanic.

By 1993, the company's clients began relocating to Santa Monica and Venice on the West Side of L.A. A trickle of one or two clients set off a full-scale migration of the industry. This meant Margarita Mix clients had to commute across town through notoriously heavy traffic - an inconvenience that started to impact business in 1997 and was not welcome to a company that prided itself on pampering its clients. The resulting erosion of market share posed a threat to the company's premier position in the industry, says American Capital Principal Roland Cline.

In 1997, The L.A. Studios opened up a third facility, Zona Playa, to support its West Side clients. The new location was not enough to capture the market lost through attrition both due to its capacity and its staffing.

Expanding the company's top-flight advertising and editor support services into the Santa Monica area appeared to be crucial for retaining a leading industry position. To implement this strategy, American Capital, with capital resources of more than $150 million and its reputation for expertise in financing employee-owned businesses, seemed ideal. In putting together the transaction, American Capital invested $3.25 million in senior subordinated notes with detachable warrants and partnered with LaSalle National Bank to provide an additional $5 million in senior debt. The transaction closed in April 1998.

With the new financing, the company is planning to open its new facility, Margarita Mix Santa Monica,containing four to six studios equipped with highly advanced equipment. This new equipment includes Postation, offering 32-track digital recording, 80-channel digital mixing, and sophisticated video features. It will be operated by some of the company's most skilled mixers who are well established with a strong following in the industry. Using the high-performance network, which provides simple and versatile integration of multiple workstations, five or six mixers can simultaneously manipulate and edit a single project. The new technology also offers unprecedented efficiencies such as access to a sound library of thousands of special effects from one console.

"Without American Capital's financing, the dreams of our expansion would not have been realized," said Jesse Meli, L.A. Studios' Chief Operating Officer who will oversee the expansion project. The L.A. Studios management is confident that the expansion, coupled with the relocation of some of the company's widely recognized talent to Santa Monica, will recapture customers who shifted portions of their audio to other Santa Monica studios and will attract new customers as well.

Barbara Ainley, Chief Executive Officer, said, "American Capital diligently worked with us to complete this highly sophisticated financial transaction, which has us perfectly positioned to capitalize on the opportunity to reinvent ourselves for the new millenium. Our employee owners are excited and all are 100 percent supportive of the expansion and the great team we have assembled to pull it off."

In an interview published in the trade publication Pro Sound News, COO Meli gave a glimpse into the company's California style and its plans for the new studio. "We are grooming for the future," he said. "Our mission is to educate our clients and to respond to anything they need. Similar to our existing facilities, [Margarita Mix Santa Monica] will be a funky, fun and celestial environment. Our mantra is 'no problem,' and, of course, we serve incredible margaritas."