SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-23388
VIDEO SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
13-3735647
(I.R.S. Employer Identification Number)
240 Pegasus Avenue Northvale, New Jersey 07647
(Address of principal executive offices, including zip code)
(201) 767-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, $.01 par value
per share, as of November 12, 1998, was 13,286,307 shares.
<PAGE>
VIDEO SERVICES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
The audited consolidated financial information at June 30, 1998 and the
unaudited consolidated financial information at September 30, 1998 and for the
three month period ended September 30, 1997 and 1998 relate to Video Services
Corporation and its subsidiaries.
Item 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets as of June 30, 1998
and September 30, 1998 3
Condensed Consolidated Statements of Operations for
the three months ended September 30, 1997 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 1997 and 1998 5
Condensed Consolidated Statement of Stockholders' Equity for
the three months ended September 30, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS ...................................................18
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ...........................18
Item 3. DEFAULTS UPON SENIOR SECURITIES .....................................18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS .............................................................18
Item 5. OTHER INFORMATION ...................................................18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................18
SIGNATURES ...................................................................19
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 1998 and September 30, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1998 1998
--------------- ---------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,492 $ 946
Accounts receivable, net 14,169 13,702
Inventories 1,083 906
Costs and estimated earnings in excess of billings on
uncompleted contracts 187 298
Deferred income taxes 1,535 1,535
Prepaid expenses and other current assets 907 1,335
--------------- ---------------
Total current assets 19,373 18,722
Fixed assets, net 36,590 37,793
Excess of cost over fair value of net assets acquired, net 22,289 22,106
Receivable from affiliates 42 -
Receivable from officers - 25
Deferred income taxes 1,667 1,667
Other assets 1,899 1,844
--------------- ---------------
Total assets $ 81,860 $ 82,157
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,443 $ 6,982
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,290 2,208
Current portion of long-term debt 5,338 5,559
Income taxes payable 708 37
Other current liabilities 3,881 3,986
--------------- ---------------
Total current liabilities 21,660 18,772
Long-term debt 30,968 34,928
Subordinated debt 5,442 5,493
Payable to affiliates - 18
Other liabilities 3,065 2,421
--------------- ---------------
Total liabilities 61,135 61,632
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 1998
and September 30, 1998 - -
Common stock: $.01 par value, 25,000,000 share authorized,
and 13,264,307 and 13,286,307 shares issued and outstanding
at June 30, 1998 and September 30, 1998, respectively 132 132
Additional paid-in-capital 21,196 21,282
Retained deficit (603) (889)
--------------- ---------------
Total stockholders' equity 20,725 20,525
--------------- ---------------
Total liabilities and stockholders' equity $ 81,860 $ 82,157
=============== ===============
See accompanying notes
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1997 and 1998
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1998
--------------- --------------
<S> <C> <C>
Revenues:
Sales $ 4,175 $ 5,361
Services 6,739 16,044
Rentals 504 501
--------------- --------------
11,418 21,906
Costs:
Costs of sales 2,701 4,255
Costs of services 3,424 9,333
Costs of rentals 131 220
--------------- --------------
6,256 13,808
Depreciation 935 2,136
--------------- --------------
Gross profit 4,227 5,962
Selling, general and administrative expenses 2,651 4,958
Amortization 83 263
--------------- --------------
Operating income from continuing operations 1,493 741
Other (expense) income:
Interest expense (541) (1,054)
Interest income and other 31 12
--------------- --------------
Income (loss) before income taxes and discontinued operations 983 (301)
Income tax expense (benefit) 429 (15)
--------------- --------------
Income (loss) from continuing operations 554 (286)
Discontinued operations:
Loss from operations of the Consulting Services segment
(less applicable income tax benefit of $62) (121) -
--------------- --------------
Net income (loss) $ 433 $ (286)
=============== ==============
Earnings per share:
Basic:
Income (loss) from continuing operations $ 0.06 $ (0.02)
Loss from discontinued operations (0.01) -
--------------- --------------
Net income (loss) $ 0.05 $ (0.02)
=============== ==============
Diluted:
Income (loss) from continuing operations $ 0.06 $ (0.02)
Loss from discontinued operations (0.01) -
--------------- --------------
Net income (loss) $ 0.05 $ (0.02)
=============== ==============
Weighted average number of shares outstanding for basic and diluted
earnings per share 9,380,300 13,265,981
=============== ==============
See accompanying notes
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 1997 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Operating Activities
Net cash used in operating activities $ (4,719) $ (1,437)
Investing Activities
Additions to fixed assets (696) (3,347)
Proceeds from sale of fixed assets 4 21
Increase in receivable from officers - (25)
(Increase) decrease in receivable from affiliates (129) 10
-------------- --------------
Net cash used in investing actvities (821) (3,341)
Financing Activities
Proceeds from subordinated debt 15 51
Proceeds from long-term borrowing 35,000 8,200
Repayments of borrowings (29,777) (4,019)
-------------- --------------
Net cash provided by financing activites 5,238 4,232
Net decrease in cash (302) (546)
Cash and cash equivalents, beginning of period 390 1,492
-------------- --------------
Cash and cash equivalents, end of period $ 88 $ 946
============== ==============
See accompanying notes
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended September 30, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Common Common
Stock Stock Paid-In Retained
Shares Amount Capital Deficit Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 13,264,307 $ 132 $ 21,196 $ (603) $ 20,725
Issuance of independent contractors
compensatory stock options - - 23 - 23
Stock related compensation 22,000 - 63 - 63
Net loss - - - (286) (286)
------------------------------------------------------------------
Balance at September 30, 1998 13,286,307 132 21,282 (889) 20,525
==================================================================
See accompanying notes
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 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 three months
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending June 30, 1999. The unaudited interim financial
information should be read in conjunction with the audited consolidated
financial statements of Video Services Corporation ("Old Video Services
Corporation") as of and for the year ended June 30, 1998 included in the Form
10-K filed by the Company (as defined below).
Video Services Corporation and its subsidiaries (collectively, the
"Company"), 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 are divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services. The Satellite and Distribution Services segment integrates
and distributes broadcast quality video content via a satellite and fiber optic
transmission network routed through its digital/analog switching center and is
an international provider of technical and distribution services to distributors
of television programming. The Systems and Products segment designs, engineers
and produces advanced video facilities for the broadcast and cable television,
post-production and corporate markets. This segment also develops, manufactures
and markets advanced color correcting and manipulation systems for the film,
post-production and multimedia industries and rents professional video equipment
to the sports, entertainment and other segments of the broadcast and cable
television and corporate markets. The Production Services segment is an
international provider of technical and creative services to owners, producers
of television programming, television advertising and other programming content.
On August 27, 1997, Old Video Services Corporation merged with and into
International Post Limited ("IPL") with IPL as the surviving corporation (the
"Merger"). At the effective time of the Merger, IPL changed its name to Video
Services Corporation. The "Company" refers to the surviving corporation after
the Merger. The Merger was accounted for as a reverse acquisition whereby
pre-Merger financial statements of Old Video Services Corporation became the
historical financial statements of the Company. As such, the net assets of IPL
have been recorded at fair value. An aggregate of 7,011,349 shares of Company
common stock were issued to the stockholders of Old Video Services Corporation
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 Old
Video Services Corporation which were canceled upon the Merger). Such newly
issued shares in the aggregate represented approximately 54.6% of the
outstanding shares of common stock immediately after the Merger.
As part of the Merger, the Company made a strategic evaluation of
facilities and personnel requirements and determined that certain IPL facilities
would be closed with the equipment being consolidated into other facilities and
determined that certain IPL personnel would be redundant. Accordingly, the
Company recorded a reserve for severance costs of $1,426 and lease related costs
of $993 as of August 27, 1997. The balance of the liability was $1,805 and
$1,475 at June 30, 1998 and September 30, 1998, respectively. At June 30, 1998
it was estimated that approximately $1,101 of such expenditures would be made in
fiscal 1999, $380 in fiscal 2000, $196 in fiscal 2001 and $128 in fiscal 2002.
The Company anticipates that funding for these amounts will be provided by
operations.
At the time of the Merger, IPL had combined assets of $43,677, net
accounts receivable ($9,966), prepaid and other current assets ($1,348), net
fixed assets ($29,259), net deferred tax assets ($2,324), and other long-term
assets ($780). The combined liabilities consisted of accounts payable and
accrued payables ($6,707), long-term debt ($30,464), income taxes payable
($298), and other liabilities ($1,463). Consideration in applying purchase
accounting to the Merger is based upon the IPL shares of common stock
outstanding immediately prior to the Merger of 6,226,958 at a per share value of
$3.50.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued)
Note 1 - Basis of Presentation (continued)
The Company recorded goodwill of $22,483 in connection with the Merger,
which is being amortized over 25 years.
In connection with, and as a condition to the Merger, immediately prior
to the Merger, the Diversified Products segment was spun-off to the stockholders
of Old Video Services Corporation in a non-cash dividend of approximately
$2,653. Immediately prior to the Merger, the principal stockholders of Old Video
Services Corporation contributed (the "Contribution") the stock of two S
corporations holding all of the general and limited partnership interests in Mal
Partners and L.I.M.A. Partners, which partnerships owned real estate and
equipment which was leased solely to Old Video Services Corporation 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.
The S corporations, through their ownership of MAL Partners and L.I.M.A.
Partners, at the time of the Contribution had combined assets of $3,801, net
accounts receivable ($9), prepaid expenses and other current assets ($74),
buildings, satellite equipment and land ($3,198), and other long-term assets
($520). The combined liabilities consisted of accounts payable and accrued
expenses ($62), mortgage obligations ($3,588), deferred taxes ($19), payable to
the Company ($1,314), payable to affiliates ($52) and other current liabilities
($29).
The following presents the unaudited combined pro forma results of
operations for the three month period ended September 30, 1997, as if the Merger
and Contribution had occurred as of July 1, 1997. The unaudited combined pro
forma results of operations are not necessarily indicative of the results of
operations that would have occurred had IPL and Old Video Services Corporation
actually combined during the periods presented or of future results of
operations of the combined operations.
(dollars in thousands, except per share amounts)
1997
--------------
Revenues $ 18,809
Income from continuing operations 586
Income from continuing operations per share .04
Net Income 406
Net Income per share .03
Pro forma income from continuing operations and net income per share are
based on the weighted average number of shares outstanding after the Merger of
13,238,307. Included in the net income for the period ended September 30, 1997
is approximately $180 of loss from discontinued operations relating to the
Consulting Services segment which was previously owned by IPL (see Note 8).
Note 2 - Inventories
Inventories, which consist of system components and equipment are valued
at the lower of specific cost or market and inventory which consists of tape
stock which is valued at the lower of cost or market on a FIFO basis.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued)
Note 3 - Accounts Receivable
<TABLE>
<CAPTION>
June 30, September 30,
1998 1998
------------------ ------------------
<S> <C> <C>
Accounts receivable, trade $ 12,579 $ 13,322
Contracts receivable billed:
Uncompleted contracts 2,031 329
Completed contracts 738 1,153
------------------ ------------------
15,348 14,804
Less: Allowance for doubtful accounts
and volume discounts 1,179 1,102
------------------ ------------------
$ 14,169 $ 13,702
================== ==================
</TABLE>
Note 4 - Fixed Assets
Fixed assets, at cost, including equipment under capitalized leases,
summarized by major categories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1998 1998
------------------ ------------------
<S> <C> <C>
Machinery and equipment $ 38,868 $ 41,696
Leasehold improvements 11,195 11,659
Furniture and fixtures 2,028 2,048
Transportation equipment 281 281
Building 2,199 2,199
Land 1,967 1,967
Equipment under capital leases 1,440 1,440
------------------ ------------------
57,978 61,290
Less: Accumulated depreciation 21,388 23,497
------------------ ------------------
$ 36,590 $ 37,793
================== ==================
</TABLE>
Note 5 - Segment Data
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" which is required to be adopted for
fiscal years beginning after December 15, 1997. Statement No. 131 will require
the Company to disclose revenues, earnings and other financial information
pertaining to the business segments by which the Company is managed, as well as
what factors management used to determine these segments. The Company is
currently evaluating the effects Statement No. 131 will have on its financial
statements and related disclosures. This statement will become effective for the
fiscal year ending June 30, 1999.
The Company's continuing operations are divided into three segments:
(i) Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services. The Satellite and Distribution Services segment integrates
and distributes broadcast quality video content via a satellite and fiber optic
transmission network routed through its digital/analog switching center and is
an international provider of technical and distribution services to distributors
of television programming. The Systems and Products segment designs, engineers
and produces advanced video facilities for the broadcast and cable television,
post-production and corporate markets. This segment also develops,
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued)
Note 5 - Segment Data (continued)
manufactures and markets advanced color correcting and manipulation systems for
the film, post-production and multimedia industries and rents professional video
equipment to the sports, entertainment and other segments of the broadcast and
cable television and corporate markets. The Production Services segment is an
international provider of technical and creative services to owners and
producers of television programming, television advertising and other
programming content.
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 expenses, 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 the three months
ended September 30, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
-------------------- ------------------
<S> <C> <C>
Net revenues from unaffiliated customers:
Systems and Products............................................ $ 4,669 $ 6,221
Satellite and Distribution Services............................. 3,346 7,043
Production Services............................................. 3,403 8,642
-------------------- ------------------
Net revenues.................................................... $ 11,418 $ 21,906
==================== ==================
Intersegment revenues:
Systems and Products............................................ $ 28 $ 1,325
Satellite and Distribution Services............................. 218 321
Production Services............................................. 95 103
-------------------- ------------------
Total intersegment revenues..................................... $ 341 $ 1 ,749
==================== ==================
Operating income:
Systems and Products............................................ $ 1,191 $ 692
Satellite and Distribution Services............................. 735 1,257
Production Services............................................. 471 47
Corporate ...................................................... (904) (1,255)
-------------------- ------------------
Operating income from continuing operations..................... $ 1,493 $ 741
Interest expense, net........................................... (541) (1,054)
Other income.................................................... 31 12
-------------------- ------------------
Income (loss) before income taxes and discontinued operations... $ 983 $ (301)
==================== ==================
June 30, September 30,
1998 1998
-------------------- ------------------
Identifiable assets at June 30, and September 30, 1998:
Systems and Products............................................ $ 5,971 $ 5,257
Satellite and Distribution Services............................. 16,460 19,394
Production Services............................................. 29,787 28,994
Corporate ...................................................... 29,642 28,512
-------------------- ------------------
Total assets.................................................... $ 81,860 $ 82,157
==================== ==================
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 6 - Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, September 30,
1997 1998
-------------------- --------------------
<S> <C> <C>
Numerator:
Income (loss) from continuing operations $ 554 $ (286)
-------------------- --------------------
Numerator for basic earnings (loss) per
share-income (loss) available to common
stockholder $ 554 $ (286)
Effect of dilutive securities:
4% convertible subordinated notes and
stock options --- ---
-------------------- --------------------
Numerator for diluted earnings (loss) per
share-income (loss) from continuing
operations available to common
stockholders after assumed conversions $ 554 $ (286)
==================== ====================
Denominator:
Denominator for basic earnings per
share-weighted-average shares 9,380,300 13,265,981
Effect of dilutive securities:
4% convertible subordinated notes and
stock options --- ---
-------------------- --------------------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 9,380,300 13,265,981
==================== ====================
Basic earnings (loss) per share from
continued operations $ 0.06 $ (0.02)
==================== ====================
Diluted earnings (loss) per share from
continued operations $ 0.06 $ (0.02)
==================== ====================
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 6 - Earnings Per Share (continued)
Net income per share has been computed using the weighted average number
of shares outstanding during each period. Pre-Merger weighted average number of
shares outstanding has been retroactively restated for the equivalent number of
shares of common stock of the Company.
The effect of 4% convertible subordinated notes and stock options have
been excluded from the diluted earnings per share calculation, because they are
anti-dilutive.
Note 7 - Long-Term Debt
<TABLE>
<CAPTION>
June 30, September 30,
1998 1998
----------------- -----------------
<S> <C> <C>
Senior secured term loan $ 30,000 $ 29,000
Senior secured revolving credit loan 2,600 7,950
Mortgage payable to credit institution bearing interest at 8.95%-
prime (8.5% at June 30, 1998 and 8.25% at September 30, 1998) plus 1%,
collateralized by fixed assets with net book value at $2,478 and $2,457 2,426 2,373
Capitalized lease obligations 1,280 1,164
----------------- -----------------
36,306 40,487
Less: current maturities 5,378 5,559
----------------- -----------------
$ 30,968 $ 34,928
================= =================
</TABLE>
In connection with the Merger, the Company refinanced all IPL's and Old
Video's long-term indebtedness (excluding capital lease obligations, Old Video's
mortgage payable, IPL's subordinated debt and IPL's note payable to Cognitive
Communications, Inc.) including lines of credit, with a $33,000 term loan and a
$17,000 revolving line of credit.
Senior Secured Long-Term Debt - The Company established a $33,000 senior
secured term loan (the "Term Loan') and the Revolving Loan (as defined herein),
with a five-year facility provided by KeyBank, as the agent bank (the
"Facility") which are secured by all assets of the Company and its existing and
future directly and indirectly owned subsidiaries. The Revolving Loan bears
interest at the lenders' prime rate minus 1.0% or LIBOR (London Interbank
Offered Rate) plus a number of basis points based upon the Company's leverage
ratio (funded debt divided by EBITDA), which is LIBOR plus 1.75%. The Term Loan
bears interest at LIBOR plus a number of basis points based upon the Company's
leverage ratio, which is LIBOR plus 1.75%. The Facility contains various
covenants that require the Company to maintain certain financial ratios, limit
capital expenditures, prohibit dividends and similar payments and restrict the
Company's ability to incur other indebtedness. The Facility is guaranteed by all
of the Company's subsidiaries.
In August 1997, the Company entered into an interest rate swap agreement
with KeyBank to reduce the impact of changes in interest rates on its Term Loan.
The agreement, which matures in five years, has a total beginning notional
principal amount of $33,000, which decreases in accordance with scheduled
principal payments on the Company's Term Loan. The swap agreement effectively
converts the Company's borrowings under its Term Loan to a fixed rate. The
Company pays the counterparty a fixed rate of 7.58% per annum and receives
payments based upon the floating one month LIBOR rate. The Company is exposed to
credit loss in the event of nonperformance by the counterparty: however, the
Company does not anticipate nonperformance by the counterparty.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 7 - Long-Term Debt (continued)
Revolving Credit Facility - The Company established a $17,000 senior
secured revolving credit facility (the "Revolving Loan") with KeyBank. The
Company had outstanding direct borrowings of $7,950 under the Revolving Loan at
September 30, 1998. The Company also has outstanding under the Revolving Loan
letters of credit of approximately $1,016 at September 30, 1998. The Company's
Revolving Loan weighted average interest rate was 7.42% at September 30, 1998.
Subordinated Debt - The Company, in connection with the Merger, assumed
IPL's $6,350 principal amount of eight year convertible subordinated notes, due
May 4, 2003, with an interest rate of 4.0%, convertible at $14 per share after
five years and redeemable after six years. The debt was valued at $4,890 at May
5, 1995 using an effective rate of 8.34%. The valuation discount is being
amortized over the life of the notes.
Also, in connection with the merger and Contribution, the Company assumed
additional long-term indebtedness of $3,842, consisting of a note payable to
Cognitive Communications, Inc. ($196), mortgage payable ($2,103) and capital
lease obligations ($1,543).
Note 8 - Discontinued Operations
On November 30, 1997, management, which had the authority to approve the
action, committed the Company to a formal plan to dispose of its interest in the
Consulting Services segment, acquired in the Merger, which provides strategic
consulting services in the area of communications, design and implementation of
intranets, extranets and internets. The Company's management has determined a
fair value for the assets taking into account offers to date, cash flow
projections, customer agreements, and employment agreements. Management
estimates the Consulting Services segment will be closed by the end of November
1998.
Losses from the discontinued Consulting Services segment amounted to $183
from the date of the Merger through September 30, 1997, net of applicable income
tax benefit of $62, and are shown separately in the consolidated statements of
income. Revenues of the discontinued Consulting Services segment were $119 from
the date of the Merger through September 30, 1997 and $597 for the three months
ended September 30,1998. Included in other current liabilities at September 30,
1998 is a reserve of $319 for future net operating losses expected to be
incurred prior to disposal of the Consulting Services segment.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in thousands, except share amounts)
General
On August 27, 1997, Video Services Corporation ("Old Video") merged with
and into International Post Limited ("IPL") with IPL being the surviving
corporation (the "Merger"). At the effective time of the Merger, IPL changed its
name to Video Services Corporation. References herein to the "Company" refer to
the combined company after giving effect to the Merger. The Merger was accounted
for as a reverse acquisition whereby the pre-Merger financial statements of Old
Video became the historical financial statements of the Company. As a result of
the Merger, the results of operations and cash flows reported for the Company
for the three months ended September 30, 1998 are not necessarily comparable to
those for the three months ended September 30, 1997. The results of operations
and cash flows as reported represent those of the Company for the three month
periods ended September 30, 1998 and 1997, and include the results of operations
and cash flows of IPL from the date of the Merger through September 30, 1998.
Certain comparable references to IPL's 1997 figures include pre-acquisition
amounts that are not included in the financial statements, but are included in
the following discussions for comparative purposes only. In addition, in August
1997 the principal stockholders of Old Video contributed by merger (the
"Contribution") the stock of two S corporations holding all of the general and
limited partnership interests in MAL Partners and L.I.M.A. Partners, 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. See Note 1 to the Company's unaudited condensed consolidated
financial statements included herein. The following discussion and analysis
should be read in conjunction with such historical consolidated financial
statements and the notes thereto.
Overview
The Company's business is currently divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services (see Note 5). The Satellite and Distribution Services
segment integrates and distributes broadcast quality video content via a
satellite and fiber optic transmission network routed through its digital/analog
switching center and is an international provider of technical and distribution
services to distributors of television programming. The Systems and Products
segment designs, engineers and produces advanced video facilities for the
broadcast and cable television, post-production and corporate markets. This
segment also develops, manufactures and markets advanced color correcting and
manipulation systems for the film, post-production and multimedia industries and
rents professional video equipment to the sports, entertainment and other
segments of the broadcast and cable television and corporate markets. The
Production Services segment is an international provider of technical and
creative services to owners and producers of television programming, television
advertising and other programming content.
Discontinued Operations
On November 30, 1997, management, which had the authority to approve the
action, committed the Company to a formal plan to dispose of the Consulting
Services segment providing strategic consulting services in the area of
communications, design and implementation of intranets, extranets and internets.
The Consulting Services segment was acquired in the Merger (See Note 8).
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
(in thousands, except share amounts)
Results of Continuing Operations
Three Months Ended September 30, 1998 compared to Three Months Ended
September 30, 1997.
Total revenues increased by $10,488 to $21,906 in 1998 from $11,418 in
1997. Revenues from the Satellite and Distribution Services segment increased by
$3,697 to $7,043 in 1998 from $3,346 in 1997. $3,273 of the $7,043 of 1998
Satellite and Distribution Services segment revenue was attributable to
post-Merger contribution to revenues from Satellite and Distribution Services
provided by IPL. Revenues from the Satellite and Distribution Services segment
other than those provided by IPL increased by 53.5% to $3,770 in 1998 from
$2,456 in 1997. This increase was primarily generated by the Goodwill Games, an
increase in the number of customer connected to the Company's satellite and
fiber optic network and the receipt of additional transmission revenue from
existing customers. Revenues from the Satellite and Distribution Services
segment provided by IPL increased by 7.5% from $3,045 in 1997 to $3,273 in 1998.
The increase is primarily due to the opening of the new facility in Burbank,
California. Revenues from the Systems and Products segment increased by 33.2% to
$6,221 in 1998 from $4,669 in 1997 due to increased demand for design and
installation of video systems. The amount of the increase was greater as a
result of a prior year significant contract pursuant to which the Company
received a commission based on equipment used in such video systems which were
purchased directly by the customer from third parties. For other contracts, the
Company records revenues from the sale of such equipment as well as the cost
related to the purchases thereof. The Production Services segment revenues of
$3,403 and $8,642 in 1997 and 1998, respectively, was solely attributable to
post-Merger contributions provided by IPL. Revenues provided by IPL decreased by
7.0% from $9,288 in 1997 to $8,642 in 1998. The decrease is primarily due to a
lower volume of creative editorial services.
Total costs of sales, services and rentals increased by $7,552 to $13,808
in 1998 from $6,256 in 1997. Costs of the Satellite and Distribution Services
segment increased by $2,150 to $3,684 in 1998 from $1,534 in 1997. This increase
was primarily attributable to costs of Satellite and Distribution Services
provided by IPL of $1,394 and a $756 increase in costs of non-IPL services
associated with the Goodwill Games and higher syndication costs and fiber
usage. Costs of IPL Satellite and Distribution Services increased $566 to
$1,778 in 1998 from $1,212 in 1997. This increase consisted primarily of costs
associated with the new West Coast facility. Costs of the Systems and Products
segment increased by $1,841 to $4,664 in 1998 from $2,823 in 1997. The growth in
costs of the Systems and Products segment was driven by the increased volume of
installations of video systems as well as the effects of the significant
contract pursuant to which the Company received a commission as discussed above.
Costs of the Production Services segment of $1,899 in 1997 and $5,460 in 1998
was solely attributed to costs provided by IPL. Cost of Production Services
provided by IPL increased by $21 to $5,460 in 1998 from $5,439 in 1997.
The Company's overall gross profit margin (excluding depreciation)
decreased to 37.0% in 1998 from 45.2% in 1997. Gross profit margin from the
Systems and Products segment decreased to 25.0% in 1998 from 39.5% in 1997
primarily as a result of the change in contract structure discussed above and
from increased amount of sub-rentals as well as a lower proportion of revenues
contributed by the equipment rental division in 1998. Gross profit margin from
the Satellite and Distribution Services segment other than services provided by
IPL decreased from 53.2% in 1997 to 49.4% in 1998 as a result of a greater
proportion of syndication revenues as well as incremental costs associated with
the Goodwill Games. Gross profit margin from Satellite and Distribution Services
provided by IPL decreased from 60.2% in 1997 to 45.7% in 1998 as a result of the
opening of the new West Coast facility. Gross profit margin from Production
Services decreased to 36.8% in 1998 from 41.4% in 1997 as a result of an
decrease in revenues combined with stable fixed costs. Since a high proportion
of costs attributable to the Production Services segment are fixed, decreases in
revenues do not result in proportionate decreases in costs.
Selling, general and administrative expenses increased to $4,958 in 1998
from $2,651 in 1997, which increases primarily resulted from the additional
administrative salaries and occupancy costs associated with IPL's operations.
However, as a result of the Company's increased revenue, selling, general and
administrative expenses as a percentage of revenues decreased to 22.6% in 1998
from 23.2% in 1997.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
(in thousands, except share amounts)
Depreciation expense increased to $2,136 in 1998 from $935 in 1997,
primarily due to the significant amount of fixed assets of IPL acquired by the
Merger. Amortization expense increased to $263 in 1998 from $83 in 1997
reflecting the amortization of the goodwill (excess of cost over the fair value
of net assets acquired) recorded in connection with the Merger, which is being
amortized over 25 years.
Interest expense increased to $1,054 in 1998 from $541 in 1997 primarily
due to the assumption and refinancing by the Company of IPL's existing long-term
indebtedness as part of the Merger. See "Liquidity and Capital Resources".
The effective tax rate applied against pre-tax income (loss) was (5.0)%
in 1998 and 43.6% in 1997. The effective tax rate for 1998 as compared to the
federal statutory tax rate of 34% was primarily the result of state income taxes
and goodwill amortization created by the Merger which is not deductible for
income tax purposes.
Income (loss) from continuing operation decreased to $(286) in 1998 from
$554 in 1997 primarily as a result of the factors discussed above.
Liquidity and Capital Resources
The Company meets its liquidity needs and capital expenditures
requirements with internally generated funds, borrowing under its bank credit
facility (including line of credit), equipment financing and capital leases.
Such funds are used for capital expenditures, working capital needs and
repayment of outstanding indebtedness
In connection with the Merger, the Company refinanced substantially all
of Old Video's and IPL's long-term indebtedness (excluding convertible
subordinated debt, Old Video's mortgage payable, note payable to Cognitive
Communications, Inc. and obligations under capital leases), including lines of
credit, with a $33,000 term loan and a $17,000 revolving line of credit. The new
facility bears interest at: (i) the lenders' prime rate minus 1.00% or (ii)
LIBOR plus a number of basis points based upon the Company's leverage ratio
(funded debt divided by EBITDA (defined as earnings before interest, taxes,
depreciation and amortization), which is LIBOR plus 1.75% (the Company 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 were due beginning
December 31, 1997. Such quarterly principal payments 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 resulted from
the refinancing. The facility contains covenants, which require the Company to
maintain certain financial ratios, prohibit dividends and similar payments and
restrict the Company's ability to incur other indebtedness. The facility is
guaranteed by all of the Company's subsidiaries.
The proceeds of the new facility were used as follows: approximately
$23,400 to refinance IPL's outstanding long-term indebtedness, approximately
$3,600 to refinance Old Video's outstanding long-term indebtedness and $1,485 of
mortgage obligations of MAL Partners and approximately $1,800 to refinance Old
Video's outstanding short-term line of credit. Approximately $3,500 was used to
pay the fees and expenses incurred in connection with the Merger.
In August 1997, the Company entered into an interest rate swap agreement
on the $33,000 term loan, which decreases in accordance with scheduled principal
payments on the Company's Term Loan. The swap agreement effectively converts the
Company's borrowings under its Term Loan to a fixed rate of 7.58% per annum.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
(in thousands, except share amounts)
At September 30, 1998, the Company's outstanding indebtedness was
approximately $40,487, including $7,950 under the revolving credit facility. At
September 30, 1998, the weighted average interest rate was approximately 8.14%
on the Company's outstanding indebtedness. The remainder of the facility
(approximately $8,034) will be available for future working capital requirements
and general corporate purposes.
In July 1998, the Company opened an additional facility in California.
The new facility provides post-production services to international television
program originators and distributors; such services include standards conversion
and international duplication. Management believes that the facility will give
the company an opportunity to recapture business lost to those of its
competitors operating on the West Coast, as well as to attract additional
customers located on the West Coast. This expansion required approximately $5.1
million in capital expenditures. The source of the capital expenditures and
operating funds was a combination of internally generated funds and bank
borrowings.
Cash Flow from Operating Activities. For the three months ended September
30, 1998, net cash used in operating activities was $1,437, primarily resulting
from EBITDA of $3,152, which was offset by increases in working capital
requirements. For the three months ended September 30, 1997, net cash used in
operating activities was $4,719, primarily resulting from EBITDA of $2,542,
which was offset by increases in working capital requirements, primarily the
payment of transaction costs associated with the Merger.
Cash Flow from Investing Activities. For the three months ended September
30, 1998, the Company used $3,341 for investing activities, consisting of $3,347
for the purchase of additional equipment, which was offset by a sale of fixed
assets. Approximately $1,900 of additional equipment was used for the West Coast
facility.
Cash Flow from Financing Activities. For the three months ended September
30, 1998, cash provided by financing activities, net of repayments of borrowings
of long-term indebtedness, was $4,232. Such amount primarily consisted of $8,200
in borrowings under the revolving line of credit described above. The Company
repaid $4,019 of borrowings primarily in connection with the refinancing
described above.
Impact of Year 2000:
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify portions of
its administrative and accounting software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. Based
on the nature of the Company's business, the Company anticipates it is not
likely to experience material business interruption due to the impact of the
year 2000 compliance on its customers and vendors. As a result, the Company does
not anticipate the incremental expenditures to address year 2000 compliance will
be material to the Company's liquidity, financial position or results of
operations over the next few year.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
(in thousands, except share amounts)
Quantative and Qualitive Disclosures about Market Risk:
Market risks relating to the Company's operations result primarily from
changes in interest rates as well credit risk concentrations. To address these
risks the Company entered into an interest rate swap as described below. The
Company does not use financial instruments for trading purposes.
The Company hedges its exposure to changes in interest rates on its
senior secured term loan. In August 1997, the Company entered into a five year
interest rate hedge agreement with a total notional principal amount of $33,000
to manage interest costs associated with changing interest rates. This agreement
converts underlying variable rate debt based on LIBOR under the Company's term
loan to fixed rate debt with an interest rate of 8.33%.
There has not been any material changes in the reported market risks
since the fiscal year ended June 30, 1998.
Forward-Looking Statements:
The above discussion contains forward-looking statements. There are
certain important factors that could cause results to differ materially from
those anticipated by the statements made above. These factors 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.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information purposes only and
not filed.
(b) REPORTS ON FORM 8-K
None
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
SIGNATURES
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 12, 1998 /s/ Louis Siracusano
-----------------------------------------------
Name: Louis H. Siracusano
Title: President and Chief Executive Officer
Date: November 12, 1998 /s/ Michael E. Fairbourne
-----------------------------------------------
Name: Michael E. Fairbourne
Title: Vice President - Administration and
Chief Accounting Officer
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME FILED AS PART OF THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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