<PAGE> 1
As filed with the Securities and Exchange Commission on July 22, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTERNATIONAL POST LIMITED
(Exact name of registrant as specified in its charter)
Delaware 13-3735647
(State of Incorporation) (I.R.S. Employer Identification Number)
545 Fifth Avenue
New York, New York 10017
(212) 986-6300
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
MARTIN IRWIN
INTERNATIONAL POST LIMITED
545 Fifth Avenue
New York, New York 10017
(212) 986-6300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
It is requested that copies of communications be sent to:
JEFFRY S. HOFFMAN, ESQ.
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 Third Avenue
New York, New York 10017
(212) 758-9500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
/ / _________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
Title of Proposed Proposed Maximum
Shares to Amount to Maximum Offering Aggregate Amount of
be Registered be Registered Price Per Share** Offering Price** Registration Fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par 9,785,550 shares* $2.875 $28,133,456.25 $8,525.30
value $0.01 per share
===============================================================================================================
</TABLE>
* As such number may be amended due to adjustments arising out of any
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination, exchange of shares or other similar corporate event.
** Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457 under the Securities Act of 1933, as amended, on the basis
of the average of the high and low prices of the registrant's common stock as
reported on The Nasdaq National Market on a date within five days prior to the
filing hereof.
-----------------------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
=============================================================
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH State.
SUBJECT TO COMPLETION
DATED JULY [ ], 1997
PROSPECTUS
9,785,550 SHARES
INTERNATIONAL POST LIMITED
COMMON STOCK
------------------
This Prospectus relates to the offer and sale by the holders thereof (the
"Selling Stockholders") of an aggregate of 9,785,550 shares of common stock, par
value $.01 per share (the "Common Stock"), of International Post Limited (the
"Company"). Of such shares, 7,011,349 will be issued in connection with the
merger (the "Merger") of the Company and Video Services Corporation, a New
Jersey corporation ("Video"), pursuant to the Agreement and Plan of Merger,
dated as of June 27, 1997 (the "Merger Agreement"), among the Company, Video and
all of Video's stockholders (plus an additional 212,096 shares of Common Stock
which will replace an equal number of shares of Common Stock owned by Video
which will be cancelled upon the Merger). The Merger will become effective upon
the later to occur of the filing of a Certificate of Merger with the Secretary
of State of the State of New Jersey or the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware (the "Effective Time"). It
is anticipated that the Merger will be consummated on or before _________, 1997.
At the Effective Time, the Company's Certificate of Incorporation will be
amended to change (the "Name Change Amendment") the corporate name of the
Company to "Video Services Corporation." The remaining 2,562,105 shares of
Common Stock are owned by The Equitable Life Assurance Society of the United
States ("ELAS") and Equitable Deal Flow Fund, L.P. ("EDFF"). ELAS is the record
holder of 928,347 shares of Common Stock and EDFF is the record holder of
1,633,758 shares of Common Stock. See "Selling Stockholders" and "Plan of
Distribution." (The shares of Common Stock offered hereby are sometimes referred
to herein as the "Shares.")
------------------------------
SEE "RISK FACTORS" ON PAGE [ ] HEREIN FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
------------------------------
The Common Stock is included on The Nasdaq National Market under the symbol
"POST". Following the Merger, it is anticipated that the Common Stock will trade
on The Nasdaq National Market under the symbol "VSCX." On July [ ], 1997, the
closing sales price of the Common Stock as reported by The Nasdaq National
Market was $[ ] per share. See "Market Price Data and Dividend Policy."
The Company will not receive any of the proceeds from the sale of the Shares
offered hereby. Expenses of this Offering, estimated at $[ ], are payable by the
Company. The aggregate proceeds to the Selling Stockholders from the sale of the
Shares will be the purchase price of the Shares sold, less the aggregate
underwriting fees, discounts and commissions, if any. See "Plan of
Distribution."
<PAGE> 4
The Shares may be sold from time to time by the Selling Stockholders directly,
or through agents designated from time to time through dealers or underwriters
also to be designated, on terms to be determined at the time of sale. To the
extent required, the specific Shares to be sold, the names of the Selling
Stockholders, the purchase price, the public offering price, the names of any
such agents, dealers or underwriters and any applicable commission or discount
with respect to a particular offer will be set forth in an accompanying
Prospectus supplement (or, if required, a post-effective amendment to the
Registration Statement (as defined herein) of which this Prospectus forms a
part). The distribution of the Shares may be effected in one or more
transactions that may take place on The Nasdaq National Market or the
over-the-counter market, including ordinary broker's transactions, privately
negotiated transactions (including in connection with the exercise of certain
stock options, see "Plan of Distribution") or through sales to one or more
dealers for resale of such securities as principals, at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage
fees, commissions or discounts may be paid by the Selling Stockholders in
connection with such sales.
The Selling Stockholders and intermediaries through whom the Shares are sold may
be deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Shares, and any profits
realized or commissions received may be deemed underwriting compensation. The
Company has agreed to indemnify the Selling Stockholders against certain
liabilities, including liabilities under the Securities Act.
-------------------------------------
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.
The date of this Prospectus is July [ ], 1997.
------------------------------------
2
<PAGE> 5
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements, information statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements, information statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at the principal offices of
the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; and
at the Commission's regional offices located at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661-2511, and at Suite
1300, Seven World Trade Center, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a web site that contains reports, proxy statements,
information statements and other information regarding issuers that file
electronically with the Commission. The address of such site is
(http://www.sec.gov). The Common Stock is traded on The Nasdaq National Market.
The Company has filed with the Commission a registration statement on
Form S-3 (herein together with all amendments thereto, if any, called the
"Registration Statement") under the Securities Act, with respect to the
securities offered by this Prospectus. This Prospectus does not contain all the
information set forth or incorporated by reference in the Registration Statement
and the exhibits and schedules relating thereto, certain portions of which have
been omitted as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered by
this Prospectus, reference is made to the Registration Statement and the
exhibits and schedules thereto which are on file at the offices of the
Commission and may be obtained upon payment of the fee prescribed by the
Commission, or may be examined without charge at the offices of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other documents referred to are not necessarily complete, and are qualified in
all respects by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents previously filed with the Commission are hereby
incorporated by reference into this Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1996 (filed on October 16, 1996; file number
000-23388).
2. The Company's Quarterly Report on Form 10-Q for the quarter
ended October 31, 1996 (filed on December 11, 1996; file
number 000-23388).
3. The Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1997 (filed on March 13, 1997; file number
000-23388).
4. The Company's Quarterly Report on Form 10-Q for the quarter
ended April 30,
3
<PAGE> 6
1997 (filed on June 13, 1997; file number 000-23388).
5. The Company's Current Report on Form 8-K filed on July 8, 1997
(file number 000-23388.
6. The Company's Proxy Statement for a special meeting of
stockholders held on July [ ], 1997, other than the section
entitled "The Merger -- Fairness Opinion" and Appendix B
(Opinion of Montgomery Securities) thereto.
7. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed with the Commission
under the Exchange Act, including any amendment or report
filed for the purpose of updating such description.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of this
offering shall be deemed to be incorporated by reference in this Prospectus and
to be a part of this Prospectus from the date of filing thereof. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated or deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any
and all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits). Requests for
such copies should be directed to: International Post Limited, 545 Fifth Avenue,
New York, New York 10017, Attention: Corporate Secretary, telephone (212)
986-6300.
Unless the context indicates otherwise, all references herein to the
"Company" refer to International Post Limited and its subsidiaries (excluding
Video and its subsidiaries after the Merger).
Unless the context indicates otherwise, all references herein to the
"Selling Stockholders" refer to Louis H. Siracusano, Arnold P. Ferolito, Donald
H. Buck, The Equitable Life Assurance Society of the United States and Equitable
Deal Flow Fund, L.P.
4
<PAGE> 7
-----------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS (INCLUDING, BUT NOT LIMITED TO, STATEMENTS IN "COMBINED COMPANY --
INTERNATIONAL POST LIMITED -- GENERAL" AND "-- BUSINESS STRATEGY"; "COMBINED
COMPANY -- VIDEO SERVICES CORPORATION -- BUSINESS STRATEGY", "-- PRINCIPAL
SERVICES" AND "-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "THE MERGER -- REASONS FOR THE MERGER") ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND ARE THUS PROSPECTIVE, INCLUDING, BUT NOT
LIMITED TO, STATEMENTS CONCERNING THE LIABILITIES THE COMPANY WILL BE REQUIRED
TO SATISFY FOLLOWING THE MERGER AND THE BENEFITS THAT ARE ANTICIPATED TO RESULT
FROM THE MERGER AS WELL AS THOSE STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT
INCLUDE SUCH WORDS AS "BELIEVES," "EXPECTS," "ANTICIPATES" OR SIMILAR
EXPRESSIONS. SUCH STATEMENTS REFLECT THE COMPANY'S AND VIDEO'S MANAGEMENTS'
CURRENT VIEWS, ARE BASED ON MANY ASSUMPTIONS, INCLUDING, BUT NOT LIMITED TO,
THAT NO SIGNIFICANT CHANGES WILL OCCUR IN THE OPERATING ENVIRONMENT OF THE
COMPANY AND/OR VIDEO PRIOR TO OR FOLLOWING THE MERGER, AND ARE SUBJECT TO RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE THESE STATEMENTS TO DIFFER
MATERIALLY FROM WHAT ACTUALLY OCCURS. THE COMPANY AND/OR VIDEO MAY EXECUTE NEW
AGREEMENTS, TERMINATE EXISTING AGREEMENTS OR ENTER INTO NEW FINANCING
ARRANGEMENTS THAT MAY AFFECT THE ACCURACY OF THESE STATEMENTS. OTHER IMPORTANT
FACTORS THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM CURRENT VIEWS
INCLUDE, BUT ARE NOT LIMITED TO, THE GENERAL PERFORMANCE OF THE ECONOMY,
SPECIFICALLY AS IT AFFECTS THE ADVERTISING, ENTERTAINMENT AND TELEVISION AND
VIDEO INDUSTRIES; THE INTERNATIONAL ECONOMIC AND POLITICAL CLIMATE WHICH COULD
IMPACT THE SALE OF DOMESTIC PROGRAMMING OVERSEAS; SIGNIFICANT CHANGES IN VIDEO
TECHNOLOGY IN THE POST-PRODUCTION, VIDEO AND COMMUNICATIONS INDUSTRIES; THE LOSS
OF KEY PERSONNEL; AND THE LOSS OF KEY CUSTOMERS. SEE "RISK FACTORS." NONE OF
THESE EVENTS CAN BE PREDICTED WITH CERTAINTY AND, ACCORDINGLY, ARE NOT TAKEN
INTO CONSIDERATION IN THE MAKING OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN. INVESTORS ARE CAUTIONED TO CAREFULLY CONSIDER SUCH FACTORS. THERE IS NO
ASSURANCE THAT THE ASSUMPTIONS USED ARE NECESSARILY THE MOST LIKELY TO OCCUR.
NEITHER THE COMPANY NOR VIDEO ASSUMES ANY OBLIGATION TO UPDATE ANY FORWARD-
LOOKING STATEMENT TO REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS OR CHANGES
IN OTHER FACTORS AFFECTING SUCH STATEMENT.
-----------------------
All information contained in this Prospectus (i) with respect to the
Company and its subsidiaries has been provided by the Company; (ii) with respect
to Video and its subsidiaries has been provided by Video; and (iii) with respect
to any stockholder of Video has been provided by such stockholder.
-----------------------------------
5
<PAGE> 8
SUMMARY
THIS SUMMARY IS NECESSARILY GENERAL AND ABBREVIATED AND HAS BEEN
PREPARED TO ASSIST IN THE REVIEW OF THIS PROSPECTUS. THIS SUMMARY IS NOT
INTENDED TO BE A COMPLETE EXPLANATION OF THE MATTERS COVERED IN THIS PROSPECTUS
AND IS QUALIFIED IN ALL RESPECTS BY REFERENCE TO THE MORE DETAILED INFORMATION
CONTAINED IN THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN,
WHICH READERS ARE URGED TO READ CAREFULLY.
PARTIES TO THE MERGER
International Post Limited. International Post Limited (the "Company"),
through its operating subsidiaries, is a leading international provider of
technical and creative services to owners, producers and distributors of
television programming, television advertising and other programming content.
The Company provides (i) producers of original programming with technical and
creative services necessary to transform original film or video to final product
for airing on network, syndicated, cable or foreign television; (ii) users of
special video effects with services required to digitally create or manipulate
images in high resolution formats for integration into television commercials
and programming; (iii) international programmers with studio facilities and
multi-standard post-production services necessary to assemble programming and
(iv) international programmers and owners of television and film libraries with
standards conversion, network playback, and duplication and audio services, all
in multiple standards and formats. As a result of a recent acquisition, the
Company, through a majority-owned subsidiary, has further expanded its services
to include the design and production of intranets, extranets and internet sites,
as well as consulting and support services related to those technologies. The
Company believes that its principal strengths include the depth and breadth of
its client relationships, the depth and continuity of its creative talent, and
its technologically advanced equipment and facilities.
The Company was incorporated in the State of Delaware in 1993. Its
principal executive offices are located at 545 Fifth Avenue, New York, New York
10017, and its telephone number is (212) 986-6300. See "Combined Company --
International Post Limited."
Video Services Corporation. Video Services Corporation ("Video"),
through its operating subsidiaries, is a leading provider of value-added video
services to a diverse base of customers within the television network, cable and
syndicated programming markets. Video's services include (i) the commercial
integration and distribution of broadcast quality video content via a satellite
and fiber optic transmission network routed through its digital/analog switching
center and (ii) the design, engineering and production of advanced digital and
analog video systems for the television, cable, post-production and corporate
markets as well as the rental of professional video equipment to the sports,
entertainment and other segments of the broadcast and cable television and
professional markets. Video is a leading single source provider of satellite and
fiber optic video transmission services in the New York metropolitan area and
one of the largest independent (i.e., not affiliated with, or related to, an
equipment manufacturer) providers of technical services and equipment to its
target markets. Video believes that it will continue to experience increasing
demand for its engineering services as a result of the anticipated conversion of
existing television and cable facilities due to the continuing trend toward
digitalization and the creation of additional television and cable facilities
due to emerging compression technologies and an increasing demand
6
<PAGE> 9
for programming content worldwide. Video is a privately-held corporation owned
by three (3) stockholders, one of whom, Louis H. Siracusano, is a director of
the Company and will be the President and Chief Executive Officer of the Company
after the Merger.
Video was incorporated in the State of New Jersey in 1979. Its
principal executive offices are located at 240 Pegasus Avenue, Northvale, New
Jersey 07647, and its telephone number is (201) 767-1000. See "Combined Company
- -- Video Services Corporation."
THE MERGER
Form of the Merger. Upon consummation of the Merger, Video will merge
with and into the Company, with the Company being the surviving corporation, and
the separate corporate existence of Video will cease. All of the assets and
liabilities of Video will be transferred to, and assumed by, the Company upon
consummation of the Merger.
Conversion of Video Common Stock. In the Merger, all of the outstanding
shares of common stock, no par value per share (the "Video Common Stock"), of
Video will be converted into the right to receive an aggregate of 7,011,349
shares of Common Stock (plus an additional 212,096 shares of Common Stock which
will replace an equal number of shares of the Common Stock currently owned by
Video which will be cancelled upon the Merger).
MANAGEMENT OF THE COMPANY AFTER THE MERGER
Upon consummation of the Merger, Mr. Louis H. Siracusano, a director of
the Company and the Chairman, President and Chief Executive Officer and a
director of Video, will become the President and Chief Executive Officer of the
Company. Messrs. Donald H. Buck, Senior Vice President of Video, Christopher
Modrzynski, Senior Vice President and Chief Financial Officer of Video, and
Michael E. Fairbourne, Senior Vice President-Administration of Video, will join
the Company as a Vice President, Vice President and Chief Financial Officer, and
Vice President-Administration, respectively. After the Merger, the Board of
Directors of the Company (the "Board") will consist of seven (7) members, four
(4) of whom will be designees of Video and three (3) of whom will be designees
of the Company. Two (2) of these directors, Messrs. Raymond L. Steele and Frank
Stillo, are not currently directors of the Company. After the Merger, Mr. Martin
Irwin, a director and the current President and Chief Executive Officer of the
Company, will become the Vice Chairman of the Board and Mr. Terrence A. Elkes
will remain in his position as the Chairman of the Board. See "The Merger --
Management of the Company after the Merger."
REASONS FOR THE MERGER
The Board believes that the terms of the Merger are fair to, and in the
best interests of, the Company and the Company's stockholders (the
"Stockholders") (other than Video and its stockholders). A special committee
(the "Special Committee") consisting of three (3) disinterested directors was
appointed by the Board to independently evaluate and negotiate the Merger
Agreement on behalf of the Company and supervise the Company's due diligence
investigation of Video. The Board also retained Montgomery Securities to provide
a fairness opinion to the Board with respect to the consideration to be paid in
the Merger, and, in connection therewith,
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<PAGE> 10
Montgomery Securities rendered an opinion to the Board and the Special Committee
that, as of the date of such opinion, the consideration to be paid in the Merger
was fair to the Company from a financial point of view.
The Board believes that the Merger offers strategic and financial
benefits to the Company and the Stockholders. The Board believes that the Merger
presents a strategic opportunity to the Company to form one of the largest and
most diversified independent (i.e., not affiliated with, or related to, an
equipment manufacturer) providers of distribution, creative and technical
services to the video services markets. A summary of the material reasons that
the Board approved the Merger Agreement are as follows (there can be no
assurance, however, that any of the following anticipated benefits will be fully
realized, if at all):
- Improved Competitive Position
The Board believes that the Merger will create a stronger
company with greater resources and a broader range of products
and services to offer the Company's and Video's respective
current and potential customers. The addition of Mr.
Siracusano and certain members of his management team is
expected to strengthen the current management team of the
Company due to their success in operating Video's business and
their familiarity with certain customers and operations of the
Company. See "The Merger -- Management of the Company after
the Merger." The Board further believes that the Company's
ability after the Merger to provide an expanded level and
range of services will result in a broader and higher level of
contact with its customers and therefore provide an
opportunity to increase revenues through cross-selling
opportunities.
- Comprehensive Outsourcing Approach
The Company and Video currently provide complementary
creative, distribution and technical services to separate
customer bases that have traditionally outsourced such
services. The Board believes that those customers will
continue to outsource such services and that the additional
services which can be offered by the Company after the Merger
to the Company's and Video's respective customer bases will
provide a competitive advantage over those companies that lack
this comprehensive outsourcing solution. The Board believes
this outsourcing approach will provide customers with several
benefits, including (i) more control over necessary but
non-core operations by using a single vendor; (ii) lower
capital investment and operating costs than in-house
alternatives; (iii) access to a full range of current
technology without the necessity of continuously upgrading
equipment; (iv) access to technical, administrative and
managerial resources for non-core activities without having to
develop them in-house; and (v) access to a diverse group of
broadly experienced technical personnel.
- Improved Financial Position
The Board believes that Video is a company with more
predictable revenues than
8
<PAGE> 11
the Company as a result of its long-term contractual
relationships with several of its major customers.
Accordingly, over the long term, the Board believes that the
Merger will add stability and predictability to the Company's
earnings and cash flow. After giving effect to the Merger, the
Company would have had pro forma fiscal year 1996 revenues
from continuing operations of approximately $78.7 million and
pro forma 1996 fiscal year net income from continuing
operations of approximately $2.8 million. See "Unaudited Pro
Forma Condensed Combined Financial Statements."
- Cost Reduction Opportunities
Because of the resulting increase in the Company's size and
the elimination of certain duplicative functions after the
Merger, the Board believes that the Company will be able to
recognize certain cost-saving reductions as a result of the
Merger. These anticipated cost-saving reductions include
reductions in costs due to the proposed elimination of certain
duplicative facilities and termination of certain identified
duplicative administrative personnel of the Company after the
Merger. See Note (i) to Notes to Unaudited Pro Forma Condensed
Combined Financial Statements. In addition, the Company is
expected to benefit from reduced financing costs and improved
purchasing costs (although no analyses were performed in order
to quantify these expectations).
- Improved Liquidity and Debt Service Capacity
As of April 30, 1997, the Company had outstanding indebtedness
of approximately $31.0 million (excluding approximately $1
million in outstanding letters of credit) and the right to
borrow approximately an additional $400,000 under its existing
credit facilities. The Merger Agreement provides that
substantially all of the Company's and Video's outstanding
long-term indebtedness will be refinanced simultaneously with
the closing of the Merger (other than $5,227,000 accreted
amount of the Company's subordinated debt which will remain
outstanding). Such refinancing is a condition to the
consummation of the Merger. Video has received a commitment
letter from KeyBank in connection with such refinancing and,
based upon the terms and conditions contained in such letter,
the Company and Video believe that a refinancing will increase
the Company's borrowing capacity and result in less
restrictive financial covenants and more favorable interest
rates than those applicable to the Company's and Video's
existing credit facilities. In addition, as a result of the
Merger, the Company's interest coverage ratio will increase
and its leverage ratio (funded debt to EBITDA) will decrease.
There can be no assurance, however, that the refinancing will
be consummated on these terms. See "The Merger --
Refinancing."
For a more detailed discussion of the factors considered by the Board
in reaching its decision, see "The Merger -- Reasons for the Merger."
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<PAGE> 12
ACCOUNTING TREATMENT
The Merger is intended to be accounted for as a reverse acquisition for
accounting and financial reporting purposes with Video being designated as the
acquiror and the Company as the acquiree. See "The Merger -- Accounting
Treatment."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors to be considered
carefully by prospective investors, including, without limitation, the
percentage ownership interest of Video's stockholders in the Company after the
Merger compared to certain anticipated contributions by Video to the Company's
financial performance after the Merger.
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction
with the Company's historical consolidated financial statements and the notes
thereto and other financial information regarding the Company appearing in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1996
and in the Company's Quarterly Reports on Form 10-Q for the quarterly periods
ended October 31, 1996, January 31, 1997 and April 30, 1997 incorporated by
reference herein, with Video's historical consolidated financial statements and
the notes thereto, Video's unaudited condensed consolidated financial
statements and the notes thereto, and other financial information appearing
elsewhere herein and with the unaudited pro forma condensed combined financial
statements and the notes thereto appearing elsewhere herein.
10
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<TABLE>
<CAPTION>
Company Video Pro Forma Company Video Pro Forma
-------- -------- ---------- --------- --------- ---------
Nine Nine Nine
Year Year Months Months Months
Ended Ended Year Ended Ended Ended Ended
July 31, June 30, June 30, April 30, March 31, March 31,
1996(1) 1996 1996 1997 1997 1997
-------- -------- ---------- --------- --------- ---------
(unaudited) (unaudited) (unaudited) (unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Revenues ....... $49,352 $29,740 $78,746 $40,882 $18,954 $59,208
Depreciation and
amortization ... 8,369 1,653 9,933 6,297 1,279 7,474
Operating
income from
continuing
operations ..... 3,842 2,387 7,520 3,420 1,830 6,180
Income from
continuing
operations ..... 814 1,212 2,769 741 1,184 2,521
Income before
income taxes and
discontinued
operations and
extraordinary
item............ 1,676 1,999 4,705 1,712 1,974 4,523
Income from
continuing
operations per
common share ... 0.13 0.17 0.21 0.12 0.16 0.19
Weighted
average number
of shares
outstanding .... 6,220 7,223 13,238 6,227 7,223 13,238
--------
EBITDA(2) ...... $12,211 $ 3,749 $17,646 $9,717 $ 1,948 $14,184
</TABLE>
- --------
1 Reflects the acquisition of Audio Plus Video as of February
15, 1994, and the acquisition of Big Picture, Even Time and
Post Edge as of May 4, 1995. Each acquisition was accounted
for under the purchase method and consequently the financial
results include these acquisitions as of the acquisition date.
2 Historical EBITDA represents earnings (continuing and
discontinued operations) before interest, taxes, depreciation
and amortization. Pro Forma EBITDA represents earnings
(continuing operations) before interest, taxes, depreciation
and amortization. EBITDA is included herein because management
believes that certain investors find it to be a useful
valuation parameter, however, EBITDA does not represent cash
flow from operations, as defined by generally accepted
accounting principles, and should not be considered as a
substitute for net earnings as an indicator of the Company's
operating performance or cash flow as a measure of liquidity.
11
<PAGE> 14
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain executive officers and directors of the Company will be
entitled to certain benefits upon consummation of the Merger. The Board and the
Special Committee were aware of these interests and considered them, among other
things, in approving the Merger Agreement. See "The Merger -- Interests of
Certain Persons in the Merger."
12
<PAGE> 15
RISK FACTORS
In addition to the other information in this Prospectus and in the
documents incorporated herein by reference, the following factors should be
considered carefully.
Determination Of Merger Consideration. There is no public market for
the Video Common Stock. The merger consideration of an aggregate of 7,011,349
shares of Common Stock for all of the Video Common Stock (plus an additional
212,096 shares of the Common Stock which will replace an equal number of shares
of the Common Stock currently owned by Video which will be cancelled upon the
Merger) has been determined by negotiations between the Special Committee and
Video's stockholders and may not be indicative of the value of Video. See "The
Merger -- Reasons for the Merger."
Control. Immediately after the Merger, the stockholders of Video will
own in the aggregate approximately 54.6% of the then outstanding Common Stock
(based on the number of shares of Common Stock outstanding as of the Record
Date) and will be in a position to control the Company through the election of
its Board of Directors. Four (4) of the members of the Board immediately after
the Merger have been designated by Video. See "The Merger -- Management of the
Company after the Merger."
Uncertainty Regarding Integration Of Operations. Achieving the
anticipated benefits of the Merger will depend in part upon whether the
integration of the two companies' businesses is accomplished in an efficient and
effective manner, and there can be no assurance that this will occur. There can
be no assurance that such integration will be accomplished smoothly or
successfully. The integration of certain operations following the Merger will
require the dedication of management resources which may temporarily distract
attention from the day-to-day business of the combined company. The inability of
management to integrate the operations of the two companies successfully could
have a material adverse effect on the Company.
According to certain analyses reviewed by the Board, without
assuming certain anticipated non-pro forma cost-saving reductions, Video and the
Company, respectively, would each contribute approximately 35.0% and 65.0% of
the combined company's estimated fiscal year 1998 revenues, 29.5% and 70.5% of
the combined company's estimated fiscal year 1998 gross profit, 32.4% and 67.6%
of the combined company's estimated fiscal year 1998 earnings before interest,
taxes, depreciation and amortization ("EBITDA") and 41.7% and 59.8% of the
combined company's estimated fiscal year 1998 earnings before interest and taxes
("EBIT"). However, the realization of certain synergies noted by management of
the Company and Video were taken into account by the Board in connection with
its approval of the Merger including the issuance to Video's stockholders of
shares of Common Stock representing in the aggregate approximately 54.6% of the
then outstanding Common Stock (based on the number of shares of Common Stock
outstanding as of the Record Date). These anticipated synergies not only
included quantifiable non-pro forma cost-saving reductions due to the
elimination of certain duplicative fees and expenses but also non-quantifiable
benefits including the addition of Video's management team. See "The Merger --
Reasons for the Merger."
13
<PAGE> 16
Transaction Charges. The Company and Video expect to incur in the
aggregate approximately $3.5 million in respect of transaction fees and costs
incident to the Merger. Such fees and costs include investment banking, legal,
accounting, financial printing and other related charges. These amounts are
preliminary estimates and are therefore subject to change. Additional and
unanticipated expenses may be incurred relating to the integration of the
businesses of the Company and Video, including the integration of administrative
functions.
Leverage and Fixed Charges after the Merger. As of April 30, 1997, the
Company had outstanding debt of approximately $31.0 million and a long-term debt
to EBITDA ratio of 3.2 to 1. Further, the Company had annual fixed charges
(consisting of interest, excluding interest income, whether expensed or
capitalized) of approximately $2.2 million for the twelve-month period ended
April 30, 1997. See the Company's historical consolidated financial statements
and the notes thereto and other financial information regarding the Company
appearing in the Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1996 and the Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended October 31, 1996, January 31, 1997 and April 30, 1997, which are
incorporated herein by reference. See "Incorporation Of Certain Information By
Reference." As of March 31, 1997, on a pro forma basis after giving effect to
the Merger and certain other transactions (in accordance with the Refinancing
Assumptions set forth in Note (m) to the Unaudited Pro Forma Condensed Combined
Financial Statements) contemplated by the Merger Agreement, the Company would
have had outstanding debt of approximately $43.3 million and a long-term debt to
EBITDA ratio of 3.1 to 1. On a pro forma basis, the Company would have had
annual fixed charges of approximately $3.0 million for the twelve-month period
ended March 31, 1997. See "Unaudited Pro Forma Condensed Combined Financial
Statements." The Company's level of indebtedness will continue to have important
consequences after the Merger, including without limitation, the following: (i)
interest expense and principal repayment resulting in annual fixed charges and
repayment obligations in the future; (ii) limitations on the Company's ability
to obtain additional financing, make capital expenditures and acquisitions and
take advantage of other significant business opportunities that may arise; and
(iii) vulnerability to adverse general economic and industry conditions.
The ability of the Company to make interest and principal payments
on its debt following the Merger will depend on its ability to generate
sufficient cash flow from operations. Future operating results are subject to
business, economic, regulatory and competitive uncertainties and contingencies,
many of which are beyond the control of the Company. There can be no assurance
that the Company will be able to generate the cash flow necessary to permit the
Company to meet its debt service obligations. If the Company is unable to
generate sufficient cash flow from operations in the future, it may be required
to further refinance all or a portion of its existing debt or to obtain
additional financing. There can be no assurance that any such refinancing would
be possible or that any additional financing could be obtained on terms that are
favorable or acceptable to the Company. Any inability of the Company to service
its indebtedness would have a significant adverse effect on the Company and the
market value and marketability of Common Stock.
Conflicts of Interest. Certain members of the Company's management and
Board have certain interests in the Merger that are in addition to the interests
of the Stockholders generally.
14
<PAGE> 17
Among other things, the Company has agreed to enter into employment agreements
with Messrs. Louis H. Siracusano, Video's Chairman, President and Chief
Executive Officer, and Donald H. Buck, Video's Senior Vice President, to serve
as the President and Chief Executive Officer of the Company and as the Vice
President of the Company, respectively, following the Merger. Further, pursuant
to the Company's employment agreements with certain of its executive officers,
these executive officers will be entitled to certain severance payments as a
result of the Merger. In addition, consummation of the Merger will result in the
immediate vesting of options outstanding under the Company's long-term incentive
plan.
Sale of Shares. As a condition to the consummation of the Merger,
pursuant to this Prospectus the Company is registering the resale by Video's
stockholders of the shares of Common Stock to be issued to them in the Merger
(as well as the sale by Equitable of its 2,562,105 shares of Common Stock) and
has agreed to grant certain other registration rights to Video's stockholders
with respect to such shares. See "The Merger -- Resale Restrictions" and "--
Registration Rights." Moreover, the Company has already filed a shelf
registration statement on Form S-3 covering an aggregate of 593,535 shares of
Common Stock (which number includes shares of Common Stock issuable upon the
exercise of certain stock options) beneficially owned by certain persons and
entities (including the shares of Common Stock beneficially owned by Video which
will be cancelled at the Effective Time). The sale of a significant number of
these shares, or the perception by investors, investment professionals and
securities analysts of the possibility of such sales, could have an adverse
impact on the price of the Common Stock or otherwise on the trading market for
the Common Stock. See "--Volatility of Stock Price."
Dependence on Key Personnel. The Company's post-Merger success depends
in large part on the continued service of its executive officers, key creative
artists and skilled technicians, and other key personnel. The Company has
employment agreements containing non-compete provisions with all of its current
key executive officers and intends to enter into employment agreements
containing non-compete provisions with Messrs. Siracusano and Buck following the
Merger and any additional executive officers employed following the Merger.
However, the Company does not have any employment agreements and/or any
covenants not to compete with most of its key artists and technicians. A
significant percentage of the Company's and Video's revenues can be attributed
to services requiring highly compensated creative technicians. Competition for
highly qualified employees is intense and the process of retaining key
technical, creative and management personnel with the requisite combination of
skills and attributes is often lengthy. There can be no assurance that the
Company will continue to attract, motivate and retain key personnel after the
Merger. Failure by the Company to retain and attract qualified key personnel
could have a material adverse effect on the Company.
Dependence on Entertainment Industry. The Company's and Video's
businesses are dependent on the success of the television programming and
advertising industries, which success in turn is highly dependent upon a number
of factors, including the quality of content produced, the availability of
alternative forms of entertainment and leisure activities, general economic
conditions and international demand for content originated in the United States.
The businesses of the Company and Video also are subject to downturns in the
television, programming and advertising industries.
15
<PAGE> 18
Dependence on Key Customers. A significant portion of Video's revenues
is derived from a small number of customers. Except for Court TV, Fox News, the
NHL and PanAm Sat, none of these customers has a contractual relationship with
Video obligating them to purchase any specified level of services from Video for
more than one (1) year. Accordingly, there can be no assurance that revenues
generated from these customers, individually or in the aggregate, will reach or
exceed historical levels in any future period. Any substantial decrease in
services provided to one (1) or more of these customers by the Company after the
Merger would have a material adverse effect on the Company. See "Combined
Company -- Video Services Corporation."
Dependence on Transponder Availability. The success of Atlantic
Satellite's business depends in part upon the price and availability of
satellite transponders. A shortage of transponders can be caused by several
factors, including the malfunctioning or expiration of the useful lives of
existing satellites or the unsuccessful launch of additional or replacement
satellites, all of which are beyond the control of Atlantic Satellite or its
customers. A shortage of satellite transponders would be likely to increase the
price of available transponders which would have an adverse impact upon Atlantic
Satellite's, and thus Video's, ability to operate profitably.
Dilution. The Merger will result in a decrease in the percentage
ownership positions of the Stockholders in the Company. An aggregate of
7,011,349 shares of Common Stock will be issued to Video's stockholders in the
Merger (plus an additional 212,096 shares of the Common Stock which will replace
an equal number of shares of the Common Stock currently owned by Video which
will be cancelled upon the Merger) which will represent approximately 54.6% of
the shares of Common Stock to be outstanding immediately after the Merger (based
on the number of shares outstanding as of the Record Date). The dilution
resulting from the Merger could reduce the market price of Common Stock. See
"-- Volatility of Stock Price."
Volatility of Stock Price. There can be no assurance with respect to
the prices at which the Common Stock will trade after the date hereof or after
the Effective Time. As of July 14, 1997, the closing sales price of the Common
Stock as reported on The Nasdaq National Market was $3.125 per share. After the
Effective Time, there will be substantially fewer shares of Common Stock held by
non-affiliated stockholders on a percentage basis than prior to the Effective
Time which may cause fluctuations in the market price of the Common Stock. In
addition, following the Merger, factors such as announcements by the Company of
variations in its quarterly financial results, analysts' estimates of the
Company's financial results, industry-wide results, changes in economic
conditions, competitive developments, sales of substantial blocks of the
securities of the Company by the holders thereof (See "--Sale of Shares"), and
the issuance of stock in connection with future financings or corporate
transactions, among other things, could cause dilution to existing stockholders
and cause the market price of the Company's shares to fluctuate significantly.
See "Market Price Data and Dividend Policy."
Anti-Takeover Effects. The increase (the "Share Amendment") in the
number of authorized shares of Common Stock contemplated by the Merger Agreement
(which amendment to the Company's Certificate of Incorporation will increase the
authorized shares of Common Stock from 15,000,000 to 25,000,000 at the Effective
Time and will be deemed approved by the Stockholders upon approval by the
Stockholders of the Merger Agreement), as well as certain other provisions
16
<PAGE> 19
of the Company's Certificate of Incorporation and By-laws which eliminate the
ability of the stockholders to take any action by written consent without a
meeting and provide that only the Board or the president may call special
meetings of the stockholders, may have anti-takeover effects, which may delay,
defer or prevent a takeover attempt that a holder of Common Stock might consider
in its best interest. Among other things, the increase in the number of
authorized shares of Common Stock contemplated by the Share Amendment might at
some time in the future make the Company a less attractive target for a takeover
bid than it would otherwise have been or render more difficult or even
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or otherwise and thus have the effect of entrenching
incumbent management. Further, the Company is subject to Section 203 of the DGCL
which restricts certain business combinations with any "interested" stockholder
as defined in such law.
17
<PAGE> 20
RECENT DEVELOPMENTS
[Simultaneously with the date of this Prospectus,] Video will merge
with and into the Company, with the Company being the surviving corporation, and
the separate corporate existence of Video to cease. An aggregate of 7,011,349
shares of Common Stock will be issued to Video's stockholders in the Merger
(plus an additional 212,096 shares of Common Stock which will replace an equal
number of shares of Common Stock currently owned by Video which will be
cancelled upon the Merger). Prior to the Merger, certain real estate assets
having a net book value of approximately $3,802,000 as of March 31, 1997 and
which are owned by certain of the Selling Stockholders will be contributed to
Video and, accordingly, transferred to the Company in the Merger. The shares of
Common Stock to be issued to Video's stockholders in the Merger will represent
approximately 54.6% of the outstanding shares of Common Stock immediately after
the Merger. A Proxy Statement for the special meeting of stockholders to be held
on July [ ], 1997 (the "Proxy Statement") which describes the Merger more fully
has been filed with the Commission and is incorporated herein by reference
(other than the section entitled "The Merger -- Fairness Opinion" and Appendix B
(Opinion of Montgomery Securities) thereto). The following information is
presented in this Prospectus to provide general information about the combined
company and the Merger.
COMBINED COMPANY
INTERNATIONAL POST LIMITED
General
The Company, through its operating subsidiaries, is a leading
international provider of technical and creative services to owners, producers
and distributors of television programming, television advertising and other
programming content. The Company provides (i) producers of original programming
with technical and creative services necessary to transform original film or
video to final product for airing on network, syndicated, cable or foreign
television; (ii) users of special video effects with services required to
digitally create or manipulate images in high resolution formats for integration
into television commercials and programming; (iii) international programmers
with studio facilities and multi-standard post-production services necessary to
assemble programming and (iv) international programmers and owners of television
and film libraries with standards conversion, network playback, and duplication
and audio services, all in multiple standards and formats. As a result of a
recent acquisition, the Company, through a majority-owned subsidiary, has
further expanded its services to include the design and production of intranets,
extranets and internet sites, as well as consulting and support services related
to those technologies. The Company believes that its principal strengths include
the depth and breadth of its client relationships, the depth and continuity of
its creative talent, and its technologically advanced equipment and facilities.
Demand for the Company's services and facilities is principally derived
from the production of new television commercials and the distribution of
previously released motion pictures and television programming through
international syndicators and programmers. Historically, the Company's clients
have outsourced those services provided by the Company and are expected to
18
<PAGE> 21
continue to outsource many of the services required for production,
post-production and distribution of film and television programming. The Company
believes that demand will also be created by the continuing trend toward
globalization in the entertainment and media industries. The worldwide market
penetration of distribution channels such as home video and digital satellite
broadcast is also anticipated to contribute to a growing demand for original and
reissued programming.
Business Strategy
The Company was founded in 1993 with the goal of becoming the leading
full-service post-production house for the United States and international
markets and has remained focused on achieving this goal. To accomplish this
objective, the Company continues to seek new ways to enhance its ability to
provide one-stop post-production services while maintaining the high quality of
such services. Through a series of strategic acquisitions, the Company grew from
a single post-production house in New York City into an all inclusive operation
comprised of four divisions with facilities in three states. The Company plans
for further growth and the expansion of its range of services through strategic
acquisitions and internal growth. The Company has invested significant sums in
its infrastructure to ensure that each of its divisions remains at the
technological forefront of the post-production industry.
Principal Services
Video Post-Production Services
The Company, through its subsidiaries, provides the following video
post-production services to the television advertising industry and to program
originators, including corporations and educational institutions:
Creative Editorial Services (Design): The creative editing
process, or the first stage of post-production, for a
television commercial generally involves the selection of the
best footage from several thousand feet of film and the
combination of that footage through editing along with special
video effects to create a cohesive message with audience
appeal. The creative editor typically is involved with all
facets of the post-production process and usually selects the
post-production facilities in which the remaining and final
stages of the television commercial's post-production takes
place.
Film-to-Videotape Transfer: The Company has film to videotape
transfer suites for the transferring of images and sound from
film to videotape. This process can be used for either
positive or negative, 16 or 35 millimeter film and for both
composite and multi-track systems. The Company's skilled
colorists operate state-of-the-art electronic equipment which
provides color correction and expansion or repositioning of
film images. In addition, the Company can correct and enhance
the color of projects originated on videotape. The videotape
element masters resulting from the transfer process can be
edited to create the final product which can then be
duplicated for a variety of markets including television
advertising,
19
<PAGE> 22
corporate video cassettes, home video cassettes, pay cable
television, television program syndication, airline in-flight
entertainment, foreign distribution and ancillary application.
Transfers are made in both the PAL (Europe and South America)
and NTSC (North America and Japan) standards.
Electronic Video Editing: The Company operates a combination
of analog and digital edit suites. The editing process ranges
from simple cuts and assembly with dissolves, wipes and
titles, to complicated layering of images and special effects.
Videotape is edited in many tape formats (sizes) for use in
commercials, shows, corporate and educational videos and other
presentations.
Computer-Generated Graphics: Company artists create
computer-generated television imagery working with
sophisticated computer software for applications such as main
titles for television shows, credits and various electronic
special visual effects including computer animation and
electronic graphics in both two and three dimensions.
Videotape Duplication: The Company offers videotape
duplication in all professional broadcast formats, including
D1, D2, BetaCam SP, 1" and 3/4", to meet the needs of the
commercial advertising, corporate video, motion picture,
television production and syndicated television program
distribution industries. The Company also creates duplication
masters with closed captioning for the hearing impaired.
The Company provides the following post-production services to
international television program originators and distributors:
Standards Conversion: Throughout the world, video signals are
recorded in four principal standards: NTSC -- used in several
countries, including the U.S., Canada, Mexico and Japan; PAL
-- used in numerous countries, including England, Italy,
Australia and China; PAL-Modified -- used exclusively in
Brazil; and SECAM -- used in France, Russia and the Middle
East. A program recorded in one standard cannot be broadcast
or played back through equipment employing another standard
unless the program is first "converted" to the other standard.
If, for example, RTL, a German television broadcaster, wants
to air "Sesame Street" (a program produced in the U.S. and,
therefore, in the NTSC standard), the video signal must first
be converted to PAL to make it compatible with the German
standard. The Company provides conversion services to and from
all of the standards currently available.
International Duplication: Duplication services are required
to accommodate multiple broadcast locations receiving the same
product in the same standard, but utilizing a variety of
videotape formats. Using the same analogy as above, the German
broadcaster received a PAL tape for his 1" equipment, but a
Scandinavian broadcaster needs to receive a PAL tape of that
same "Sesame Street" episode for his D2 equipment.
Accordingly, the Company would "duplicate" the tape to the
20
<PAGE> 23
different format in the same standard.
Specialized Video Services: The Company is meeting an
increasing demand for specialized services using state-of-the
art, multistandard film-to-tape, editing and audio suites.
Audio capabilities include restoration, layback, ADR
(automatic dialogue replacement), audio-for-video editing, and
the recreation or enhancement of music and sound effects
tracks. Additional services include scene-by-scene color
correction of film or tape, video restoration and I(3)
(International Image Interpretation), an innovative standards
conversion technology which achieves extremely high quality
for film-originated material.
Additional Services: In addition, in the Company's South
Florida facilities, the Company provides studio facilities and
technical personnel for MTV Latino and network playback
operations for Discovery Latin America, Discovery
Spain/Portugal and Discovery Brazil/Argentina.
Communications Consulting and Production Services
Through Cognitive Communications, LLC ("Cognitive"), the Company
also provides communications consulting and production services for the
planning, design, development and implementation of intranets, extranets and
internet sites. Intranets and extranets are office network information systems
that use internet technology to enhance communications. These services are
provided by experienced communications consultants with expertise in corporate
communications, strategic planning, research, organizational development, human
resources and emerging communications technologies. Management believes that the
favorable cost/benefit features of intranets and extranets will result in
increased demand for Cognitive's services. Cognitive has worked on projects for
several Fortune 500 companies, including Apple Computer, Inc., The McGraw-Hill
Companies, Inc., Corning Incorporated, BellSouth Corporation and Xerox Corp., as
well as other smaller public and private companies.
Sales, Marketing and Customer Service
A full-time sales force, together with the Company's editors, graphic
artists and senior management, actively market the Company's services through
industry contacts and through advertising in the major industry trade magazines
such as Shoot, Ad Week and Post. The focus of this advertising is to promote the
Company's image for quality services, its technical capabilities and its
state-of-the art facilities.
The Company's marketing strategy, with respect to the services it
provides for television program distributors to the international market, is to
focus on the needs of the end-users as well as on the needs of the clients. The
Company actively develops relationships with overseas facilities and
broadcasters through visits and multi-lingual communication, to learn and
respond to their individual technical and operational requirements. This
strategy has resulted in end-users requesting that their international
television program distributors utilize the Company's services and has
alleviated many problems between the distributors and the broadcasters. Sales
and marketing efforts emphasize the needs of the client and the end-user,
technical proficiency, and the
21
<PAGE> 24
Company's global perspective.
Competition
The competitive video services industry is both specialized and
fragmented. Certain post-production services businesses (both independent
companies and divisions of diversified companies) provide most of the same
services provided the Company, while others specialize in one or several of
these services. Certain film production companies also provide post-production
services. Many of the Company's competitors are located in New York City, one of
the principal domestic markets for the Company's services. Certain of these, as
well as other competitors of the Company, have greater financial resources than
the Company.
The Company competes on the basis of customer satisfaction with the
range, quality and pricing of its offered services. Its ability to remain
competitive is also based in part on its capacity to respond to technological
change by purchasing state-of-the art equipment. The Company also competes on
the basis of its ability to attract and retain qualified, highly skilled
personnel. 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 post-production services industry
has been and is likely to continue to be subject to technological change to
which the Company must respond in order to remain competitive. The Company has
no long-term or exclusive agreements with its customers (other than certain
agreements with Discovery Communications, Inc. with respect to providing
services to Discovery Latin America and Discovery Spain/Portugal, and with MTV
Latin America, Inc. with respect to providing services to MTV Latino); however,
the Company has had long-term relationships with many of its customers.
Major competitors of the Company in providing standards conversion
services include Delvin Video Services, Magno Video, Intercontinental Televideo
and International Image based in Toronto, Canada. Major competitors of the
Company in providing creative editorial services include Crew Cuts Film & Tape,
Red Car, Progressive Image Group and Dennis Hayes & Associates. Major
competitors of the Company in providing film-to-videotape transfer, electronic
video editing and computer-generated graphic services include Post Perfect (a
subsidiary of The New York Media Group), The Tape House Editorial Co., PrinczCo
Productions, Nice Shoes, L.L.C., Click 3X and Broadcast Video, Inc.
Properties
The Company leases seven principal production facilities, three located
in New York City, one in Northvale, New Jersey and three in South Florida. The
Company's three New York City facilities consist of approximately 68,000 square
feet, including the Company's principal executive offices. The Company
consolidated two 8,000 square foot facilities in New York City to one 18,000
square foot facility in the second quarter of the 1997 fiscal year. The
Company's Northvale, New Jersey facility consists of approximately 38,000 square
feet. This facility is currently leased from a partnership owned by the majority
stockholders of Video. As a result of the Merger, the Company will own this
facility after the Merger and, according, be relieved of rent obligations
therefor. The three South Florida facilities consist of approximately 42,000
square
22
<PAGE> 25
feet.
The Company's facilities include nine film-to-tape transfer and color
correction suites, sixteen on-line editing suites, seventeen off-line editing
suites, sixteen graphic suites (several of which can operate as edit suites),
seven audio suites, ten special project booths and two production rooms
dedicated to standards conversion and duplication services. In addition, the
Company's South Florida facilities include two network playback operations and
one studio facility.
VIDEO SERVICES CORPORATION
Overview
Video, through its operating subsidiaries, is a leading provider of
value-added video services to a diverse base of customers within the television
network, cable and syndicated programming markets. Video's services include (i)
the commercial integration and distribution of broadcast quality video content
via a satellite and fiber optic transmission network routed through its
digital/analog switching center and (ii) the design, engineering and production
of advanced digital and analog video systems for the television, cable,
post-production and corporate markets as well as the rental of professional
video equipment to the sports, entertainment and other segments of the broadcast
and cable television and professional markets. Video is a leading single source
provider of satellite and fiber optic video transmission services in the New
York metropolitan area and one of the largest independent (i.e., not affiliated
with, or related to, an equipment manufacturer) providers of technical services
and equipment to its target markets. Video believes that it will continue to
experience increasing demand for its engineering services as a result of the
anticipated conversion of existing television and cable facilities due to the
continuing trend toward digitalization and the creation of additional television
and cable facilities due to emerging compression technologies and an increasing
demand for programming content worldwide. Video is a privately-held corporation
owned by three (3) stockholders, one of whom, Louis H. Siracusano, is a director
of the Company and will be the President and Chief Executive Officer of the
Company after the Merger.
Video was incorporated in 1979 to service select segments of the video
industry which its founders, Messrs. Siracusano, Ferolito and Irwin, had
identified as being underserviced. Originally, Video focused its efforts on
building advanced video systems and providing professional video equipment to
particular segments of the television and professional video services
industries. Over the years, Video identified additional market segments which it
believed presented opportunities for significant revenue growth and its lines of
business gradually expanded to include post-production and standards conversion,
as well as satellite and fiber optic transmission services. In 1992, Video
divested itself of its post-production business, which divestiture resulted in
the formation of the Company. In February 1994, Video sold its standards
conversion business to the Company in connection with the Company's initial
public offering and used the sale proceeds to repay indebtedness and to expand
certain business segments, particularly satellite and fiber optic transmission
services.
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<PAGE> 26
Business Strategy
Video has achieved significant growth in revenues and profits by
identifying and developing opportunities within certain segments of the market
for video services. Video's business strategy is to continue to capitalize on
opportunities created by changes in technology and markets, as well as to become
the leading supplier of services to the market segments in which it currently
competes. Video has developed good customer relationships with all of the major
television networks and many of the established and developing cable networks by
maintaining high levels of technical capabilities and customer service. AT&T's
SKYNET Satellite Services recently acknowledged Video's satellite uplink
performance in 1996 by presenting Video with the prestigious SKYNET Uplinker
Award, which is awarded to companies that have accessed AT&T satellites without
any interferences, incidents or procedure violations over a period of one (1)
year. Video believes that it will be able to continue to grow its existing
businesses by selling additional services to existing customers and by acquiring
new customers as a result of its technological capabilities, strong reputation
and aggressive sales force.
Video is also focused on capitalizing on opportunities created by
emerging industry trends such as the emergence of digital television and its
more advanced variant, high-definition television; the proliferation of
alternative transmission/distribution methods such as direct-to-home satellite
services, multipoint microwave systems and the internet; and the conversion of
existing television facilities from analog to digital and from videotape-based
to digital server-based technologies. Video believes that the continued
proliferation of new distribution technologies, as well as the industry wide
conversion of equipment and systems from analog to digital, will create an
increasing demand for technical expertise and resources which can be outsourced
by the end-user. Video believes that the aggressive timetable associated with
such conversion, which has resulted both from recent mandates by the Federal
Communications Commission (the "FCC") for digital television and high-definition
television as well as competitive forces in the marketplace, is likely to
accelerate the rate of increase in the demand for these services. As a result,
Video believes that significant opportunities exist for Video to provide
services for the upgrading and conversion of the industry's technical
infrastructure.
Video has implemented several strategies for capitalizing on these
growth opportunities, including the expansion of its engineering staff to meet
market demand, the introduction of additional services, such as repair and
maintenance contracts, and, most important, the negotiation and implementation
of strategic partnerships to position Video as a leader in the conversion to
digital television and high-definition television. Video recently executed a
memorandum of understanding with one of the nation's largest manufacturers of
television transmitters, Comark Communications, Inc., relating to the proposed
formation of a strategic alliance to create a turnkey system for the
broadcasting industry's conversion to digital television and high-definition
television. Video believes that this alliance will provide technological
leadership for broadcasters in the conversion process.
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<PAGE> 27
Principal Services
Satellite and Fiber Optic Transmission Services
Through two of its operating subsidiaries, Atlantic Satellite
Communications Inc. ("Atlantic Satellite") and Waterfront Communications
Corporation ("Waterfront"), Video provides integrated satellite and fiber optic
video and data transmission services to a wide range of customers with whom it
has enjoyed long-term relationships, including the major television broadcast
networks and certain cable television networks, independent national and
international television stations and producers of syndicated television shows.
Satellite and fiber optic transmission services are used by these customers
independently and in combination to integrate editing and transmission of video
content as quickly as possible. Video's use of fiber optic and satellite
technologies enables it to provide its customers rapid and reliable transmission
of broadcast quality video content with a high level of flexibility. Video
believes that, in the New York metropolitan area, Atlantic Satellite is a
leading single source provider of satellite and related transmission services
and that Waterfront is the leading provider of "first mile" and "last mile"
fiber optic video and data transmission services. "First mile" transmission
services are services whereby content is transmitted from an origination point,
via local transmission means, to a long distance video network carrier (such as
VYVX or AT&T) or satellite earth station (such as Atlantic Satellite) and "last
mile" transmission services are services whereby content is received into, via
local transmission means, the final destination point for the content (such as a
television network, local broadcaster or cable channel). Atlantic Satellite's
teleport facilities provide customers with access to the full complement of
satellite and fiber optic transmission services provided by Atlantic Satellite
and Waterfront.
Atlantic Satellite's teleport facility is located on contiguous
properties in Northvale, New Jersey and Tappan, New York. This facility contains
broadcast quality satellite dishes, which transmit and receive domestic feeds in
both C-Band and KU Band frequencies, and provides international transmission to
both PanAmSat and Orion satellites. At this facility, Atlantic Satellite
provides primary up-link and down-link services, as well as ancillary services
such as tape playback and recording, tape duplication, syndication services
(including spot insertion and editing), and digitally compressed satellite
transmission expertise. Atlantic Satellite provides over 3,000 hours per year of
playback and uplink services for pre-taped, syndicated television programs
produced by Universal Pictures, Warner Brothers, Hearst and 20th Century Fox. It
also downlinks and records numerous live sporting events for clients such as the
National Hockey League (NHL) and provides satellite transmission services for
clients such as Fox Sports, NHK, NFL Films and Phoenix Communications Group Inc.
("Phoenix"), which is the communications/production provider for Major League
Baseball.
Waterfront's services are provided through a video switching facility
located in New York City which is connected to all major news organizations and
all New York area teleports including Atlantic Satellite's. Waterfront's
extensive network of both analog and digital video fiber optic connections and
multiple paths to Atlantic Satellite enable domestic and international
broadcasters to take advantage of Video's single source transmission services at
competitive rates. Video believes that Waterfront's fully-manned facility
provides it with a competitive advantage over its major competitor, "The Switch"
(operated by Keystone), which does not provide the same level of service.
Waterfront's fiber optic connections are located in local venues such as the New
York
25
<PAGE> 28
Stock Exchange and the United Nations in New York City, as well as Giants
Stadium, the Continental Airlines Arena and the Meadowlands Racetrack in New
Jersey. These fiber optic connections enable Waterfront's customers to transmit
video content directly from those venues to their studios or, alternatively, to
Atlantic Satellite for national and international distribution. In addition to
local fiber optic transmission and connections to Atlantic Satellite's
transmission facility, Waterfront provides its customers with access to several
long-distance fiber optic carriers through its remote facility located in
downtown Manhattan. Waterfront also provides transportable services, including
point-to-point microwave transmission, transportable up-link and down-link
transmission, and broadcast quality teleconference services, as well as access
to other teleport facilities. Video believes that Waterfront's switching
facility is the largest such facility in the New York metropolitan area and that
Waterfront's connections to major event and sports venues within the New York
metropolitan area provide clients with extensive and essential coverage.
Video believes that its ability to combine "first mile" and "last mile"
fiber optic transmission and satellite transmission services provides it with a
competitive advantage over providers of satellite-only transmission services.
These integrated capabilities offer broadcasters, cable television networks and
others the ability to edit news, sports and other video content in their
Manhattan studios (which are linked to Waterfront) and, after alteration, to
transmit that content anywhere in the world almost instantaneously through the
Waterfront/Atlantic Satellite fiber optic link. Video believes that the combined
services provided by Atlantic Satellite and Waterfront have achieved a
reputation for quality and reliability in the industry, which has resulted in
contracts with Fox News, Fox Sports, Court TV, PanAmSat, CNBC, MS/NBC, the NHL
and Worldwide Television Network.
Production of Video Systems and Equipment Rental
Through A.F. Associates, Inc. ("AFA"), Video designs, builds, installs
and services advanced video systems for the broadcast and cable television
industries, and for professional and corporate markets. AFA's services include
project management; design and engineering; consultation with architects and
building contractors; drafting and technical documentation; equipment and
materials specification and procurement; pre-wiring and assembly; site
installation; system testing and commissioning; and training. Video believes
that AFA is one of the leading independent providers of such services.
Systems are designed by AFA's in-house engineers utilizing computerized
design programs and are assembled in AFA's facility in Northvale, New Jersey.
Assembly includes custom fabrication of all audio, video and control
interconnect wiring, mounting of equipment into rack enclosures and custom
operating consoles, pre-wiring of all interconnecting cabling and subsystem
testing. The entire system is then shipped to the customer's location, where it
is installed and tested by AFA's technicians and engineers. The end product is a
professionally designed and built system, utilizing advanced design and
construction concepts and incorporating state-of-the-art broadcast equipment.
Through the use of AFA's systems integration services, the client need only set
overall system and operational requirements. AFA engineers and constructs the
entire system and manages all aspects of technical construction.
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<PAGE> 29
AFA's clients include the four (4) major networks, numerous cable
channel networks (e.g., Cable News Network, Inc., CNBC, Fox News Channel,
Lifetime Television, USA Networks, Inc. and Home and Garden Cable Network),
satellite broadcasters (e.g., Direct TV, AlphaStar Television Networks and SKY
Latin America), corporate television networks (e.g., Merrill Lynch & Co., Inc.,
International Business Machines Corp. and Toys R Us), and numerous production
and post-production facilities. Over 50% of AFA's business is repeat business
from clients who seek AFA's technical and engineering expertise.
Recently completed projects include: the entire production and on-air
facilities for the start-up of the Fox Cable News Channel; ABC-TV's first
digital studio control room; newsroom technical facilities for WNBC-TV in New
York; technical facilities for the Museum of Television and Radio in Beverly
Hills, CA; direct-to-house satellite broadcast centers for News Corp.'s SKY
Latin America service in Rio de Janeiro, Mexico City and Miami; and a 147
channel satellite broadcast facility for AlphaStar Digital Television. Current
projects include a new 50 foot mobile broadcast unit for ABC Sports' Monday
Night Football; a television studio complex for Martha Stewart Living TV; and an
operations center for SKY Latin America.
Video believes that increases in cable, direct satellite and
independent broadcasting made possible by emerging compression technologies, as
well as the migration of broadcasting standards from analog to digital, will
provide significant opportunities for AFA to expand its customer base.
Through Video Rentals, Inc. ("VRI"), Video supplies broadcast and
industrial video equipment for rental to the broadcast and professional video
industries and provides support and maintenance services for such equipment. VRI
rents cameras, super slo-mo systems, interformat portable editing systems,
character generators, graphic equipment and specialized equipment for sports
production. Equipment rentals may range from a period of one (1) day to as long
as six (6) months to a year. Specialized equipment packages, such as editing
systems, are also rented for longer periods by certain customers, including MTV,
Phoenix and others. Purchases of equipment to be held for rental are made both
on the basis of anticipated rental demand and in response to specific customer
orders and commitments from such customers for minimum rental terms (in the case
of more specialized equipment).
VRI specializes in network sports production. As the exclusive field
shop for Fox Sports, VRI is responsible for storing, shipping and maintaining
equipment owned by the network and used for its football, hockey and baseball
broadcasts. VRI also serves as a rental agent for the rental of this equipment
to third parties. Major customers of VRI include ABC, CBS, NBC, Fox and MTV, as
well as major mobile truck operators.
Video believes that VRI is one of the largest independent video
equipment rental suppliers on the East Coast and that it provides complementary
outsourcing solutions for clients of its other subsidiaries. For example, VRI
provides editing systems for NHL Productions, which are used in conjunction with
Atlantic Satellite's provision of satellite transmission services.
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<PAGE> 30
Sales, Marketing and Customer Service
Video markets its services through its management's efforts to exploit
its industry contacts and attendance at industry trade shows, as well as
advertisements in trade journals and referrals from existing customers and
suppliers. Atlantic Satellite and Waterfront jointly market their services
through the efforts of management and a full-time sales force which emphasizes
quality and the range of their offered services. In addition, AFA maintains a
full-time sales force which emphasizes to potential customers the extensive
experience of its professional engineers, AFA's leadership role in systems
technology and its comprehensive project management services. VRI focuses on its
market leadership position, round-the-clock customer service, diversity and
reliability of its inventory and its competitive pricing structure, as well as
the value-added services it provides to its larger customers, such as logistics
and inventory management.
USA Networks contributed 22% of Video's consolidated gross revenues in
the 1994 fiscal year and Alpha Star and InTouch Ministries contributed 20% and
10% of such revenues, respectively, in the 1996 fiscal year. Revenues from such
customers were derived from one-time contracts for services provided by AFA and
do not necessarily represent a recurring source of revenues.
Supply of Services and Equipment
In most situations where Atlantic Satellite is providing satellite
up-link services, the customer has secured the transponder time and instructs
Atlantic Satellite as to which satellite and transponder to transmit the signal.
In those situations where Atlantic Satellite is providing transponder time as
part of a service package to a customer, Atlantic Satellite obtains transponder
time from third-party re-sellers of transponder time. Satellite owners do not
sell occasional transponder time directly to end-users or service providers.
Rather, they sell or lease transponders on a full-time basis for a minimum of
one (1) year. Waterfront may either order fiber optic lines from third party
providers to be installed between Waterfront's facility and the customer or the
customer may order these lines directly from a third party provider, with
Waterfront providing only the connection with its switch. AFA and VRI obtain
their equipment from a variety of sources, including the major equipment
manufacturers such as Sony Corporation of America, BTS Broadcast Television
Systems and Tektronix. AFA orders equipment used in the production of its video
systems based upon customer purchase orders after receipt of deposits. Larger
systems are funded through periodic customer payments which relate closely to
the capital needs of the project. Although Video has not experienced any
significant difficulty in obtaining equipment, there can be no assurance that
shortages will not arise in the future. The loss of any one or more
manufacturing sources would have an adverse effect on Video until alternative
arrangements could be secured. Video believes that there are alternative
adequate sources of components of sufficient quality and quantity.
Competition
The market for the satellite transmission services provided by Atlantic
Satellite is highly competitive. Major competitors include Micronet (a
subsidiary of Lenfest Communications, Inc.), Group W (a subsidiary of
Westinghouse Electric Corporation), Keystone (a subsidiary of French
28
<PAGE> 31
Telecom) and Gateway (a subsidiary of VYVX, Inc.). Some of these competitors
have significantly greater resources than Video. Atlantic Satellite competes
primarily based upon customer service and its large and valued subscriber base,
which permits a high degree of inter-subscriber connections. Although Video
believes that Waterfront's video switching facility is the largest in the New
York metropolitan area, "The Switch" (operated by Keystone) has "first mile" and
"last mile" capabilities and competes with Waterfront. AT&T also competes in the
switching business to some extent. However, Video believes that its fully-manned
facility provides it with an advantage over its competitors which do not provide
the same level of service. AFA's primary competitors are Sony Corporation,
Communications Engineering Inc. and National TeleConsultants, as well as small,
regionally-based integrators and dealers. Competition is based upon technical
expertise, experience and price. VRI's major competitors are Bexel Corporation,
which has locations in several metropolitan areas, as well as smaller companies
which do not offer the variety of services provided by VRI. Competition is based
upon price, diversity and availability of inventory and customer service. Video
believes that the ability of each of its operating subsidiaries to cross-market
to existing customers using other services offered by Video's other subsidiaries
provides Video with a competitive advantage over many competitors who lack the
full complement of services provided by Video.
Properties
Video's corporate headquarters are located at 240 Pegasus Avenue,
Northvale, New Jersey ("240 Pegasus") where VSC Corporation (one of Video
subsidiaries which acts as a holding company of certain of Video's other
subsidiaries) and Atlantic Satellite lease an aggregate of approximately 15,000
square feet plus outdoor antenna pads. Atlantic Satellite and VRI also lease
approximately 13,000 and 7,000 square feet, respectively, at 183 Oak Tree Road
in Tappan, New York ("183 Oak Tree"), which is adjacent to the 240 Pegasus
property. Atlantic Satellite has subleased 10,000 square feet at 183 Oak Tree
Road to the NHL. Atlantic Satellite's teleport facility is located at 240
Pegasus and 183 Oak Tree. In addition, VSC Corporation leases approximately
11,800 square feet at 235 Pegasus Avenue, Northvale, New Jersey ("235 Pegasus")
for general and warehouse purposes. All of the foregoing properties are leased
from partnerships of which Messrs. Siracusano and Ferolito are the sole
partners. Such partnerships own 240 Pegasus and 183 Oak Tree, and lease 235
Pegasus from an unaffiliated third party. The partnerships' fee and leasehold
interests in such properties will be contributed to entities which will be
acquired by a wholly-owned subsidiary of Video prior to the Merger.
Waterfront leases approximately 7,200 square feet in midtown Manhattan
which houses Waterfront's Technical Operation Center and executive offices and
approximately 2,600 square feet in downtown Manhattan which is used for
Waterfront's remote switching hub. A portion of the midtown space is subleased
by the Company for executive offices and for a secretarial station. AFA leases
approximately 30,000 square feet at another facility located in Northvale, New
Jersey, which facility serves as its executive offices and its engineering and
fabrication facility. In addition, Video also owns 7.65 acres of vacant land in
Northvale, New Jersey.
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<PAGE> 32
Government Regulation
The Communications Act of 1934, as amended by the Telecommunications
Act of 1996 (the "Act"), prohibits the operation of satellite earth station
facilities such as those operated by Atlantic Satellite, except under licenses
issued by the FCC. Atlantic Satellite holds the following four (4) satellite
earth station FCC licenses.
<TABLE>
<CAPTION>
Call Sign License Expiration Date
--------- -----------------------
<S> <C>
E960405 September 6, 2006
E910152 March 22, 2001
E881160 February 17, 1999
E4626 September 10, 2002
</TABLE>
No FCC authorization is required for reception of transmission from
domestic satellites to points within the United States. When applicable, Video
relies on third party FCC licenses or authorizations when it transmits certain
domestic satellite traffic through earth stations operated by such third
parties.
The FCC establishes technical standards for satellite transmission
equipment which change from time to time, and it also requires coordination of
earth stations with land-based microwave systems at certain frequencies to
assure non-interference. Transmission equipment must also be installed and
operated in a manner that avoids exposing humans to harmful levels of radio-
frequency radiation. The placement of earth stations or other antennae is
typically subject to regulation under local zoning ordinances. Video believes
that Atlantic Satellite's equipment meets and is operated in material compliance
with all applicable laws, regulations and industry standards.
Waterfront holds two point-to-point microwave licenses from the FCC for
the transmission of signals from a single point to temporary fixed locations
within 25 miles of the license coordinates. There are two microwave licenses:
<TABLE>
<CAPTION>
Call Sign License Expiration Date
--------- -----------------------
<S> <C>
WNEI382 June 23, 1999
WMQ-537 February 1, 2001
</TABLE>
While the FCC generally renews satellite earth station and
point-to-point microwave licenses on a routine basis, there can be no assurance
that Atlantic Satellite's and Waterfront's licenses will be renewed at their
expiration dates. Failure to obtain renewal of such licenses would have a
material adverse effect on Video.
Backlog
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At March 31, 1996 and March 31, 1997, Video had backlogs of
approximately $3,591,000 and $8,526,000, respectively. All of such backlog is
attributable to AFA's video production systems projects.
Employees
As of March 31, 1997, Video and its subsidiaries had a total of 129
employees. None of Video's employees is represented by a labor union or is
subject to a collective bargaining agreement. Video has never experienced a work
stoppage and believes that its employee relations are satisfactory.
Legal Proceedings
Video and its subsidiaries are involved in various claims and legal
proceedings of a nature considered normal to its business. While it is not
possible to predict or determine the outcome of these claims and proceedings, it
is the opinion of Video's management that their outcomes will not have a
material adverse effect on Video.
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<PAGE> 34
Management's Discussion and Analysis of Financial Condition
and Results of Operations
(in thousands, except share amounts)
The following discussion and analysis is based upon Video's historical
consolidated financial statements included elsewhere herein and does not take
into account any effects of the Merger. In addition, Video recently discontinued
the operations of its Diversified Products segment. See Note 15 to Video's
historical audited consolidated financial statements. The following discussion
should be read in conjunction with Video's historical consolidated financial
statements and the notes thereto.
Overview
Video's business is currently divided into two segments: (i) Satellite
and Fiber Optic Transmission Services ("Transmission Services") and (ii) Systems
and Products. The Transmission Services segment integrates and distributes
broadcast quality video content via a satellite and fiber optic transmission
network routed through its digital/analog switching center. The Systems and
Products segment designs, engineers and produces advanced video facilities for
the broadcast and cable television, post-production and professional markets and
rents professional video equipment to the sports, entertainment and other
segments of the broadcast and cable television and professional markets.
Discontinued Operations
On January 2, 1997, Video's management, which had the authority to
approve the action, committed Video to a formal plan to discontinue the
operations of its Diversified Products segment as a condition to the Merger (See
Notes 15 and 20 to Video's historical audited consolidated financial
statements). Losses from the operation of the Diversified Products segment
amounted to $682 and $436, net of applicable income tax benefit of $474 and $291
for the periods ended March 31, 1996 and 1997, respectively. A provision for the
disposal of these operations amounted to $1,029, net of applicable income tax
benefit of $134, which has been recorded in Video's statement of operations for
the nine-month period ended March 31, 1997 based upon management's best estimate
of the future operating losses expected to be incurred prior to the planned
disposal of the Diversified Products segment. In February 1997, Video Dub, Inc.
(part of the Diversified Products segment) contributed the assets ($608) and
liabilities ($170) of its New York City facility to a new company in exchange
for a 30% equity interest ($438) in such new company. Video Dub, Inc. is
included in the net assets of Video to be disposed and spun-off to its
stockholders prior to the Merger. Management believes that this transaction will
reduce the anticipated future operating losses from the Diversified Products
segment. (See Note 6 to Video's historical unaudited condensed consolidated
financial statements.)
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<PAGE> 35
Results of Continuing Operations
Nine Months Ended March 31, 1997 compared to Nine Months Ended March
31, 1996
Total revenues decreased 22.7% to $18,954 in 1997 from $24,508 in 1996.
The decrease in total revenues was due to a decrease in revenues of the Systems
and Products segment to $11,523 in 1997 from $17,580 in 1996, which was
partially offset by an increase in revenues of the Transmission Services segment
to $7,431 in 1997 from $6,928 in 1996. The decrease in revenues of the Systems
and Products segment resulted primarily from a change in the structure of a
significant contract pursuant to which Video now receives a commission on
equipment purchased by the customer from third parties. Previously, Video had
recorded revenues from the sale of such equipment as well as costs related to
the purchase thereof. The increase in revenues of the Transmission Services
segment was due primarily to an increase in the number of customers connected to
Video's satellite and fiber optic network and the receipt of additional
transmission revenues from existing customers, partially offset by a decrease in
syndication revenues due to programming cancellations.
Total cost of sales, services and rentals decreased to $11,135 in 1997
from $17,139 in 1996 primarily as a result of the change in the structure of the
contract described above. Gross profit margins increased to 41.3% in 1997 from
30.1% in 1996 as a result of a change in the service mix which favored higher
margin services. Gross profit margins of the Systems and Products segment
increased to 34.0% in 1997 from 22.5% in 1996 due to a higher proportion of
revenues contributed by the equipment rental division in 1997 as well as the
effects of the significant contract pursuant to which Video now receives a
commission as discussed above. Gross profit margins of the Transmission Services
segment increased to 52.5% in 1997 from 49.2% in 1996 primarily as a result of
increased revenues without a corresponding increase in costs. Since a high
proportion of costs attributable to the Transmission Services segment are fixed,
increases in revenues do not result in proportionate increases in costs.
Selling, general and administrative expenses increased 7.6% to $4,710
in 1997 from $4,377 in 1996. Such expenses as a percentage of revenues increased
to 24.8% in 1997 from 17.9% in 1996, primarily due to the initiation of a
marketing study, preparation of sales brochures and the payment of increased
sales commissions, combined with the reduction of revenues. Video believes that
these additional costs will continue to be incurred.
Operating income from continuing operations increased 6.3% to $1,830 in
1997 from $1,722 in 1996. This increase was due to increased gross profits in
both the Systems and Products and Transmission Services segments, partially
offset by the increased selling, general and administrative expenses.
Depreciation and amortization expenses increased 0.7% to $1,279 in 1997
from $1,270 in 1996 due to the acquisition of additional equipment for expansion
and replacement.
Interest expense increased 12.2% to $406 in 1997 from $362 in 1996 as a
result of increased borrowings under Video's credit facility.
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Other income increased to $550 in 1997 from $80 in 1996 as a result of
the payment on a note receivable, previously fully reserved, relating to the
1993 sale of a radio station.
Year Ended June 30, 1996 compared to Year Ended June 30, 1995
Total revenues increased 53.0% to $29,740 in 1996 from $19,439 in 1995.
The increase in total revenues was due primarily to the performance of the
Systems and Products segment, the revenues of which increased 75.8% to $20,499
in 1996 from $11,660 in 1995. The growth in revenues of the Systems and Products
segment resulted from increased demand for design and installation of video
systems. Video believes that demand for the services provided by the Systems and
Products segment should continue to increase as a result of (i) the emergence of
digital television and its more advanced variant, high-definition television;
(ii) the proliferation of alternative transmission/distribution methods such as
direct-to-home satellite services, multipoint microwave systems and the
internet; and (iii) the conversion of existing television facilities from analog
to digital and from videotape-based to digital server-based technologies.
Revenues of the Transmission Services segment increased 18.8% to $9,241 in 1996
from $7,779 in 1995 primarily as a result of an increase in the number of
customers connected to Video's satellite and fiber optic network and additional
revenues from existing customers. Video has recently negotiated contracts in
respect of its Transmission Services segment that are expected to provide
significant additional revenues and believes that demand for the services
offered by this segment will continue to increase.
Total cost of sales, services and rentals increased to $19,691 in 1996
from $11,994 in 1995. As a percentage of sales, cost of sales, services and
rentals increased to 66.2% in 1996 from 61.7% in 1995 primarily as a result of
the higher percentage of total revenues contributed by the Systems and Products
segment which historically has produced lower gross margins than the
Transmission Services segment. Cost of sales, services and rentals for the
Systems and Products segments consists of salaries, equipment, materials and
sub-rentals of equipment. Cost of services for the Transmission Services segment
includes salaries, equipment maintenance and transponder rental expenses. Gross
margins for the Transmission Services segment decreased to 49.8% in 1996 from
51.8% in 1995 primarily as a result of higher transponder rental costs. The
higher transponder rental costs resulted from increased industry demand due to
the failure of an existing third party satellite and several unsuccessful third
party satellite launches. Gross margins of the Systems and Products segment
decreased to 26.6% in 1996 from 29.3% in 1995 due to a higher ratio of large AFA
contracts which produce lower gross margins than smaller contracts.
Selling, general and administrative expenses increased 12.8% to $6,009
in 1996 from $5,326 in 1995. This increase was a direct result of the 53%
increase in total revenues and the additional selling, general and
administrative costs required to manage such growth. Selling, general and
administrative expenses as a percentage of revenues decreased to 20.2% in 1996
from 27.4% in 1995. The decrease, as a percentage of revenues, was primarily
attributable to the distribution of fixed costs over a higher revenue base in
1996.
Operating income from continuing operations increased 387.1% to $2,387
in 1996 from $490 in 1995. Video attributes this growth to several factors,
including growth in revenues from 1995 to 1996 and a decrease in the ratio of
overhead and fixed costs to revenues, as a result of
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<PAGE> 37
Video generally increasing its capacity utilization.
Depreciation and amortization expenses increased to $1,653 in 1996 from
$1,629 in 1995 as a result of additional purchases of equipment, primarily for
use in the equipment rental division of the Systems and Products segment.
Interest expense increased to $485 in 1996 from $465 in 1995 primarily
as a result of an increase in the principal amount of aggregate indebtedness
during the fourth quarter of 1996 in order to finance the purchase of additional
equipment.
The effective income tax rate applied against pre-tax income was 39.4%
in 1996 and 0% in 1995. In both 1995 and 1996, Video decreased valuation
allowances as a result of the use and planned realization of net operating loss
carryforwards. As of June 30, 1996, approximately $709 of state net operating
loss carryforwards have been fully reserved due to significant uncertainty about
the ability of certain of Video's subsidiaries (principally dormant
subsidiaries) to generate taxable income.
Income before discontinued operations increased to $1,212 in 1996 from
$223 in 1995 primarily as a result of the factors discussed above.
Year Ended June 30, 1995 compared to Year Ended June 30, 1994
Total revenues decreased 4.7% to $19,439 in 1995 from $20,391 in 1994.
The decrease in total revenues was due to a decrease in the revenues contributed
by the Systems and Products segment to $11,660 in 1995 from $15,155 in 1994.
This decrease in revenues of the Systems and Products segment resulted primarily
from the completion of a one-time contract with USA Networks in fiscal 1994. The
decline in the revenues of the Systems and Products segment was partially offset
by a 48.6% increase in revenues of the Transmission Services segment to $7,779
in 1995 from $5,236 in 1994, which increase was primarily due to an increase in
the number of customers connected to Video's satellite and fiber optic network
and additional revenues due to increased transmission volume from existing
customers.
Total cost of sales, services and rentals decreased to $11,994 in 1995
from $14,291 in 1994. As a percentage of sales, costs of sales, services and
rentals decreased to 61.7% in 1995 from 70.1% in 1994 as a result of the lower
percentage of total revenues contributed by the Systems and Products segment
which historically has produced lower gross margins than the Transmission
Services segment and higher capacity utilization in the Transmission Services
segment. In the Systems and Products segment, gross margins increased to 25.0%
in 1995 from 24.6% in 1994. In the Transmission Services segment, gross margins
increased to 51.8% in 1995 from 45.3% in 1994.
Selling, general and administrative expenses decreased 12.7% to $5,326
in 1995 from $6,099 in 1994. Selling, general and administrative expenses as a
percentage of revenues decreased to 27.4% in 1995 from 29.9% in 1994. The
decrease in selling, general and administrative expenses resulted from
reductions in staff and facilities related to a corporate cost reduction
initiative as well as a reduction in provisions for uncollectible accounts.
35
<PAGE> 38
Operating income from continuing operations increased $2,659 to $490 in
1995 as compared to a loss of $2,169 in 1994. This increase was due primarily to
an increase in operating income of the Transmission Services segment of $1,637
and an increase in operating income of the Systems and Products segment of $497,
combined with the reduction in corporate expenses (principally selling, general
and administrative expenses) of $525, as previously described.
Depreciation and amortization expenses decreased to $1,629 in 1995 from
$2,170 in 1994 as a result of lower capital expenditures primarily in the
equipment rental division of the Systems and Products segment.
Interest expense decreased 80.7% to $465 in 1995 from $2,405 in 1994
primarily as a result of the use of proceeds from the sale of VSC Post and Audio
Plus Video International Inc. in February 1994 (See Note 15 to Video's
historical audited consolidated financial statements) to reduce the principal
amount of Video's indebtedness.
In both 1994 and 1995, Video decreased valuation allowances as a result
of the use and planned realization of net operating loss carryforwards.
Income before discontinued operations decreased to $223 in 1995 from
$8,824 due to a non-recurring income tax benefit of $13,145 recorded in 1994 as
the result of the use and planned realization of net operating loss
carryforwards.
Liquidity and Capital Resources
Historically, Video has met its liquidity needs and capital
expenditures requirements with internally generated funds, borrowings under its
bank line of credit, equipment financing and capital leases. Video's use of
funds has been for capital expenditures and working capital needs, repayment of
outstanding indebtedness and funding of advances to affiliates.
As of March 31, 1997, Video's outstanding indebtedness was
approximately $5,146, $1,759 of which was outstanding pursuant to a revolving
credit facility with Summit Commercial/Gibraltar Corp. which provides for
borrowings of up to $2,100 based on working capital levels at that time. The
revolving credit facility is available to Video at any time until the expiration
of the facility in June 1998, subject to the satisfaction of certain working
capital requirements. Substantially all of Video's indebtedness (as well as the
Company's) will be refinanced in connection with the Merger. See "The Merger --
Refinancing."
Cash Flow From Operating Activities. For the nine months ended March
31, 1997, net cash provided by operating activities was $2,234, primarily
resulting from earnings before interest, taxes, depreciation and amortization
("EBITDA") of $3,659, which was partially offset by increases in working capital
requirements. For the years ended June 30, 1996 and 1995, net cash provided by
operating activities was $1,951 and $481, respectively, primarily resulting from
EBITDA of $4,137 and $2,317, respectively, which were partially offset by
increases in working capital requirements. For the year ended June 30, 1994,
cash used in continuing operations was $1,933, resulting primarily from EBITDA
of $254 which was offset by increases in working capital requirements.
36
<PAGE> 39
Cash Flow From Investing Activities. For the nine months ended March
31, 1997, Video used $1,939 for investing activities, consisting of $1,000 for
the purchase of vacant land from an affiliate with the remainder utilized
primarily for the purchase of new rental equipment which was offset by a $640
repayment of an advance to an affiliate. For the years ended June 30, 1996 and
1995, Video used $3,171 and $1,402, respectively, for investing activities,
primarily related to the purchase of new rental equipment and for additional
satellite transmission capacity and advances to affiliates. For the year ended
June 30, 1994, investing activities generated proceeds of $18,595, resulting
primarily from the sale of Video's international services group to the Company.
Cash Flow From Financing Activities. For the nine months ended March
31, 1997, cash provided by financing activities, net of repayments of long-term
indebtedness, was $859, consisting of $803 in increased borrowings under Video's
line of credit, $1,475 of equipment financing and capital leases and a $600
mortgage secured by the vacant land referred to above. For the years ended June
30, 1996 and 1995, cash provided by financing activities, net of repayments of
indebtedness was $445 and $869, respectively, which was provided by increased
borrowings under Video's line of credit ($153 and $503 in 1996 and 1995,
respectively, net of repayments) and equipment financing ($1,510 and $2,789 in
1996 and 1995, respectively). For the year ended June 30, 1994, net cash used in
financing activities was $15,953, primarily relating to a cash payment of
$10,000 to subordinated debt holders in partial satisfaction of $15,000
principal amount of indebtedness plus accrued interest of $8,321 and the sale of
377,125 shares of Common Stock which resulted in net proceeds of $3,858.
37
<PAGE> 40
SELECTED FINANCIAL DATA
International Post Limited
The following table sets forth selected historical consolidated financial
data for the Company, Manhattan/Transfer Edit Company ("MTE Co.") and its
predecessor (the "Predecessor") for the periods and at the dates indicated. The
Predecessor consists of substantially all of the operating assets and certain of
the liabilities, prior to the 1993 fiscal year, of MTE Holdings, Inc.
("Holdings"), formerly known as Manhattan Transfer/Edit, Inc. The historical
consolidated financial data for each of the years in the five-year period ended
July 31, 1996, and at July 31, 1992, 1993, 1994, 1995 and 1996, is derived from
and qualified by reference to the Company's historical consolidated financial
statements that have been audited and reported upon by Arthur Andersen LLP,
independent public accountants. The historical consolidated financial data for
the nine-month periods ended April 30, 1996 and 1997 and at April 30, 1996 and
1997 is derived from and qualified by reference to the Company's unaudited
historical consolidated financial statements. The information in the table
should be read in conjunction with the Company's historical consolidated
financial statements and the notes thereto and other financial information
regarding the Company appearing in the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1996 and in the Company's Quarterly Reports on
Form 10-Q for the quarterly periods ended October 31, 1996, January 31, 1997 and
April 30, 1997, which are incorporated herein by reference. See "Incorporation
Of Certain Information By Reference."
<TABLE>
<CAPTION>
PREDECESSOR MTE CO. COMPANY
----------- ------- ---------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31, APRIL 30, APRIL 30,
1992 1993(1) 1994(1) 1995(2) 1996(2) 1996 1997
----------- ------- ------- -------- -------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $11,648 $20,871 $27,827 $38,349 $49,352 $37,155 $40,882
Depreciation and
amortization................ 2,822 3,343 3,905 5,749 8,369 5,810 6,297
Income from operations........ 1,281 2,347 3,709(3) 3,475 3,842 4,444 3,420
Income before income taxes.... 1,269 1,262 3,243 2,680 1,676 2,700 1,712
Net income (Pro forma for
Predecessor and MTE
Co.)(4)..................... 37 466 3,320 1,606 814 1,385 741
Net income per share (Pro
forma for MTE Co.)(1)....... -- 0.13 0.70 0.26 0.13 0.22 0.12
Weighted average number of
shares outstanding (Pro
forma for MTE Co.)(1)....... -- 3,471 4,714 6,214 6,220 6,218 6,227
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR MTE CO. COMPANY
----------- ------- -------------------------------------------
AS OF AS OF AS OF AS OF AS OF AS OF
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31, APRIL 30,
1992 1993(1) 1994(2) 1995(2) 1996(2) 1997
----------- ------- ------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $17,691 $23,447 $35,893 $66,673 $67,861 $69,833
Long-term debt, net of current portion.... -- 4,500 415 20,257 19,797 21,718
Subordinated debt, net of current
portion................................. -- -- -- 4,927 5,096 5,227
Stockholders' equity...................... $16,712 $14,177 $27,930 $29,461 $29,835 $30,576
</TABLE>
- ---------------
(1) Reflects the acquisition of the business of VSC Post as of August 1, 1992.
The pro forma weighted average number of shares outstanding for the Company
gives effect to the following acquisitions of the Company: (i) the
acquisition of the business of MTE Co., (ii) the acquisition of Audio Plus
Video and (iii) the sale by the Company of 2,300,000 shares of Common Stock
in the Company's initial public offering, as if each of such transactions
had been consummated as of August 1, 1992.
38
<PAGE> 41
(2) Reflects the acquisition of Audio Plus Video as of February 15, 1994, and
the acquisition of Big Picture, Even Time and Post Edge as of May 4, 1995.
Each acquisition was accounted for under the purchase method and
consequently the financial results include these acquisitions as of the
acquisition date.
(3) The Company recorded $1,202,000 of non-cash compensation expenses related to
the granting of options to certain directors and an officer.
(4) Reflects a pro forma income tax expense that would have been provided had
MTE Co. and its Predecessor been corporate taxable entities.
Video Services Corporation
The following table sets forth selected historical consolidated financial
data for Video for the periods and at the dates indicated. The historical
consolidated financial data for each of the years in the three-year period ended
June 30, 1996, and at June 30, 1994, 1995 and 1996, is derived from and
qualified by reference to Video's historical consolidated financial statements
that have been audited and reported upon by Ernst & Young LLP, independent
auditors. The historical consolidated financial data for each of the years in
the two-year period ended June 30, 1993 and at June 30, 1992 and 1993, and for
the nine-month periods ended March 31, 1996 and 1997 and at March 31, 1996 and
1997 is derived from and qualified by reference to Video's unaudited historical
consolidated financial statements. The information in the table should be read
in conjunction with Video's historical consolidated financial statements and the
notes thereto and other financial information appearing elsewhere herein. For
additional information, see "The Combined Company -- Video -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $ 22,526 $ 18,241 $ 20,391 $ 19,439 $ 29,740 $24,508 $18,954
Depreciation and
amortization............... 4,043 2,931 2,170 1,629 1,653 1,270 1,279
Operating income (loss) from
continuing operations...... (3,385) (2,383) (2,169) 490 2,387 1,722 1,830
Income (loss) before income
taxes, discontinued
operations, and
extraordinary item......... (8,027) (5,601) (4,321) 223 1,999 1,440 1,974
Income (loss) before
discontinued operations and
extraordinary item......... (8,027) (5,772) 8,824 223 1,212 864 1,184
Income (loss) from
discontinued operations,
net of tax(2)(3)........... (708) 3,374 12,508 (74) (388) (436) (1,711)
Gain on debt extinguishment,
net of tax................. -- -- 5,951 -- -- -- --
Net income (loss)............ (7,319) (2,398) 27,283 149 824 428 (527)
Pro forma income before
discontinued operations and
extraordinary item per
share(4)................... -- -- -- -- $ 0.17 $ 0.12 $ 0.16
Pro forma net income per
share(4)................... -- -- -- -- $ 0.11 $ 0.06 $ 0.07
Weighted average number of
shares outstanding(4)...... -- -- -- -- 7,223 7,223 7,223
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF AS OF AS OF
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, MARCH 31,
1992 1993 1994 1995 1996 1997(1)
-------- -------- -------- -------- -------- -----------
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............. $ 28,171 $ 20,140 $ 13,731 $ 16,005 $ 17,305 $20,430
Long-term debt, net of
current portion......... 11,096 2,159 2,042 2,388 2,073 2,133
Stockholders' equity
(deficiency)............ (22,662) (25,060) 1,663 1,812 2,655 2,128
</TABLE>
- ---------------
(1) Included in the nine months ended March 31, 1997 is approximately $500 of
other income pertaining to the payment of a note receivable for which Video
had established a full valuation allowance. The note receivable was partial
consideration for the sale of a radio station in fiscal 1991.
(2) The operating results of Video's Diversified Products segment have been
reflected as discontinued operations for the years ended June 30, 1992,
1993, 1994, 1995 and 1996 and the nine-month periods ended March 31, 1996
and 1997. The operating results of Video's International Services Group have
been reflected as discontinued operations for the years ended June 30, 1992,
1993 and 1994. The operating results of Video's Post Production Group have
been reflected as discontinued operations for the years ended June 30, 1992,
1993 and 1994. See Video's audited consolidated financial statements as of
June 30, 1995 and 1996 and for the three years in the period ended June 30,
1994, 1995 and 1996 included elsewhere herein for further detail.
(3) In April 1992, Video adopted a formal plan to dispose of its Commercial
Audio Equipment segment. The operating results of Video's Commercial Audio
Equipment segment have been reflected as discontinued operations for the
year ended June 30, 1992.
(4) Pro forma income (loss) before discontinued operations and extraordinary
item per share and pro forma net income per share give effect to the
conversion of Video Common Stock into Common Stock (i.e., shares of the
combined company) in the Merger.
40
<PAGE> 43
Pro Forma
The following table sets forth selected pro forma consolidated financial
data for the Company, after giving effect to the Merger, the spin-off by Video
of certain operations and assets to its stockholders and the Contribution and
Refinancing transactions (in accordance with the Refinancing Assumptions set
forth in Note (m) to the Unaudited Pro Forma Condensed Combined Financial
Statements) contemplated by the Merger Agreement and described elsewhere herein,
for the period and at the dates indicated. See "The Merger -- Refinancing." The
information in the table should be read in conjunction with the pro forma and
historical consolidated financial statements and the notes thereto and other
financial information appearing elsewhere, or incorporated by reference, herein.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1996 MARCH 31, 1997
------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................................. $78,746 $59,208
Depreciation and amortization......................... 9,933 7,474
Operating income from continuing operations........... 7,520 6,180
Income before income taxes and discontinued
operations.......................................... 4,705 4,523
Income from continuing operations..................... 2,769 2,521
Income from continuing operations per common share.... 0.21 0.19
Weighted average number of shares used in calculating
net income from continuing operations per common
share............................................... 13,238 13,238
- ---------------
EBITDA(1)............................................. $17,646 $14,184
</TABLE>
- ---------------
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is included herein because management believes that
certain investors find it to be a useful valuation parameter, however,
EBITDA does not represent cash flow from operations, as defined by generally
accepted accounting principles, and should not be considered as a substitute
for net earnings as an indicator of the Company's operating performance or
cash flow as a measure of liquidity.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1997
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Total assets................................................................... $ 86,463
Long-term debt, net of current portion......................................... 34,427
Subordinated debt, net of current portion...................................... 5,227
Stockholders' equity........................................................... 20,551
</TABLE>
41
<PAGE> 44
THE MERGER
This section of the Prospectus describes certain aspects of the Merger
and the Merger Agreement. The following description does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement
which is publicly available and is incorporated herein by reference.
REASONS FOR THE MERGER
The Board has unanimously determined (with Messrs. Siracusano and
Barnathan, both of whom are directors of Video, abstaining) that the terms of
the Merger, which were established through arm's-length negotiations with Video,
are fair to, and in the best interests of, the Company and the Company's
stockholders (the "Stockholders"). In view of certain conflicts of interests, a
special committee (the "Special Committee") consisting of three (3)
disinterested directors was appointed by the Board to independently evaluate and
negotiate the Merger Agreement on behalf of the Company and supervise the
Company's due diligence investigation of Video and, in addition, had retained
Montgomery Securities to provide a fairness opinion to the Board with respect to
the consideration to be paid in the Merger. The Board believes that the Merger
presents a strategic opportunity to the Company to form one of the largest and
most diversified independent providers of distribution, creative and technical
services to the video services market. The material reasons that the Board
approved the Merger Agreement are as follows (there can be no assurance,
however, that any of the following anticipated benefits will be fully realized,
if at all):
- Improved Competitive Position
The Board believes that the Merger will create a stronger
company with greater resources and a broader range of products
and services to offer the Company's and Video's respective
current and potential customers. The addition of Mr.
Siracusano and certain members of his management team is
expected to strengthen the current management team of the
Company due to their success in operating Video's business and
their familiarity with certain customers and operations of the
Company. See "-- Management of the Company after the Merger."
The Board further believes that the Company's ability after
the Merger to provide an expanded level and range of services
will result in a broader and higher level of contact with its
customers and therefore provide an opportunity to increase
revenues through cross-selling opportunities.
- Comprehensive Outsourcing Approach
The Company and Video currently provide complementary
creative, distribution and technical services to separate
customer bases that have traditionally outsourced such
services. The Board believes that those customers will
continue to outsource such services and that the additional
services which can be offered by the Company after the Merger
to the Company's and Video's respective customer bases will
provide a competitive advantage over those companies that lack
this comprehensive outsourcing solution. The Board believes
this outsourcing
42
<PAGE> 45
approach will provide customers with several benefits,
including (i) more control over necessary but non-core
operations by using a single vendor; (ii) lower capital
investment and operating costs than in-house alternatives;
(iii) access to a full range of current technology without the
necessity of continuously upgrading equipment; (iv) access to
technical, administrative and managerial resources for
non-core activities without having to develop them in-house;
and (v) access to a diverse group of broadly experienced
technical personnel.
- Improved Financial Position
The Board believes that Video is a company with more
predictable revenues than the Company as a result of its
long-term contractual relationships with several of its major
customers. Accordingly, over the long term, the Board believes
that the Merger will add stability and predictability to the
Company's earnings and cash flow. After giving effect to the
Merger, the Company would have had pro forma fiscal year 1996
revenues from continuing operations of approximately $78.7
million and pro forma 1996 fiscal year net income from
continuing operations of approximately $2.8 million. See
"Unaudited Pro Forma Condensed Combined Financial Statements."
- Cost Reduction Opportunities
Because of the resulting increase in the Company's size and
the elimination of certain duplicative functions after the
Merger, the Board believes that the Company will be able to
recognize certain cost-saving reductions as a result of the
Merger. These anticipated cost-saving reductions include
reductions in costs due to the proposed elimination of certain
duplicative facilities of the Company after the Merger (for
which the Company paid $75,000 in rent for fiscal 1996) and
termination of certain identified duplicative administrative
personnel of the Company after the Merger (who received in the
aggregate $220,000 from the Company in fiscal 1996). See Note
(i) to Notes to Unaudited Pro Forma Condensed Combined
Financial Statements. In addition, the Company is expected to
benefit from reduced financing costs and improved purchasing
costs (although no analyses were performed in order to
quantify these expectations).
- Improved Liquidity and Debt Service Capacity
As of April 30, 1997, the Company had outstanding indebtedness
of approximately $31.0 million (excluding approximately $1
million in outstanding letters of credit) and the right to
borrow approximately an additional $400,000 under its existing
credit facilities. Interest coverage (earnings before
interest, taxes, depreciation and amortization divided by
gross interest expense) for the fiscal year ended July 31,
1996 and the nine-month period ended April 30, 1997 was 5.4x
and 5.7x, respectively. Video's long-term indebtedness
consists of approximately $458,000 principal amount of secured
notes payable to equipment manufacturers at annual interest
rates ranging from 9.9% to 12.25%, approximately $3.2 million
principal
43
<PAGE> 46
amount of secured notes payable to credit institutions at
annual interest rates ranging from 10.0% to 13.0% and
approximately $92,000 of debt pursuant to capital leases.
Video has a $2.1 million short-term line of credit ($1,759,000
outstanding at March 31, 1997) which is collateralized by
accounts receivable and certain machinery and equipment and
bears interest at prime plus 1.75%. The Merger Agreement
provides that substantially all of the Company's and Video's
outstanding long-term indebtedness will be refinanced
simultaneously with the closing of the Merger (other than
$5,227,000 accreted amount of the Company's subordinated debt
which will remain outstanding). Such refinancing is a
condition to the consummation of the Merger. Video has
received a commitment letter from KeyBank in connection with
such refinancing and, based upon the terms and conditions
contained in such letter, the Company and Video believe that a
refinancing will increase the Company's borrowing capacity and
result in less restrictive financial covenants and more
favorable interest rates than those applicable to the
Company's and Video's existing credit facilities. In addition,
as a result of the Merger, the Company's interest coverage
ratio will increase and its leverage ratio (funded debt to
EBITDA) will decrease. There can be no assurance, however,
that the refinancing will be consummated on these terms. The
Boards of the Directors of the Company and Video have full
discretion and authority to agree to such other terms and
conditions in respect of the refinancing as they deem
appropriate or necessary. Moreover, the Boards of Directors of
the Company and Video have the authority to waive compliance
with this refinancing condition. See "-- Refinancing."
The Board also reviewed the proposed terms and conditions of the Merger
and considered the opinion rendered by Montgomery Securities to the Special
Committee and the Board that, as of the date of such opinion, the consideration
to be paid in the Merger was fair to the Company from a financial point of view.
The Board also considered, among other things, (i) information concerning the
respective businesses, prospects, financial performance and operations of the
Company and Video, (ii) an analysis of the value that Video might contribute to
the Company, including pro forma historical and projected revenue and earnings
contributions, (iii) the current financial market conditions and historical
market prices, volatility and trading information with respect to the Common
Stock and (iv) the consideration to be received by Video's stockholders in the
Merger and the relationship between the market value of the Common Stock to be
issued to them and Video's projected earnings and other measures. The Board
further noted that after the issuance of the January 8, 1997 press release
announcing the execution of the letter of intent, no other prospective bidders
or strategic partners had expressed an interest in a merger or other similar
transaction with the Company. Prior to the issuance of the January 8, 1997 press
release, the Company had been approached on an informal basis by a prospective
strategic partner, however, no serious discussions with this party ever ensued.
Based upon the foregoing, as well as based upon the financial condition of the
Company and the market price of the Common Stock, no alternative to the Merger
was deemed to exist by the Board prior to their approval of the Merger.
The Board also considered a variety of potentially negative factors in
its deliberations concerning the Merger, including (i) the risk that some, if
not all, of the potential benefits of the
44
<PAGE> 47
Merger will not be fully realized, if at all, (ii) the risks associated with
integrating the businesses and operations of the Company and Video, (iii) the
possibility that the Merger would not be consummated, (iv) increased capital
expenditure requirements of the Company as a result of the Merger on an
aggregate basis as compared to capital expenditures requirements of the Company
by itself (however, based upon the combined company's pro forma historical
financial information, no percentage increase is expected). See "Combined
Company -- Video Services Corporation -- Management's Discussion and Analysis of
Financial Condition and Results of Operations," and (v) the other risks
described above under "Risk Factors."
In view of the wide variety of factors considered in connection with
its evaluation of the Merger, the Board did not find it practical to, and did
not, quantify or otherwise attempt to assign relative weight to the specific
factors considered in reaching its determination. However, the Board concluded
that the positive factors outweighed the negative factors cited.
CONTRIBUTION
The Merger Agreement provides that, prior to the Merger, the following
assets will have been contributed to Video (or a subsidiary thereof) without the
payment of any consideration (other than shares of Video Common Stock and the
assumption of any indebtedness related to these assets, which indebtedness shall
not exceed an aggregate of $5,000,000 on the Effective Time and which
indebtedness shall be on customary terms and conditions): (a) the land and
buildings located at 240 Pegasus Avenue, Northvale, New Jersey and 183 Oak Tree
Road, Tappan, New York (which land and buildings are owned by the Subchapter S
corporations); and (b) a sublease (the "Mirror Sublease") of the building
located at 235 Pegasus Avenue, Northvale, New Jersey. The Mirror Sublease will
be a lease from a newly-formed entity owned by Messrs. Siracusano and Ferolito
formed solely for the purposes of, and the actions of which are limited to,
acting as lessor under the Mirror Sublease and as lessee under the master lease
relating to 235 Pegasus Avenue, and actions related thereto. The terms of the
Mirror Sublease will mirror the terms of the master lease except that the term
will be one day shorter and payments will be due one day earlier. Approximately
eight (8) acres of undeveloped property located on Union Street, Northvale, New
Jersey have already been sold to Video by its principal stockholders.
AMENDMENTS TO CERTIFICATE OF INCORPORATION OF COMPANY
At the Effective Time of the Merger, the Company's Certificate of
Incorporation will be amended to change the name of the Company to "Video
Services Corporation" and to increase the number of authorized shares of Common
Stock from 15,000,000 to 25,000,000 shares.
45
<PAGE> 48
MANAGEMENT OF THE COMPANY AFTER THE MERGER
Directors. Pursuant to the Merger Agreement, at the Effective Time, the
persons listed below will constitute the seven-member Board, each to hold office
until the next Annual Meeting of Stockholders and until their respective
successors are elected and qualified. Four (4) of the proposed directors
(Messrs. Barnathan, Siracusano, Steele and Stillo) have been designated by Video
and three (3) of the proposed directors (Messrs. Alter, Elkes and Irwin) have
been designated by the Company. Five (5) of such persons (Messrs. Alter,
Barnathan, Elkes, Irwin and Siracusano) are presently directors of the Company.
Messrs. Jeffrey J. Kaplan and Kenneth F. Gorman, current directors of the
Company, will resign as directors at the Effective Time.
<TABLE>
<CAPTION>
DIRECTOR
SINCE
-----
<S> <C>
Robert H. Alter, 67.................................................. 1993
Robert H. Alter was elected a director of the Company in
October 1993. Mr. Alter is the Vice Chairman and a director
of the Cabletelevision Advertising Bureau ("CAB"), the
national trade association of the cable television industry
devoted to marketing and advertising, a position he has held
since October 1991. Prior to October 1991, Mr. Alter, who
founded the CAB, also served as its President and Chief
Executive Officer for ten years. In November 1992, Mr. Alter
was elected President of Alter Associates, Inc. From October
1991 to November 1992, Mr. Alter served as the senior advisor
to the Board of Directors of Star TV/Hong Kong.
Julius Barnathan, 69................................................. 1993
Julius Barnathan was elected a director of the Company in
October 1993 and during the 1994, 1995 and 1996 fiscal years
served as a director of Video. Mr. Barnathan is currently a
consultant to (and has been employed as such by) Quantel Ltd.
since February 1992, by Faroudja Laboratories Inc. since July
1994, by Statistical Research Inc. since March 1995 and by
Warner Bros. since March 1996. Mr. Barnathan was employed by
Capital Cities/ABC, Inc. for 39 years. Among other positions,
he served as Senior Vice President of Capital Cities/ABC,
Inc. in charge of Technology and Strategic Planning and
President of ABC Broadcast Operations and Engineering. Mr.
Barnathan is the Chairman of the National Captioning
Institute.
Terrence A. Elkes, 63................................................ 1993
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
DIRECTOR
SINCE
-----
<S> <C>
Terrence A. Elkes was elected the Chairman of the Board in
October 1993 and had served on the partnership committee of
MTE Co. from July 1992 to February 1994, when it dissolved
upon consummation of the Company's initial public offering.
Mr. Elkes is a Managing Director of Apollo Partners, Ltd.
("Apollo"), a private investment firm involved in the
acquisition of companies in the media, communications,
entertainment and broadcasting fields, which he co-founded in
1987 with Mr. Gorman, another director of the Company. Prior
to forming Apollo, Mr. Elkes was employed by Viacom
International, Inc. where he served as President from
1978-1982 and Chief Executive Officer from 1983-1987.
Martin Irwin, 60..................................................... 1993
Martin Irwin was elected President, Chief Executive Officer
and a director of the Company in October 1993 and had served
as President, Chief Executive Officer and a member of the
partnership committee of MTE Co. from July 1992 to February
1994, when it dissolved upon consummation of the Company's
initial public offering. From September 1991 through June
1992, Mr. Irwin ran the post-production operations of Video,
which he co-founded in 1979. Mr. Irwin served as President,
Chief Operating Officer and a director of Video from 1979 to
1989 and then served as a director of and Senior Consultant
to Video from July 1989 until July 1992. Prior to co-founding
Video, Mr. Irwin was employed by EUE/Screen Gems, a division
of Columbia Pictures Industries, Inc., where he last served
as Senior Vice President and General Manager.
Louis H. Siracusano, 54.............................................. 1993
Louis H. Siracusano was elected a director of the Company in
October 1993 and had been a member of the partnership
committee of MTE Co. from July 1992 to February 1994, when it
dissolved upon consummation of the Company's initial public
offering. He has served as the Chairman, Chief Executive
Officer and a director of Video since 1986 and President
since 1989. Mr. Siracusano also served as President of Audio
Plus Video from July 1989 to February 1994. Mr. Siracusano
was a founder of Video and has served in various capacities
with Video since its formation. Mr. Siracusano was with Ampex
Corporation and the American Broadcasting Company in various
sales and engineering management positions prior to Video's
formation in 1979.
Raymond L. Steele, 62................................................ --
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
DIRECTOR
SINCE
-----
<S> <C>
Raymond L. Steele was a Principal of Pacholder Associates,
Inc., an institutional money manager and workout specialist,
until his retirement in 1991. Since November 1993, he has
been retained as a consultant for Emerson Radio Corp., NUWAVE
Technologies Inc., a distributor of video enhancement chips,
Home Holdings, Inc., an insurance holding company, and GFTA,
a German software developer. He has served as a director of
numerous companies, including Orion Pictures Corporation and
Webcraft Technologies, Inc., and currently serves as a
director of Emerson Radio Corp., Pharmhouse, Inc.,
Modernfold, Inc., a manufacturer of movable walls, and GFTA.
Frank Stillo, 63..................................................... --
Frank Stillo has been active in the printing industry since
1950 and co-founded his own printing company in 1968. Since
1989, Mr. Stillo has been the Chairman and Chief Executive
Officer of MGA Printing Co., a subsidiary of Sandy Alexander,
Inc., a printing company, and has served as its President
since 1981. Mr. Stillo also currently serves as the President
of The Metropolitan Lithographers Association and is a
director of Mickelberry Communications Inc., a privately-held
printing, advertising and sales promotion company.
</TABLE>
Except as indicated above, there are no arrangements or
understandings between any director and any other person pursuant to
which such person was selected as a director or nominee.
48
<PAGE> 51
Officers. After the Effective Time, the executive officers of the
Company will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Terrence A. Elkes 63 Chairman of the Board
Martin Irwin 60 Vice Chairman of the Board
(current President and Chief Executive
Officer of the Company)
Louis H. Siracusano 54 President and Chief Executive Officer
(current Chairman, President and Chief
Executive Officer of Video)
Donald H. Buck 58 Vice President (current Senior Vice President
of Video)
Christopher A. Modrzynski 41 Vice President and Chief Financial Officer
(current Senior Vice President and Chief
Financial Officer of Video)
Michael E. Fairbourne 44 Vice President-Administration (current
Senior Vice President-Administration of
Video)
</TABLE>
For information on the business background of Messrs. Elkes, Irwin and
Siracusano, see "-- Directors" above.
Donald Buck has been a Senior Vice President of Video since August
1987, the President of Atlantic Satellite since August 1992 and the President of
Waterfront since April 1993. Prior thereto, Mr. Buck served as President of
Video Dub, Inc. (a Video subsidiary) from 1980. During 1975-1980 he was an
Executive Vice President of Sales for E.U.E. Screen Gems Video Division of
Columbia Pictures Industries.
Christopher A. Modrzynski has been a Senior Vice President and the
Chief Financial Officer of Video since April 1997. Mr. Modrzynski is a Certified
Public Accountant and began his career with Coopers & Lybrand, a Big Six
accounting firm. In 1981, Mr. Modrzynski joined the National Broadcasting
Company and served in various financial and production positions with Sports and
Entertainment divisions. In January 1987, Mr. Modrzynski joined the National
Hockey League's New Jersey Devils as controller and was later named Senior Vice
President, Finance of Meadowlanders, Inc., its parent company.
Michael E. Fairbourne has been the Senior Vice President-Administration
of Video since March 1994. Previously, Mr. Fairbourne was the Vice
President-Controller of Video from July 1987 to March 1994 and the Controller of
Video from September 1983 to July 1987. Prior to joining Video, from 1976 to
1983, Mr. Fairbourne, a certified public accountant, was in private
49
<PAGE> 52
practice.
REFINANCING
The refinancing of substantially all of the Company's and Video's
existing long-term indebtedness (other than $5,227,000 accreted amount of the
Company's subordinated debt which will remain outstanding) is also a condition
to the consummation of the Merger. The Company is currently a party to a
$22,000,000 six-year senior secured term loan and $10,000,000 senior secured
revolving credit facility for working capital purposes with a syndicate of
financial institutions pursuant to a credit agreement entered into in May 1995
(and amended in September 1996 in respect of certain covenants). The loans are
secured by all of the assets of the Company and its subsidiaries, as well as by
all of the capital stock of such subsidiaries. The loans currently bear interest
at The Bank of New York's Prime rate plus 0.375% or LIBOR (London Interbank
Offered Rate) plus 1.75% per annum. The Company also pays a commitment fee equal
to 0.375% on the unused amount of the revolving loan. As of April 30, 1997, the
Company had outstanding direct borrowings of $15,560,000 outstanding under the
term loan, bearing interest at 7.5% per annum, and $8,500,000 outstanding under
the revolving loan, bearing interest at an average rate of 7.48% per annum. The
Company also had outstanding under the revolving loan letters of credit
aggregating $1,196,482 as of April 30, 1997.
As of March 31, 1997, Video's long-term indebtedness consists of
$380,045 principal amount of secured notes payable to equipment manufacturers at
annual interest rates ranging from 9.9% to 12.25%, $2,925,336 principal amount
of secured notes payable to credit institutions at annual interest rates ranging
from 10.0% to 13.0% and $81,174 of debt pursuant to capital leases. This
indebtedness includes indebtedness incurred by subsidiaries of Video that will
be disposed and spun-off to Video's stockholders prior to the Merger. Video
typically finances its capital requirements on a transactional basis, with
lending institutions taking a security interest in specific equipment for the
life of the loan, which is usually three to four years. Video has a $2,100,000
short-term line of credit ($1,759,000 outstanding at March 31, 1997) which is
collateralized by accounts receivable and certain machinery and equipment and
bears interest at prime plus 1.75%.
Video has received a commitment letter from KeyBank in connection with
the required refinancing and, based upon the terms and conditions contained in
such letter, the Company and Video expect that the material terms and conditions
of the contemplated refinancing will be as follows: (i) substantially all of the
Company's and Video's existing long-term debt will be refinanced with a
five-year facility (the "Facility") composed of a $33 million term loan and a
$17 million revolving line of credit; (ii) the Facility will bear interest at
KeyBank's Prime rate or LIBOR plus a number of basis points based upon the
Company's leverage ratio (funded debt divided by EBITDA), which, based upon the
pro forma financial information contained herein, the Company anticipates
initially being LIBOR plus 1.75% (the Company will have the option to choose the
applicable interest rate); (iii) principal payments of $1 million per quarter in
respect of the term loan portion of the Facility will be due beginning December
31, 1997 and such quarterly principal payments will increase to $1.25 million
per quarter on December 31, 1998 and then increase to $1.75 million per quarter
on December 31, 1999 and then further increase to $2.0 million per quarter on
September 30, 2001 with a balloon payment of $3.75 million in respect of the
term loan portion of the Facility due on September 30, 2002; (iv) the Facility
will be secured by all of
50
<PAGE> 53
the assets of the Company and its subsidiaries (after giving effect to the
Merger); (v) no significant gain or loss will result from the refinancing; (vi)
the Facility will contain covenants which require the Company to maintain
certain financial ratios, prohibit dividends and similar payments and restrict
the incurrence of other indebtedness; and (vii) the Facility will be guaranteed
by all of the Company's subsidiaries (after giving effect to the Merger). See
"Unaudited Pro Forma Condensed Combined Financial Statements." There can be no
assurance, however, that the refinancing will be consummated on these terms. The
Boards of Directors of the Company and Video have full discretion and authority
to agree to such other terms and conditions in respect of the refinancing as
they deem appropriate or necessary. Moreover, the Boards of Directors of the
Company and Video have the authority to waive compliance with this refinancing
condition.
It is anticipated that the proceeds of the new facility ($50 million
consisting of a $33 million term loan and a $17 million revolving loan of
credit) will be used as follows: approximately $25.7 million to refinance the
Company's outstanding long-term indebtedness, approximately $3.4 million to
refinance Video's outstanding long-term indebtedness to be assumed by the
Company upon the Merger, approximately $1.8 million to refinance Video's
outstanding short-term line of credit to be assumed by the Company upon the
Merger and approximately $3.5 million to pay the fees and expenses incurred in
connection with the Merger. The remainder of the facility (approximately $15.6
million) will be used for future working capital requirements and general
corporate purposes.
Certain subordinated debt of the Company incurred in connection with
its acquisition of CABANA corp., formerly known as Big Picture/Even Time Limited
("BPET"), in May 1995 will still remain outstanding after the refinancing
described above. This subordinated debt represents $6,350,000 aggregate
principal amount of eight-year convertible notes, due May 4, 2003, which bear
interest at the rate of 4% per annum and are convertible into shares of Common
Stock at a conversion price of $14.00 per share after May 2000 and are
redeemable after May 2001.
RESALE RESTRICTIONS
As a result of the effectiveness of the Registration Statement of which
this Prospectus is a part as contemplated by the Merger Agreement, all of the
shares of Common Stock issued to Video's stockholders pursuant to the Merger
will be freely transferable under the Securities Act.
Notwithstanding the foregoing registration, each stockholder of Video
has agreed to enter into and deliver to the Company prior to the Closing a Stock
Resale Agreement (a copy of such agreement is included in Appendix A to the
Proxy Statement which is incorporated herein by reference) which provides that
such person will not, directly or indirectly, sell, transfer or otherwise
dispose of the shares of Common Stock to be received by him in the Merger for a
period of six (6) months after the consummation of the Merger except for (i) the
transfer of Common Stock upon the exercise of options to purchase an aggregate
of 721,529 shares of Common Stock granted by them to Messrs. Barnathan, Elkes,
Fairbourne, Gorman, Irwin, Shendell and certain other persons; (ii) the transfer
of Common Stock by them to any immediate family member or affiliate of such
person; provided in each case the transferee agrees to be bound by these
transfer restrictions; (iii) the sale by Mr. Siracusano in a private transaction
or in the open market of only such number of shares of Common Stock as required
in order to discharge any tax liability
51
<PAGE> 54
(currently estimated at approximately $300,000) incurred by Mr. Siracusano
arising from the Merger or any transaction consummated in connection therewith
(together with any tax liability resulting from such sale) and commissions
payable in connection with such sales; (iv) the sale of Common Stock by such
stockholders so long as any such sale does not reduce their collective ownership
of Common Stock below 50.1% of the outstanding Common Stock at the time of such
sale; (v) sales of Common Stock in compliance with the Tag-Along Rights
Agreement discussed in the succeeding paragraph.
The Video stockholders, Equitable, Elkes and Gorman have agreed to
enter into a Tag- Along Rights Agreement (a copy of such agreement is included
in Appendix A to the Proxy Statement which is incorporated herein by reference)
which provides that if any of them proposes to sell in either (i) a private
placement through an underwriter or other placement agent or (ii) an
underwritten offering, in each case within a two (2) year period following the
Merger, any of the shares of Common Stock acquired pursuant to the Merger, in
the case of Messrs. Siracusano, Ferolito and Buck, or any shares of Common Stock
it owns as of the Effective Time, in the case of Equitable, or any shares of
Common Stock purchasable upon exercise of certain options to purchase shares of
Common Stock owned by Equitable, in the case of Messrs. Elkes and Gorman
(collectively, the "Covered Shares"), then each party shall have the right to
sell a pro rata portion of the total shares to be sold in such transaction based
on the number of Covered Shares then owned by such party. The Tag-Along Rights
Agreement also provides that if Mr. Siracusano proposes to sell any Covered
Shares during the two (2) year period following the Merger, other than pursuant
to a transaction described above in clauses (i) and (ii) and other than sales
involving less than an aggregate of 40,000 shares of Common Stock in any 20-day
period, then each of Equitable and Messrs. Elkes and Gorman shall have the right
to sell a pro rata portion of the total shares to be sold in such transaction
based on the number of shares of Covered Shares then owned by such party. The
Tag-Along Rights Agreement does not apply to bona fide sales to third parties
and does not apply to transfers permitted under the Stock Resale Agreement
(other than sales contemplated in clause (iv) of the immediately preceding
paragraph).
REGISTRATION RIGHTS
In addition to the filing of the Registration Statement of which this
Prospectus forms a part, the Company has agreed to enter into a registration
rights agreement (the "Video Registration Rights Agreement") with each of
Video's stockholders under which they will be entitled to certain demand,
piggyback and other registration rights. Under the Video Registration Rights
Agreement, Messrs. Siracusano, Ferolito and Buck will be entitled to demand on
three (3) occasions after the six month anniversary of the Effective Time that
the Company file a registration statement under the Securities Act covering the
sale of the shares of Common Stock they receive pursuant to the Merger (provided
that the Video Stockholders' Form S-3 is not then still effective). In addition,
they will be entitled to include such shares of Common Stock in certain
registration statements filed by the Company (See "-- Resale Restrictions") and,
after the Effective Time (in the event that the Video Stockholders' Form S-3 is
not then still effective), the Company will be required to file a shelf
registration statement on Form S-3 under the Securities Act covering the sale of
such shares of Common Stock. The Company will bear all expenses of such
registration statements, except for fees and expenses of counsel for the selling
stockholders and underwriters' discounts, fees and expenses, if any.
52
<PAGE> 55
ACCOUNTING TREATMENT
The Merger is intended to be accounted for as a reverse acquisition for
accounting and financial reporting purposes with Video being designated as the
acquiror and the Company as the acquiree. As such, the net assets of the Company
after the Merger will be recorded at fair value and Video's pre-Merger
stockholders' equity will be retroactively restated for the equivalent number of
shares of Common Stock to be received by its stockholders in the Merger, with
differences between the par value of the Common Stock and the Video Common Stock
recorded as an adjustment to the paid-in capital of the combined company.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain employees and members of management and the Boards of Directors
of the Company and Video will be entitled to receive certain benefits in
connection with the Merger described below.
Video Personnel. Pursuant to the Merger Agreement, the Company has
agreed to enter into employment agreements with Messrs. Louis H. Siracusano,
Video's Chairman, President and Chief Executive Officer, and Donald H. Buck,
Video's Senior Vice President. Each of Messrs. Siracusano and Buck are also
stockholders of Video. Under Mr. Siracusano's employment agreement with the
Company, the Company will agree to employ him as the President and Chief
Executive Officer of the Company for (i) a four (4) year period or (ii) twenty
four (24) months following notice of termination by the Company or by Mr.
Siracusano, whichever is later. Under Mr. Buck's employment agreement with the
Company, the Company will agree to employ him as the Vice President of the
Company for a three (3) year period or twelve (12) months following notice of
termination by either party, whichever is later.
Mr. Siracusano's employment agreement provides for base compensation of
$200,000 per annum, and annual bonuses and a long-term bonus based on the
Company's achievement of certain cash flow and net income targets to be
determined by Mr. Siracusano and the Compensation Committee of the Board. Under
the terms of the employment agreement, Mr. Siracusano will be entitled to
receive an annual bonus of between 5% and 40% of his base salary for the
relevant year upon the Company's achievement of a percentage (ranging from 90%
to 109.9% or greater) of the agreed upon cash flow and net income targets for
such year, which bonus will be payable within thirty (30) days of delivery to
the Board of the Company's audited financial statements. In addition, the
employment agreement provides that Mr. Siracusano will be entitled to receive a
long-term bonus of between 12.5% and 100% of his cumulative base salary for the
entire contract period if the Company achieves a percentage (ranging from 90% to
109.9% or greater) of the agreed upon cash flow and net income targets for such
period. The long-term bonus is payable in a single installment within thirty
(30) days following the delivery of the Company's audited financial statements
for the period ended June 30, 2001 and will be reduced by amounts previously
paid to Mr. Siracusano as annual bonuses. The employment agreement further
provides that the Compensation Committee of the Board may award Mr. Siracusano
other bonus payments in its discretion.
Mr. Buck's employment agreement provides for base compensation of
$175,000
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<PAGE> 56
per annum and a bonus to be negotiated and agreed upon by the parties promptly
following the execution of the employment agreement.
Each of Messrs. Siracusano's and Buck's employment agreements
provides that (i) the Compensation Committee may award a discretionary bonus to
him on an annual basis, (ii) each will be entitled to participate in such
compensation plans, incentive plans, group life, health, accident, disability
and hospitalization insurance plans, pension plans and retirement plans as the
Company may make available to its other executive employees, and (iii) upon
termination without cause, he is entitled to receive his annual base
compensation and any incentive compensation for the remainder of the originally
scheduled term of the employment agreement. Termination for cause includes
termination for breach, nonperformance, fraud or conviction of a felony.
Additionally, each such employment agreement provides that the employee is
entitled to terminate his employment at any time during the six-month period
following any "Change in Control" (as defined in the Company's 1993 Long Term
Incentive Plan (the "1993 Plan"); a copy of such definition is included in
Appendix E to the Proxy Statement which is incorporated herein by reference)
that results in a material diminution in the capacity and terms of his
employment. Any such termination will be treated as a termination without cause.
Mr. Arnold P. Ferolito (another principal stockholder of Video and
the current Executive Vice President of Video) will be retained as a consultant
by the Company after the Merger for a one (1) year period at a monthly fee of
$5,000, plus the maintenance of health benefits.
At the Effective Time, options held by Mr. Julius Barnathan (a
director of the Company and Video) to purchase 5,000 shares of Common Stock from
Video at an exercise price of $1.00 per share granted in January 1995 will be
cancelled and replaced with options to purchase the same number of shares of
Common Stock on the same terms and conditions from Video's stockholders. In
addition, at the Effective Time, Mr. Barnathan will also receive options to
purchase approximately 30,000 shares of Common Stock from Video's stockholders
at an exercise price of $2.00 per share in replacement of options to purchase
11,123 shares of Video Common Stock at an exercise price of $5.39 per share
granted in June 1997 which will be cancelled as of the Effective Time. The
number of shares and exercise price of these replacement options are based on
the same conversion ratio applied in determining the number of shares of Common
Stock to be issued in exchange for the Video Common Stock owned by each
stockholder of Video. Assuming a per share market price of the Common Stock of
$3.125 (which is the per share closing sales price of the Common Stock as
reported by The Nasdaq Stock Market on the Record Date), the difference between
the exercise prices of Mr. Barnathan's options and such market price aggregates
approximately $44,375.
At the Effective Time, Messrs. Michael Fairbourne, Video's Senior
Vice President Administration, and Edward Shendell, Video's Secretary and
General Counsel, will receive options to purchase 60,000 and 25,000 shares of
Common Stock, respectively, from Video's stockholders at an exercise price of
$2.00 per share in replacement of options to purchase approximately 22,245 and
9,269 shares of Video Common Stock, respectively, at an exercise price of $5.39
per share granted in June 1997 which will be cancelled as of the Effective Time.
The number of shares and exercise price of these replacement options are based
on the same conversion ratio applied in
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<PAGE> 57
determining the number of shares of Common Stock to be issued in exchange for
the Video Common Stock owned by each stockholder of Video. Assuming a per share
market price of the Common Stock of $3.125 (which is the per share closing sales
price of the Common Stock as reported by The Nasdaq Stock Market on the Record
Date), the difference between the exercise prices of Messrs. Fairbourne's and
Shendell's options and such market price aggregates approximately $67,500 and
$28,125, respectively.
At the Effective Time, Mr. Barry W. Ridings, a director of Video,
will receive options to purchase approximately 30,000 shares of Common Stock
from Video's stockholders at an exercise price of $2.00 per share in replacement
of options to purchase 11,123 shares of Video Common Stock at an exercise price
of $5.39 per share granted in June 1997 which will be cancelled as of the
Effective Time. The number of shares and exercise price of these replacement
options are based on the same conversion ratio applied in determining the number
of shares of Common Stock to be issued in exchange for the Video Common Stock
owned by each stockholder of Video. Assuming a per share market price of the
Common Stock of $3.125 (which is the per share closing sales price of the Common
Stock as reported by The Nasdaq Stock Market on the Record Date), the difference
between the exercise prices of Mr. Ridings' options and such market price
aggregates approximately $33,750.
As a result of the Merger, the personnel of Video will receive, in
the aggregate, the following quantifiable benefits: (i) Employee base
compensation of $375,000 per annum (Messrs. Siracusano and Buck), (ii)
Consulting fees of $60,000 (Mr. Ferolito) and (iii) Options to purchase
approximately 150,000 shares of Common Stock (Messrs. Barnathan, Fairbourne,
Shendell and Ridings). Assuming a per share market price of the Common Stock of
$3.125 (which is the per share closing sales price of the Common Stock as
reported by The Nasdaq Stock Market on the Record Date), the difference between
the exercise prices of these options and such market price aggregates
approximately $173,750.
Company Personnel. Mr. Louis H. Siracusano, a director of the Company,
is the Chairman, President and Chief Executive Officer and a director of Video
and a holder of approximately 46% of the outstanding shares of Video Common
Stock. As noted above, Mr. Siracusano will become the President and Chief
Executive Officer of the Company upon the Merger, and Mr. Martin Irwin, a
director and the current President and Chief Executive Officer of the Company,
will become the Vice Chairman of the Board. Messrs. Siracusano and Barnathan,
who are both directors of Video, abstained from the Board's vote as to the
approval of the Merger Agreement and the transactions contemplated thereby. See
above under "Video Personnel" regarding certain options to be granted to Mr.
Barnathan at the Effective Time.
Jeffrey J. Kaplan, a director of the Company and its former
Executive Vice President and Chief Financial Officer, is a party to a one-year
consulting agreement with the Company that provides for a bonus to his affiliate
of $50,000 upon consummation of the Merger and an automatic three (3) year
extension of the consulting agreement upon consummation of the Merger.
Further, pursuant to the Company's employment agreements with
certain of its executive officers, including Martin Irwin, Adrien Macaluso (a
Vice President of the Company and
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<PAGE> 58
the President of Audio Plus Video), Daniel Rosen (a Vice President of the
Company and the President of MTE) and Kenneth D. Lorber (a Vice President of the
Company and the President of The Post Edge, Inc., "Post Edge"), for a six (6)
month period following a Change of Control (as defined in the 1993 Plan) that
results in a material diminution in the capacity and terms of their employment,
such employees may terminate their employment with the Company and such
termination will be deemed a termination without Cause (as defined in such
employment agreements), thereby entitling them to certain severance payments.
Consummation of the Merger would be deemed a Change of Control under these
employment agreements. However, in respect of Mr. Macaluso, in March 1997, Mr.
Macaluso notified the Company of his intention to terminate his employment
effective March 1998. (Such one year notice is required under Mr. Macaluso's
employment agreement.) As a result thereof, Mr. Macaluso is not entitled to any
severance payments thereunder.
The 1993 Plan provides that in the event of a Change in Control
(as defined in the 1993 Plan; a copy of such definition is included in Appendix
E to the Proxy Statement which is incorporated herein by reference), (i) all
stock appreciation rights outstanding for at least six (6) months and all
options awarded under the 1993 Plan not previously vested and exercisable will
immediately become fully vested and exercisable, and (ii) the restrictions
applicable to any restricted shares awarded under the 1993 Plan will lapse and
such shares will be deemed fully vested. Consummation of the Merger would be
deemed a Change in Control under the 1993 Plan, and, as a result of the Merger,
the following stock options held by the named executive officers will
immediately vest and become exercisable: Martin Irwin - 80,000; Kenneth D.
Lorber - 16,667; Adrien Macaluso - 40,000; Daniel Rosen - 50,000; Gary R. Strack
- - 8,333; and Jane Stuart - 16,667. If an employee's employment is terminated due
to a Change in Control, his stock options under the 1993 Plan remain exercisable
for the shorter of five (5) years or the remainder of the original term.
The 1993 Plan also provides that if, within one (1) year after the
Change in Control Date (as defined in the 1993 Plan; a copy of such definition
is included in Appendix E to the Proxy Statement which is incorporated herein by
reference), (i) no shares of Common Stock are listed on a national securities
exchange or on The Nasdaq Stock Market or (ii) for a period of sixty (60)
consecutive trading days, the fair market value of a share of Common Stock on
such an exchange or market has declined by twenty percent (20%) or more from the
fair market value of a share of Common Stock on the Change in Control Date or
the Change in Control Price (as defined in the 1993 Plan; a copy of such
definition is included in Appendix E to the Proxy Statement which is
incorporated herein by reference), whichever is higher, then the Company will
provide written notice thereof to each participant in the 1993 Plan and for a
period of sixty (60) days following the giving of such notice, the Company will,
by written offer to the participants which will accompany such notice, offer the
opportunity to such participants to be paid the value of all of their
outstanding options and stock appreciation rights, determined on the basis of
the Change in Control Price. Such amount will be payable in a cash lump sum
within thirty (30) days after the Company receives notification of the
participant's election to accept this offer. In addition, certain options issued
outside of the 1993 Plan to Messrs. Terrence Elkes, Kenneth Gorman and Jeffrey
Kaplan contain similar provisions in respect of a Change in Control. Each of
Messrs. Kaplan, Irwin, Elkes and Gorman has agreed to waive his rights under
these provisions.
56
<PAGE> 59
The Company has entered into a severance agreement with Mr. Irwin,
effective as of the Effective Time, whereby Mr. Irwin will be entitled to
receive $150,000 over a one (1) year period commencing with the Effective Time,
$100,000 over a one (1) year period commencing with the first anniversary of the
Effective Time and $75,000 over a one (1) year period commencing with the second
anniversary of the Effective Time. In addition, as part of such severance
package, Video's stockholders have agreed to grant to Mr. Irwin, on a pro rata
basis, options to purchase an aggregate of 75,000 shares of the Common Stock
they will receive in the Merger at an exercise price of $0.75 per share. Such
options will vest immediately.
At the Effective Time, options held by each of Messrs. Terrence A.
Elkes and Kenneth F. Gorman to purchase 30,000 shares of Common Stock from Video
at an exercise price of $11.00 per share will be cancelled and replaced with
options to purchase the same number of shares of Common Stock from Video's
stockholders on the same terms and conditions.
As a result of the Merger, the personnel of the Company will
receive, in the aggregate, the following quantifiable benefits: (i) Severance
payment of $50,000 in a lump-sum upon consummation of the Merger and
continuation of severance payments of $100,000 per annum over three years (Mr.
Kaplan), (ii) The vesting of options to purchase 211,667 shares of Common Stock
(Messrs. Irwin, Lorber, Macaluso, Rosen and Strack, and Ms. Stuart), (iii)
Severance payments of $325,000 over a three (3) year period as well as severance
in the form of options to purchase 75,000 shares of Common Stock (Mr. Irwin) and
(iv) Options to purchase 60,000 shares of Common Stock (Messrs. Elkes and
Gorman).
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares hereunder. All proceeds will be received by the Selling Stockholders.
MARKET PRICE DATA AND DIVIDEND POLICY
The Common Stock is included on The Nasdaq National Market under the
symbol "POST". The Common Stock began trading on February 8, 1994 at the
effective time of the Company's initial public offering. Prior to such time,
there was no public market for the Common Stock. Following the Merger, it is
anticipated that the Common Stock will trade on The Nasdaq National Market under
the symbol "VSCX."
The following table sets forth the high and low bid prices of the
Common Stock on The Nasdaq National Market for the quarterly periods indicated.
<TABLE>
<CAPTION>
1995 FISCAL YEAR HIGH LOW
- ---------------- ---- ---
<S> <C> <C>
First Quarter............................... $9 1/4 $7 3/4
(August 1 to October 31, 1994)
Second Quarter.............................. 9 3 1/2
</TABLE>
57
<PAGE> 60
<TABLE>
<S> <C> <C>
(November 1 to January 31, 1995)
Third Quarter............................... 7 5/8 5 1/4
(February 1 to April 30, 1995)
Fourth Quarter.............................. 6 1/4 3 5/8
(May 1 to July 31, 1995)
</TABLE>
<TABLE>
<CAPTION>
1996 FISCAL YEAR HIGH LOW
- ---------------- ---- ---
<S> <C> <C>
First Quarter............................... 5 4
(August 1 to October 31, 1995)
Second Quarter.............................. 4 1/4 3 1/8
(November 1 to January 31, 1996)
Third Quarter............................... 4 3/64 3
(February 1 to April 30, 1996)
Fourth Quarter.............................. 4 1/8 3 3/4
(May 1 to July 31, 1996)
</TABLE>
<TABLE>
<CAPTION>
1997 FISCAL YEAR HIGH LOW
- ---------------- ---- ---
<S> <C> <C>
First Quarter............................... 4 1/8 3 5/8
(August 1 to October 31, 1996)
Second Quarter.............................. 4 3/4 3 1/2
(November 1 to January 31, 1997)
Third Quarter............................... 4 1/8 3 3/8
(February 1 to April 30, 1997)
Fourth Quarter.............................. $ $
(May 1 to _____, 1997)
</TABLE>
On July [ ], 1997, the closing sales price of the Common Stock as
reported by The Nasdaq National Market was $___ per share.
No cash dividends have ever been declared by the Company on the Common
Stock. After the Merger, the Company intends to retain its earnings to finance
the development and growth of its business. Accordingly, the Company does not
anticipate that any dividends will be declared on the Common Stock for the
foreseeable future. Future payment of cash dividends, if any, will
58
<PAGE> 61
depend on the Company's financial condition, results of operations, business
conditions, capital requirements, restrictions contained in agreements, future
prospects and other factors deemed relevant by the Board.
Video is a privately-held corporation and no public trading market
exists for the Video Common Stock. No cash dividends have ever been declared by
Video on the Video Common Stock.
SELLING STOCKHOLDERS
The following securities are covered by this Prospectus:
1. The resale by Louis H. Siracusano of up to 3,349,382 Shares
that will be acquired in connection with the Merger.
2. The resale by Arnold P. Ferolito of up to 3,349,382 Shares
that will be acquired in connection with the Merger.
3. The resale by Donald H. Buck of up to 524,681 Shares that will
be acquired in connection with the Merger.
4. The resale by ELAS of up to 928,347 Shares that were acquired
when ELAS and EDFF foreclosed on a total of 2,562,105 shares
of Common Stock (the "Foreclosure") which were pledged as
collateral security for certain loans by them to MTE Holdings,
Inc. ("Holdings").
5. The resale by EDFF of up to 1,633,758 shares that were
acquired in connection with the Foreclosure.
The Shares offered hereby are being sold by the Selling Stockholders.
The table below sets forth, as of the date hereof and as adjusted to reflect the
sale of the Shares (in each case after giving effect to the Merger), certain
information regarding the ownership of the Common Stock by the Selling
Stockholders. Except as otherwise indicated, the number of shares of Common
Stock reflected in the table below has been determined in accordance with Rule
13d-3 promulgated under the Exchange Act. Under such Rule, each Selling
Stockholder is deemed to beneficially own the number of shares of Common Stock
issuable upon, among other things, the exercise of options, if such options are
exercisable within sixty days. Where less than all shares of Common Stock
beneficially owned by a Selling Stockholder are being registered for sale, the
remaining shares of Common Stock, or a portion of them, may already be
registered for sale or otherwise freely tradable.
59
<PAGE> 62
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF BENEFICIAL OWNERSHIP OF
OF COMMON STOCK SHARES TO BE COMMON STOCK
PRIOR TO OFFERING SOLD IN AFTER OFFERING
----------------- OFFERING --------------
--------
STOCKHOLDERS NUMBER PERCENT NUMBER PERCENT
- ------------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Louis H. Siracusano 3,352,882 25.33% 3,349,382 3,500 *
(1)
Arnold P. Ferolito 3,350,382 25.31% 3,349,382 1,000 *
(1)
Donald H. Buck 525,681 3.97% 524,681 1,000 *
(1)
The Equitable Life 928,347 7.01% 928,347 0 *
Assurance Society of the (2)
United States
Equitable Deal Flow 1,633,758 12.34% 1,633,758 0 *
Fund, L.P. (2)
</TABLE>
- -------------------------------
* Less than 1%
(1) After the Merger, Messrs. Elkes and Gorman will have an option to
purchase 14,616; 14,616 and 768 of Messrs. Siracusano's, Ferolito's and
Buck's shares, respectively. After the Merger, Mr. Barnathan will have
an option to purchase 17,052; 17,052 and 896 of Messrs. Siracusano's,
Ferolito's and Buck's shares, respectively. Mr. Irwin also will
receive, at the Effective Time of the Merger, an option to purchase
36,540; 36,540 and 1,920 of Messrs. Siracusano's, Ferolito's and Buck's
shares, respectively. See "The Merger -- Resale Restrictions" and "--
Interests of Certain Persons in the Merger."
(2) Messrs. Terrence A. Elkes and Kenneth F. Gorman each has an option to
purchase an aggregate of 149,512 shares of such Common Stock. These
non-transferable options are exercisable at $2.06 per share and
terminate in February 2000.
Louis H. Siracusano was elected a director of the Company in October
1993 and had been a member of the partnership committee of Manhattan/Transfer
Edit Company from July 1992 to February 1994, when it dissolved upon
consummation of the Company's initial public offering. He has served as the
Chairman, Chief Executive Officer and a director of Video since 1986 and
President since 1989. Mr. Siracusano also served as President of Audio Plus
Video, Inc. from July 1989 to February 1994, at which time it was acquired by
the Company from Video. Mr. Siracusano was a founder of Video and has served in
various capacities with Video since its formation. Mr. Siracusano is a principal
stockholder of Video and will become the President and Chief Executive Officer
of the Company after the Merger.
Arnold P. Ferolito is a principal stockholder of Video and the current
Executive Vice President of Video. Mr. Ferolito will be retained as a consultant
by the Company after the Merger for one year at a monthly fee of $5,000.
Donald H. Buck has been a Senior Vice President of Video since August
1987, the President of Atlantic Satellite Communications, Inc. (a Video
subsidiary) since August 1992 and
60
<PAGE> 63
the President of Waterfront Communications Corporation (a Video subsidiary)
since April 1993. Mr. Buck is a current stockholder of Video and will serve as a
Vice President of the Company after the Merger.
Notwithstanding the foregoing, each stockholder of Video has agreed to
enter into and deliver to the Company prior to the Closing a Stock Resale
Agreement which provides that such person will not, directly or indirectly,
sell, transfer or otherwise dispose of the shares of Common Stock to be received
by him in the Merger for a period of six (6) months after the consummation of
the Merger except for certain circumstances. See "The Merger -- Resale
Restrictions."
ELAS is a wholly-owned subsidiary of The Equitable Companies
Incorporated and is the general partner of EDFF. ELAS also beneficially owns
indirectly the 1,633,758 shares of Common Stock held by EDFF through its control
of EDFF. ELAS and EDFF acquired an aggregate of 2,562,105 shares of Common Stock
when they foreclosed on such shares which were pledged as collateral security
for certain loans to Holdings, a corporation which formed the Company in October
1993, and majority-owned by a trust having ELAS and EDFF as its sole
beneficiaries, to own and operate the businesses of Manhattan/Transfer Edit
Company, a general partnership owned 78% by Holdings and 22% by Video, and Audio
Plus Video International, Inc., a wholly-owned subsidiary of Video.
61
<PAGE> 64
PLAN OF DISTRIBUTION
The 9,785,550 Shares being sold hereby may be offered to purchasers
directly by any of the Selling Stockholders. Alternatively, the Selling
Stockholders may from time to time offer the Shares through underwriters,
dealers or agents, who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of securities for whom they may act as agent. The Selling Stockholders and any
underwriters, dealers or agents that participate in the distribution of
securities offered hereby may be deemed to be underwriters, and any profit on
the sale of such securities by them and any discounts, commissions, or
concessions received by any such underwriters, dealers or agents might be deemed
to be underwriting discounts and commissions, under the Securities Act. In
addition, the Selling Stockholders have granted, or may grant in the future,
options that are exercisable for Shares. Such shares will be issued to the
optionees upon the exercise of their options and will not be sold to third
parties by the Selling Stockholders. Such optionees will be able to freely sell
their Shares upon exercise of their options unless they are otherwise restricted
pursuant to the Securities Act or otherwise.
The securities offered hereby may be sold from time to time in one or
more transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. The distribution
of the Shares offered hereby by the Selling Stockholders may be effected in one
or more transactions that may take place on The Nasdaq National Market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such Shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees, discounts and commissions may be paid by
the Selling Stockholders in connection with such sales of Shares.
At the time a particular offer of the Shares offered hereby is made, to
the extent required, a supplement to this Prospectus will be distributed (or, if
required, a post-effective amendment to the Registration Statement of which this
Prospectus is a part will be filed) which will identify the specific Shares
being offered and set forth the aggregate amount of Shares being offered, the
purchase price and the terms of the offering, including the name or names of the
Selling Stockholders and of any underwriters, dealers or agents, the purchase
price paid by any underwriter for Shares purchased from the Selling
Stockholders, any discounts, commissions and other items constituting
compensation from the Selling Stockholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, including the proposed
selling price to the public. In addition, an underwritten offering will require
clearance by the National Association of Securities Dealers, Inc. of the
underwriter's compensation arrangements. The Company will not receive any of the
proceeds from the sale by the Selling Stockholders of the Shares offered hereby.
All expenses incident to this offering will be borne in full by the Company,
including without limitation, the reasonable fees and disbursements of counsel
retained by the Selling Stockholders, but excluding underwriting discounts and
commissions, if any.
The Company will use its best efforts to keep the Registration
Statement, of which this Prospectus forms a part, continuously effective under
the Securities Act until all of the securities covered by the Registration
Statement are sold thereunder; provided, however, that the Company
62
<PAGE> 65
may terminate the Registration Statement at any time for any reason, provided
that the Company files (if eligible to do so), and uses all reasonable efforts
to cause to be declared effective a new registration statement with respect to
any remaining securities covered by the Registration Statement which have not
theretofore been sold under a prior Registration Statement no later than four
(4) months after any such termination. In addition, the Company will pay
substantially all of the expenses incident to the Registration Statement and
sale of the Shares offered hereby to the public, including without limitation,
the reasonable fees and disbursements of counsel retained by the Selling
Stockholders and any fees and disbursements of underwriters customarily paid by
issuers or sellers of securities, but excluding underwriting discounts and
commissions. The Company will indemnify and hold harmless the Selling
Stockholders and their directors, officers, employees and agents, if any, each
other person who participates as an underwriter in the offering or sale of such
securities and each other person, if any, who controls such Selling Stockholders
or any such underwriter within the meaning of the Securities Act, against any
losses, claims, damages, liabilities or expenses, joint or several, arising,
under certain circumstances, out of any registration of the Shares. In addition,
the Company will require an undertaking from the Selling Stockholders to
indemnify and hold harmless, in the same manner and to the same extent as
provided with respect to the Company's indemnification of the Selling
Stockholders, the Company and any of its directors, officers signatory to such
registration statement and persons who control the Company within the meaning of
the Securities Act, if any.
In order to comply with certain states securities laws, if applicable,
the Shares offered hereby will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In certain states the Shares may not
be sold unless the Shares have been registered or qualified for sale in such
state, or unless an exemption from registration or qualification is available
and is obtained.
The certificates representing the Shares offered hereby contain legends
as to their restricted transferability. Upon the effectiveness of the
Registration Statement, of which this Prospectus forms a part, and the transfer
of the Shares pursuant thereto, such legends will no longer be necessary, and
accordingly, new certificates representing such Shares will be issued to the
transferee without any such legends unless otherwise required by law.
In addition to sales pursuant to the Registration Statement, of which
this Prospectus forms a part, the Shares may be sold in accordance with Rule 144
promulgated under the Securities Act.
Each Selling Stockholder will be subject to applicable provisions of
the Exchange Act and rules and regulations thereunder, including without
limitation, Regulation M, which provisions may limit the timing of purchases and
sales of any of the Shares by the Selling Stockholders. All of the foregoing may
affect the marketability of the Shares.
63
<PAGE> 66
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Shereff, Friedman, Hoffman & Goodman, LLP, New York, New York.
EXPERTS
The Company's consolidated financial statements incorporated by
reference in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and is incorporated herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Video Services Corporation and
its subsidiaries at June 30, 1996 and 1995, and for each of the three years in
the period ended June 30, 1996, appearing in the Registration Statement and the
Prospectus have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
64
<PAGE> 67
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined balance sheet as
of March 31, 1997 presents the financial position of the combined company
assuming the Merger and certain related transactions occurred as of March 31,
1997. Assumptions necessary to reflect these transactions and to restate
historical combined balance sheets are presented in the "Pro Forma Adjustments"
column, which are further described below and in the Notes to Unaudited Pro
Forma Condensed Combined Financial Statements.
The following unaudited pro forma condensed combined statements of
income for the year ended June 30, 1996 and the nine months ended March 31, 1997
present the results of operations of the combined company assuming the Merger
and certain related transactions occurred as of July 1, 1995. Assumptions
necessary to reflect these transactions and to restate historical combined
results of operations are presented in the "Pro Forma Adjustments" column, which
are further described below and in the Notes to Unaudited Pro Forma Condensed
Combined Financial Statements.
The Merger will be accounted for as a reverse acquisition for
accounting and financial reporting purposes with Video being designated as the
acquiror and the Company as the acquiree. As such, the net assets of the
"Company After The Merger" will be recorded at fair value and Video's pre-Merger
stockholders' equity will be retroactively restated for the equivalent number of
shares of Common Stock to be received by its stockholders in the Merger, with
differences between the par value of the Common Stock and the shares of common
stock, no par value per share (the "Video Common Stock"), of Video recorded as
an adjustment to the paid-in capital of the combined company.
In the opinion of Video's and the Company's managements, all
adjustments necessary to present fairly such pro forma condensed combined
financial information have been made. The unaudited pro forma condensed combined
financial information is not necessarily indicative of the actual results of
operations that would have occurred had the Merger and certain related
transactions, been consummated as of the dates indicated above or of operating
results that may be obtained in the future. The unaudited pro forma condensed
combined financial information should be read in conjunction with the
accompanying notes and the historical consolidated financial statements and
notes thereto of the Company and of Video included elsewhere, or incorporated by
reference, herein.
65
<PAGE> 68
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
"COMPANY
AFTER THE
PRO FORMA MERGER"
ASSETS VIDEO (a) IPL (a) ADJUSTMENTS PRO FORMA
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 1,674 $ 522 $ 11 (b) $ 2,207
Accounts receivable, net ........................................ 5,315 11,199 (59)(c) 16,506
51 (b)
Inventories ..................................................... 2,013 -- -- 2,013
Costs and estimated earnings in excess of billings on uncompleted
contracts ....................................................... 386 -- -- 386
Prepaid expenses and other current assets ....................... 432 1,770 65 (b) 2,267
Deferred taxes .................................................. 569 402 238 (d) 1,209
------- -------- -------- --------
Total current assets ............................................... 10,389 13,893 306 24,588
Fixed assets, net .................................................. 6,053 27,982 3,263 (b) 37,298
Excess of cost over fair value of net assets acquired, net ......... -- 22,429 17,286 (e) 17,286
(22,429)(e)
Deferred income taxes .............................................. -- 1,929 -- 1,929
Receivable from affiliates ......................................... 1,083 -- (1,083)(b) --
Receivable from officers ........................................... 211 -- (211)(f) --
Other assets ....................................................... 2,047 3,600 (205)(g) 5,362
539 (b)
(619)(f)
Net assets to be disposed .......................................... 647 -- (647)(f) --
------- -------- -------- --------
Total assets ....................................................... $20,430 $ 69,833 $ (3,800) $ 86,463
======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................... $ 7,498 $ 6,007 $ 595 (i) $ 14,131
(59)(c)
90 (b)
Billings in excess of costs and estimated earnings
on uncompleted contracts ........................................ 2,754 -- -- 2,754
Notes payable ................................................... 1,759 -- (1,759)(m) --
Current portion of long-term debt ............................... 1,254 4,008 257 (b) 3,629
(5,262)(m)
3,372 (h)(m)
Taxes payable ................................................... 107 491 -- 598
Other current liabilities ....................................... 608 -- 34(b) 642
------- -------- -------- --------
Total current liabilities .......................................... 13,980 10,506 (2,732) 21,754
Long-term debt ..................................................... 2,133 21,718 3,427 (b) 34,427
(23,851)(m)
31,000 (h)(m)
Subordinated debt .................................................. -- 5,227 -- 5,227
Deferred taxes payable ............................................. 1,745 -- 263(b) 2,008
Payable to affiliates .............................................. -- -- 219(b) 219
Other liabilities .................................................. 444 1,806 27(b) 2,277
------- -------- -------- --------
Total liabilities .................................................. 18,302 39,257 8,353 65,912
------- -------- -------- --------
Stockholders' equity:
Common stock .................................................... 103 62 (62)(j)
29 (j) 132
Paid-in capital ................................................. 291 24,979 (24,979)(j) 21,633
(29)(j)
21,172 (j)
199 (i)
</TABLE>
66
<PAGE> 69
<TABLE>
<S> <C> <C> <C> <C>
Retained earnings (deficit) ..................................... 1,734 5,535 (5,535)(j) (1,214)
(1,471)(b)
(647)(f)
(211)(f)
(619)(f)
------- -------- -------- --------
Total stockholders' equity ......................................... 2,128 30,576 (12,153) 20,551
------- -------- -------- --------
$20,430 $ 69,833 $ (3,800) $ 86,463
------- -------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
67
<PAGE> 70
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
"COMPANY
AFTER THE
MERGER"
PRO FORMA CONSOLIDATED
VIDEO (a) IPL (a) ADJUSTMENTS PRO FORMA
--------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Sales .................................................. $ 18,258 $ -- $ (106)(k) $ 18,152
Services ............................................... 9,241 49,352 (237)(k) 58,356
Rentals ................................................ 2,241 -- (3)(k) 2,238
-------- -------- -------- --------
29,740 49,352 (346) 78,746
Cost:
Cost of sales .......................................... 14,512 -- (85)(k) 14,427
Cost of services ....................................... 4,643 24,049 (237)(k) 28,455
Cost of rentals ........................................ 536 -- (3)(k) 533
-------- -------- -------- --------
19,691 24,049 (325) 43,415
Depreciation expenses ..................................... 1,608 7,229 (7)(k) 9,001
171 (b)
-------- -------- -------- --------
Gross profit .............................................. 8,441 18,074 (185) 26,330
Selling, general and administrative expenses .............. 6,009 13,092 (574)(i) 17,878
(84)(l)
609 (b)
(1,174)(b)
Amortization of other assets .............................. 45 1,140 691 (e) 932
59 (b)
(1,003)(e)
-------- -------- -------- --------
Operating income from continuing operations ............... 2,387 3,842 1,291 7,520
Other (expense) income:
Interest expense ....................................... (485) (2,262) (451)(b) (3,008)
2,747 (m)
(2,557)(m)
Other .................................................. 97 96 -- 193
-------- -------- -------- --------
Income before income taxes and discontinued operations .... 1,999 1,676 1,030 4,705
Income tax expense ........................................ 787 862 287(d) 1,936
-------- -------- -------- --------
Income from continuing operations ......................... $ 1,212 $ 814 $ 743 $ 2,769
======== ======== ======== ========
Income from continuing operations per common share ........ $ 0.17 $ 0.13 $ 0.21
======== ======== ========
Number of shares used in calculating income from continuing
operations per common share ............................... 7,223 6,227 (212)(g) 13,238
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
68
<PAGE> 71
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
"COMPANY
AFTER THE
MERGER"
PRO FORMA CONSOLIDATED
VIDEO (a) IPL (a) ADJUSTMENTS PRO FORMA
--------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Sales ............................ $ 9,595 $ -- $ (417)(k) $ 9,178
Services ......................... 7,431 40,882 (205)(k) 48,108
Rentals .......................... 1,928 -- (6)(k) 1,922
-------- -------- -------- --------
18,954 40,882 (628) 59,208
Cost:
Cost of sales .................... 6,976 -- (334)(k) 6,642
Cost of services ................. 3,533 20,980 (205)(k) 24,308
Cost of rentals .................. 626 -- (6)(k) 620
-------- -------- -------- --------
11,135 20,980 (545) 31,570
Depreciation expense ................ 1,267 5,405 (28)(k) 6,772
128 (b)
-------- -------- -------- --------
Gross profit ........................ 6,552 14,497 (183) 20,866
Selling, general and administrative
expenses ......................... 4,710 10,185 (63)(l) 13,984
434 (b)
(431)(i)
(851)(b)
Amortization of other assets ........ 12 892 518 (e) 702
(752)(e)
32 (b)
-------- -------- -------- --------
Operating income from
continuing operations ............ 1,830 3,420 930 6,180
Other (expense) income:
Interest expense ................. (406) (1,688) (269)(b) (2,187)
2,094 (m)
(1,918)(m)
Other ............................ 550 (20) -- 530
-------- -------- -------- --------
Income before income taxes and
discontinued operations .......... 1,974 1,712 837 4,523
Income tax expense .................. 790 971 241(d) 2,002
-------- -------- -------- --------
Income from continuing operations ... $ 1,184 $ 741 $ 596 $ 2,521
======== ======== ======== ========
Income from continuing operations per
common share ..................... $ 0.16 $ 0.12 $ 0.19
======== ======== ========
Number of shares used in calculating
income from continuing operations
per common share ................. 7,223 6,227 (212)(g) 13,238
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES
69
<PAGE> 72
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(a) The pro forma information has been prepared using the historical
consolidated financial statements of the Company (incorporated herein
by reference) for the nine months ended April 30, 1997 and the year
ended July 31, 1996, and the historical consolidated financial
statements of Video for the year ended June 30, 1996 and the nine
months ended March 31, 1997.
(b) The Merger Agreement requires the principal stockholders of Video to
contribute by merger (the "Contribution") to Video the stock of two (2)
Subchapter S corporations holding all of the general and limited
partnership interests in MAL Partners ("MAL") and L.I.M.A. Partners
("LIMA"), which partnerships own real estate and equipment which is
leased solely to Video and the Company. The Contribution, which
represents a transfer between entities under common control, has been
recorded at the lower of historical amortized cost or fair value.
Balance Sheet - The Subchapter S corporations, through their ownership
of LIMA and MAL, have combined assets of $3,929, consisting of cash and
cash equivalents ($11), net accounts receivable ($51), prepaid expenses
and other current assets ($65), buildings, satellite equipment and land
($3,263), and other long-term assets ($539). The Subchapter S
corporations' combined liabilities consist of amounts due Video
($1,083), accounts payable and accrued expenses ($90), mortgage
obligations ($3,684) other current liabilities ($34) deferred taxes
payable ($263), payable to affiliates ($219), other liabilities ($27)
and stockholders' deficiencies of $1,471.
Statement of Income - The Company and Video recorded aggregate rent
expense which was paid to the Subchapter S corporations of $1,174, and
$851 for the year ended June 30, 1996 and the nine months ended March
31, 1997, respectively. Rent expense payable to the Subchapter S
corporations will no longer be incurred as a result of the Contribution
and the Merger and will instead be replaced by depreciation, interest
and selling, general and administrative expenses incurred by the
Subchapter S corporations. Depreciation expense of $171, and $128 for
the year ended June 30, 1996 and the nine months ended March 31, 1997,
respectively, has been recorded with respect to the real estate owned
by the Subchapter S corporations. Amortization expense of $59 and $32
for the year ended June 30, 1996 and the nine months ended March 31,
1997, respectively, has been recorded with respect to the capital
leases of the Subchapter S corporations. The Subchapter S corporations
incurred interest expense and selling, general and administrative
expenses of $451 and $609, and $269 and $434 for the year ended June
30, 1996 and the nine months ended March 31, 1997, respectively, which
have also been recorded in the unaudited pro forma condensed combined
financial statements.
(c) To eliminate receivables and payables between Video and the Company.
70
<PAGE> 73
(d) To record the tax impact of pro forma adjustments.
(e) To record the excess of cost over the fair value of the net assets of
the Company. The excess cost over the fair value of the acquired net
assets will be amortized over 25 years.
The purchase price and allocation of the purchase price is as follows:
<TABLE>
<S> <C> <C>
Consideration (6,227 shares of the Company's Common Stock at
$3.40 per share based upon the fair market value of the Company's
Common Stock over a five day period before and after
Video and the Company announced the transaction and
agreed on the purchase price).................................................... $21,172
Transaction costs................................................................ 3,500
Severance pay for terminated employees of the Company............................ 560
Stock option component of severance package...................................... 199
Loss on sublease................................................................. 35
Other............................................................................ 205
Tax impact of purchase accounting adjustments.................................... (238)
-------
Purchase price................................................................... 25,433
Net assets of the Company as of April 30, 1997........................ ($30,576)
Excess of cost over fair value of net assets acquired
of the Company as of April 30, 1997................................... 22,429
-------
Identifiable net tangible
assets of the Company................................................. (8,147)
-------
Excess of cost over fair value of net assets acquired............................ $17,286
=======
</TABLE>
The historical carrying value as of March 31, 1997 of identifiable
tangible assets and liabilities of the Company are assumed to
approximate fair value.
(f) In connection with the Merger, Video is required to spin-off certain
operations and assets to its stockholders. On January 2, 1997,
management of Video, who have the authority to approve the action,
committed Video to a formal plan to discontinue the operations of its
Diversified Products segment. The Diversified Products segment
principally provides professional and industrial videotape duplication
and blank videotape distribution. This entry records the spin-off to
the stockholders of Video of the net assets of the Diversified Products
segment and approximately $211 and $619 of receivables from officers
and net cash value of officers' life insurance, respectively.
(g) The Merger Agreement requires the cancellation and reissuance of $205
of Common Stock
71
<PAGE> 74
(212 shares) held by Video upon the Merger.
(h) In connection with the Merger, Video and the Company will incur
approximately $3,500 in transaction costs consisting primarily of
legal, accounting, printing and investment banking fees which will be
paid using proceeds from the refinancing. See Note (m) below.
(i) In connection with the Merger, the current chief executive officer of
the Company (the "CEO") will no longer be employed by the new company
(the "Company After The Merger"). The CEO will, however, become a
non-employee director (i.e., the Vice Chairman) of the Company After
The Merger. The CEO will receive, and the former chief financial
officer of the Company ("CFO") has received, severance packages
aggregating $551 (net present value) payable over the next 3 years. In
addition, as part of the CEO's severance package, the Video
stockholders will grant to the CEO, on a pro rata basis, options to
purchase an aggregate of 75,000 of the shares of the Company After The
Merger's Common Stock issued in the Merger at an exercise price of
$0.75 per share. Such options will vest immediately. Such severance
amounts have been recorded as purchase accounting adjustments. The CEO
and CFO were paid compensation of $234 and $220 for the year ended June
30, 1996 and $176 and $165 for the nine-month period ended March 31,
1997, respectively. Video has committed to employ a new CFO for annual
compensation of $175. Video has also reviewed current facilities
utilized by Video and the Company and has determined the Company's
facilities for which $75 and $56 of non-affiliated rent expense was
incurred for the year ended June 30, 1996 and the nine months ended
March 31, 1997, respectively, are duplicative. Video has also
identified six duplicative administrative employees of the Company who
will be terminated after the Merger. The identified personnel, who were
paid $220 for the year ended June 30, 1996 and $165 for the nine months
ended March 31, 1997, will receive severance benefits of two weeks pay
based upon a Company severance plan. Video has committed itself to
vacate the duplicative Company facility and terminate the identified
Company personnel and has accordingly recorded a reserve for loss on
sublease of $35 and a reserve for severance costs of $9 as of March 31,
1997.
(j) Pursuant to the Merger Agreement, Video will merge with the Company
through the conversion and exchange of all of the shares of Video
Common Stock for shares of the Company's Common Stock, thus making
Video the acquiree and the Company the acquiror for legal purposes.
However, because, pursuant to the Merger Agreement, the Video
stockholders will, upon the consummation of the Merger, hold
approximately 54.6% of the outstanding Common Stock, appoint a majority
of the Board of Directors of the Company (the "Board") and supply a
majority of key management personnel, the Merger will be accounted for
as a "reverse acquisition." The Company will therefore be designated
the acquiree and Video the acquiror for accounting purposes. As such,
the net assets of the Company will be recorded at fair value and the
pre-Merger financial statements of Video will become the historical
financial statements of the Company After The Merger. In addition,
pre-Merger stockholders' equity and earnings per share will be
retroactively restated for the equivalent number of shares to be
received by Video's stockholders in the
72
<PAGE> 75
Merger, with differences between the par value of the Company's and
Video's common stock recorded as an adjustment to the paid-in capital
of the Company After The Merger.
(k) To eliminate intercompany sales between Video and the Company and
depreciation expense related to the profit on sales of equipment which
are included as fixed assets of the Company.
(l) In connection with the Merger, one of the principal stockholders of
Video will no longer be employed by the Company After The Merger. This
stockholder received a salary of $72 from Video for the year ended June
30, 1996. He also received a salary of $72 from one of the Subchapter S
corporations to be contributed to Video (see Note (b) above) in the
year ended June 30, 1996 and the nine months ended March 31, 1997. This
stockholder will be retained as a consultant by the Company After The
Merger for one year at a monthly fee of $5.
(m) The Merger Agreement provides that substantially all of the Company's
and Video's outstanding long-term indebtedness will be refinanced
simultaneously with the closing of the Merger (other than $5,227 of the
Company's subordinated debt which will remain outstanding). Such
refinancing is a condition to the consummation of the Merger. The Pro
Forma Condensed Combined Financial Statements assume that the
refinancing will be consummated substantially in accordance with the
terms set forth in a commitment letter received by Video (See "The
Merger -- Refinancing") and, therefore, the following assumptions
regarding the refinancing have been made (the "Refinancing
Assumptions"): (i) the Company After The Merger will borrow $33,000
under a five year term loan and will draw down approximately $1,372
under a five year $17,000 revolving line of credit (collectively, the
"Facility"); (ii) the Facility will bear interest at KeyBank's Prime
rate or LIBOR plus a number of basis points based upon the Company's
leverage ratio (funded debt divided by EBITDA), which, based upon the
pro forma financial information, the Company anticipates initially
being LIBOR plus 1.75% (the Company will have the option to choose the
applicable interest rate); (iii) principal payments of $1,000 per
quarter in respect of the term loan portion of the Facility will be due
beginning December 31, 1997 and such quarterly principal payments will
increase to $1,250 per quarter on December 31, 1998 and then increase
to $1,750 per quarter on December 31, 1999 and then further increase to
$2,000 per quarter on September 30, 2001 with a balloon payment of
$3,750 in respect of the term loan portion of the Facility due on
September 30, 2002; (iv) the Facility will be secured by all of the
assets of the Company After The Merger and its subsidiaries; and (v) no
significant gain or loss will result from the refinancing. In addition
to refinancing the $30,872 of Video and Company debt outstanding at
March 31, 1997 (excluding $5,227 of the Company's subordinated debt
which will remain outstanding), the funds borrowed will also be
utilized to pay transaction costs ($3,500). The term loan has been
classified as current ($2,000) and long-term ($31,000) based upon
stated repayment terms. The Boards of Directors of the Company and
Video have full discretion and authority to agree to such other terms
and conditions in respect of the refinancing as they deem appropriate
or necessary. Moreover, the Boards of Directors of the Company and
73
<PAGE> 76
Video have the authority to waive compliance with this refinancing
condition. The calculation of pro forma interest expense on the new
debt is as follows:
<TABLE>
<S> <C>
Term Loan............................................................... $33,000
Draw-down on revolving line of credit................................... 1,372
-------
New principal indebtedness.............................................. 34,372
30 day LIBOR rate at March 31, 1997 (5.69%) plus 1.75%.................. 7.44%
-------
Annual interest expense................................................. $ 2,557
=======
Fiscal 1996 annual interest expense refinanced.......................... $ 2,747
=======
Interest expense for the nine months ended March 31, 1997 .............. $ 1,918
=======
Interest expense refinanced for the nine months ended March 31, 1997 ... $ 2,094
=======
</TABLE>
74
<PAGE> 77
Video Services Corporation and Subsidiaries
Unaudited Condensed Consolidated Financial Statements
As of March 31, 1997
and for the nine months ended March 31, 1997
CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS.................................... F-1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS.......................... F-2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ......................... F-3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........... F-4
<PAGE> 78
Video Services Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
-------- -----------
(Note) (Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ................................................. $ 520 $ 1,674
Accounts receivable, net .................................................. 4,900 5,315
Inventories ............................................................... 312 2,013
Costs and estimated earnings in excess of billings on uncompleted contracts 416 386
Prepaid expenses and other current assets ................................. 341 432
Deferred taxes ............................................................ 594 569
------- -------
Total current assets .......................................................... 7,083 10,389
Fixed assets, net ......................................................... 5,096 6,053
Receivable from affiliates ................................................ 1,739 1,083
Receivable from officers .................................................. 326 211
Other assets .............................................................. 1,886 2,047
Net assets to be disposed ................................................. 1,542 647
------- -------
Total assets .................................................................. $17,672 $20,430
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable and accrued expenses ..................................... $ 5,244 $ 7,498
Billings in excess of costs and estimated
earnings on uncompleted contracts ...................................... 921 2,754
Notes payable ............................................................. 956 1,759
Current portion of long-term debt ......................................... 1,362 1,254
Taxes payable ............................................................. 258 107
Other current liabilities ................................................. 1,270 608
------- -------
Total current liabilities .......................................................... 10,011 13,980
Long-term debt ..................................................................... 2,140 2,133
Deferred taxes payable ............................................................. 2,475 1,745
Other liabilities .................................................................. 391 444
------- -------
Total liabilities .................................................................. 15,017 18,302
Stockholders' equity:
Common stock, no par value:
Authorized 7,500,000 shares,
issued and outstanding 2,678,162 .......................................... 103 103
Paid-in capital ........................................................... 291 291
Retained earnings ......................................................... 2,261 1,734
------- -------
Total stockholders' equity ......................................................... 2,655 2,128
$17,672 $20,430
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
Note: The balance sheet at June 30, 1996 has been derived from the audited
consolidated balance sheet at that date.
F-1
<PAGE> 79
Video Services Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
For the nine months ended March 31, 1996 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revenues:
Sales ............................................................... $ 16,023 $ 9,595
Services ............................................................ 6,928 7,431
Rentals ............................................................. 1,557 1,928
-------- --------
24,508 18,954
Costs:
Cost of sales ....................................................... 13,272 6,976
Cost of services .................................................... 3,520 3,533
Cost of rentals ..................................................... 347 626
-------- --------
17,139 11,135
Depreciation expense ......................................................... 1,227 1,267
-------- --------
Gross profit ................................................................. 6,142 6,552
Selling, general and administrative expenses ................................. 4,377 4,710
Amortization of other assets ................................................. 43 12
-------- --------
Operating income from continuing operations .................................. 1,722 1,830
Other (expense) income:
Interest expense .................................................... (362) (406)
Other income ........................................................ 80 550
-------- --------
Income before income taxes and discontinued operations ....................... 1,440 1,974
Income tax expense ........................................................... 576 790
-------- --------
Income before discontinued operations ........................................ 864 1,184
Discontinued operations:
Loss from operations of Diversified Products segment (less applicable
income tax benefit of $291 and $474, respectively) .................. (436) (682)
Estimated loss on disposal of Diversified Products segment
(less applicable income tax benefit of $134) ........................ -- (1,029)
-------- --------
Net income (loss) ............................................................ $ 428 $ (527)
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
F-2
<PAGE> 80
Video Services Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended March 31, 1996 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by continuing operations ........ $ 2,496 $ 2,234
INVESTING ACTIVITIES
Additions to fixed assets ......................... (1,829) (2,653)
Proceeds from disposal of fixed assets ............ 26 74
(Increase) decrease in receivables from affiliates (524) 640
------- -------
Net cash used in investing activities ............. (2,327) (1,939)
FINANCING ACTIVITIES
Proceeds from borrowings .......................... 1,525 2,878
Repayments of borrowings .......................... (2,334) (2,019)
------- -------
Net cash (used in) provided by financing activities (809) 859
Net (decrease) increase in cash ................... (640) 1,154
Cash and cash equivalents at beginning of period .. 1,295 520
------- -------
Cash and cash equivalents at end of period ........ $ 655 $ 1,674
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
F-3
<PAGE> 81
Video Services Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(In Thousands)
March 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine months
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1997. The unaudited interim financial
information should be read in conjunction with the Company's audited
consolidated financial statement as of and for the year ended June 30, 1996
included elsewhere herein.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets expected to be disposed of. The Company
adopted the provisions of Statement 121 in the first quarter of 1997. The
Company determined that no impairment provision for the carrying value of its
long-lived assets was necessary.
2. INVENTORIES
Inventories, which consist of system components and equipment, are
valued at the lower of specific cost or market.
3. RELATED PARTY TRANSACTION
In August 1996, the Company acquired undeveloped real estate from
L.I.M.A. Partners, a real estate partnership that is owned by the principal
stockholders of the Company, for $1,000 and entered into a six year mortgage
with a financial institution for $600. The annual principal payments are $100
and bear interest at prime plus l%. The transaction, which represented a
transfer between entities under common control, was recorded at the lower of
historical cost or fair value.
F-4
<PAGE> 82
Video Services Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
4. DEBT
During fiscal 1997, the Company financed the acquisition of
approximately $390 of equipment through a four year, 12.06% loan with a
financial institution for the same amount. The annual principal payments are
approximately $120. During fiscal 1997, the Company also purchased a phone
system for approximately $175 and entered into a four year 12.3% loan with a
financial institution for the same amount. The annual principal payments are
approximately $53.
5. OTHER INCOME
Included in other income is $500 pertaining to the payment of a note
receivable for which the Company had established a full valuation allowance. The
note receivable was partial consideration for the sale of a radio station in
fiscal 1993.
6. DISCONTINUED OPERATIONS
DIVERSIFIED PRODUCTS
In connection with and as a condition to the proposed merger with
International Post Limited ("IPL") (see Note 7), on January 2, 1997 management,
which has the authority to approve the action, committed the Company to a formal
plan to discontinue the operations of its Diversified Products segment. The
Diversified Products segment principally provides professional and industrial
video duplication and blank videotape distribution.
Losses from the discontinued Diversified Products segment amounted to
$436 for the nine month period ended March 31, 1996, net of applicable income
tax benefit of $291, and is shown separately in the condensed consolidated
statements of income.
Revenues of the discontinued operations of the Diversified Products
segment were $9,715 and $8,371 for the nine month periods ended March 31, 1996
and 1997, respectively.
Liabilities aggregating approximately $900 consisting principally of
notes payable of the discontinued Diversified Products segment will be retained
by the Company.
Under generally accepted accounting principles, a provision for loss on
discontinued operations has been included based on management's best estimates
of the amounts expected to be realized on the discontinuance of the Diversified
Products segment. The amounts could differ materially in the near term from the
amounts assumed in arriving at the loss anticipated on disposal of the
discontinued operations.
F-5
<PAGE> 83
Video Services Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
6. DISCONTINUED OPERATIONS (CONTINUED)
Net assets of the operations of the Diversified Products segment as of
March 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Accounts receivable, net .................... $ 1,506
Inventories ................................. 754
Prepaid expenses and other current assets.... 29
Fixed assets, net ........................... 179
Other assets ................................ 183
Investment in Company ....................... 438
Allowance for losses of investment in
Company ................................... (438)
Accounts payable and accrued expenses ....... (1,685)
Other current liabilities ................... (319)
-------
$ 647
=======
</TABLE>
In February 1997, Video Dub, Inc. (part of the Company's discontinued
Diversified Products segment mentioned above) contributed the assets ($608) and
liabilities ($170) of its New York City facility to a new company in exchange
for a 30% equity interest ($438) in a new entity. Video Dub, Inc. is included in
the net assets of the Company to be disposed and spun-off to its shareholders
prior to the consummation of the proposed merger between the Company and IPL.
See Note 7.
7. PROPOSED MERGER AND ACQUISITION
On June 27, 1997, the Company signed a definitive agreement to merge
("Merger Agreement") with IPL. Subject to the terms and conditions of the Merger
Agreement, the holders of all of the Company's common stock will receive
7,223,445 shares of IPL common stock. The merger will be accounted for as a
reverse acquisition whereby the pre-merger financial statements of the Company
will become the historical financial statements of the successor. The acquired
assets and liabilities of IPL will be recorded at their respective fair market
values at the date of merger. The merger is expected to be consummated during
the first quarter of 1998.
In connection with and as a condition to the Merger Agreement,
immediately prior to the merger, the Diversified Products segment will be
spun-off to the Company's stockholders in a non-cash dividend and the net
assets of MAL and L.I.M.A. Partners, two real estate partnerships owned by the
principal stockholders of the Company, will be contributed to the Company in the
form of a capital contribution (or repayment of affiliated receivables).
F-6
<PAGE> 84
Video Services Corporation and Subsidiaries
Audited Consolidated Financial Statements
As of June 30, 1995 and 1996
and for the years June 30, 1994, 1995 and 1996
CONTENTS
REPORT OF INDEPENDENT AUDITORS............................................ F-8
CONSOLIDATED BALANCE SHEETS............................................... F-9
CONSOLIDATED STATEMENTS OF INCOME......................................... F-10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY........................... F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS .................................... F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-13
<PAGE> 85
Report of Independent Auditors
Board of Directors and Shareholders
Video Services Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Video
Services Corporation and Subsidiaries as of June 30, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Video
Services Corporation and Subsidiaries at June 30, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
- --------------------------
Ernst & Young LLP
White Plains, New York
September 20, 1996 except for
Note 15 as to which the date is
January 2, 1997 and Note 20 as to
which the date is June 27, 1997
F-8
<PAGE> 86
Video Services Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
---------------------
(In Thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................ $ 1,295 $ 520
Accounts receivable, net ............................. 5,498 4,900
Inventories .......................................... 433 312
Costs and estimated earnings in excess of billings on
uncompleted contracts ............................. 164 416
Prepaid expenses and other current assets ............ 654 341
Deferred taxes ....................................... 425 594
---------------------
Total current assets .................................... 8,469 7,083
Fixed assets, net ....................................... 4,668 5,096
Receivable from affiliates .............................. 1,408 1,739
Receivable from officers ................................ 158 326
Other assets ............................................ 1,302 1,886
Net assets to be disposed ............................... -- 1,175
---------------------
Total assets ............................................ $16,005 $17,305
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................ $ 4,572 $ 5,244
Billings in excess of costs and estimated
earnings on uncompleted contracts ................. 916 921
Notes payable ........................................ 503 656
Current portion of long-term debt .................... 1,141 1,362
Taxes payable ........................................ 696 258
Other current liabilities ............................ 1,885 1,270
---------------------
Total current liabilities ............................... 9,713 9,711
Long-term debt .......................................... 2,388 2,073
Deferred and other taxes payable ........................ 1,828 2,475
Other liabilities ....................................... 264 391
---------------------
Total liabilities ....................................... 14,193 14,650
---------------------
Stockholders' equity
Common stock, no par value:
Authorized 7,500,000 shares,
issued and outstanding 2,640,162 (1995) shares and
2,678,162 (1996) shares ........................... 84 103
Paid-in capital ...................................... 291 291
Retained earnings .................................... 1,437 2,261
---------------------
Total stockholders' equity .............................. 1,812 2,655
---------------------
$16,005 $17,305
=====================
</TABLE>
See accompanying notes.
F-9
<PAGE> 87
Video Services Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1994 1995 1996
----------------------------------------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Sales .............................................. $ 12,931 $ 9,289 $ 18,258
Services ........................................... 5,236 7,779 9,241
Rentals ............................................ 2,224 2,371 2,241
----------------------------------------
20,391 19,439 29,740
Costs:
Cost of sales ...................................... 10,758 7,653 14,512
Cost of services ................................... 2,863 3,752 4,643
Cost of rentals .................................... 670 589 536
----------------------------------------
14,291 11,994 19,691
Depreciation expense .................................. 2,015 1,517 1,608
----------------------------------------
Gross profit .......................................... 4,085 5,928 8,441
Selling, general and administrative expenses .......... 6,099 5,326 6,009
Amortization of other assets .......................... 155 112 45
----------------------------------------
Operating income (loss) from continuing operations .... (2,169) 490 2,387
Other (expense) income:
Interest expense ................................... (2,405) (465) (485)
Other income ....................................... 253 198 97
----------------------------------------
Income (loss) before income taxes, discontinued
operations and extraordinary item .................. (4,321) 223 1,999
Income tax (benefit) expense .......................... (13,145) -- 787
----------------------------------------
Income before discontinued operations and
extraordinary item ................................. 8,824 223 1,212
Discontinued operations:
Loss from operations of Diversified Products
Segment (less applicable income tax benefit of
$24, $-- and $248) .............................. (335) (74) (388)
Gain on disposal of International Services Group
(less applicable income taxes of $7,988) ........ 10,103 -- --
Gain on disposal of Post Production Operations
(less applicable income taxes of $2,250) ........ 2,740 -- --
----------------------------------------
Net income before extraordinary item .................. 21,332 149 824
Extraordinary item:
Gain on debt extinguishment (net of applicable
income taxes of $4,815) ......................... 5,951 -- --
Net income ............................................ $ 27,283 $ 149 $ 824
========================================
</TABLE>
See accompanying notes.
F-10
<PAGE> 88
Video Services Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
------------------------ Paid-In Treasury Retained
Shares Amount Capital Stock Earnings Total
----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 3,222,162 $ 127 $ 441 $(2,459) $(23,169) $(25,060)
Purchase of Treasury (582,000) -- -- (560) -- (560)
Stock ......................
Retirement of Treasury -- (43) (150) 3,019 (2,826) --
Stock.......................
Net income ................. -- -- -- -- 27,283 27,283
----------------------------------------------------------------------------------------
Balance at June 30, 1994 2,640,162 84 291 1,288 1,663
Net income ................. -- -- -- 149 149
----------------------------------------------------------------------------------------
Balance at June 30, 1995 2,640,162 84 291 1,437 1,812
Issuance of Common 38,000 19 19
Stock.......................
Net income ................. 824 824
----------------------------------------------------------------------------------------
Balance at June 30, 1996....... 2,678,162 $ 103 $ 291 $ 2,261 $ 2,655
========================================================================================
</TABLE>
See accompanying notes.
F-11
<PAGE> 89
Video Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1994 1995 1996
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $ 27,283 $ 149 $ 824
Adjustments to reconcile net income to net cash provided
by continuing operations:
Depreciation ......................................... 2,321 1,821 1,868
Amortization of other assets ......................... 216 143 46
Gain on debt extinguishment .......................... (10,766) -- --
Gain on disposal of discontinued operations .......... (23,081) -- --
Gain on sale of securities ........................... (296) -- --
Gain on sale of equipment ............................ -- (471) (351)
Deferred income taxes ................................ 315 -- 411
Provision for bad debts .............................. 354 54 133
(Increase) decrease in operating assets:
Accounts receivable .............................. 476 (1,560) (1,488)
Inventories ...................................... (77) 275 (369)
Costs and estimated earnings in excess of billings
on uncompleted contracts .................... -- (164) (252)
Prepaid expenses and other assets ................ 255 (597) (399)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses ............ 1,016 544 2,277
Billings in excess of costs and estimated earnings
on uncompleted contracts .................... (1,837) 200 5
Other liabilities ................................ 1,888 87 (754)
-----------------------------------------
Net cash (used in) provided by continuing operations ......... (1,933) 481 1,951
INVESTING ACTIVITIES
Additions to fixed assets .................................... (1,171) (1,477) (2,970)
Proceeds from disposal of fixed assets ....................... 128 594 380
Proceeds from disposal of discontinued operations ............ 21,638 -- --
Costs of disposal of discontinued operations ................. (1,554) -- --
Proceeds from sale of investments ............................ 309 -- --
Increase in obligations from affiliates ...................... (755) (519) (581)
-----------------------------------------
Net cash provided by (used in) investing activities .......... 18,595 (1,402) (3,171)
FINANCING ACTIVITIES
Purchase of treasury stock ................................... (440) -- --
Amounts paid for debt extinguishment ......................... (10,000) -- --
Costs of debt extinguishment ................................. (223) -- --
Proceeds from issuance of stock .............................. -- -- 19
Proceeds from borrowings ..................................... 1,449 3,292 1,663
Repayments of borrowings ..................................... (6,739) (2,423) (1,237)
-----------------------------------------
Net cash (used in) provided by financing activities .......... (15,953) 869 445
-----------------------------------------
Net increase (decrease) in cash .............................. 709 (52) (775)
Cash and cash equivalents at beginning of year ............... 638 1,347 1,295
-----------------------------------------
Cash and cash equivalents at end of year ..................... $ 1,347 $ 1,295 $ 520
========================================
</TABLE>
See accompanying notes.
F-12
<PAGE> 90
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands)
As of June 30, 1995 and 1996 and for
the years ended June 30, 1994, 1995 and 1996
1. ORGANIZATION AND PRESENTATION
Video Services Corporation, through its wholly-owned subsidiaries
(hereinafter collectively referred to as the "Company"), operates primarily in
the United States and provides a broad range of services to the video industry.
See Note 12 for additional segment information. All significant intercompany
accounts and transactions have been eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts have been reclassified.
REVENUE RECOGNITION
Revenue from the sale of equipment and services is recorded at the time
of shipment of equipment or the completion of services for the customer. Revenue
from long-term contracts is recognized under the percentage-of-completion
method, under which method the Company recognizes revenues based on the ratio
that incurred costs bear to estimated total completion costs. Provision is made
currently for estimated losses, if any, on uncompleted contracts.
F-13
<PAGE> 91
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Property and equipment are recorded at cost and depreciated
predominantly by the straight-line method over their estimated useful lives.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the term of the underlying lease. Estimated useful lives by class of
assets are as follows:
<TABLE>
<S> <C>
Machinery and equipment 3 - 10 years
Equipment held for rental 3 - 10 years
Furniture and fixtures 3 - 10 years
Leasehold improvements 3 - 14 years
Transportation equipment 3 - 7 years
</TABLE>
Repairs and maintenance are charged to expense as incurred.
Expenditures that result in the enhancement of the value of the facilities
involved are treated as additions to property and equipment. Cost of property
and equipment disposed of and accumulated depreciation thereon are removed from
the related accounts, and gain or loss, if any, is recognized.
Property and equipment of the Company are reviewed for impairment
whenever events or circumstances indicate that the asset's undiscounted expected
cash flows are not sufficient to recover its carrying amount. The Company
measures an impairment loss by comparing the fair value of the asset to its
carrying amount. Fair value of an asset is calculated as the present value of
expected future cash flows.
INVENTORIES
Inventories of system components and equipment are valued at the lower
of specific cost or market; tape stock is valued at the lower of average cost or
market.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes".
The Company uses different methods of accounting for financial
reporting and tax purposes, principally through the utilization of accelerated
depreciation methods for income tax purposes, certain valuation allowances and
net operating loss carryforwards; accordingly, deferred taxes are provided on
the basis of such differences.
F-14
<PAGE> 92
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
In connection with the acquisition of a subsidiary, the Company
recorded goodwill of $554, which is being amortized over 40 years and is
included in other assets on the accompanying balance sheet, net of accumulated
amortization of $82 and $91 at June 30, 1995 and 1996, respectively.
INVESTMENTS
Investments consist of unregistered common stock of International Post
Limited ("IPL"), a publicly-traded company, and are carried at cost. See Notes
8, 15 and 20.
CUSTOMER CONCENTRATIONS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company conducts most of its operations in the video industry. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral from its customers. Management believes it has
reasonably estimated losses from uncollectible receivables. The Company had
sales to one individual Systems and Products segment customer in 1994 and two
Systems and Products segment customers in 1996 in excess of 10% of consolidated
1994 and 1996 revenues, respectively. Sales to such customers aggregated to 22%
and 30% of consolidated 1994 and 1996 revenues, respectively.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents all short-term highly liquid
investments that are readily convertible to known amounts of cash and so near
maturity (three months or less) that they present insignificant risk in changes
in value because of changes in interest rates.
Cash equivalents at June 30, 1995 and 1996 of $125 and $131,
respectively are used to collateralize a standby letter of credit, related to an
operating lease.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable, and other accrued liabilities approximate fair
value due to the short maturity of these items. The carrying amount of the
amounts due under the line of credit approximate fair value because the interest
rates vary with market interest rates. The carrying amount of long-term debt
approximates fair value based on prevailing interest rates.
F-15
<PAGE> 93
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of 1997 and, based on
current circumstances, does not believe the effect of adoption will be material.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock Based Compensation," which is effective for the Company's 1997 fiscal
year. Statement No. 123 allows companies to either account for stock-based
compensation under the new provisions of Statement No. 123 or under the
provisions of APB No. 25, but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of Statement No. 123
had been adopted. The Company intends to continue accounting for its stock-based
compensation in accordance with the provisions of APB No. 25. As such, the
adoption of Statement No. 123 will not impact the financial condition or the
results of operations of the Company.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
--------------------
<S> <C> <C>
Accounts receivable, trade ........... $4,970 $3,806
Contract receivables billed:
Uncompleted contracts ....... 845 694
Completed contracts ......... 334 580
--------------------
6,149 5,080
Less: allowance for doubtful accounts 651 180
--------------------
$5,498 $4,900
====================
</TABLE>
F-16
<PAGE> 94
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
-------------------------
<S> <C> <C>
Costs incurred on uncompleted contracts
to date ................................. $ 9,844 $ 12,216
Estimated earnings to date .............. 2,309 2,827
-------------------------
12,153 15,043
Less: billings to date ................. 12,905 15,548
Billings in excess of costs and estimated -------------------------
earnings on uncompleted contracts .. $ (752) $ (505)
=========================
</TABLE>
Included in accompanying balance sheets under the following caption:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
-------------------
<S> <C> <C>
Costs and estimated earnings in excess
of billings on uncompleted contracts ... $ 164 $ 416
Billings in excess of costs and estimated
earnings on uncompleted contracts .. (916) (921)
-------------------
$(752) $(505)
===================
</TABLE>
5. FIXED ASSETS
Fixed assets, at cost, summarized by major categories, consist of the
following:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
----------------------
<S> <C> <C>
Machinery and equipment ....... $22,263 $16,880
Furniture and fixtures ........ 922 606
Leasehold improvements ........ 2,403 2,062
Transportation equipment ...... 304 171
----------------------
25,892 19,719
Less: accumulated depreciation 21,224 14,623
----------------------
$ 4,668 $ 5,096
======================
</TABLE>
F-17
<PAGE> 95
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
6. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
----------------
<S> <C> <C>
System components and equipment, net of
obsolescence allowance of $553 and $579... $273 $312
Tape stock .................................... 160 --
----------------
$433 $312
================
</TABLE>
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expense and other current assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
----------------
<S> <C> <C>
Prepaid expenses ......... $188 $245
Insurance claim receivable 380 --
Other .................... 86 96
----------------
$654 $341
================
</TABLE>
8. OTHER ASSETS
Other assets, net of amortization, consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
--------------------
<S> <C> <C>
Goodwill ..................................... $ 516 $ 463
Investments .................................. 220 205
Cash value of officers' life insurance (net of
borrowings of $764 and $123) ........... 292 1,126
Other ........................................ 274 92
--------------------
$1,302 $1,886
====================
</TABLE>
F-18
<PAGE> 96
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
8. OTHER ASSETS (CONTINUED)
Included in other assets are 212,096 unregistered shares of IPL with a
cost basis of $205. The Company was restricted from selling these shares until
February 15, 1995. Additionally, the Company has granted options on 65,000 of
these shares to certain directors of IPL.
As of June 30, 1995 and 1996, registered tradable shares of IPL had a fair
market value of $4.50 and $3.88 per share, respectively. See Note 20.
9. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
--------------------
<S> <C> <C>
Wages payable ................. $ 507 $ 511
Customer deposits ............. 630 5
Sales and payroll taxes payable 313 553
Other ......................... 435 201
--------------------
$1,885 $1,270
====================
</TABLE>
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
--------------------
<S> <C> <C>
Notes payable to equipment manufacturer, bearing interest at
9.9% - 12.25%, collateralized by fixed assets with a net
book value of $421 and $499 .............................. $ 453 $ 537
Notes payable to credit institutions, bearing interest at 10.0%-
13.0%, collateralized by fixed assets with a net book
value of $4,247 and $4,597 ............................... 2,921 2,784
Capital lease obligations bearing interest at 11.3%-16.4% ...... 155 114
--------------------
3,529 3,435
Less: Current maturities ...................................... 1,141 1,362
--------------------
$2,388 $2,073
====================
</TABLE>
F-19
<PAGE> 97
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
10. LONG-TERM DEBT (CONTINUED)
The Company has a short-term debt line of credit of $1,500, ($503 and $656
outstanding at June 30, 1995 and 1996) which is collateralized by accounts
receivable and certain machinery and equipment and bears interest at prime (9.0%
and 8.25% at June 30, 1995 and 1996, respectively) plus 1.75%. The Company's
weighted average interest rates were 10.75% and 10.36% during 1995 and 1996,
respectively.
The following is a schedule of principal payments, exclusive of capital
lease obligations.
<TABLE>
<S> <C>
1997......................................................... $ 1,317
1998......................................................... 938
1999......................................................... 527
2000......................................................... 402
2001......................................................... 137
---------
$ 3,321
=========
</TABLE>
Interest payments totaled $785, $466 and $522 for the years ended June 30,
1994, 1995 and 1996, respectively.
The Company leases certain equipment from unaffiliated entities; such
equipment has been classified as machinery and equipment. Future minimum lease
payments under capital leases together with the present value of the related
minimum payments as of June 30, 1996 are:
<TABLE>
<CAPTION>
Fiscal Year Amount
- ----------- -------
<S> <C>
1997......................................................... $ 59
1998......................................................... 51
1999......................................................... 15
2000......................................................... 11
2001......................................................... -
-------
Total minimum lease payments................................. 136
Less: amount representing interest........................... 22
-------
Present value of minimum lease payments...................... $ 114
=======
</TABLE>
F-20
<PAGE> 98
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
10. LONG-TERM DEBT (CONTINUED)
Leased property under capital leases are classified in fixed assets as
follows:
<TABLE>
<CAPTION>
JUNE 30
1995 1996
----------------
<S> <C> <C>
Machinery and equipment ........... $170 $170
Less: accumulated amortization .... 16 79
----------------
$154 $ 91
================
</TABLE>
11. RELATED PARTIES
At June 30, 1995 and 1996, the Company had amounts receivable of $1,442
and $1,656, respectively from two real estate partnerships (MAL Partners and
L.I.M.A. Partners) that are owned by the principal stockholders of the Company.
The Company also had amounts (payable) and receivable of $(35) and $84,
respectively from other affiliated entities. The affiliate balances principally
arose from working capital loans made by the Company. The Company rents space
from entities (including MAL and L.I.M.A. Partners) whose principals own a
majority interest in the Company, including affiliates to whom the Company has
made working capital loans. Total payments in connection with leases with
related parties approximated $1,273, $1,146 and $1,177 for 1994, 1995 and 1996,
respectively. The ability of the affiliates to repay these loans is contingent
upon receiving lease payments from the Company in excess of third party
financing and operating costs. See Note 20.
At June 30, 1995 and 1996, the Company had amounts receivable from
officers of $158 and $326, respectively.
F-21
<PAGE> 99
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
12. BUSINESS SEGMENT INFORMATION
The Company's continuing operations have been classified into two
business segments: Systems and Products, and Transmission Services. The Systems
and Products segment includes the production of turnkey video systems for the
broadcast and cable television industries, as well as video equipment rental.
The Transmission Services segment includes satellite and fiber optic video
transmission, including video switching with connections to broadcast television
networks, cable television operators and local television stations. The
Diversified Products segment is shown as discontinued operations (see Note 16).
The Company operates primarily in the United States; foreign operations
are not significant. Intersegment sales are accounted for at cost.
The Company does not allocate income and expenses that are of a general
corporate nature to industry segments in computing operating income. These
include general corporate expenses, interest income and expense, and certain
other income and expenses not directly attributable to a specific segment.
Identifiable assets by segment include assets directly identifiable with those
operations. Other assets primarily consist of corporate cash and cash
equivalents and fixed assets associated with nonsegment activities.
Summarized financial information by business segment for 1994, 1995 and
1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------------------------
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
Systems and Products ................... $ 15,155 $ 11,660 $ 20,499
Transmission Services .................. 5,236 7,779 9,241
------------------------------------------
Net revenues .............................. $ 20,391 $ 19,439 $ 29,740
==========================================
Intersegment revenues:
Systems and Products ................... $ 463 $ 1,295 $ 795
Transmission Services .................. 1,398 913 792
------------------------------------------
Total intersegment revenues ............... $ 1,861 $ 2,208 $ 1,587
==========================================
Operating income (loss):
Systems and Products ................... $ 769 $ 1,266 $ 2,881
Transmission Services .................. (469) 1,168 1,794
Corporate expenses ..................... (2,469) (1,944) (2,288)
------------------------------------------
Operating income (loss) from continuing
operations ....................... (2,169) 490 2,387
------------------------------------------
Interest expense, net .................. (2,405) (465) (485)
Other income ........................... 253 198 97
</TABLE>
F-22
<PAGE> 100
<TABLE>
<S> <C> <C> <C>
--------------------------------------------
Income (loss) before income taxes, discontinued
operations and extraordinary items.................. $ (4,321) $ 223 $ 1,999
============================================
</TABLE>
12. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------------------
<S> <C> <C> <C>
Identifiable assets at June 30:
Systems and Products ........................ $ 1,822 $ 2,981 $ 6,025
Transmission Services ....................... 4,846 5,465 5,255
Discontinued operations ..................... 3,097 2,904 1,175
Corporate ................................... 3,966 4,655 4,850
-------------------------------------
Total assets ................................ $13,731 $16,005 $17,305
=====================================
Additions to fixed assets:
Systems and Products ........................ $ 632 $ -- $ 1,231
Transmission Services ....................... 283 1,189 1,117
Discontinued operations ..................... 256 102 557
Corporate ................................... -- 186 65
-------------------------------------
Net capital expenditures .................... $ 1,171 $ 1,477 $ 2,970
=====================================
Depreciation:
Systems and Products ........................ $ 784 $ 510 $ 632
Transmission Services ....................... 1,088 908 900
Corporate ................................... 143 99 76
-------------------------------------
Total depreciation from continuing operations $ 2,015 $ 1,517 $ 1,608
=====================================
</TABLE>
13. INCOME TAXES
The provision for federal and state income taxes (exclusive of tax
expense (benefit) from discontinued operations) consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1994 1995 1996
------------------------------------
<S> <C> <C> <C>
Federal:
Current .......................... $ (191) $ -- $ 21
Deferred ......................... -- 127 633
Adjustments to valuation allowance (9,416) (127) --
State:
Current .......................... (39) -- 104
Deferred ......................... (47) 230 124
Adjustments to valuation allowance (3,452) (230) (95)
------------------------------------
$(13,145) $ -- $ 787
====================================
</TABLE>
F-23
<PAGE> 101
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
13. INCOME TAXES (CONTINUED)
The reconciliation between the statutory tax rate and those reflected
in the Company's income tax provision for continuing operations is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1994 1995 1996
----------------------------------------
<S> <C> <C> <C>
Statutory tax rate .......................... (34.0)% 34.0% 34.0%
Change in valuation allowance ............... (270) (125.1) (3.2)
Officers life insurance ..................... -- 7.6 --
Non-deductible travel and entertainment ..... -- 15.7 --
State and local taxes, net of federal benefit (1) 66.8 7.4
Other ....................................... 1 1 1.2
--------------------------------------
(304)% 0% 39.4%
======================================
</TABLE>
The components of deferred federal and state income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996
---------------------
<S> <C> <C>
Receivable allowance ............... $ 207 $ 314
Inventory reserves ................. 216 253
Other .............................. 2 27
---------------------
425 594
Federal and state net operating loss
carryforwards ............... 1,365 709
Accelerated depreciation ........... (959) (978)
Valuation allowance ................ (804) (709)
---------------------
(398) (978)
---------------------
Deferred tax asset (liability) .... $ 27 $(384)
=====================
</TABLE>
Included within deferred and other taxes payable are accrued income tax
liabilities of $1,430 and $1,497 as of December 31, 1995 and 1996, respectively.
The valuation allowance decreased by approximately $357 and $95 in 1995
and 1996, respectively, as a result of the utilization and planned realization
of net operating loss carryforwards.
F-24
<PAGE> 102
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
13. INCOME TAXES (CONTINUED)
As of June 30, 1995 and 1996, the Company has operating loss
carryforwards for state income tax purposes of $804 and $709 expiring by 2011,
respectively. A valuation allowance has been provided.
The Company has made payments for Federal and state income taxes of
$36, $426 and $500 for the years ended June 30, 1994, 1995 and 1996,
respectively.
14. RETIREMENT PLANS
The Company provides retirement benefits principally through a
profit-sharing and deferred compensation plan which covers most employees.
Matching contributions by the Company to the plan are based on participant
contributions (which is limited to a fixed percentage of participant
compensation). The Company may make additional contributions to the plan at its
discretion.
Plan expense, which represents the matching employer contributions,
amounted to $46, $41 and $50 for the years ended June 30, 1994, 1995 and 1996.
15. DISCONTINUED OPERATIONS
POST PRODUCTION OPERATIONS (VSC POST PRODUCTION INC. (POST))
On July 30, 1992, the Company contributed substantially all of the
assets and liabilities (net liabilities of approximately $2,217) of its post
production subsidiary to a newly-created general partnership, Manhattan
Transfer/Edit Company (MTE Co.), in return for a 22% equity interest. The net
liabilities included debt of approximately $6 million for which MTE Co. became
primarily liable. As a general partner, the Company remained contingently
liable.
The recognition of the $2,217 net liability as income was directly
linked to the extinguishment of the related debt and the corresponding release
of the Company from the remaining contingent liability. Income was to be
recorded on a pro-rata basis with the related debt retirement. As of June 30,
1993, $1,496 of the aforementioned net liability remained.
The Company recorded equity income of $483, representing 22% of the
income of MTE Co. from July 1, 1993 through February 15, 1994.
F-25
<PAGE> 103
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In Thousands)
15. DISCONTINUED OPERATIONS (CONTINUED)
On February 15, 1994, pursuant to a reorganization of MTE Co., the
Company exchanged its 22% equity ownership in MTE Co. for 763,583 shares of IPL,
a corporate successor to MTE Co. IPL simultaneously consummated a public
offering of its stock. These events have released the Company from its
contingent liability on the aforementioned debt allowing the recognition of the
remaining $1,496 as income during the year ended June 30, 1994.
A net gain of $1,648 was recognized when 193,125 of these shares were
sold in conjunction with the public offering of IPL. A net gain of $1,363 was
recognized when 252,181 of the IPL shares held by the Company were given to
subordinated debt holders in partial settlement of an obligation (See Note 17).
The $1,363 represents the excess of fair market value over carrying value of the
related shares. Cash proceeds of the aforementioned transactions were
approximately $4,208.
INTERNATIONAL SERVICES GROUP (AUDIO PLUS VIDEO INTERNATIONAL INC.)
The Company had made a decision to pursue the sale of its international
services group in the beginning of 1994. Revenues and results of operations
prior to the measurement date were not material. Net sales of the international
services group for the period July 1, 1993 through February 15, 1994 were
$6,086. Operating income for this period was $660 net of tax expense of $559.
On February 15, 1994, the Company sold its international services group
to IPL. The proceeds from the sale consisted of $17,430 in cash and $2,750 in
restricted stock of IPL. The Company has recorded a gain on disposition of
$9,443, net of tax effect of $7,429.
DIVERSIFIED PRODUCTS
On January 2, 1997, management, which has the authority to approve the
action, committed the Company to a formal plan to discontinue the operations of
its Diversified Products segment as a condition to the proposed merger with IPL
(see Note 20). The Diversified Products segment principally provides
professional and industrial videotape duplication and blank videotape
distribution.
F-26
<PAGE> 104
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
15. DISCONTINUED OPERATIONS (CONTINUED)
Losses from the discontinued operations of the Diversified Products
segment amounted to $359 in 1994, $74 in 1995 and $636 in 1996, net of
applicable income tax benefit of $24, $ - and $248, respectively.
Revenues of the discontinued operations of the Diversified Products
segment were $13,967 in 1994, $12,312 in 1995 and $13,179 in 1996.
Net assets of the discontinued operations of the Diversified Products
segment as of June 30, 1996, in thousands, consisted of the following:
<TABLE>
<S> <C>
Accounts receivable, net ................ $ 1,953
Inventories ............................. 490
Prepaid expenses and other current assets 44
Fixed assets, net ....................... 645
Other assets ............................ 120
Accounts payable and accrued expenses ... (1,305)
Notes payable ........................... (300)
Other current liabilities ............... (405)
Long-term debt .......................... (67)
-------
$ 1,175
=======
</TABLE>
16. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain property and equipment under leases
accounted for as operating leases. Certain of such leases include escalation
clauses. At June 30, 1996, future minimum rental payments under noncancelable
leases were as follows:
<TABLE>
<CAPTION>
Affiliated Unaffiliated Total
-------------------------------------------
<S> <C> <C> <C>
1997....................................... $514 $193 $707
1998....................................... 300 194 494
1999....................................... 300 194 494
2000....................................... 300 133 433
2001....................................... 75 47 122
Thereafter................................. - 16 16
</TABLE>
F-27
<PAGE> 105
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
16. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS (CONTINUED)
Aggregate rental expense for continuing operations amounted to $1,444,
$1,391 and $1,286 for the years ended June 30, 1994, 1995 and 1996. Affiliated
rental expense amounted to $1,273, $1,146 and $1,177 for the years ended June
30, 1994, 1995 and 1996.
17. EXTRAORDINARY GAIN
On February 15, 1994, the Company arranged to transfer $10,000 cash and
318,181 restricted shares of IPL stock to subordinated debt holders in full
settlement of a $15,000 bond obligation and the related accrued interest of
$8,321. This stock had a carrying value of $969 and a fair market value as of
the date of transfer of $2,332. Approximately $223 of costs were incurred in
negotiating this settlement and have been charged as an offset to gain on debt
extinguishment.
18. TREASURY STOCK
During February 1994, the Company purchased 582,000 shares of its
outstanding common stock from a shareholder and a related trust, for cash of
$440 and certain assets with a carrying value of $120, including $88 of IPL
stock.
On June 30, 1994, the Company retired 1,362,401 shares of common stock
representing all the treasury stock outstanding.
19. SUBSEQUENT EVENTS
Effective July 1, 1996, the Company revised several one year operating
leases for office space with L.I.M.A. Partners into five year leases. The annual
minimum rental payments under these noncancelable leases will be $310.
In August 1996, the Company acquired undeveloped real estate from
L.I.M.A. Partners for $1,000 and entered into a six year mortgage with a
financial institution for $600. The annual principal payments are $100 and bear
interest at prime plus 1%. The transaction, which represented a transfer between
entities under common control, will be recorded at the lower of historical cost
or fair value.
F-28
<PAGE> 106
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(dollars in thousands)
20. PROPOSED MERGER AND ACQUISITION
On June 27, 1997, the Company signed a definitive agreement to merge
("Merger Agreement") with IPL. Subject to the terms and conditions of the Merger
Agreement, the holders of all of the Company's common stock will receive
7,223,445 shares of IPL common stock. The merger will be accounted for as a
reverse acquisition whereby the pre-merger financial statements of the Company
will become the historical financial statements of the successor. The acquired
assets and liabilities of IPL will be recorded at their respective fair market
values at the date of merger. The merger is expected to be consummated during
the fourth quarter of 1997.
In connection with, and as a condition to, the Merger Agreement,
immediately prior to the merger, the Diversified Products segment will be
spun-off to the Company's stockholders in a non-cash dividend and the net assets
of MAL Partners and L.I.M.A. Partners, two real estate partnerships owned by the
principal stockholders of the Company, will be contributed to the Company in the
form of a capital contribution (or repayment of affiliated receivables).
F-29
<PAGE> 107
No person is authorized in connection with any offering made hereby to give any
information or to make any representation not 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 or any underwriter. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained herein is
correct as of any time subsequent to its date. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the registered securities to which it relates. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
TABLE OF CONTENTS
PAGE
----
Available Information...................................
Incorporation of Certain
Information by Reference..............................
Special Note Regarding
Forward-Looking Statements............................
Summary.................................................
Recent Developments.....................................
Combined Company........................................
Selected Financial Data.................................
The Merger..............................................
Use Of Proceeds.........................................
Market Price Data And Dividend Policy...................
Selling Stockholders....................................
Plan Of Distribution....................................
Legal Matters...........................................
Experts.................................................
Unaudited Pro Forma Condensed
Combined Financial Statements........................
Financial Statements of Video
Services Corporation..................................
INTERNATIONAL POST LIMITED
9,785,550 SHARES
COMMON STOCK
PROSPECTUS
JULY [ ], 1997
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........................ $ *
NASD Fee................................................................... *
Printing and Engraving..................................................... *
Legal Fees and Expenses (other than Blue Sky).............................. *
Blue Sky Fees and Expenses................................................. *
Accounting Fees and Expenses............................................... *
Transfer Agent Fees........................................................ *
Travel and Miscellaneous................................................... *
-
Total .............................................................. $ *
--
</TABLE>
- ------------
* To be filed by amendment
All of the above items, except the Securities and Exchange Commission
registration fee and the NASD fee, are estimated. All expenses incurred in
connection with this offering will be borne by the Company, including without
limitation, the reasonable fees and disbursements of counsel retained by the
Selling Stockholders, but excluding underwriting discounts and commissions, if
any.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
(the "Delaware Law") provides, in summary, that directors and officers of
Delaware corporations are entitled, under certain circumstances, to be
indemnified against all expenses and liabilities (including attorneys' fees)
incurred by them as a result of suits brought against them in their capacity as
a director or officer, if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful, provided that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, they
are fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper. Any such indemnification may be made by the corporation
only as authorized in each specific case upon a determination by the
stockholders or disinterested directors that indemnification is proper because
the indemnitee has met the applicable standard of conduct. Article 8 of the
Company's Certificate of Incorporation entitles officers and
II-1
<PAGE> 109
directors of the Company to indemnification to the fullest extent permitted by
Section 145 of the Delaware Law, as the same may be supplemented from time to
time.
Article 9 of the Company's Certificate of Incorporation, as amended,
provides that no director shall have any personal liability to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except that such provision does not limit or eliminate the liability
of any director (i) for breach of such director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) under Section
174 of the Delaware Law (involving certain unlawful dividends or stock purchases
or redemptions), or (iv) for any transaction from which such director derived an
improper personal benefit.
The Company maintains a primary directors and officers liability and
company reimbursement insurance policy (the "Policy") which, among other things,
provides for (i) payment on behalf of any of the Company's past, present or
future directors or officers against Loss (as defined in the Policy) as a result
of any Claim (as defined in the Policy) first made against the directors or
officers of the Company for any error, misstatement, misleading statement, act,
omission, neglect, or breach of duty committed or attempted, or allegedly
committed or attempted (each a "Wrongful Act"), occurring after August 1, 1992,
by one or more directors or officers of the Company, individually or
collectively, in their respective capacities as such, or for any matter claimed
against one or more directors or officers of the Company solely by reason of
their status as such, except for such Loss paid by the Company to any director
or officer of the Company as indemnification, and (ii) payment on behalf of the
Company against Loss for which the Company is required or permitted to pay as
indemnification to any director or officer of the Company as the result of any
Claim first made against any director or officer of the Company for any Wrongful
Act. The Policy does not cover Loss arising from any Claim made against the
Company or its directors or officers stemming from, among other things, a Claim
(a) brought about or contributed to by the fraudulent, dishonest or criminal act
or omission of a director or officer of the Company, provided that a judgment or
other final adjudication adverse to such director or officer establishes that
fraudulent, dishonest or criminal acts were committed by such director or
officer, or (b) based upon or attributable to any of the directors or officers
of the Company gaining in fact any personal profit or advantage to which they
were not legally entitled. The Company also maintains a supplemental insurance
and company reimbursement policy providing substantially similar coverage as
discussed above.
The Merger Agreement provides that, for a period of six (6) years after
the Effective Time, the Company will not amend Article 9 of its Certificate of
Incorporation (as in effect at the Effective Time) in a manner that would
adversely affect the rights thereunder of any individuals who at any time prior
to and at the Effective Time were or are directors or officers of the Company in
respect of their terms of office or acts or omissions occurring at or prior to
or after the Effective Time (including, without limitation, the transactions
contemplated by the Merger Agreement) unless such amendment or modification is
required by law.
Further, the Merger Agreement provides that, after the Effective Time,
the Company will,
II-2
<PAGE> 110
to the fullest extent permitted under applicable law, indemnify and hold
harmless each present and former director, officer, employee, fiduciary and
agent of the Company, Video and their respective subsidiaries and each fiduciary
and agent of each such director and officer (collectively, the "Fiduciary
Indemnified Parties") against all costs and expenses (including attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and settlement
amounts paid in connection with any claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), whether
civil, criminal, administrative or investigative, arising out of or pertaining
to any action or omission in their capacity as a director, officer, employee,
fiduciary or agent, whether occurring before or after the Effective Time, until
the expiration of the statute of limitations relating thereto (and will pay any
expenses in advance of the final disposition of such action or proceeding to
each Fiduciary Indemnified Party to the fullest extent permitted under the
Delaware Law upon receipt from the Fiduciary Indemnified Party to whom expenses
are advanced of any undertaking to repay such advances required under the
Delaware Law). In the event of any such claim, action, suit, proceeding or
investigation, the Company will pay the reasonable fees and expenses of counsel
selected by the Fiduciary Indemnified Parties, which counsel selected by the
Fiduciary Indemnified Parties will be reasonably satisfactory to the Company,
promptly after statements therefor are received and the Company will cooperate
in the defense of any such matter; provided, however, that the Company will not
be liable for any settlement effected without its written consent (which consent
will not be unreasonably delayed or withheld); and provided, further, that the
Company will not be obligated to pay the fees and expenses of more than one
counsel (plus appropriate local counsel) for all Fiduciary Indemnified Parties
in any single action except to the extent that two or more of such Fiduciary
Indemnified Parties will have conflicting interests in the outcome of such
action, in which case such additional counsel (including local counsel) as may
be required to avoid any such conflict or likely conflict may be retained by the
Fiduciary Indemnified Parties at the expense of the Company; and provided
further that, in the event that any claim for indemnification is asserted or
made within the period prior to the expiration of the applicable statute of
limitations, all rights to indemnification in respect of such claim will
continue until the disposition of such claim.
The Merger Agreement also provides that the Company will also use its
reasonable efforts to maintain in effect for six (6) years from the Effective
Time, if available, the current directors' and officers' liability insurance
policies maintained by the Company and Video (provided that the Company may
substitute therefor policies containing terms and conditions, including the
amounts of coverage, which are not materially less favorable) with respect to
matters occurring prior to the Effective Time, provided, however, that in no
event shall the Company be required to expend more than an amount per year equal
to 150% of current annual premiums paid by the Company and Video for such
insurance.
II-3
<PAGE> 111
ITEM 16. EXHIBITS
The following exhibits are filed as part of this the Registration
Statement.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger, dated as of June 27, 1997, by
and among International Post Limited, Video Services
Corporation and Louis H. Siracusano, Arnold P. Ferolito and
Donald H. Buck (incorporated by reference to Exhibit 10.57 to
the Company's Current Report on Form 8-K filed on July 8,
1997, file number 000- 23388) .
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Shereff, Friedman, Hoffman & Goodman, LLP (included
in Exhibit 5.1).
24.1 Power of Attorney (appears on signature page).
---------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
this Registration Statement (or the most
recent post- effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in this Registration
Statement. Notwithstanding the foregoing,
any increase or decrease in volume of
securities offered (if the total dollar
value of securities offered would not exceed
that which was registered) and any deviation
from the low or high end of the estimated
maximum
II-4
<PAGE> 112
offering range may be reflected in the form
of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b)
promulgated under the Securities Act of 1933
if, in the aggregate, the changes in volume
and price represent no more than a 20%
change in the maximum aggregate offering
price set forth in the "Calculation of
Registration Fee" table in this Registration
Statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in this Registration
Statement or any material change to such
information in this Registration Statement;
Provided, however, that paragraphs (a)(1)(i) and (ii) shall not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Company pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-5
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of New York, State of New York, on this 18th day of July,
1997.
INTERNATIONAL POST LIMITED
By: /s/ Martin Irwin
------------------------------
Martin Irwin
President and Chief
Executive Officer
<PAGE> 114
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Signature Title Date
------------------ ----- ----
<S> <C> <C>
President, Chief Executive Officer
/s/ Martin Irwin and Director
- ------------------------------- (Principal Executive Officer) July 18, 1997
Martin Irwin
Vice President, Treasurer and
/s/ Gary R. Strack Secretary
- ------------------------------- (Principal Financial and Accounting July 18, 1997
Gary R. Strack Officer)
/s/ Robert H. Alter
- ------------------------------- Director July 18, 1997
Robert H. Alter
/s/ Julius Barnathan
- ------------------------------- Director July 18, 1997
Julius Barnathan
/s/ Terrence A. Elkes
- ------------------------------- Director July 18, 1997
Terrence A. Elkes
/s/ Kenneth F. Gorman
- ------------------------------- Director July 18, 1997
Kenneth F. Gorman
/s/ Jeffrey J. Kaplan
- ------------------------------- Director July 18, 1997
Jeffrey J. Kaplan
/s/ Louis H. Siracusano
- ------------------------------- Director July 18, 1997
Louis H. Siracusano
</TABLE>
<PAGE> 115
INTERNATIONAL POST LIMITED
FORM S-3
REGISTRATION STATEMENT
EXHIBIT INDEX
Exhibit
-------
2.1 Agreement and Plan of Merger, dated as of June 27, 1997, by
and among International Post Limited, Video Services
Corporation and Louis H. Siracusano, Arnold P. Ferolito and
Donald H. Buck (incorporated by reference to Exhibit 10.57 to
the Company's Current Report on Form 8-K filed on July 8,
1997, file number 000-23388) .
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP*
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Shereff, Friedman, Hoffman & Goodman, LLP (included
in Exhibit 5.1)
24.1 Power of Attorney (appears on signature page)
- ----------
*To be filed by amendment.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement on Form S-3 of our report dated
September 25, 1996 included in International Post Limited's Form 10-K for the
year ended July 31, 1996 and to all references to our Firm included in this
Registration Statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New York, New York
July 17, 1997
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Selected Financial
Data" and "Experts" and to the use of our report dated September 20, 1996
(except for Note 15 as to which the date is January 2, 1997 and Note 20 as to
which the date is June 27, 1997), with respect to the financial statements of
Video Services Corporation included in the Registration Statement (Form S-3,
File No. 333-[ ]) and related Prospectus of International Post Limited for the
registration of 9,785,550 shares of its common stock.
/s/ Ernst & Young LLP
Ernst & Young LLP
White Plains, New York
July 17, 1997
