<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1997
REGISTRATION NO. 333-31745
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VIDEO SERVICES CORPORATION
(FORMERLY, INTERNATIONAL POST LIMITED)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3735647
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
</TABLE>
240 PEGASUS AVENUE
NORTHVALE, NEW JERSEY 07647
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LOUIS H. SIRACUSANO
VIDEO SERVICES CORPORATION
240 PEGASUS AVENUE
NORTHVALE, NEW JERSEY 07647
(201) 767-1000
(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:
MARJORIE SYBUL ADAMS, ESQ.
GORDON ALTMAN BUTOWSKY
WEITZEN SHALOV & WEIN
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036
(212) 626-0800
AND
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. [ ]
------------------------
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.
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<PAGE> 2
PROSPECTUS
9,785,550 SHARES
VIDEO SERVICES CORPORATION
(FORMERLY, 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 Video Services Corporation,
formerly known as International Post Limited (the"Company"). Of such shares,
7,223,445 were issued in connection with the merger (the "Merger") of
International Post Limited ("IPL") 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 IPL, Video and all of Video's
stockholders (such amount included 212,096 shares of Common Stock which were
issued to replace an equal number of shares of Common Stock owned by Video which
were canceled upon the Merger). The Merger became effective on August 27, 1997
(the "Effective Time"). At the Effective Time, the Company's Certificate of
Incorporation was amended to change its corporate name to "Video Services
Corporation." The remaining 2,562,105 shares of Common Stock offered hereby 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.") As used herein, the "Company" refers to Video Services Corporation
after giving effect to the Merger, and "Video" and "IPL" refer to such
corporations prior to the Effective Time.
------------------------
SEE "RISK FACTORS" ON PAGE 8 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
"VSCX." On August 27, 1997, the closing sales price of the Common Stock as
reported by The Nasdaq National Market was $2.8125 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 $230,000, 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."
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 August 28, 1997.
<PAGE> 3
AVAILABLE INFORMATION
The Company is (and prior to the Merger, IPL was) subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, is required to file 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 included 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. IPL'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. IPL's Quarterly Report on Form 10-Q for the quarter ended October 31,
1996 (filed on December 11, 1996; file number 000-23388).
3. IPL's Quarterly Report on Form 10-Q for the quarter ended January 31,
1997 (filed on March 13, 1997; file number 000-23388).
4. IPL's Quarterly Report on Form 10-Q for the quarter ended April 30, 1997
(filed on June 13, 1997; file number 000-23388).
5. IPL's Current Report on Form 8-K filed on July 8, 1997 (file number
000-23388).
6. IPL's Proxy Statement for a special meeting of stockholders held on
August 26, 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 IPL'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
2
<PAGE> 4
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: Video Services Corporation, 240 Pegasus
Avenue, Northvale, New Jersey 07647, Attention: Corporate Secretary, telephone
(201) 767-1000.
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.
------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS (INCLUDING, BUT NOT LIMITED TO, STATEMENTS IN "BUSINESS -- OVERVIEW";
"-- BUSINESS STRATEGY" AND "-- PRINCIPAL SERVICES;" "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- VIDEO SERVICES
CORPORATION" 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 MANAGEMENT'S 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 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 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.
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT TO
REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS OR CHANGES IN OTHER FACTORS
AFFECTING SUCH STATEMENTS.
------------------------
3
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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.
THE COMPANY
The Company (through those of its operating subsidiaries which, prior to
the Merger, were subsidiaries of Video) is a leading provider of value-added
video services to a diverse base of customers within the television network,
cable and syndicated programming markets. These 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. The Company 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. The Company 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. Louis H. Siracusano, the Company's
President and Chief Executive Officer, was a principal stockholder and a
director of Video and was Video's Chairman, President and Chief Executive
Officer prior to the Merger.
In addition, the Company (through those of its operating subsidiaries
which, prior to the Merger, were subsidiaries of IPL) 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. The Company's
services also 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 in these areas
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 MERGER
Form of the Merger. On August 27, 1997, Video merged with and into IPL,
with IPL being the surviving corporation, and the separate corporate existence
of Video ceased. All of the assets and liabilities of Video were transferred to,
and assumed by, IPL upon consummation of the Merger. At the Effective Time, the
Company's name was changed from International Post Limited to Video Services
Corporation.
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 were converted into the right to receive an aggregate of 7,223,445 shares
of Common Stock (such amount included 212,096 shares of Common Stock which were
issued to replace an equal number of shares of Common Stock owned by Video which
were canceled at the Effective Time).
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MANAGEMENT OF THE COMPANY AFTER THE MERGER
Mr. Louis H. Siracusano, a director of IPL and the Chairman, President and
Chief Executive Officer and a director of Video, became the President and Chief
Executive Officer of the Company upon consummation of the Merger. 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, joined the Company as a Vice
President, Vice President and Chief Financial Officer, and Vice
President -- Administration, respectively. The post-merger Board of Directors of
the Company (the "Board") consists of seven (7) members, four (4) of whom were
designated by Video and three (3) of whom were designated by IPL. Two (2) of
these directors, Messrs. Raymond L. Steele and Frank Stillo, were not directors
of IPL prior to the Merger. Upon consummation of the Merger, Mr. Martin Irwin, a
director of IPL and the President and Chief Executive Officer of IPL prior to
the Merger, became the Vice Chairman of the Board and Mr. Terrence A. Elkes
remains in his position as the Chairman of the Board. See "The Merger --
Management of the Company after the Merger."
REASONS FOR THE MERGER
The IPL Board of Directors (the "IPL Board") believed that the terms of the
Merger were fair to, and in the best interests of, IPL and IPL'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 IPL Board to independently evaluate and negotiate
the Merger Agreement on behalf of IPL and supervise IPL's due diligence
investigation of Video. The IPL Board also retained Montgomery Securities to
provide a fairness opinion to the IPL Board with respect to the consideration to
be paid in the Merger, and, in connection therewith, Montgomery Securities
rendered an opinion to the IPL Board and the Special Committee that, as of the
date of such opinion, the consideration to be paid in the Merger was fair to IPL
from a financial point of view.
The IPL Board believed that the Merger offered strategic and financial
benefits to IPL and the Stockholders. The IPL Board believed that the Merger
presented a strategic opportunity to IPL 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 market. A summary of the material reasons why the IPL 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 IPL Board believed that the Merger
would create a stronger company with greater resources and a broader range
of products and services to offer IPL's and Video's respective current and
potential customers. The addition of Mr. Siracusano and certain members of
his management team was expected to strengthen the Company's management
team due to their success in operating Video's business and their
familiarity with certain customers and operations of IPL. See "The
Merger -- Management of the Company after the Merger." The IPL Board
further believed that the Company's ability after the Merger to provide an
expanded level and range of services would 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. Prior to the Merger, IPL and
Video provided complementary creative, distribution and technical services
to separate customer bases that have traditionally outsourced such
services. The IPL Board believed that those customers would continue to
outsource such services and that the additional services which could be
offered by the Company after the Merger to IPL's and Video's respective
customer bases would provide a competitive advantage over those companies
that lack this comprehensive outsourcing solution. The IPL Board believed
this outsourcing approach would 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.
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Improved Financial Position. The IPL Board believed that Video was a
company with more predictable revenues than IPL as a result of its
long-term contractual relationships with several of its major customers.
Accordingly, over the long term, the IPL Board believed that the Merger
would 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 IPL Board believed that the Company would be able to
recognize certain cost-saving reductions as a result of the Merger. These
anticipated cost-saving reductions included 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 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,
IPL 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. Substantially all of IPL's and Video's outstanding long-term
indebtedness was refinanced simultaneously with the closing of the Merger
(other than $5,227,000 accreted amount of IPL's subordinated debt which
remains outstanding). The IPL Board believed that a refinancing would
increase the Company's borrowing capacity and result in less restrictive
financial covenants and more favorable interest rates than those applicable
to IPL's and Video's credit facilities. In addition, the IPL Board
considered that, as a result of the Merger, the Company's interest coverage
ratio would increase and its leverage ratio (funded debt to EBITDA) would
decrease. See "The Merger -- Refinancing."
For a more detailed discussion of the factors considered by the IPL Board
in reaching its decision, see "The Merger -- Reasons for the Merger."
ACCOUNTING TREATMENT
The Merger will be accounted for as a reverse acquisition for accounting
and financial reporting purposes with Video being designated as the acquiror and
IPL 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 former stockholders in the Company
after the Merger compared to certain anticipated contributions by Video to the
Company's financial performance after the Merger.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following summary financial data should be read in conjunction with
IPL's historical consolidated financial statements and the notes thereto and
other financial information regarding IPL appearing in IPL's Annual Report on
Form 10-K for the fiscal year ended July 31, 1996 and in IPL'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. IPL's fiscal year ended on July 31 and Video's fiscal year
ended on June 30. The pro forma information is presented using a fiscal year
ending on June 30. The fiscal year 1996 information for IPL and Video has been
audited and all other information is unaudited.
<TABLE>
<CAPTION>
FISCAL YEAR 1996 FIRST NINE MONTHS FISCAL YEAR 1997
------------------------------------ ---------------------------------------
IPL VIDEO PRO FORMA IPL VIDEO PRO FORMA
---------- ---------- ---------- ----------- ----------- -----------
<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(1)................... $ 12,211 $ 3,749 $ 17,646 $ 9,717 $ 1,948 $14,184
</TABLE>
- ---------------
(1) 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 operating performance or cash
flow as a measure of liquidity.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain executive officers and directors of IPL and/or Video became
entitled to certain benefits upon consummation of the Merger. The IPL 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."
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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 was no public market for the
Video Common Stock prior to the Merger. 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 Common Stock issued to replace an equal number of
shares of Common Stock owned by Video which were cancelled upon the Merger) was
determined by negotiations between the Special Committee and Video's
stockholders and may not have been indicative of the value of Video. See "The
Merger -- Reasons for the Merger."
Control. After giving effect to the Merger (but before giving effect to
any sales of Shares, pursuant to this Prospectus or otherwise), the stockholders
of Video own in the aggregate approximately 54.6% of the outstanding Common
Stock (based on the number of shares of Common Stock outstanding as of July 14,
1997, the record date for the meeting of stockholders held to vote on the Merger
Agreement, among other things (the "Record Date")), and are in a position to
control the Company through the election of the Board. Four (4) of the members
of the post-Merger Board 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 IPL's
and Video's 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 IPL and Video successfully could have a material
adverse effect on the Company.
According to certain analyses reviewed by the IPL Board, without assuming
certain anticipated non-pro forma cost-saving reductions, Video and IPL,
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
IPL and Video were taken into account by the IPL 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."
Transaction Charges. The Company incurred 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 IPL and Video,
including the integration of administrative functions.
Leverage and Fixed Charges after the Merger. As of April 30, 1997, IPL had
outstanding debt of approximately $31.0 million and a long-term debt to EBITDA
ratio of 3.2 to 1. Further, IPL 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
IPL's historical consolidated financial statements and the notes thereto and
other financial information regarding IPL appearing in IPL's Annual Report on
Form 10-K for the fiscal year ended July 31, 1996 and IPL'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
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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) effected pursuant
to 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 continues 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 depends 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 IPL's management and the IPL
Board had certain interests in the Merger that were in addition to the interests
of the Stockholders generally. Among other things, the Company has entered 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 IPL's employment agreements with certain of its executive
officers, these executive officers are entitled to certain severance payments as
a result of the Merger. In addition, consummation of the Merger resulted in the
immediate vesting of options outstanding under IPL's long-term incentive plan.
Sale of Shares. As a condition to the consummation of the Merger, pursuant
to this Prospectus the Company has registered the resale by Video's stockholders
of the shares of Common Stock which were issued to them in the Merger (as well
as the sale by The Equitable Life Assurance Society of the United States and
Equitable Deal Flow Fund, L.P. ("Equitable") of its 2,562,105 shares of Common
Stock) and has granted 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. (However, because such shelf registration statement included the
shares of Common Stock beneficially owned by Video which were cancelled at the
Effective Time and replaced by shares covered by the Registration Statement of
which this Prospectus forms a part, such shelf registration statement will be
amended to remove 212,094 shares of Common Stock therefrom, resulting in 381,441
shares of Common Stock covered thereby.) 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 key
executive officers, including Messrs. Siracusano and Buck. 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
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percentage of IPL'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 business is 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 Company's
business is also subject to downturns in the television, programming and
advertising industries.
Dependence on Key Customers. A significant portion of Video's revenues was
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 it 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
"Business -- Principal Services."
Dependence on Transponder Availability. The success of Atlantic Satellite
Communications, Inc.'s ("Atlantic Satellite") 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 the Company's, ability to operate
profitably.
Dilution. The Merger resulted in a decrease in the percentage ownership
positions of the stockholders in the Company. An aggregate of 7,011,349 shares
of Common Stock were issued to Video's stockholders in the Merger (plus an
additional 212,096 shares of Common Stock which were issued to replace an equal
number of shares of Common Stock owned by Video which were cancelled upon the
Merger) which represented approximately 54.6% of the shares of Common Stock
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 the 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 Effective Time. As of
August 27, 1997, the closing sales price of the Common Stock as reported on The
Nasdaq National Market was $2.8125 per share. After the Effective Time (but
before giving effect to any sales of Shares offered hereby), there were
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, 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 Common Stock to
fluctuate significantly. See "Market Price Data and Dividend Policy."
Anti-Takeover Effects. At the Effective Time, the Company's Certificate of
Incorporation was amended to increase (the "Share Amendment") the number of
shares of Common Stock authorized from 15,000,000 to 25,000,000. This increase,
as well as certain other provisions of the Company's Certificate of
Incorporation and Bylaws 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
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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 General Corporation Law of the State of
Delaware which restricts certain business combinations with any "interested"
stockholder as defined in such law.
RECENT DEVELOPMENTS
On August 27, 1997, Video merged with and into IPL with IPL being the
surviving corporation, and the separate corporate existence of Video ceased. At
the Effective Time, the Company's name was changed to Video Services Corporation
and the Common Stock began to trade on The Nasdaq National Market under the
symbol "VSCX." An aggregate of 7,223,445 shares of Common Stock were issued to
Video's stockholders in the Merger (such amount included 212,096 shares of
Common Stock which were issued to replace an equal number of shares of Common
Stock owned by Video which were 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 were owned by certain of the Selling Stockholders
were contributed to Video and, accordingly, transferred to the Company in the
Merger. The shares of Common Stock which were issued to Video's stockholders in
the Merger represented approximately 54.6% of the outstanding shares of Common
Stock immediately after the Merger. A Proxy Statement for the special meeting of
stockholders which was held on August 26, 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.
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BUSINESS
OVERVIEW
The Company, through those of its operating subsidiaries which, prior to
the Merger, were subsidiaries of Video, is a leading provider of value-added
video services to a diverse base of customers within the television network,
cable and syndicated programming markets. These 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, postproduction 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. The Company 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. The Company 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. Louis H. Siracusano, the Company's
President and Chief Executive Officer, was a principal stockholder and a
director of Video, and was Video's Chairman, President and Chief Executive
Officer.
Video was incorporated in 1979 to service select segments of the video
industry which its founders, Messrs. Siracusano, Arnold Ferolito and Martin
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 IPL in 1993. In February 1994, Video sold its
standards conversion business to IPL in connection with IPL'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.
On August 27, 1997, pursuant to the Merger Agreement, Video and IPL merged with
IPL as the surviving corporation. At the Effective Time, the Company's name was
changed to "Video Services Corporation."
In addition, through those of its operating subsidiaries which, prior to
the Merger, were subsidiaries of IPL, the Company 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. The
Company's services also 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 in
these areas 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 post-production 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, IPL's clients
outsourced those services provided by IPL, and the Company expects that such
clients will 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
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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 intends to continue Video's business strategy of capitalizing
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. The Company believes that it will be able to continue to
grow the businesses operated by Video 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.
The Company 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. The Company 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. The Company 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, the Company believes that significant opportunities exist for it to
provide services for the upgrading and conversion of the industry's technical
infrastructure.
Prior to the Merger, Video had 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 itself as a
leader in the conversion to digital television and high-definition television.
In April 3, 1997, Video 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. The Company believes that this
alliance will provide technological leadership for broadcasters in the
conversion process.
In addition, the Company intends to continue IPL's strategy of seeking to
become the leading full-service post-production house for the United States and
international markets and to continue 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, IPL 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 post-production and other
services through strategic acquisitions and internal growth. Historically, IPL
invested significant sums in its infrastructure to ensure that each of its
divisions remained at the technological forefront of the post-production
industry.
PRINCIPAL SERVICES
Satellite and Fiber Optic Transmission Services
Through two of its operating subsidiaries, Atlantic Satellite and
Waterfront Communications Corporation ("Waterfront"), the Company provides
integrated satellite and fiber optic video and data transmission services
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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. The
Company's use of fiber optic and satellite technologies enables it to provide
its customers with rapid and reliable transmission of broadcast quality video
content with a high level of flexibility. The Company 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 the Company's single source transmission
services at competitive rates. The Company 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 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. The
Company 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.
The Company 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. The Company believes that
the combined services provided by Atlantic Satellite and Waterfront have
achieved a reputation for quality and reliability in the
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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"), the Company 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. The Company
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.
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.
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.
The Company 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"), the Company 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. VRI's 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,
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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.
The Company 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.
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.
Video Post-Production Services
The Company 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, 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, l" and
3/4", to meet the needs of the commercial advertising, corporate video,
motion picture, television production and syndicated television program
distribution
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<PAGE> 18
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 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.
SALES, MARKETING AND CUSTOMER SERVICE
Historically, Video marketed 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.
A full-time sales force, together with editors, graphic artists and senior
management, actively market the Company's post-production 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
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broadcasters. Sales and marketing efforts emphasize the needs of the client and
the end-user, technical proficiency, and the Company's global perspective.
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 did not experience 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 the Company until alternative arrangements could be
secured. The Company believes that there are alternative adequate sources of
components of sufficient quality and quantity.
COMPETITION
The competitive video services industry is both specialized and fragmented.
Major competitors for Atlantic Satellite's transmission services include
Micronet (a subsidiary of Lenfest Communications, Inc.), Group W (a subsidiary
of Westinghouse Electric Corporation), Keystone (a subsidiary of French Telecom)
and Gateway (a subsidiary of VYVX, Inc.). Some of these competitors have
significantly greater resources than the Company. 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 the
Company 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, the Company 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. The Company believes that the ability of its
operating subsidiaries to cross-market to existing customers using other
services offered by the Company's other subsidiaries provides the Company with a
competitive advantage over many competitors who lack the full complement of
services provided by the Company.
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 for post-production services are located in New York
City, one of the principal domestic markets for such services. Certain of these,
as well as other competitors of the Company, have greater financial resources
than the Company.
With regard to its post-production services, the Company competes on the
basis of customer satisfaction with the range, quality and pricing of its
offered services. The Company also competes in this area on the basis of its
ability to attract and retain qualified, highly skilled personnel. The Company
believes that prices for its post-production 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
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<PAGE> 20
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 customers for which it provides post-production services (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 such
customers.
Major competitors of the Company in providing standards conversion services
include Devlin Video Services, Magno Sound & 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's corporate headquarters (which are owned by the Company) are
located at 240 Pegasus Avenue, Northvale, New Jersey ("240 Pegasus") where
Atlantic Satellite also occupies an aggregate of approximately 15,000 square
feet plus outdoor antenna pads. The Company owns another facility at 183 Oak
Tree Road in Tappan, New York ("183 Oak Tree"), which is adjacent to the 240
Pegasus property in which Atlantic Satellite and VRI also occupy approximately
13,000 and 7,000 square feet, respectively. Atlantic Satellite has leased 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, the Company
subleases approximately 50,000 square feet at 235 Pegasus Avenue, Northvale, New
Jersey for general and warehouse purposes from an entity owned by Messrs.
Siracusano and Ferolito, which in turn leases such property from an unaffiliated
third party. The terms of the lease and the sublease are substantially
identical. In addition, the Company also owns approximately 8 acres of vacant
land in Northvale, New Jersey.
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. AFA leases from an entity owned by Messrs.
Siracusano and Ferolito 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.
The Company leases six principal production facilities, three located in
New York City, and three in South Florida. The Company's three New York City
production facilities consist of approximately 68,000 square feet. 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. In addition,
the Company owns the Company's Northvale, New Jersey production facility which
consists of approximately 38,000 square feet. The three South Florida production
facilities consist of approximately 42,000 square 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.
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
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<PAGE> 21
under licenses issued by the FCC. Atlantic Satellite holds the following four
(4) satellite earth station FCC licenses:
<TABLE>
<CAPTION>
LICENSE EXPIRATION
CALL SIGN 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, the
Company will rely (as Video has done historically) 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. The Company
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 the Company.
BACKLOG
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
After giving effect to the Merger, the Company had a total of approximately
500 employees. None of the Company's employees is represented by a labor union
or is subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and believes that its employee relations are
satisfactory.
LEGAL PROCEEDINGS
The Company 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 management that their outcomes will not have a material
adverse effect on the Company.
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<PAGE> 22
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
"VSCX" (and was included under the symbol "POST" prior to the Merger). The
Common Stock began trading on February 8, 1994 at the effective time of IPL's
initial public offering. Prior to such time, there was no public market for the
Common Stock. Prior to the Merger, there was no public market for Video's common
stock.
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>
HIGH LOW
----- ----
<S> <C> <C>
1995 FISCAL YEAR
First Quarter................................................. $9 1/4 $7 3/4
(August 1 to October 31, 1994)
Second Quarter................................................ 9 3 1/2
(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)
1996 FISCAL YEAR
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)
1997 FISCAL YEAR
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................................................ 3 3/4 2 7/8
(May 1 to July 31, 1997)
1998 FISCAL YEAR
First Quarter................................................. 3 1/16 2 3/4
(August 1 to August 27, 1997)
</TABLE>
On August 27, 1997, the closing sales price of the Common Stock as reported
by The Nasdaq National Market was $2.8125 per share.
No cash dividends have ever been declared by the Company on the Common
Stock. The Company intends to continue 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 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.
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<PAGE> 23
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 IPL Board unanimously determined (with Messrs. Siracusano and
Barnathan, both of whom were directors of Video, abstaining) that the terms of
the Merger, which were established through arm's-length negotiations with Video,
were fair to, and in the best interests of, IPL and 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 IPL Board
to independently evaluate and negotiate the Merger Agreement on behalf of IPL
and supervise IPL's due diligence investigation of Video. In addition, the IPL
Board retained Montgomery Securities to provide a fairness opinion to the IPL
Board with respect to the consideration to be paid in the Merger. The IPL Board
believed that the Merger presented a strategic opportunity to IPL 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 IPL 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 IPL Board believed that the Merger would create a stronger company
with greater resources and a broader range of products and services to
offer IPL's and Video's respective current and potential customers. The
addition of Mr. Siracusano and certain members of his management team was
expected to strengthen the Company's management team due to their success
in operating Video's business and their familiarity with certain
customers and operations of IPL. See "-- Management of the Company after
the Merger." The IPL Board further believed that the Company's ability
after the Merger to provide an expanded level and range of services would
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
Prior to the Merger, IPL and Video provided complementary creative,
distribution and technical services to separate customer bases that have
traditionally outsourced such services. The IPL Board believed that those
customers would continue to outsource such services and that the
additional services which can be offered by the Company after the Merger
to IPL's and Video's respective customer bases would provide a
competitive advantage over those companies that lack this comprehensive
outsourcing solution. The IPL Board believed this outsourcing approach
would 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 IPL Board believed that Video was a company with more predictable
revenues than IPL as a result of its long-term contractual relationships
with several of its major customers. Accordingly, over the long term, the
IPL Board believed that the Merger would 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."
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<PAGE> 24
- Cost Reduction Opportunities
Because of the resulting increase in the Company's size and the
elimination of certain duplicative functions after the Merger, the IPL
Board believed that the Company would be able to recognize certain cost
saving reductions as a result of the Merger. These anticipated
cost-saving reductions included reductions in costs due to the proposed
elimination of certain duplicative facilities after the Merger (for which
IPL paid $75,000 in rent for fiscal 1996) and termination of certain
identified duplicative administrative personnel of IPL after the Merger
(who received in the aggregate $220,000 from IPL in fiscal 1996). See
Note (i) 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, IPL 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. As of March
31, 1997, Video's long-term indebtedness consisted 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. Video had a $2,100,000 short-term line of credit ($1,759,000
outstanding at March 31, 1997) which was collateralized by accounts
receivable and certain machinery and equipment and bore interest at prime
plus 1.75%. Substantially all of IPL's and Video's outstanding long-term
indebtedness was refinanced simultaneously with the closing of the Merger
through a facility provided by KeyBank (other than $5,227,000 accreted
amount of IPL's subordinated debt which remains outstanding). The IPL
Board believed that this refinancing would increase the Company's
borrowing capacity and result in less restrictive financial covenants and
more favorable interest rates than those applicable to IPL's and Video's
credit facilities. In addition, as a result of the Merger, the Company's
interest coverage ratio would increase and its leverage ratio (funded
debt to EBITDA) would decrease. See "-- Refinancing."
The IPL 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 IPL Board that, as of the date of such opinion, the
consideration to be paid in the Merger was fair to IPL from a financial point of
view. The IPL Board also considered, among other things, (i) information
concerning the respective businesses, prospects, financial performance and
operations of IPL 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) then 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 IPL
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 IPL. Prior to the issuance of the January 8, 1997 press
release, IPL 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 IPL and the
market price of the Common Stock, no alternative to the Merger was deemed to
exist by the IPL Board prior to their approval of the Merger.
The IPL 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 Merger would not be fully realized, if
at all, (ii) the risks associated with integrating the businesses and operations
of IPL and Video,
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<PAGE> 25
(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 IPL by
itself (however, based upon the combined Company's pro forma historical
financial information, no percentage increase was expected) (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Video Services Corporation") 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 IPL 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 IPL Board
concluded that the positive factors outweighed the negative factors cited.
CONTRIBUTION
Pursuant to the Merger Agreement, the following assets were contributed to
Video (or a subsidiary thereof) without the payment of any consideration (other
than shares of Video Common Stock and the assumption of approximately $3,597,000
indebtedness related to these assets: (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 were owned by certain Subchapter S corporations); and
(b) a sublease (the "Mirror Sublease") of the building located at 235 Pegasus
Avenue, Northvale, New Jersey. The Mirror Sublease is 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 mirrors
the terms of the master lease except that the term is one day shorter and
payments are due one day earlier. Approximately eight (8) acres of undeveloped
property located on Union Street, Northvale, New Jersey were sold to Video by
its principal stockholders prior to the Merger.
AMENDMENTS TO CERTIFICATE OF INCORPORATION OF COMPANY
At the Effective Time, the Company's Certificate of Incorporation was
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.
MANAGEMENT OF THE COMPANY AFTER THE MERGER
Directors. The persons listed below constitute the seven-member Board,
each holding office until the next Annual Meeting of Stockholders and until
their respective successors are elected and qualified. Four (4) of the directors
(Messrs. Barnathan, Siracusano, Steele and Stillo) were designated by Video and
three (3) of the directors (Messrs. Alter, Elkes and Irwin) were designated by
IPL. Five (5) of such persons (Messrs. Alter, Barnathan, Elkes, Irwin and
Siracusano) were directors of IPL prior to the Merger. Messrs. Jeffrey J. Kaplan
and Kenneth F. Gorman, directors of IPL prior to the Merger, resigned as
directors at the Effective Time.
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<TABLE>
<CAPTION>
DIRECTOR
SINCE
--------
<S> <C>
Robert H. Alter, 67............................................................... 1993
Robert H. Alter was elected a director of IPL 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 IPL 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
Terrence A. Elkes was elected the Chairman of the Board of IPL in October
1993 and had served on the partnership committee of Manhattan Transfer/Edit
Company ("MTE Co.") from July 1992 to February 1994, when it dissolved upon
consummation of IPL'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 IPL. 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 became the Vice Chairman of the Board upon the Merger and has
served as a director of IPL since October 1993. From October 1993 until the
Effective Time, he served as the President and Chief Executive Officer of
IPL. Mr. Irwin had served as President and 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 IPL'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, 55........................................................... 1993
Louis H. Siracusano was elected a director of IPL 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 IPL's initial public
offering prior to the Merger. He became the President and Chief Executive
Officer of the Company upon the Merger. He 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
International, Inc. ("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.
</TABLE>
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<PAGE> 27
<TABLE>
<CAPTION>
DIRECTOR
SINCE
--------
<S> <C>
Raymond L. Steele, 62............................................................. 1997
Raymond L. Steele became a director upon the Merger and 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.................................................................. 1997
Frank Stillo became a director upon the Merger and 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
Sandy Alexander, Inc., a printing company, and Chief Executive Officer of MGA
Printing Co., a subsidiary of Sandy Alexander, Inc., 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.
Officers. The executive officers of the Company are 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 (prior to the Merger, President
and Chief Executive Officer of IPL)
Louis H. Siracusano...... 55 President and Chief Executive Officer (prior to the Merger,
Chairman, President and Chief Executive Officer of Video)
Donald H. Buck........... 58 Vice President (prior to the Merger, Senior Vice President
of Video)
Christopher A.
Modrzynski............. 41 Vice President and Chief Financial Officer (prior to the
Merger, Senior Vice President and Chief Financial Officer of
Video)
Michael E. Fairbourne.... 44 Vice President -- Administration (prior to the Merger,
Senior Vice President -- Administration of Video)
</TABLE>
For information on the business background of Messrs. Elkes, Irwin and
Siracusano, see "-- Directors" above.
Donald Buck was appointed Vice President of the Company upon the Merger and
prior thereto was 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 was appointed Vice President and Chief Financial
Officer of the Company upon the Merger and prior thereto was 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 was appointed Vice President -- Administration of the
Company upon the Merger and prior thereto was 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
26
<PAGE> 28
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 practice.
REFINANCING
At the Effective Time, substantially all of IPL's and Video's existing
long-term indebtedness was refinanced (other than $5,227,000 accreted amount of
IPL's subordinated debt which has remained outstanding). IPL's pre-merger
indebtedness consisted of 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 were secured by all of the assets of IPL and its
subsidiaries, as well as by all of the capital stock of such subsidiaries. The
loans bore interest at The Bank of New York's Prime rate plus 0.375% or LIBOR
(London Interbank Offered Rate) plus 1.75% per annum. IPL also paid a commitment
fee equal to 0.375% on the unused amount of the revolving loan. As of April 30,
1997, IPL 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. IPL
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 consisted 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 included indebtedness incurred by subsidiaries of Video that were
disposed and spun-off to Video's stockholders prior to the Merger. Video
typically financed its capital requirements on a transactional basis, with
lending institutions taking a security interest in specific equipment for the
life of the loan, which was usually three to four years. Video had a $2,100,000
short-term line of credit ($1,759,000 outstanding at March 31, 1997) which was
collateralized by accounts receivable and certain machinery and equipment and
bore interest at prime plus 1.75%.
In connection with the Merger, substantially all of IPL's and Video's
existing long-term debt was refinanced with a five-year facility provided by
KeyBank (the "Facility") composed of a $33 million term loan and a $17 million
revolving line of credit which bears 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 has the option to choose the applicable interest rate). 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. The Facility is secured by all of the assets of the
Company and its subsidiaries. No significant gain or loss has resulted from the
refinancing. The Facility contains covenants which require the Company to
maintain certain financial ratios and levels of net worth, prohibit dividends
and similar payments and restrict the incurrence of other indebtedness. The
Facility is guaranteed by all of the Company's subsidiaries. See "Unaudited Pro
Forma Condensed Combined Financial Statements."
The proceeds of the Facility were used as follows: approximately $24.7
million was used to refinance IPL's outstanding long-term indebtedness,
approximately $4.5 million was used to refinance Video's outstanding long-term
indebtedness which was assumed by the Company upon the Merger, approximately
$1.8 million was used to refinance Video's outstanding short-term line of credit
which was assumed by the Company upon the Merger. Approximately $3.5 million
will be used to pay the fees and expenses incurred in connection with the
Merger. The remainder of the Facility (approximately $15.5 million) will be used
for future working capital requirements and general corporate purposes.
Certain subordinated debt of IPL incurred in connection with its
acquisition of CABANA corp., formerly known as Big Picture/Even Time Limited
("BPET"), in May 1995 still remains outstanding after the
27
<PAGE> 29
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 forms a part as contemplated by the Merger Agreement, all of the
shares of Common Stock issued to Video's stockholders pursuant to the Merger are
freely transferable under the Securities Act.
Notwithstanding the foregoing registration, each former stockholder of
Video has entered into a Stock Resale Agreement with the Company (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
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 (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; and (v) sales of Common Stock in compliance with the
Tag-Along Rights Agreement discussed in the succeeding paragraph.
Each of the former stockholders of Video, as well as Equitable, Elkes and
Gorman entered 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 owned 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 entered into a registration rights
agreement (the "Video Registration Rights Agreement") with each of Video's
former stockholders under which they are entitled to certain demand, piggyback
and other registration rights. Under the Video Registration Rights Agreement,
Messrs. Siracusano, Ferolito and Buck are entitled to demand on three (3)
occasions after the six (6) 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
28
<PAGE> 30
Stock they received pursuant to the Merger (provided that the Registration
Statement of which this Prospectus forms a part is not then still effective). In
addition, they are entitled to include such shares of Common Stock in certain
registration statements filed by the Company and (in the event that the
Registration Statement of which this Prospectus forms a part is not still
effective), the Company is 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.
ACCOUNTING TREATMENT
The Merger will be accounted for as a reverse acquisition for accounting
and financial reporting purposes with Video being designated as the acquiror and
IPL 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
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
IPL and Video became entitled to receive certain benefits in connection with the
Merger described below.
Video Personnel. Pursuant to the Merger Agreement, the Company has entered
into employment agreements with Messrs. Louis H. Siracusano, the Chairman,
President and Chief Executive Officer of Video prior to the Merger, and Donald
H. Buck, the Senior Vice President of Video prior to the Merger. Each of Messrs.
Siracusano and Buck were also stockholders of Video. Under Mr. Siracusano's
employment agreement with the Company, the Company has agreed 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 has agreed to employ him as a 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
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 of the Board may award a discretionary bonus to
him on an annual basis, (ii) each will be entitled
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<PAGE> 31
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 former principal stockholder of Video and
the Executive Vice President of Video prior to the Merger) has been retained as
a consultant by the Company for a one (1) year period from the Effective Time 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 a director of IPL and Video prior to the Merger) to purchase
5,000 shares of Common Stock from Video at an exercise price of $1.00 per share
granted in January 1995 were cancelled and replaced with options to purchase the
same number of shares of Common Stock on the same terms and conditions from
Video's former stockholders. In addition, at the Effective Time, Mr. Barnathan
also received 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 were cancelled as of the Effective
Time. The number of shares and exercise price of these replacement options were
based on the same conversion ratio applied in determining the number of shares
of Common Stock issued in exchange for the Video Common Stock formerly 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 prior to the Merger, and Edward Shendell, Video's
Secretary and General Counsel prior to the Merger, received 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
were cancelled as of the Effective Time. The number of shares and exercise price
of these replacement options were based on the same conversion ratio applied in
determining the number of shares of Common Stock issued in exchange for the
Video Common Stock formerly 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 prior to
the Merger, received options to purchase approximately 30,000 shares of Common
Stock from Video's former 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 were cancelled as
of the Effective Time. The number of shares and exercise price of these
replacement options were 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.
30
<PAGE> 32
As a result of the Merger, the personnel of Video received, 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.
IPL Personnel. Mr. Louis H. Siracusano, a director of IPL prior to the
Merger, was Video's Chairman, President and Chief Executive Officer and a
director of Video prior to the Merger and a holder of approximately 46% of the
outstanding shares of Video Common Stock. As noted above, Mr. Siracusano became
the President and Chief Executive Officer of the Company upon the Merger, and
Mr. Martin Irwin, a director and the President and Chief Executive Officer of
the IPL prior to the Merger, became the Vice Chairman of the Board. Messrs.
Siracusano and Barnathan, who were both directors of Video prior to the Merger,
abstained from the IPL Board's vote as to the approval of the Merger Agreement
and the transactions contemplated thereby. See above under "Video Personnel"
regarding certain options granted to Mr. Barnathan at the Effective Time.
Jeffrey J. Kaplan, a director of IPL prior to the Merger and its former
Executive Vice President and Chief Financial Officer, is a party to a one-year
consulting agreement with the Company that provided 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 IPL and the President of Audio Plus Video), Daniel Rosen (a Vice
President of IPL and the President of MTE) and Kenneth D. Lorber (a Vice
President of IPL 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 is deemed a Change of Control under these employment
agreements. However, in respect of Mr. Macaluso, in March 1997, Mr. Macaluso
notified IPL 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 is 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 vested and became
exercisable at the Effective Time: 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, such employee's 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
31
<PAGE> 33
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 waived his rights under these
provisions.
IPL entered into a severance agreement with Mr. Irwin, which became
effective as of the Effective Time, whereby Mr. Irwin is 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 former stockholders granted to Mr. Irwin, on a pro rata basis,
options to purchase an aggregate of 75,000 shares of the Common Stock they
received in the Merger at an exercise price of $0.75 per share. Such options
vested 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 were cancelled and replaced with options to
purchase the same number of shares of Common Stock from Video's former
stockholders on the same terms and conditions.
As a result of the Merger, the personnel and certain directors of IPL
received, 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).
32
<PAGE> 34
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
IPL as the acquiree. As such, the net assets of the Company will be recorded at
fair value and Video's pre-Merger stockholders' equity will be retroactively
re-stated 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
shares of Common Stock and the shares of Video Common Stock recorded as an
adjustment to the paid-in capital of the combined Company.
In the opinion of management, 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 IPL and of Video included elsewhere,
or incorporated by reference, herein.
33
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA COMPANY
VIDEO(a) IPL(a) ADJUSTMENTS PRO FORMA
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
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)
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.
34
<PAGE> 36
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA COMPANY
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.
35
<PAGE> 37
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA COMPANY
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.
36
<PAGE> 38
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 IPL (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) Pursuant to the Merger Agreement, the principal stockholders of Video
contributed 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 owned real estate and equipment which was
leased solely to Video and IPL. 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, had 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 consisted 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 -- IPL 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 IPL.
(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 IPL.
The excess cost over the fair value of the acquired net assets will be
amortized over 25 years.
37
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price and allocation of the purchase price is as follows:
<TABLE>
<S> <C> <C>
Consideration (6,227 shares of IPL's Common Stock at $3.40 per
share based upon the fair market value of IPL's Common Stock
over a five day period before and after Video and IPL
announced the transaction and agreed on the purchase
price)...................................................... $21,172
Transaction costs............................................. 3,500
Severance pay for terminated employees of IPL................. 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 IPL as of April 30, 1997........................ $(30,576)
Excess of cost over fair value of net assets acquired of IPL
as of April 30, 1997........................................ 22,429
--------
Identifiable net tangible assets of IPL....................... (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 IPL are assumed to approximate fair value.
(f) In connection with the Merger, Video spun-off certain operations and assets
to its stockholders. On January 2, 1997, management of Video, who had 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 required the cancellation and reissuance of $205 of
Common Stock (212 shares) held by Video upon the Merger.
(h) In connection with the Merger, Video and IPL incurred 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 chief executive officer of IPL (the
"CEO") is no longer be employed by the Company. The CEO has, however,
become a non-employee director (i.e., the Vice Chairman) of the Company.
The CEO and IPL's former chief financial officer ("CFO") have 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
former stockholders of Video granted to the CEO, on a pro rata basis,
options to purchase an aggregate of 75,000 of the shares of the Company's
Common Stock issued in the Merger at an exercise price of $0.75 per share.
Such options vested 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 employed a
new CFO for annual compensation of $175. Video also reviewed facilities
utilized by Video and IPL and has determined that IPL'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,
were duplicative. Video also identified six
38
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
duplicative administrative employees of IPL who would 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, are
entitled to receive severance benefits of two weeks pay based upon an IPL
severance plan. Video committed the Company to vacate the duplicative IPL
facility and terminate the identified IPL personnel and 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 merged with IPL through the
conversion and exchange of all of the shares of Video Common Stock for
shares of IPL's Common Stock, thus making Video the acquiree and IPL the
acquiror for legal purposes. However, because, pursuant to the Merger
Agreement, the former stockholders of Video, upon the consummation of the
Merger, held approximately 54.6% of the outstanding Common Stock, appointed
a majority of the Board of Directors of the Company and supplied a majority
of key management personnel, the Merger will be accounted for as a "reverse
acquisition." IPL will therefore be designated the acquiree and Video the
acquiror for accounting purposes. As such, the net assets of IPL will be
recorded at fair value and the pre-Merger financial statements of Video
will become the historical financial statements of the Company. In
addition, pre-Merger stockholders' equity and earnings per share will be
retroactively restated for the equivalent number of shares received by
Video's former stockholders in the Merger, with differences between the par
value of IPL's and Video's common stock recorded as an adjustment to the
paid-in capital of the Company.
(k) To eliminate intercompany sales between Video and IPL and depreciation
expense related to the profit on sales of equipment which are included as
fixed assets of IPL.
(l) In connection with the Merger, one of the former principal stockholders of
Video is no longer employed by the Company. 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 contributed to
Video (see Note (b) above) in the year ended June 30, 1996 and the nine
months ended March 31, 1997. This stockholder has been retained as a
consultant by the Company for one year at a monthly fee of $5.
(m) Substantially all of IPL's and Video's outstanding long-term indebtedness
was refinanced simultaneously with the closing of the Merger (other than
$5,227 of IPL's subordinated debt which has remained outstanding). In
connection therewith, the Company borrowed $33,000 under a five year term
loan and expects to draw down approximately $1,372 under a five year
$17,000 revolving line of credit provided by KeyBank (collectively, the
"Facility") which bears 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). 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. The Facility is secured by all of the assets of the
Company and its subsidiaries. No significant gain or loss will result from
the refinancing. In addition to refinancing the $30,872 of Video and IPL
debt outstanding at March 31, 1997 (excluding $5,227 of IPL's subordinated
debt which has remained 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
39
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
long-term ($31,000) based upon stated repayment terms. 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 (5.6%) 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>
40
<PAGE> 42
SELECTED FINANCIAL DATA
INTERNATIONAL POST LIMITED
The following table sets forth selected historical consolidated financial
data for IPL, 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 IPL'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 IPL's unaudited historical
consolidated financial statements. The information in the table should be read
in conjunction with IPL's historical consolidated financial statements and the
notes thereto and other financial information regarding IPL appearing in IPL's
Annual Report on Form 10-K for the fiscal year ended July 31, 1996 and in IPL'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. IPL
----------- ------- ----------------------------------------------------------
YEAR
YEAR ENDED YEAR YEAR YEAR NINE MONTHS NINE MONTHS
ENDED JULY ENDED ENDED ENDED ENDED ENDED
JULY 31, 31, JULY 31, JULY 31, JULY 31, APRIL 30, APRIL 30,
1992 1993(1) 1994(2) 1995(2) 1996 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. IPL
----------- ------- --------------------------------------------
AS OF
AS OF JULY AS OF AS OF AS OF AS OF
JULY 31, 31, JULY 31, JULY 31, JULY 31, APRIL 30,
1992 1993(1) 1994(2) 1995(2) 1996 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 IPL gives
effect to the following acquisitions of IPL: (i) the acquisition of the
business of MTE Co., (ii) the acquisition of Audio Plus Video and (iii) the
sale by IPL of 2,300,000 shares of Common Stock in IPL's initial public
offering, as if each of such transactions had been consummated as of August
1, 1992.
41
<PAGE> 43
(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) IPL 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 "-- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Video Services Corporation."
<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) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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>
42
<PAGE> 44
<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) (UNAUDITED)
(IN THOUSANDS)
<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.
43
<PAGE> 45
PRO FORMA-COMBINED COMPANY
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 described elsewhere herein, for the periods 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>
44
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- VIDEO SERVICES CORPORATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following discussion and analysis is based upon Video's historical
consolidated financial statements included elsewhere herein at dates and for
periods ending prior to the Merger and therefore 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
Prior to the Merger, Video's business was 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 its 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. was included in the
net assets of Video which were disposed and spun-off to its stockholders prior
to the Merger. Video's management believed that this transaction would reduce
the anticipated future operating losses from the Diversified Products segment.
(See Note 6 to Video's historical unaudited condensed consolidated financial
statements.)
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, prior to the Merger, received 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.
45
<PAGE> 47
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, prior to the
Merger, received 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 believed that these
additional costs would 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.
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 believed 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. Prior to the Merger, Video negotiated
contracts in respect of its Transmission Services segment that it expected would
provide significant additional revenues and believed that demand for the
services offered by this segment would 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 mainte nance 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
46
<PAGE> 48
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 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.
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,
47
<PAGE> 49
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 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 was 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 provided for borrowings of up to
$2,100 based on working capital levels at that time. The revolving credit
facility was 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 IPL's) was
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.
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.
48
<PAGE> 50
SELLING STOCKHOLDERS
The following securities are covered by this Prospectus:
1. The resale by Louis H. Siracusano of up to 3,349,382 Shares acquired in
connection with the Merger.
2. The resale by Arnold P. Ferolito of up to 3,349,382 Shares acquired in
connection with the Merger.
3. The resale by Donald H. Buck of up to 524,681 Shares 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, 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.
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP OWNERSHIP
OF COMMON STOCK OF COMMON STOCK
PRIOR TO OFFERING NUMBER OF AFTER OFFERING
----------------------- SHARES TO BE ------------------
STOCKHOLDERS NUMBER PERCENT SOLD IN NUMBER PERCENT
- --------------------------------------- --------- ------- OFFERING ------ -------
------------
<S> <C> <C> <C> <C> <C>
Louis H. Siracusano.................... 3,352,882(1) 25.33% 3,349,382 3,500 *
Arnold P. Ferolito..................... 3,350,382(1) 25.31% 3,349,382 1,000 *
Donald H. Buck......................... 525,681(1) 3.97% 524,681 1,000 *
The Equitable Life Assurance Society of
the United States.................... 928,347(2) 7.01% 928,347 0 *
Equitable Deal Flow Fund, L.P.......... 1,633,758(2) 12.34% 1,633,758 0 *
</TABLE>
- ---------------
* Less than 1%
(1) Messrs. Elkes and Gorman have an option to purchase 14,616; 14,616 and 768
of Messrs. Siracusano's, Ferolito's and Buck's shares, respectively. Mr.
Barnathan has an option to purchase 17,052; 17,052 and 896 of Messrs.
Siracusano's, Ferolito's and Buck's shares, respectively. Mr. Irwin also
received, at the Effective Time, 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 is President and Chief Executive Officer of the
Company. Mr. Siracusano was elected a director of IPL 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 IPL's initial public offering. He
served as the Chairman, Chief Executive Officer and a director of Video from
1986 and President from 1989 to the Effective Time. Mr. Siracusano also served
as President of Audio Plus Video from July 1989 to February 1994, at which time
it was acquired by IPL from Video. Mr. Siracusano was a founder of Video and
49
<PAGE> 51
has served in various capacities with Video since its formation. Mr. Siracusano
was a principal stockholder of Video.
Arnold P. Ferolito was a principal stockholder of Video and, prior to the
Merger, was the Executive Vice President of Video. Mr. Ferolito has been
retained as a consultant by the Company after the Merger for one year at a
monthly fee of $5,000.
Donald H. Buck is a Vice President of the Company. Prior to the Merger, Mr.
Buck was a Senior Vice President of Video from August 1987, the President of
Atlantic Satellite (a former Video subsidiary) from August 1992 and the
President of Waterfront (a former Video subsidiary) from April 1993. Mr. Buck
was a stockholder of Video.
Notwithstanding the foregoing, each stockholder of Video has entered into a
Stock Resale Agreement with the Company 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.
50
<PAGE> 52
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 forms 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 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
51
<PAGE> 53
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.
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
IPL'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.
52
<PAGE> 54
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
<TABLE>
<S> <C>
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
</TABLE>
<PAGE> 55
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>
Note: The balance sheet at June 30, 1996 has been derived from the audited
consolidated balance sheet at that date.
See accompanying notes to unaudited condensed consolidated financial statements.
F-1
<PAGE> 56
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> 57
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> 58
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.
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.
F-4
<PAGE> 59
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-5
<PAGE> 60
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 61
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
<TABLE>
<S> <C>
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
</TABLE>
F-7
<PAGE> 62
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.
LOGO
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> 63
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> 64
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> 65
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 Stock....... (582,000) -- -- (560) -- (560)
Retirement of Treasury Stock..... -- (43) (150) 3,019 (2,826) --
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 Stock......... 38,000 19 19
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> 66
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> 67
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.
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.
F-13
<PAGE> 68
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-14
<PAGE> 69
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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>
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>
F-15
<PAGE> 70
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
F-16
<PAGE> 71
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
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
F-17
<PAGE> 72
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-18
<PAGE> 73
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1995 and 1996, the Company had amounts receivable from officers
of $158 and $326, respectively.
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.
F-19
<PAGE> 74
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
------- ------- -------
Income (loss) before income taxes, discontinued
operations and extraordinary items.................. $(4,321) $ 223 $ 1,999
======= ======= =======
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>
F-20
<PAGE> 75
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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-21
<PAGE> 76
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
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.
F-22
<PAGE> 77
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
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.
F-23
<PAGE> 78
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-24
<PAGE> 79
======================================================
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
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Available Information.................. 2
Incorporation of Certain Information by
Reference............................ 2
Special Note Regarding Forward-Looking
Statements........................... 3
Summary................................ 4
Risk Factors........................... 8
Recent Developments.................... 11
Business............................... 12
Use of Proceeds........................ 21
Market Price Data and Dividend
Policy............................... 21
The Merger............................. 22
Unaudited Pro Forma Condensed Combined
Financial Statements................. 33
Selected Financial Data................ 41
Management's Discussion and Analysis of
Financial Condition and Results of
Operations -- Video Services
Corporation.......................... 45
Selling Stockholders................... 49
Plan of Distribution................... 51
Legal Matters.......................... 52
Experts................................ 52
Financial Statements of Video Services
Corporation.......................... F-1
</TABLE>
======================================================
VIDEO SERVICES
CORPORATION
(FORMERLY INTERNATIONAL
POST LIMITED)
9,785,550 SHARES
COMMON STOCK
------------------------
PROSPECTUS
------------------------
AUGUST 28, 1997
======================================================
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee...................... $ 8,525.30
NASD Fee................................................................. N/A
Printing and Engraving................................................... 80,000
Legal Fees and Expenses (other than Blue Sky)............................ 125,000
Blue Sky Fees and Expenses............................................... N/A
Accounting Fees and Expenses............................................. 10,000
Transfer Agent Fees...................................................... N/A
Travel and Miscellaneous................................................. 6,474.70
----------
Total.......................................................... $ 230,000
==========
</TABLE>
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 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
II-1
<PAGE> 81
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, 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
II-2
<PAGE> 82
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.
ITEM 16. EXHIBITS
The following exhibits are filed as part of this the Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
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).
</TABLE>
- ---------------
* Previously filed.
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 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.
II-3
<PAGE> 83
(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-4
<PAGE> 84
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 Amendment No. 1 to
the 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
28th day of August, 1997.
VIDEO SERVICES CORPORATION
By: /s/ LOUIS H. SIRACUSANO
------------------------------------
Louis H. Siracusano
President and Chief Executive
Officer
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>
/s/ LOUIS H. SIRACUSANO President, Chief Executive August 28, 1997
- ------------------------------------------ Officer and Director (Principal
Louis H. Siracusano Executive Officer)
/s/ CHRISTOPHER A. MODRZYNSKI Vice President and Chief August 28, 1997
- ------------------------------------------ Financial Officer (Principal
Christopher A. Modrzynski Financial and Accounting
Officer)
/s/ ROBERT H. ALTER Director August 28, 1997
- ------------------------------------------
Robert H. Alter
/s/ JULIUS BARNATHAN Director August 28, 1997
- ------------------------------------------
Julius Barnathan
/s/ TERRENCE A. ELKES Director August 28, 1997
- ------------------------------------------
Terrence A. Elkes
/s/ MARTIN IRWIN Director August 28, 1997
- ------------------------------------------
Martin Irwin
/s/ RAYMOND L. STEELE Director August 28, 1997
- ------------------------------------------
Raymond L. Steele
/s/ FRANK STILLO Director August 28, 1997
- ------------------------------------------
Frank Stillo
</TABLE>
II-5
<PAGE> 85
INTERNATIONAL POST LIMITED
FORM S-3
REGISTRATION STATEMENT
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <S> <C>
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)....
</TABLE>
- ---------------
* Previously filed.
II-6
<PAGE> 1
EXHIBIT 5.1
August 28, 1997
Video Services Corporation (formerly, International Post Limited)
240 Pegasus Avenue
Northvale, New Jersey 07647
Dear Sirs:
Video Services Corporation (formerly, International Post Limited), a
Delaware corporation (the "Company"), intends to transmit for filing with the
Securities and Exchange Commission Amendment No. 1 to a registration statement
on Form S-3 under the Securities Act of 1933, as amended (the "Registration
Statement"), relating to 9,785,550 shares of the Company's common stock, par
value $.01 per share (the "Common Stock"), which were either issued pursuant to
the terms of the Agreement and Plan of Merger, dated as of June 27, 1997, among
International Post Limited, Video Services Corporation ("Video") and all of the
stockholders of Video, or are currently outstanding (the "Shares"). The Shares
are being offered for sale by the selling stockholders named in the Registration
Statement (the "Selling Stockholders"). This opinion is an exhibit to the
Registration Statement.
We have acted as counsel to the Company in connection with the proposed
offer and sale of the Shares as contemplated by the Registration Statement.
However, we are not general counsel to the Company and would not ordinarily be
familiar with or aware of matters relating to the Company unless they are
brought to our attention by representatives of the Company.
We have examined copies (in each case signed, certified or otherwise proved
to our satisfaction) of the Company's Certificate of Incorporation and By-Laws
as presently in effect, minutes and other instruments evidencing actions taken
by the Company's directors and stockholders, and such other documents and
instruments relating to the Company and the proposed offering as we have deemed
necessary under the circumstances. In our examination of all such agreements,
documents, certificates and instruments, we have assumed the genuineness of all
signatures and the authenticity of all agreements, documents, certificates and
instruments submitted to us as originals and the conformity with the originals
of all agreements, instruments, documents and certificates submitted to us as
copies. Insofar as this opinion relates to securities to be issued in the
future, we have assumed that all applicable laws, rules and regulations in
effect at the time of such issuance are the same as such laws, rules and
regulations in effect as of the date hereof.
We note that we are members of the Bar of the State of New York and that we
are not admitted to the Bar of any other state. Insofar as this opinion may
involve the laws of the State of Delaware, our opinion is based solely upon our
reading of the Delaware General Corporation Law as reported in the Prentice-Hall
Corporation Law Service.
Based on the foregoing, and subject to and in reliance on the accuracy and
completeness of the information relevant thereto provided to us, it is our
opinion that:
1. The Company has been duly incorporated under the laws of the State
of Delaware and has an authorized capital stock consisting of 25,000,000
shares of Common Stock and 3,000,000 shares of preferred stock, par value
$.01 per share.
2. The Shares have been duly authorized, and are legally and validly
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and as an exhibit to any filing made by the Company under
the securities or "Blue Sky" laws of any state.
<PAGE> 2
Video Services Corporation (formerly, International Post Limited)
August 28, 1997
Page 2
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes, except as expressly provided in the
preceding paragraph.
Very truly yours,
/s/ SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Amendment No. 1 to the 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 Amendment No. 1 to the Registration Statement.
/s/ ARTHUR ANDERSEN
New York, New York
August 25, 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 Amendment No. 1 to the Registration
Statement (Form S-3, File No. 333-31745) and related Prospectus of Video
Services Corporation (formerly, International Post Limited) for the registration
of 9,785,550 shares of its common stock.
Ernst & Young Sig
White Plains, New York
August 26, 1997
