<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
August 27, 1997
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Date of Report (Date of earliest event reported)
Video Services Corporation
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
000-23388
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(Commission file number)
13-3735647
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(IRS Employer Identification No.)
240 Pegasus Avenue
Northvale, New Jersey 07647
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(Address of principal executive offices)
(201) 767-1000
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(Registrant's telephone number, including area code)
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(Former name or former address, if changed since last report)
<PAGE> 2
Item 7 of the Registrant's current report on Form 8-K dated September 4,
1997 is hereby amended in its entirety to read as follows:
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired. The consolidated financial
statements of Video Services Corporation and its Subsidiaries as of June 30,
1996 and 1997 and for the years ended June 30, 1995, 1996 and 1997 begin at page
F-1.
(b) Pro Forma Financial Information of Business Acquired.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On August 27, 1997, Video Services Corporation ("Video") merged with and
into International Post Limited ("IPL") with IPL as the surviving corporation
for legal purposes. At the effective time of the merger, IPL changed its name to
Video Services Corporation (herein referred to as "The Company After the
Merger"). The merger was accounted for as a reverse acquisition whereby the
pre-merger financial statements of Video became the historical financial
statements of the successor. As such, the net assets of IPL have been recorded
at fair value and Video's pre-merger stockholders' equity has been retroactively
restated for the equivalent number of shares of common stock of The Company
After the Merger which were received by its stockholders in the merger, with
differences between the par value of the IPL common stock and the Video common
stock recorded as an adjustment to the paid-in capital of The Company After the
Merger. An aggregate of 7,011,349 shares of common stock of The Company After
the Merger 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 IPL common stock owned by Video which were canceled upon the merger).
Such shares in the aggregate represented approximately 54.6% of the outstanding
shares of Common Stock immediately after the merger.
In connection with, and as a condition to, the merger, immediately prior
to the merger, Video's Diversified Products segment was spun-off to Video'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 Video, were incorporated and, in connection therewith,
contributed to Video in the form of a capital contribution.
Also, in connection with the merger, The Company After the Merger
refinanced all of IPL's and Video's long-term indebtedness (excluding capital
lease obligations, Video's mortgage payable, IPL's subordinated debt and IPL's
note payable with Cognitive Communications, LLC), including lines of credit,
with a $33 million term loan and a $17 million revolving line of credit. The
Diversified Products spin-off, debt refinancing and contribution of the two real
estate partnerships are collectively referred to as the "related transactions."
The following unaudited pro forma condensed combined balance sheet as of
June 30, 1997 presents the financial position of The Company After the Merger
assuming the merger and the related transactions occurred as of June 30, 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 statement of income
for the year ended June 30, 1997 presents the results of operations of The
Company After the Merger assuming the merger and the related transactions
occurred as of July 1, 1996. 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.
In the opinion of The Company After the Merger's management, all
adjustments necessary to present fairly such pro forma condensed combined
financial statements have been made. The unaudited pro forma condensed combined
financial statements are not necessarily indicative of the actual results of
operations that would have occurred had the merger and the 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 statements should be read in conjunction with the accompanying notes
and the historical consolidated financial statements and notes thereto of IPL
filed on Form 10-K and of Video included herein, respectively.
<PAGE> 3
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
"COMPANY
AFTER
PRO FORMA THE MERGER"
VIDEO(a) IPL(a) ADJUSTMENTS PRO FORMA
-------- ------ ----------- ---------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 390 $ 154 $ (13)(b) $ 531
Accounts receivable, net 6,173 9,699 (108)(c) 15,821
57 (b)
Inventories 688 421 -- 1,109
Costs and estimated earnings
in excess of billings on
uncompleted contracts 363 -- -- 363
Prepaid expenses and other
current assets 574 864 37(b) 1,475
Deferred taxes 674 479 460(d) 1,613
------- ------- -------- -------
Total current assets 8,862 11,617 433 20,912
Fixed assets, net 5,852 28,479 3,224(b) 37,555
Excess of cost over fair
value of net assets
acquired, net -- 22,240 19,168 (e) 19,168
(22,240)(e)
Deferred income taxes 622 1,759 2,381
Receivable from affiliates 1,192 (1,192)(b) -
Receivable from officers 211 -- (211)(f) -
Other assets 3,428 2,453 (205)(g) 1,914
(2,539)(h)
528 (b)
(1,336)(f)
(415)(n)
Net assets to be disposed 634 - (634)(f) -
------- ------- -------- -------
Total assets $20,801 $66,548 $ (5,419) $81,930
======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable and
accrued expenses $ 7,812 $ 4,964 $ (3,500)(h)(m) $10,140
961 (h)
(1,171)(m)
1,149 (i)
(108)(c)
33 (b)
Billings in excess of costs
and estimated earnings
on uncompleted contracts 462 -- -- 462
Current portion of long-
term debt 149 4,245 261 (b) 4,119
(3,536)(m)
3,000 (h)(m)
Taxes payable 335 -- 335
Other current liabilities 1,789 - 25 (b) 1,814
------- ------- -------- -------
Total current liabilities 10,212 9,544 (2,886) 16,870
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
"COMPANY
AFTER
PRO FORMA THE MERGER"
VIDEO(a) IPL(a) ADJUSTMENTS PRO FORMA
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Long-term debt 5,330 21,010 3,357 (b) 34,904
(24,793)(m)
30,000 (h)(m)
Subordinated debt -- 5,268 -- 5,268
Deferred taxes payable 2,017 258 (b) 2,275
Payable to affiliates -- -- 103 (b) 103
Other liabilities 509 1,639 65 (b) 2,048
(165)(n)
------- ------- -------- -------
Total liabilities 18,068 37,461 5,939 61,468
Stockholders' equity:
Common stock 103 62 (62)(j) 132
29 (j)
Paid-in capital 419 24,979 (24,979)(j) 21,761
(29)(j)
21,172 (j)
199 (i)
Retained earnings (deficit) 2,211 4,046 (4,046)(j) (1,431)
(1,461)(b)
(634)(f)
(211)(f)
(1,336)(f)
------- ------- -------- -------
Total stockholders' equity 2,733 29,087 (11,358) 20,462
------- ------- -------- -------
$20,801 $66,548 $ (5,419) $81,930
======= ======= ======== =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
"COMPANY
AFTER
THE MERGER"
PRO FORMA CONSOLIDATED
VIDEO(a) IPL(a) ADJUSTMENTS PRO FORMA
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Sales $15,130 $ -- $ (392)(k) $ 14,738
Services 9,979 52,387 (208)(k) 62,158
Rentals 2,501 -- (7)(k) 2,494
------- ------- ------ -------
27,610 52,387 (607) 79,390
Cost:
Cost of sales 11,641 -- (314)(k) 11,327
Cost of services 4,822 27,682 (208)(k) 32,296
Cost of rentals 809 -- (7)(k) 802
------- ------- ------ -------
17,272 27,682 (529) 44,425
Depreciation expenses 1,807 7,239 (26)(k)
161(b) 9,181
------- ------- ------ -------
Gross profit 8,531 17,466 (213) 25,784
Selling, general and
administrative expenses 6,764 13,715 (574)(i) 19,289
(84)(l)
601 (b)
(1,133)(b)
Amortization of other assets 17 1,198 767 (e) 984
44 (b)
(1,042)(e)
------- ------- ------ -------
Operating income from
continuing operations 1,750 2,553 1,208 5,511
Other (expense) income:
Interest expense (517) (2,273) (352)(b) (3,389)
2,218 (m)
(2,465)(m)
Other 592 (12) 580
------- ------- ------ -------
Income before income taxes
and discontinued operations 1,825 268 609 2,702
Income tax expense 187 1,016 133 (d) 1,336
------- ------- ------ -------
Income (loss) from continuing
operations $ 1,638 $ (748) $ 476 $ 1,366
======= ======= ====== =======
Income (loss) from continuing
operations per common share $ 0.23 $ (0.12) $ 0.10
======= ======= =======
Number of shares used in
calculating income (loss) from
continuing operations per
common share 7,223 6,227 (212)(g) 13,238
======= ======= ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
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 for the year ended July 31, 1997
included in IPL's annual report on Form 10-K for such year filed with the
Securities and Exchange Commission, including certain reclassifications to
conform to Video's presentation, and the historical consolidated financial
statements of Video for the year ended June 30, 1997 included herein.
(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 $3,833, consisting of cash and cash
equivalents ($-13), net accounts receivable ($57), prepaid expenses and
other current assets ($37), buildings, satellite equipment and land
($3,224), and other long-term assets ($528). The Subchapter S
corporations' combined liabilities consisted of amounts due Video
($1,192), accounts payable and accrued expenses ($33), mortgage
obligations ($3,618) other current liabilities ($25) deferred taxes
payable ($258), payable to affiliates ($103), other liabilities ($65) and
stockholders' deficiencies of $1,461.
Statement of Income--IPL and Video recorded aggregate rent expense which
was paid to the Subchapter S corporations of $1,133, for the year ended
June 30, 1997. 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 $161 for the year ended June 30, 1997, has been
recorded with respect to the real estate owned by the Subchapter S
corporations. Amortization expense of $44 for the year ended June 30,
1997, 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 $352 and $601
for the year ended June 30, 1997, which has 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.
6
<PAGE> 7
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 960
Stock option component of severance package 199
Loss on sublease 189
Other 205
Tax impact of purchase accounting adjustments (460)
IPL unamortized gain on interest rate swap (165)
-------
Purchase price 25,600
Net assets of IPL as of July 31, 1997 $ (29,087)
Excess of cost over fair value of
net assets acquired of IPL
as of July 31, 1997 22,240
IPL unamortized deferred financing costs as
of July 31, 1997 415
Identifiable net tangible assets
of IPL (6,432)
-------
Excess of cost over fair value of net assets
acquired $19,168
=======
</TABLE>
The historical carrying value as of June 30, 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 $1,336 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, of which approximately $2,500 was recorded through
June 30, 1997, consisting primarily of legal, accounting, printing and
investment banking fees which were paid using proceeds from the
refinancing. See Note (m) below.
(i) In connection with the merger, the chief executive officer and chief
financial officer of IPL (the "CEO" and "CFO," respectively) are no longer
employed by The Company After the Merger. The CEO, however, became a
non-employee director (i.e., the Vice Chairman) of The Company After the
Merger. The CEO and 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 Video stockholders granted to the CEO, on
a pro rata basis, options to purchase an aggregate of 75,000 shares of The
Company After the Merger's common stock issued in the merger at an
exercise price of $0.75 per share. Such options vested immediately. Such
severance amounts have been recorded as purchase accounting adjustments.
The CEO and CFO were paid compensation of $262 and $141 for the year ended
June 30, 1997. Video has employed a new CFO, for annual compensation of
$175. Video also reviewed current facilities utilized by Video
7
<PAGE> 8
and IPL and has determined that IPL's facilities for which $75 was
incurred for the year ended June 30, 1996, were duplicative. Video also
identified six duplicative administrative employees of IPL who were
terminated after the Merger. The identified personnel, who were paid $274
for the year ended June 30, 1997, received severance benefits of two weeks
pay based upon an IPL severance plan. Video also identified two
individuals of certain IPL facilities who were terminated in connection
with the merger. The identified personnel will be paid $400 as severance.
Video committed itself to vacate the duplicative IPL facility and
terminate the identified IPL personnel and accordingly recorded a reserve
for loss on sublease of $189 and a reserve for severance costs of $9 as of
June 30, 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 common stock of The Company After the Merger, thus making Video
the acquiree and IPL the acquiror for legal purposes. However, because,
pursuant to the merger agreement, the Video stockholders, upon the
consummation of the merger, held approximately 54.6% of the outstanding
common stock, appointed a majority of the Board and supplied a majority of
key management personnel of The Company After the Merger, the merger was
accounted for as a "reverse acquisition." IPL was therefore designated the
acquiree and Video the acquiror for accounting purposes. As such, the net
assets of IPL were recorded at fair value and the pre-merger financial
statements of Video became the historical financial statements of The
Company After The Merger. In addition, pre-merger stockholders' equity and
earnings per share were retroactively restated for the equivalent number
of shares received by Video's 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 After The Merger.
(k) To eliminate intercompany sales between Video and IPL and depreciation
expense related to the profit on equipment purchased by IPL from Video.
(l) In connection with the merger, one of the principal stockholders of Video
is no longer employed by The Company After The Merger. This stockholder
received a salary of $144 from one of the Subchapter S corporations
contributed to Video (see Note (b) above) in the year ended June 30, 1997.
This stockholder has been retained as a consultant by The Company After
The Merger for one year at a monthly fee of $5.
(m) Simultaneously with the closing of the merger, The Company After the
Merger refinanced all of IPL's and Video's outstanding long-term
indebtedness (other than capital leases aggregating approximately $1,571
and $72 for IPL and Video, respectively, Video's mortgage payable at $517,
IPL's note payable to Cognitive Communications LLC of $245 and $5,268 of
IPL's subordinated debt, all of which remained outstanding), including
lines of credit with $33,000 term loan and a five year $17,000 revolving
line of credit (collectively, the "Facility"). The Facility bears interest
at a) KeyBank's prime rate less 1% or b) LIBOR plus a number of basis
points based upon the Company's leverage ratio (funded debt divided by
EBITDA), which is initially LIBOR plus 1.75%. The Company After the
Merger has 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. Such quarterly principal
payments will increase to $1,250 per quarter on December 31, 1998,
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 After the Merger and its subsidiaries. No significant gain or loss
resulted from the refinancing. In addition to refinancing the $28,329 of
Video and IPL debt outstanding at June 30, 1997, the funds borrowed were
utilized to pay transaction costs ($3,500) and for other working capital
purposes ($1,171). The term loan has been classified as current ($3,000)
and long-term ($30,000) based upon stated repayment terms. The calculation
of pro forma interest expense on the new debt is as follows:
8
<PAGE> 9
<TABLE>
<S> <C>
Term Loan $33,000
30 day LIBOR rate at June 30, 1997 (5.72%) plus 1.75% 7.47%
------
Annual interest expense excluding interest expense
for capital leases $ 2,465
=======
Fiscal 1997 annual interest expense refinanced,
excluding amounts pertaining to capital leases,
Video's mortgage payable, Cognitive Communications
note payable and interest on the subordinated debt,
respectively $ 2,218
=======
</TABLE>
(n) To account for IPL's deferred gain relating to an interest rate swap
agreement ($165) and deferred financing costs ($415) both of which
pertained to debt which was refinanced in connection with the merger (see
note m).
9
<PAGE> 10
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of June 27, 1997, 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 Current Report on Form 8-K (File No.
000-23388) filed with the Securities and Exchange Commission on July
8, 1997).
16.1 Arthur Anderson LLP letter re change in certifying accountant
(incorporated by reference to Exhibit 16.1 to Current Report on Form
8-K (File No. 000-23388) filed with the Securities and Exchange
Commission on September 4, 1997).
23.1 Consent of Ernst & Young LLP.
99.1 Press Release announcing the completion of the merger (incorporated
by reference to Exhibit 99.1 to Current Report on Form 8-K (File No.
000-23388) filed with the Securities and Exchange Commission on
September 4, 1997).
<PAGE> 11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDEO SERVICES CORPORATION
(REGISTRANT)
Date: November 7, 1997 By: \s\ Louis H. Siracusano
-----------------------------
Louis H. Siracusano
President and
Chief Executive Officer
and Chief Operating Officer
<PAGE> 12
Audited Consolidated Financial Statements
Video Services Corporation and Subsidiaries
As of June 30, 1996 and 1997
and for the years ended June 30, 1995, 1996 and 1997
<PAGE> 13
Video Services Corporation and Subsidiaries
Audited Consolidated Financial Statements
As of June 30, 1996 and 1997
and for the years ended June 30, 1995, 1996 and 1997
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors............................................. F-1
Consolidated Balance Sheets................................................ F-2
Consolidated Statements of Operations...................................... F-3
Consolidated Statements of Stockholders' Equity............................ F-4
Consolidated Statements of Cash Flows...................................... F-5
Notes to Consolidated Financial Statements................................. F-6
</TABLE>
<PAGE> 14
Report of Independent Auditors
Board of Directors and Stockholders
Video Services Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Video
Services Corporation and Subsidiaries as of June 30, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1997. 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, 1996 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
--------------------------
Ernst & Young LLP
White Plains, New York
September 12, 1997
F-1
<PAGE> 15
Video Services Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
----------------------
(Dollars In Thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 520 $ 390
Accounts receivable, net................................ 4,900 6,173
Inventories............................................. 312 688
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 416 363
Prepaid expenses and other current assets............... 341 574
Deferred taxes.......................................... 594 674
------- -------
Total current assets...................................... 7,083 8,862
Fixed assets, net......................................... 5,096 5,852
Receivable from affiliates................................ 1,739 1,192
Receivable from officers.................................. 326 211
Other assets.............................................. 1,886 3,428
Deferred taxes............................................ - 622
Net assets to be disposed................................. 1,542 634
------- -------
Total assets.............................................. $17,672 $20,801
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................... $ 5,244 $ 7,812
Billings in excess of costs and estimated
earnings on uncompleted contracts.................... 921 462
Notes payable........................................... 956 -
Current portion of long-term debt....................... 1,362 149
Taxes payable........................................... 258 -
Other current liabilities............................... 1,270 1,789
------- -------
Total current liabilities 10,011 10,212
Long-term debt............................................ 2,140 5,330
Deferred and other taxes payable.......................... 2,475 2,017
Other liabilities......................................... 391 509
------- -------
Total liabilities......................................... 15,017 18,068
Stockholders' equity
Common stock, no par value:
Authorized 7,500,000 shares,
issued and outstanding 2,678,162 shares................... 103 103
Paid-in capital........................................... 291 419
Retained earnings......................................... 2,261 2,211
------- -------
Total stockholders' equity................................ 2,655 2,733
------- -------
$17,672 $20,801
======= =======
</TABLE>
See accompanying notes.
F-2
<PAGE> 16
Video Services Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1996 1997
------------------------------------
(In Thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Sales...................................... $9,289 $18,258 $15,130
Services................................... 7,779 9,241 9,979
Rentals.................................... 2,371 2,241 2,501
------ ------ ------
19,439 29,740 27,610
Costs:
Cost of sales.............................. 7,653 14,512 11,641
Cost of services........................... 3,752 4,643 4,822
Cost of rentals............................ 589 536 809
------ ------ ------
11,994 19,691 17,272
Depreciation expense....................... 1,517 1,608 1,807
------ ------ ------
Gross profit............................... 5,928 8,441 8,531
Selling, general and administrative expenses 5,326 6,009 6,764
Amortization of other assets............... 112 45 17
------ ------ ------
Operating income from continuing operations 490 2,387 1,750
Other (expense) income:
Interest expense........................... (465) (485) (517)
Other income............................... 198 97 592
------ ------ ------
Income before income taxes and discontinued
operations.............................. 223 1,999 1,825
Income tax expense........................ - 787 187
------ ------ ------
Income from continuing operations.......... 223 1,212 1,638
Discontinued operations:
Loss from operations of Diversified Products
segment (less applicable income tax
benefit of $--, $248 and $380).......... (74) (388) (776)
Estimated loss on disposal of Diversified
Products segment (less applicable income
tax benefit of $447).................... - - (912)
------ ------ ------
Net income (loss).......................... $ 149 $ 824 $ (50)
====== ====== ======
Income from continuing operations per share $ .08 $ .46 $ .61
Loss from discontinued operations per share (.03) (.15) (.63)
------ ------ ------
Net income (loss) per share $ .05 $ .31 $ (.02)
====== ====== ======
Weighted average number of shares
outstanding 2,640 2,659 2,678
====== ====== ======
</TABLE>
See accompanying notes.
F-3
<PAGE> 17
Video Services Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Paid-In Retained
-----------------
Shares Amount Capital Earnings Total
--------- ------ ------- -------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
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
Issuance of consultant
compensatory stock options . - - 128 - 128
Net loss ..................... - - - (50) (50)
--------- ---- ---- ------- -------
Balance at June 30, 1997 ..... 2,678,162 $103 $419 $ 2,211 $ 2,733
========= ==== ==== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 18
Video Services Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) .............................. $ 149 $ 824 $ (50)
Adjustments to reconcile net income to net
cash provided by continuing operations:
Depreciation ................................ 1,821 1,868 2,015
Amortization of other assets ................ 143 46 18
Issuance of consultant compensatory stock
options.................................... - - 128
Loss on disposal of discontinued operations.. - - 823
Gain (loss) on sale of equipment ............ (471) (351) 27
Deferred income taxes ....................... - 411 (103)
Provision for bad debts ..................... 54 133 76
(Increase) decrease in operating assets:
Accounts receivable ....................... (1,560) (1,488) (1,057)
Inventories ............................... 275 (369) (404)
Costs and estimated earnings in excess of
billings on uncompleted contracts ........ (164) (252) 53
Prepaid expenses and other assets ......... (597) (399) (1,663)
Increase (decrease) in operating
liabilities: ............................. 544 2,277 2,674
Accounts payable and accrued expenses
Billings in excess of costs and estimated..
earnings on uncompleted contracts ........ 200 5 (459)
Other liabilities ......................... 87 (754) (1,007)
------- ------- -------
Net cash provided by continuing operations ..... 481 1,951 1,071
INVESTING ACTIVITIES
Additions to fixed assets ...................... (1,477) (2,970) (3,053)
Proceeds from disposal of fixed assets ......... 594 380 99
(Increase) decrease in obligations from
affiliates ..................................... (519) (581) 562
------- ------- -------
Net cash used in investing activities .......... (1,402) (3,171) (2,392)
FINANCING ACTIVITIES
Proceeds from issuance of stock ................ - 19 -
Proceeds from borrowings ....................... 3,292 1,663 4,159
Repayments of borrowings ....................... (2,423) (1,237) (2,968)
------- ------- -------
Net cash provided by financing activities ...... 869 445 1,191
------- ------- -------
Net decrease in cash ........................... (52) (775) (130)
Cash and cash equivalents at beginning of year.. 1,347 1,295 520
------- ------- -------
Cash and cash equivalents at end of year ....... $ 1,295 $ 520 $ 390
======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 19
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars In Thousands)
As of June 30, 1996 and 1997
and for the years ended June 30, 1995, 1996 and 1997
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 is a leading provider of value-added Video Services to a
diverse base of customers within the television network, cable and syndicated
programming markets. 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.
REVENUE RECOGNITION
Revenue from the sale of equipment and services is recorded at the time of
shipment of equipment or the completion of services for the customer. Revenue
from long-term contracts is recognized under the percentage-of-completion
method, under which method the Company recognizes revenues based on the ratio
that incurred costs bear to estimated total completion costs. Provision is made
currently for estimated losses, if any, on uncompleted contracts.
F-6
<PAGE> 20
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Property and equipment are recorded at cost and depreciated predominantly
by the straight-line method over their estimated useful lives. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the term of the underlying lease. Estimated useful lives by class of assets are
as follows:
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
Repairs and maintenance are charged to expense as incurred. Expenditures
that result in the enhancement of the value of the facilities involved are
treated as additions to property and equipment. Cost of property and equipment
disposed of and accumulated depreciation thereon are removed from the related
accounts, and gain or loss, if any, is recognized.
Property and equipment of the Company are reviewed for impairment whenever
events or circumstances indicate that the asset's undiscounted expected cash
flows are not sufficient to recover its carrying amount. The Company measures an
impairment loss by comparing the fair value of the asset to its carrying amount.
Fair value of an asset is calculated as the present value of expected future
cash flows.
INVENTORIES
Inventories of system components and equipment are valued at the lower of
specific cost or market; tape stock is valued at the lower of average cost or
market.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes".
The Company uses different methods of accounting for financial reporting
and tax purposes, principally through the utilization of accelerated
depreciation methods for income tax purposes, certain valuation allowances and
net operating loss carryforwards; accordingly, deferred taxes are provided on
the basis of such differences.
F-7
<PAGE> 21
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
In connection with the acquisition of a subsidiary, the Company recorded
goodwill of $554, which is being amortized over 40 years and is included in
other assets on the accompanying balance sheets, net of accumulated amortization
of $91 and $105 at June 30, 1996 and 1997, 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 and 19.
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 two individual Systems and Products segment customers in 1996 and to
one Systems and Products segment customer in 1997 in excess of 10% of
consolidated 1996 and 1997 revenues, respectively. Sales to such customers
aggregated 30% and 15% of 1996 and 1997 revenues, respectively.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include all highly
liquid investments with a maturity of three months or less at the date of
purchase.
Cash equivalents at June 30, 1996 and 1997 of $131 and $34, 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.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share has been computed using the weighted average
number of shares outstanding during each period.
F-8
<PAGE> 22
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board issued FASB Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Statement 131 requires that segment data be disclosed based on how management
makes decisions about allocating resources to segments and measuring their
performance. While the Company is studying the application of the disclosure
provisions, it does not expect this statement to materially affect its financial
position or results of operations. This Statement will become effective for the
fiscal year ending June 30, 1999.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
-------- --------
<S> <C> <C>
Accounts receivable, trade ............................ $ 3,806 $ 4,720
Contract receivables billed:
Uncompleted contracts ........................... 694 1,738
Completed contracts ............................. 580 17
-------- --------
5,080 6,475
Less: allowance for doubtful accounts ................. 180 302
-------- --------
$ 4,900 $ 6,173
======== ========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
-------- --------
<S> <C> <C>
Costs incurred on uncompleted contracts to date ............. $ 12,216 $ 8,758
Estimated earnings to date .................................. 2,827 1,167
-------- --------
15,043 9,925
Less: billings to date ..................................... 15,548 10,024
-------- --------
Billings in excess of costs and estimated
earnings on uncompleted contracts ....................... $ (505) $ (99)
======== ========
</TABLE>
Included in accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
----- -----
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts .............................. $ 416 $ 363
Billings in excess of costs and estimated
earnings on uncompleted contracts .............................. (921) (462)
----- -----
$(505) $ (99)
===== =====
</TABLE>
F-9
<PAGE> 23
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. FIXED ASSETS
Fixed assets, at cost, summarized by major categories, consist of the
following:
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
------- -------
<S> <C> <C>
Machinery and equipment ......... $16,880 $17,709
Furniture and fixtures .......... 606 597
Leasehold improvements .......... 2,062 2,461
Transportation equipment ........ 171 195
Land ............................ - 1,000
------- -------
19,719 21,962
Less: accumulated depreciation.. 14,623 16,110
------- -------
$ 5,096 $ 5,852
======= =======
</TABLE>
6. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
----- ----
<S> <C> <C>
System components and equipment, net of
obsolescence allowance of $579 and $592.. $ 312 $688
===== ====
</TABLE>
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expense and other current assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
---- ----
<S> <C> <C>
Prepaid expenses ....................... $245 $113
Prepaid federal and state income taxes.. - 442
Other .................................. 96 19
---- ----
$341 $574
==== ====
</TABLE>
F-10
<PAGE> 24
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,
1996 1997
------ ------
<S> <C> <C>
Goodwill......................................... $ 463 $ 449
Investments ..................................... 205 205
Cash value of officers' life insurance (net of
borrowings of $123 and $132) ............... 1,126 1,336
Transaction costs (see Note 19) ................. - 1,358
Other ........................................... 92 80
------ ------
$1,886 $3,428
====== ======
</TABLE>
Included in other assets are 212,096 unregistered shares of IPL with a cost
basis of $205. Additionally, the Company granted options on 65,000 of these
shares to certain directors of IPL.
As of June 30, 1996 and 1997, registered tradable shares of IPL had a fair
market value of $3.88 and $3.13 per share, respectively. See Note 19.
9. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
------ ------
<S> <C> <C>
Wages payable ............................... $ 511 $ 553
Customer deposits ........................... 5 728
Sales and payroll taxes payable ............. 553 221
Reserves for loss on disposal - Diversified
Products segment ............................ - 151
Other ....................................... 201 136
------ ------
$1,270 $1,789
====== ======
</TABLE>
F-11
<PAGE> 25
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
------ ------
<S> <C> <C>
Notes payable to equipment manufacturer, bearing
interest at 8.65% - 12.25%, collateralized by
fixed assets with a net book value of $499
and $286. See Note 20........................... $ 604 $ 374
Notes payable to credit institutions, bearing
interest at 10.0%-13.0%, collateralized by
fixed assets with a net book value of $4,597
and $4,566. See Note 20......................... 2,784 2,655
Mortgage payable to credit institution bearing
interest at prime (8.50% at June 30, 1997) plus
1%, collateralized by fixed assets with a net
book value at $1,000............................ - 517
Capital lease obligations bearing interest at
11.3%-16.4%..................................... 114 72
------ ------
3,502 3,618
Less: Current maturities......................... 1,362 149
------ ------
$2,140 $3,469
====== ======
</TABLE>
In connection with the merger between the Company and IPL (see Note 19),
the Company refinanced all of its debt, excluding its capital lease obligations
and mortgage payable (see Note 20). The Company's current debt obligations are
approximately $3.9 million after giving effect to the merger, refinancing and
contribution of two real estate partnerships owned by the principal stockholders
of the Company (see Note 19), which is less than IPL's pre-refinancing current
portion of long term-debt of approximately $4.2 million. Consequently, all of
the Company's debt, excluding current capital lease obligations and mortgage
payable, has been classified as long-term.
The Company has a short-term line of credit of $1,500 and $2,100 at June
30, 1996 and 1997, respectively, under which $956 and $1,861 was outstanding at
June 30, 1996 and 1997, respectively. The line of credit is collateralized by
accounts receivable and certain machinery and equipment and bears interest at
prime (8.25% and 8.50% at June 30, 1996 and 1997, respectively) plus 1.75%. The
Company's weighted average interest rates were 10.36% and 10.58% during 1996 and
1997, respectively.
The following is a schedule of principal payments based upon the debt
refinanced (Note 20), exclusive of capital lease obligations.
<TABLE>
<S> <C>
1998..................................... $ 100
1999..................................... 100
2000..................................... 100
2001..................................... 100
2002 and thereafter...................... 5,007
------
$5,407
======
</TABLE>
F-12
<PAGE> 26
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. LONG-TERM DEBT (CONTINUED)
Interest payments totaled $466, $522 and $517 for the years ended June 30,
1995, 1996 and 1997, respectively.
The Company leases certain machinery and equipment from unaffiliated
entities. Future minimum lease payments under capital leases as of June 30, 1997
are:
<TABLE>
<CAPTION>
Fiscal Year Amount
- ----------- ------
<S> <C>
1998 ................................................................. $59
1999 ................................................................. 15
2000 ................................................................. 11
2001 ................................................................. --
2002 ................................................................. --
---
Total minimum lease payments ......................................... 85
Less: amount representing interest ................................... 13
---
Present value of minimum lease payments .............................. $72
===
</TABLE>
Leased property under capital leases is classified in fixed assets as
follows:
<TABLE>
<CAPTION>
JUNE 30
1996 1997
--------------------------
<S> <C> <C>
Machinery and equipment............................ $170 $170
Less: accumulated amortization..................... 79 118
-------------------------
$ 91 $ 52
=========================
</TABLE>
11. RELATED PARTIES
At June 30, 1996 and 1997, the Company had accounts receivable of
$1,655 and $1,233, 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 accounts receivable and (payable) of $84 and
$(41), respectively from (to) 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 - See Note 19)
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 $1,146, $1,177 and $1,067 for
1995, 1996 and 1997, respectively.
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, was recorded at the lower of historical cost or
fair value.
F-13
<PAGE> 27
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTIES (CONTINUED)
At June 30, 1996 and 1997, the Company had amounts receivable from
officers of $326 and $211, 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.
Summarized financial information by business segment for 1995, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
Net revenues from unaffiliated customers:
<S> <C> <C> <C>
Systems and Products ................................... $ 11,660 $ 20,499 $ 17,631
Transmission Services .................................. 7,779 9,241 9,979
-------- -------- --------
Net revenues ........................................... $ 19,439 $ 29,740 $ 27,610
======== ======== ========
Intersegment revenues:
Systems and Products ................................... $ 1,295 $ 795 $ 290
Transmission Services .................................. 913 792 705
-------- -------- --------
Total intersegment revenues ............................ $ 2,208 $ 1,587 $ 995
======== ======== ========
Operating income:
Systems and Products ................................... $ 1,266 $ 2,881 $ 2,341
Transmission Services .................................. 1,168 1,794 2,239
Corporate expenses ..................................... (1,944) (2,288) (2,830)
-------- -------- --------
Operating income from continuing operations ............ 490 2,387 1,750
-------- -------- --------
Interest expense, net .................................. (465) (485) (517)
Other income ........................................... 198 97 592
-------- -------- --------
Income before income taxes and discontinued operations.. $ 223 $ 1,999 $ 1,825
======== ======== ========
</TABLE>
F-14
<PAGE> 28
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
Identifiable assets at June 30:
<S> <C> <C> <C>
Systems and Products ........................ $ 2,981 $ 6,025 $ 6,650
Transmission Services ....................... 5,465 5,255 5,447
Discontinued operations ..................... 2,904 1,542 634
Corporate ................................... 4,655 4,850 8,070
------- ------- -------
Total assets ................................ $16,005 $17,672 $20,801
======= ======= =======
Additions to fixed assets:
Systems and Products ........................ $ -- $ 1,231 $ 461
Transmission Services ....................... 1,189 1,117 953
Discontinued operations ..................... 102 557 418
Corporate ................................... 186 65 1,221
------- ------- -------
Net capital expenditures .................... $ 1,477 $ 2,970 $ 3,053
======= ======= =======
Depreciation:
Systems and Products ........................ $ 510 $ 632 $ 740
Transmission Services ....................... 908 900 981
Corporate ................................... 99 76 86
------- ------- -------
Total depreciation from continuing operations $ 1,517 $ 1,608 $ 1,807
======= ======= =======
</TABLE>
13. INCOME TAXES
The provision for federal and state income taxes (exclusive of tax
benefit from discontinued operations) consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996 1997
----- ----- -----
Federal:
<S> <C> <C> <C>
Current ............................ $ -- $ 21 $ 556
Deferred ........................... 127 633 55
Adjustments to valuation allowance.. (127) -- --
State:
Current ............................ -- 104 202
Deferred ........................... 230 124 (4)
Adjustments to valuation allowance.. (230) (95) (622)
----- ----- -----
$ -- $ 787 $ 187
===== ===== =====
</TABLE>
F-15
<PAGE> 29
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. INCOME TAXES (CONTINUED)
The reconciliation between the statutory tax rates and those reflected
in the Company's income tax provision for continuing operations is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Statutory tax rate ............................ 34.0% 34.0% 34.0%
Change in valuation allowance ................. (125.1) (3.2) (34.0)
Stock options granted by shareholders ......... -- -- 1.6
Officers' life insurance ...................... 7.6 -- --
Non-deductible travel and entertainment ....... 15.7 -- 1.0
State and local taxes, net of federal benefit.. 66.8 7.4 7.0
Other ......................................... 1 1.2 .6
------ ------ ------
0% 39.4% 10.2%
====== ====== ======
</TABLE>
The components of deferred federal and state income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
------- -------
<S> <C> <C>
Receivable allowance ............... $ 314 $ 309
Inventory reserves ................. 253 262
Other .............................. 27 103
------- -------
594 674
Federal and state net operating loss
carryforwards ...................... 1,668 1,808
Valuation allowance ................ (1,668) (1,186)
Accelerated depreciation ........... (978) (830)
------- -------
Deferred tax (liability) asset ..... $ (384) $ 466
======= =======
</TABLE>
Included within deferred and other taxes payable are accrued income tax
liabilities of $1,497 and $1,187 as of June 30, 1996 and 1997, respectively.
The valuation allowance decreased by approximately $95 in 1996 as a
result of the utilization and planned realization of state net operating loss
carryforwards. The Federal net operating loss valuation allowance decreased by
approximately $622 in 1997 as a result of revised estimates of future taxable
income principally as a result of discontinuing the Company's Diversified
Products segment. A valuation allowance of $337 remains as of June 30, 1997 for
Federal net operating losses which remain with the Diversified Products segment.
The valuation allowance for state net operating losses increased by $140 as a
result of additional losses incurred by certain subsidiaries included within the
Diversified Products segment which the Company does not plan to utilize.
F-16
<PAGE> 30
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. INCOME TAXES (CONTINUED)
As of June 30, 1997, the Company has potential tax benefits from net
operating loss carryforwards for state income tax purposes of $849 expiring by
2011 and 2012, respectively. As of June 30, 1997 and 1996, the Company also has
potential tax benefits from net operating loss carryforwards for Federal income
tax purposes of approximately $959 of which approximately $834 and $125 expire
in 2007 and 2010, respectively. The valuation allowance relates principally to
state and Federal net operating loss carryforwards for certain subsidiaries
which are being discontinued (see Note 16).
The Company has made payments for Federal and state income taxes of
$426, $500 and $1,300 for the years ended June 30, 1995, 1996 and 1997,
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 $41, $50 and $57 for the years ended June 30, 1995, 1996 and 1997.
15. STOCK-BASED COMPENSATION PLANS
The Company has elected to follow Accounting Principles Board Opinion
(APB) No. 25 "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its employee stock options. Under APB No. 25,
the Company does not recognize compensation expense since the exercise price of
the stock options granted is equal to the market value of the Company's common
stock at the date of grant. Statement of Financial Accounting Standard No. 123,
"Accounting for Stock Based Compensation" (SFAS 123) requires the Company to
disclose the pro forma impact on net income (loss) as if compensation expense
associated with employee stock options had been calculated under the fair value
method.
On June 13, 1997, the principal stockholders of the Company entered into
Stock Option Agreements (the "Stockholder Options") with various employees of
the Company to purchase 87,128 shares of the Company's common stock from such
stockholders. The Stockholder Options converted into options to purchase from
such stockholders 235,000 shares of New Video Services Corporation common stock
upon consummation of the merger between the Company and IPL (see Note 19). The
Stockholder Options were fully vested at June 30, 1997, become exercisable on
March 2, 1998 and expire on the fifth anniversary of the vesting date. The
exercise prices of the Stockholder Options upon grant were in excess of the
estimated fair market value of the Company's common stock.
F-17
<PAGE> 31
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The Black-Scholes option pricing model used the following assumptions to
value the Stockholder Options: expected volatility of 0.4, dividend yield of 0%,
five year expected life, and risk free interest rate of 5.52%.
The following table shows the pro forma impact of Stockholder Options
on the Company's net loss for the year ended June 30, 1997 in accordance with
SFAS 123. This pro forma impact may not be representative of the effect on the
future years because of the subjective assumptions used in the fair value
estimate calculated under the Black-Scholes model and because new grants are
generally made each year.
<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
---------------------------------
<S> <C> <C>
Income from continuing operations $1,638 $1,438
Loss from discontinued operations (1,688) (1,688)
Net loss (50) (250)
Income from continuing operations per share 0.61 0.54
Loss from discontinued operations per share (0.63) (0.63)
Net loss per share (0.02) (0.09)
</TABLE>
16. DISCONTINUED OPERATIONS
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 19). The Diversified Products segment principally provides
professional and industrial videotape duplication and blank videotape
distribution.
Losses from operations of the Diversified Products segment amounted to
$74 in 1995, $388 in 1996 and $776 in 1997, net of applicable income tax benefit
of $0, $248 and $380, respectively.
Revenues of the discontinued operations of the Diversified Products
segment were $12,312 in 1995, $13,175 in 1996 and $11,404 in 1997.
F-18
<PAGE> 32
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. DISCONTINUED OPERATIONS (CONTINUED)
Net assets of the discontinued operations of the Diversified Products
segment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
------- -------
<S> <C> <C>
Accounts receivable, net ...................... $ 1,953 $ 1,661
Inventories ................................... 490 470
Prepaid expenses and other current assets ..... 44 15
Fixed assets, net ............................. 645 195
Other assets .................................. 120 121
Accounts payable and accrued expenses ......... (1,305) (1,601)
Other current liabilities ..................... (405) (227)
Investment in company ......................... -- 422
Allowance for losses in investment in company.. -- (422)
------- -------
$ 1,542 $ 634
======= =======
</TABLE>
Included in 1997 other current liabilities is a reserve of $151 for future net
operating losses incurred prior to disposal of the Diversified Products segment.
In February 1997, Video Dub, Inc. (part of the Company's discontinued
Diversified Products segment mentioned above) contributed the assets ($592) and
liabilities ($170) of its New York City facility to a new company in exchange
for a 30% equity interest ($422) in the new entity. Video Dub, Inc. is included
in the net assets of the Company to be disposed and was spun-off to its
shareholders prior to the consummation of the merger between the Company and
IPL. See Note 19.
17. OTHER INCOME
Included in 1997 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-19
<PAGE> 33
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. 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, 1997, future minimum rental payments under noncancelable
leases were as follows:
<TABLE>
<CAPTION>
Affiliated Unaffiliated Total
------------------------------------------------------
<S> <C> <C> <C>
1998......................................... $610 $194 $804
1999......................................... 610 194 804
2000......................................... 610 133 743
2001......................................... 385 47 432
2002......................................... - 16 16
</TABLE>
Aggregate rental expense from continuing operations amounted to $1,391,
$1,286 and $1,203 for the years ended June 30, 1995, 1996 and 1997. Affiliated
rental expense from continuing operations amounted to $1,146, $1,177 and $1,067
for the years ended June 30, 1995, 1996 and 1997.
19. MERGER AND ACQUISITION
On August 27, 1997, the Company merged with and into IPL with IPL as
the surviving corporation for legal purposes. At the effective time of the
merger, IPL changed its name to Video Services Corporation (herein referred to
as "New Video Services Corporation"). The merger was accounted for as a reverse
acquisition whereby the pre-merger financial statements of the Company became
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 the merger. An aggregate of 7,011,349 shares of New Video Services
Corporation common stock were issued to the Company's stockholders in the merger
(plus an additional 212,096 shares of New Video Services Corporation common
stock which were issued to replace an equal number of shares of IPL common stock
owned by the Company which were canceled upon the merger). Such shares in the
aggregate represented approximately 54.6% of the outstanding shares of New Video
Services Corporation common stock immediately after the merger. In connection
with the merger, IPL's chief executive officer and chief financial officer were
replaced by the corresponding executives of the Company.
F-20
<PAGE> 34
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. MERGER AND ACQUISITION (CONTINUED)
The following presents the unaudited combined pro forma results of
operations for the year ended June 30, 1997, as if the merger had occurred as of
July 1, 1996 (beginning of the Company's fiscal year). The unaudited combined
pro forma results of operations are not necessarily indicative of the results of
operations that would have occurred had IPL and the Company actually combined
during the periods presented or of future results of operations of the combined
operations.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1997
--------
<S> <C>
Revenues ..................................... $ 79,390
Income from continuing operations ............ 1,366
Income from continuing operations per share... 0.10
Net (loss) ................................... (322)
Net (loss) per share ......................... --
</TABLE>
The pro forma income from continuing operations and net loss per share
are based on the weighted average number of shares outstanding after the merger
of 13,238. Included in the net loss is approximately $1,688 of loss from
discontinued operations relating to certain subsidiaries of the Company which
have been discontinued in connection with the merger (see Note 16).
In connection with, and as a condition to, the merger, immediately
prior to the merger, the Diversified Products segment was 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, were incorporated and, in connection therewith,
contributed to the Company in the form of a capital contribution.
20. SUBSEQUENT EVENT
In connection with the merger between the Company and IPL (see Note
19), New Video Services Corporation refinanced IPL's and the Company's
outstanding long-term indebtedness (excluding capital lease obligations, Video's
mortgage payable, IPL's subordinated debt and IPL's note payable to Cognitive
Communications, LLC), including lines of credit, with a $33 million term loan
and a $17 million revolving line of credit. The facility bears interests at: (i)
the lender's prime rate less 1% or (ii) LIBOR plus a number of basis points
based upon New Video Services Corporation's leverage ratio (funded debt divided
by EBITDA), which is initially LIBOR plus 1.75% (New Video Services Corporation
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 are due
beginning December 31, 1997. Such quarterly principal payments increase to $1.25
million per quarter on December 31, 1998, 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 New Video Services
F-21
<PAGE> 35
Video Services Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
20. SUBSEQUENT EVENT (CONTINUED)
Corporation and its subsidiaries (after giving effect to the merger). The
facility contains covenants which require New Video Services Corporation to
maintain certain financial ratios, prohibit cash dividends and similar payments
and restrict the incurrence of other indebtedness. The facility is guaranteed by
all of New Video Services Corporation's subsidiaries (after giving effect to the
merger). New Video Services Corporation's current debt obligations are
approximately $3.9 million after giving effect to the refinancing and
contribution of MAL and L.I.M.A. Partners (see Note 19). No significant gain or
loss resulted from the refinancing.
The proceeds of the new facility were used as follows: approximately
$23.4 million to refinance IPL's outstanding long-term indebtedness,
approximately $3.6 million to refinance the Company's outstanding long-term
indebtedness and approximately $1.8 million to refinance the Company's
outstanding short-term line of credit. 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 $17.7 million) will be used for future
working capital requirements and general corporate purposes.
Also in connection with the merger, IPL's long term incentive plan was
replaced by New Video Services Corporation's 1997 Long Term Incentive Plan (the
"1997 Plan"). The plans are similar in their terms except that under the 1997
Plan, the aggregate number of shares of common stock issuable has been increased
to 735,000, stock options (other than incentive stock options) may be issued
under the 1997 Plan below the fair market value of the underlying common stock
on the date of grant and awards may be granted under the 1997 Plan to
consultants and independent contractors performing services for New Video
Services Corporation. Certain other revisions were made in the 1997 Plan as a
result of recent changes in federal securities laws relating to equity
compensation plans, and to conform the 1997 Plan to the requirements of Internal
Revenue Code Section 162(m). The merger was deemed a Change in Control under
IPL's former plan, and, as a result of the merger, all stock options outstanding
at the time of the merger became vested and immediately exercisable.
F-22
<PAGE> 36
Index To Exhibits
Exhibit No.
- -----------
23.1 Consent of Ernst & Young LLP.
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement Form
S-8 No. 33-320557 pertaining to the 1993 Long Term Incentive Plan, the
Restricted Share Plan for Directors and Various Stock Option Agreements of
Video Services Corporation (formerly International Post Limited) and Form S-3
No. 333-31745 pertaining to the Registration Statement and related Prospectus
of Video Services corporation (formerly International Post Limited), of our
report dated September 12, 1997, with respect to the consolidated financial
statements of Video Services Corporation included in this Form 8-K/A (Amendment
No. 1) Current Report as of June 30, 1996 and 1997 and for each of the three
years in the period ended June 30, 1997.
/s/ Ernst & Young LLP
White Plains, New York
November 6, 1997
