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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] 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 0-23388
VIDEO SERVICES CORPORATION
(Exact name of registrant as
Specified in its charter)
DELAWARE 13-3735647
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
240 Pegasus Avenue
Northvale, New Jersey 07647
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (201) 767-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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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 file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].
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The aggregate market value of the registrant's common stock, par value
$.01 per share, held by persons other than affiliates of the registrant as of
August 31, 1998, was approximately $7,237,224.
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The number of outstanding shares of the registrant's common stock, par
value $.01 per share, as of August 31, 1998, was: 13,264,307.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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<PAGE>
PART I
Certain statements contained in this Annual Report on Form 10-K are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are thus prospective. These statements are
generally (but not necessarily) preceded or followed by, or include, such words
as "believes", "expects", "anticipates" or similar expressions. Such statements
reflect management's current views, are based on many assumptions, including,
but not limited to, that no significant changes will occur in the operating
environment of the Company, and are subject to risks, uncertainties and other
factors which could cause these statements to differ materially from what
actually occurs. The Company may execute new agreements, terminate existing
agreements or enter into new financing arrangements that may affect the accuracy
of these statements. Other important factors that could cause results to differ
materially from current views include, but are not limited to, the general
performance of the economy, specifically as it affects the advertising,
entertainment and television and video and broadcast 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. None of these events can be predicted with
certainty and, accordingly, are not taken into consideration in the making of
the forward-looking statements contained herein. Readers are cautioned to
carefully consider such factors. There is no assurance that the assumptions used
are necessarily the most likely to occur. The Company does not assume any
obligation to update any forward-looking statement to reflect actual results,
changes in assumptions or changes in other factors affecting such statement.
ITEM 1. BUSINESS
Background
Video Services Corporation, a privately held New Jersey corporation ("Old
Video"), was incorporated in 1979 to service select segments of the video
industry which its founders, Louis H. Siracusano, Arnold P. Ferolito and Martin
Irwin, had identified as being under-serviced. Originally, Old Video focused its
efforts on building advanced video systems and providing professional video
equipment to particular segments of the television and professional video
services industries. Over the years, Old Video identified additional market
segments which it believed presented opportunities for significant revenue
growth and its lines of business gradually expanded to include post-production
and standards conversion, as well as satellite and fiber optic transmission
services. In 1992, Old Video divested itself of its post-production business,
which divestiture ultimately resulted in the formation of International Post
Limited, a Delaware Corporation ("IPL"), in October 1993. In February 1994, Old
Video sold its standards conversion business to IPL in connection with IPL's
initial public offering and used the sale proceeds to repay indebtedness and to
expand certain business segments, particularly satellite and fiber optic
transmission services. After such sale, Old Video owned approximately 3% of
IPL's outstanding Common Stock.
On August 27, 1997, Old Video merged with and into IPL, with IPL being the
surviving corporation, and the separate corporate existence of Old Video ceased
(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 after the Merger. At the effective time of the Merger,
IPL's name was changed to Video Services Corporation. References herein to the
"Company" refer to the combined Company after giving effect to the Merger.
Overview
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 (see Note 12). 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.
<PAGE>
On January 2, 1997, Old Video's management, which had the authority to
approve the action, committed Old Video to a formal plan to discontinue the
operations of its Diversified Products segment as a condition to the Merger. In
August 1997 and prior to the Merger, Old Video spun off the Diversified Products
segment to Old Video's stockholders. 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 Company is a leading single source provider of satellite and fiber
optic video transmission services in the New York metropolitan area and one of
the largest independent (i.e., not affiliated with, or related to, an equipment
manufacturer) providers of technical services and equipment to its target
markets. The Company believes that it will continue to experience increasing
demand for its engineering services as a result of the anticipated conversion of
existing television and cable facilities to digital, emerging compression
technologies and an increasing demand for programming content worldwide. The
Company provides (i) producers of original programming with technical and
creative services necessary to transform original film or video to final product
for airing on network, syndicated, cable or foreign television; (ii) users of
special video effects with services required to digitally create or manipulate
images in high resolution formats for integration into television commercials
and programming; (iii) international programmers with studio facilities and
multi-standard post-production services necessary to assemble programming; and
(iv) international programmers and owners of television and film libraries with
standards conversion, network playback, and duplication and audio services, all
in multiple standards and formats. The Company believes that its principal
strengths in these areas include the depth and breadth of its client
relationships, the depth and continuity of its creative talent, and its
technologically advanced equipment and facilities.
Demand for the Company's post-production services and facilities is
principally derived from the production of new television commercials and the
distribution of previously released motion pictures and television programming
through international syndicators and programmers. Historically, the Company's
post-production clients have outsourced their post-production services
requirements, and the Company expects that such clients will continue to
outsource many of the services required for production, post-production and
distribution of film and television programming. The Company believes that
demand will also be created by the continuing trend toward globalization in the
entertainment and media industries. The worldwide market penetration of
distribution channels such as home video and digital satellite broadcast is also
anticipated to contribute to a growing demand for original and reissued
programming.
Business Strategy
The Company's business strategy is to capitalize on opportunities created
by changes in technology and markets, as well as to become the leading supplier
of services to the market segments in which it currently competes. The Company
has developed good customer relationships with all of the major television
networks and many of the established and developing cable networks by
maintaining high levels of technical capabilities and customer service. For
example, AT&T's SKYNET Satellite Services acknowledged the Company's satellite
uplink performance in 1997 and 1996 by presenting the Company with the
prestigious SKYNET Uplinker Award, which is awarded to companies that have
accessed AT&T satellites without any interferences, incidents or procedure
violations over a period of one year. The Company believes that it will be able
to continue to grow the businesses by selling additional services to existing
customers and by acquiring new customers as a result of its technological
capabilities, superior service, strong reputation and aggressive sales force.
The Company is also focused on capitalizing on opportunities created by
emerging industry trends such as the emergence of digital television and its
more advanced variant, high-definition television; the proliferation of
alternative transmission/distribution methods such as direct-to-home satellite
services and multipoint microwave systems; and the conversion of existing
television facilities from analog to digital and from videotape-based to digital
server-based technologies. The Company believes that the continued proliferation
of new distribution technologies, as well as the industry-wide conversion of
equipment and systems from analog to digital, will create an increasing demand
for technical expertise and resources which can be outsourced by the end-user.
The Company believes that the aggressive timetable associated with such
conversion, which has resulted both from recent mandates by the Federal
Communications Commission (the "FCC") for digital television and high-definition
television as well as competitive forces in the marketplace, is likely to
accelerate the rate of increase in the demand for these services. As a result,
the Company believes that significant opportunities exist for it to provide
services for the upgrading and conversion of the industry's technical
infrastructure.
<PAGE>
The Company has implemented several strategies for capitalizing on these
growth opportunities, including the expansion of its engineering staff to meet
market demand, the introduction of additional services, such as repair and
maintenance contracts, and, most important the negotiation and implementation of
strategic partnerships to position itself as a leader in the conversion to
digital television and high-definition television. In June 1997, A.F.
Associates, Inc., one of the Company's subsidiaries, signed a contract with
Comark Digital Systems pursuant to which it has engineered and built new digital
master control and studio facilities for two analog television stations owned by
Sinclair Communications, Inc. in Birmingham, Alabama and Milwaukee, Wisconsin.
In March 1998, the Company executed a "Strategic Alliance Agreement" with one of
the nation's largest manufacturers of television transmitters, Comark
Communications, Inc. ("Comark"), relating to joint marketing of turnkey systems
for the broadcasting industry's conversion to digital television and high
definition television. The Company believes that this alliance will provide
technological leadership for broadcasters in the conversion process.
In addition, the Company seeks to become the leading full-service
post-production house for the United States and international markets and to
continue to seek new ways to enhance its ability to provide one-stop
post-production services while maintaining the high quality of such services.
The Company plans for further growth and the expansion of its range of
post-production and other services through strategic acquisitions and internal
growth. In the first quarter of fiscal year 1999, the Company opened an
additional 13,000 sq. ft. facility in Burbank, California to provide technical
and distribution services to international television program originators and
distributors. Management believes that the facility will give the company an
opportunity to recapture business lost to those of its competitors operating in
California, as well as to attract additional customers located on the West
Coast. Historically, the Company invested significant sums in its infrastructure
to ensure that each of its divisions remained at the technological forefront of
the post-production industry.
Principal Services
Satellite and Distribution Services
Through two of its operating subsidiaries, Atlantic Satellite
Communications, Inc. ("Atlantic Satellite") and Waterfront Communications
Corporation ("Waterfront"), the Company provides integrated satellite and fiber
optic video and data transmission services to a wide range of customers with
whom it has enjoyed long-term relationships, including the major television
broadcast networks and several cable television networks, independent national
and international television stations and producers of syndicated television
shows. Satellite and fiber optic transmission services are used by these
customers independently and in combination to integrate editing and transmission
of video content as quickly as possible. The Company's use of fiber optic and
satellite technologies enables it to provide its customers with rapid and
reliable transmission of broadcast quality video content with a high level of
flexibility. The Company believes that, in the New York metropolitan area,
Atlantic Satellite is a leading single source provider of satellite and related
transmission services and that Waterfront is the leading provider of "first
mile" and "last mile" fiber optic video and data transmission services. "First
mile" transmission services are services whereby content is transmitted from an
origination point, via local transmission means, to a long distance video
network carrier (such as VYVX or AT&T) or satellite earth station (such as
Atlantic Satellite) and "last mile" transmission services are services whereby
content is received into, via local transmission means, the final destination
point for the content (such as a television network local broadcaster or cable
channel). Atlantic Satellite's teleport facilities provide customers with access
to the full complement of satellite and fiber optic transmission services
provided by Atlantic Satellite and Waterfront.
Atlantic Satellite's teleport facility is located on contiguous properties
in Northvale, New Jersey and Tappan, New York. This facility contains broadcast
quality satellite dishes, which transmit and receive domestic feeds in both
C-Band and KU Band frequencies, and provides international transmission to both
PanAmSat and Orion satellites. At this facility, Atlantic Satellite provides
primary up-link and down-link services, as well as ancillary services such as
tape playback and recording, tape duplication, syndication services (including
spot insertion and editing), and digitally compressed satellite transmission
expertise. Atlantic Satellite provides over 3,000 hours per year of playback and
uplink services for pre-taped, syndicated television programs produced by Warner
Brothers, Hearst and KingWorld among others. It also downlinks and records
numerous live sporting events for clients such as the National Hockey League
(NHL) and the National Basketball Association (NBA) and provides satellite
transmission services for clients such as Fox Sports, NHK, NFL Films and Phoenix
Communications Group Inc. ("Phoenix"), which is the communications/production
provider for Major League Baseball.
Waterfront's services are provided through a video switching facility
located in New York City which is connected to all major news organizations and
all New York area teleports including Atlantic Satellite's. Waterfront's
extensive network of both analog and digital video fiber optic connections and
multiple paths to Atlantic Satellite enable domestic and international
broadcasters to take advantage of the Company's single source transmission
services at competitive rates. The Company believes that Waterfront's fully
manned facility provides it with a competitive advantage over its major
competitor, "The Switch" (operated by Globecast), which does not provide the
same level of service. Waterfront's fiber optic connections are located in local
venues such as the New York Stock Exchange and the United Nations in New York
City, as well as Giants Stadium, the Continental Airlines Arena and the
Meadowlands Racetrack in New Jersey. These fiber optic connections enable
Waterfront's customers to transmit video content directly from those venues to
their studios or, alternatively, to Atlantic Satellite for national and
international distribution. In addition to local fiber optic transmission and
connections to Atlantic Satellite's transmission facility, Waterfront provides
its customers with access to several long-distance fiber optic carriers through
its remote facility located in downtown Manhattan. Waterfront also provides
transportable services, including point-to-point microwave transmission,
transportable up-link and down-link transmission, and broadcast quality
teleconference services, as well as access to other teleport facilities. The
Company believes that Waterfront's switching facility is the largest such
facility in the New York metropolitan area and that Waterfront's connections to
major events and sports venues within the New York metropolitan area provide
clients with extensive and essential coverage.
The Company believes that its ability to combine "first mile" and "last
mile" fiber optic transmission and satellite transmission services provides it
with a competitive advantage over providers of satellite-only transmission
services. These integrated capabilities offer broadcasters, cable television
networks and others the ability to edit news, sports and other video content in
their Manhattan studios (which are linked to Waterfront) and, after alteration,
to transmit that content anywhere in the world almost instantaneously through
the Waterfront/Atlantic Satellite fiber optic link. The Company believes that
the combined services provided by Atlantic Satellite and Waterfront have
achieved a reputation for quality and reliability in the industry, which has
resulted in contracts with Fox News, Fox Sports, Court TV, PanAmSat, CNBC,
MS/NBC, the NHL and Worldwide Television Network.
Through Audio Plus Video International, Inc. ("Audio Plus Video"), the
Company provides the following broad range of technical and distribution
services to distributors of television programming to the international market
and, to a lessor extent, a variety of international television program
originators, including standards conversion, international duplication and
specialized video services.
Standards Conversion: Throughout the world, video signals are recorded in
four principal standards: NTSC-used in several countries, including the U.S.,
Canada, Mexico and Japan; PAL-used in numerous countries, including England,
Italy, Australia and China; PAL-Modified-used exclusively in Brazil; and
SECAM-used in France, Russia and the Middle East. A program recorded in
one-standard cannot be broadcast or played back through equipment employing
another standard unless the program is first "converted" to the other standard.
If, for example, RTL, a German television broadcaster, wants to air "Sesame
Street" (a program produced in the U.S. and, therefore, in the NTSC standard),
the video signal must first be converted to PAL to make it compatible with the
German standard. The Company provides conversion services to and from all of the
standards currently available.
International Duplication: Duplication services are required to accommodate
multiple broadcast locations receiving the same product in the same standard,
but utilizing a variety of videotape formats. Using the same analogy as above,
the German broadcaster received a PAL tape for his 1" equipment, but a
Scandinavian broadcaster needs to receive a PAL tape of that same "Sesame
Street" episode for his D2 equipment. Accordingly, the Company would "duplicate"
the tape to the different format in the same standard.
Specialized Video Services: The Company is meeting an increasing demand for
specialized services using state-of-the art, multistandard film-to-tape, editing
and audio suites. Audio capabilities include restoration, layback, ADR
(automatic dialogue replacement), audio-for-video editing, and the recreation,
or enhancement of music and sound effects tracks. Additional services include
screen-by-screen color correction of film or tape, video restoration and I3
(International Image Interpretation), an innovative standards conversion
technology, which achieves extremely high quality for film-originated material.
The Company's services that are provided to the television industry and
program originators, and the specialized video services that are provided to
television program distributors to the international market, are generally
offered on an hourly or daily rate basis. Standards conversion and duplication
services provided to television program distributors to the international market
are offered at rates that are based on program length. The Company maintains an
in-house engineering staff to facilitate the modification of equipment to meet
client requirements.
Through fiber optic connections, Audio Plus Video is linked to Atlantic
Satellite giving them the ability to send and receive signals both domestically
and internationally. This service is especially essential with time sensitive
material such as sporting events. For example, satellite services aid in the
rapid international distribution the Company provides for the National
Basketball Association.
<PAGE>
In the fourth quarter of fiscal year 1998, Audio Plus Video began an
expansion to the West Coast with the leasing of a new 13,000 square foot
facility in Burbank, California. That business became operational in July 1998
and the Company expects to capture both new customers and existing customers
whose operations were transferring to the West Coast.
Audio Plus Video is beginning its ninth year of worldwide distribution for
the NBA and eleventh year for Children's Television Workshop's "Sesame Street".
Other programs include "Samurai - X", "Baywatch", "Ricki Lake", "Third Rock From
the Sun", "Bewitched", "South Park" and "Dr. Katz". Specials during the year
included The Academy Awards, NCAA Basketball Tournament, The Oscars, The Golden
Globe Awards and The Grammy's. In December 1995, Turner Entertainment Co.
awarded Audio Plus Video its International Vendor of the Year Award for
outstanding service.
Audio Plus Video clients include: Sony Pictures Entertainment, CBS
International, NBC, ABC, Buena Vista, Warner Brothers, Hearst, Worldvision, NBA,
Children's Television Workshop and Discovery Channel.
Systems and Products
Through AF Associates, Inc. ("AFA"), the Company designs, builds, installs
and services advanced video systems for the broadcast and cable television
industries, and for professional and corporate markets. AFA's services include
project management; design and engineering; consultation with architects and
building contractors; drafting and technical documentation, equipment and
materials specification and procurement; pre-wiring and assembly; site
installation; system testing and commissioning; and training. The Company
believes that AFA is one of the leading independent providers of such services.
Systems are designed by AFA's in-house engineers utilizing computerized
design programs and are assembled in AFA's facility in Northvale, New Jersey.
Assembly includes custom fabrication of all audio, video and control
interconnect wiring, mounting of equipment into rack enclosures and custom
operating consoles, pre-wiring of all interconnecting cabling and subsystem
testing. The entire system is then shipped to the customer's location, where it
is installed and tested by AFA's technicians and engineers. The end product is a
professionally designed and built system, utilizing advanced design and
construction concepts and incorporating state-of-the-art broadcast equipment.
Through the use of AFA's systems integration services, the client need only set
overall system and operational requirements. AFA engineers and constructs the
entire system and manages all aspects of technical construction.
AFA's clients include the four (4) major networks, numerous cable channel
networks (e.g., Cable News Network, Inc., CNBC, Fox News Channel, Lifetime
Television, USA Networks, Inc. and Home and Garden Cable Network), satellite
broadcasters (e.g., Direct TV and SKY Latin America), corporate television
networks (e.g., Merrill Lynch & Co., Inc., Pfizer, AT&T and Toys R Us), and
numerous production and post-production facilities. Over 50% of AFA's business
is repeat business from clients who seek AFA's technical and engineering
expertise. The Company believes that increases in cable, direct satellite and
independent broadcasting made possible by emerging compression technologies, as
well as the migration of broadcasting standards from analog to digital, will
provide significant opportunities for AFA to expand its customer base.
Projects recently completed by AFA include: new studio facilities and
technical center for the "Shop at Home" cable network, the broadcast center for
Warner Brothers, "WEB" network; an expansion of the playback center for
satellite broadcaster NetSat in Brazil and several corporate television
operations for AT&T. Current projects include a new all digital television
station for the PBS affiliate Channel 13/WNET in New York City, a large cable
operation for Golden Channels in Israel, a regional cable news channel for Time
Warner, a corporate training center for Pfizer and a major direct-to-home
satellite television facility for DTH/TechCo Partners.
In May 1998, AFA acquired a product group with the objective of developing,
manufacturing and marketing advanced color correcting and manipulation systems
for the film, post-production and multimedia industries. Its products enhance
any visual representation medium that requires a true color image where a better
picture is essential. The color correction process, when interfaced with a film
scanner or tape machine, compensates for color problems in the medium that
detract from its quality. The process, though expensive, is cost effective in
that its application reduces production time by not having to "reshoot" the film
or tape. The process is also required when filming special effects. The current
industry trend toward ultra-high resolution and high definition television
(HDTV) will further enhance the need for this technology.
Through Video Rentals, Inc. ("VRI"), the Company supplies broadcast and
industrial video equipment for rental to the broadcast and professional video
industries and provides support and maintenance services for such equipment. VRI
rents cameras, super slo-mo systems, interformat portable editing systems,
character generators, graphic equipment and specialized equipment for sports
production. Equipment rentals may range from a period of one (1) day to as long
as a year. Specialized equipment packages, such as editing systems, are also
rented for longer periods by certain customers, including MTV, Phoenix and
others. VRI's purchases of equipment to be held for rental are made both on the
basis of anticipated
<PAGE>
rental demand and in response to specific customer orders and commitments from
such customers for minimum rental terms (in the case of more specialized
equipment).
VRI specializes in network sports production. As the exclusive field shop
for Fox Sports, VRI is responsible for storing, shipping and maintaining
equipment owned by the network and used for its football, hockey and baseball
broadcasts. VRI also serves as a rental agent for the rental of this equipment
to third parties. Major customers of VRI include ABC, CBS, NBC, Fox and MTV, as
well as major mobile truck operators.
The Company believes that VRI is one of the largest independent video
equipment rental suppliers on the East Coast and that it provides complementary
outsourcing solutions for clients of its other subsidiaries. For example, VRI
provides editing systems for NHL Productions, which are used in conjunction with
Atlantic Satellite's provision of satellite transmission services.
Production Services
The production of every commercial, television program or corporate
communications video involves the recording of the image on film or videotape.
This is done on location or in a studio by a production company. Once the
footage has been recorded, the post-production process begins in order to
transform the raw recorded footage into a final usable product. Creative and
technical input, which includes the transfer of film-to-tape, color correction,
editing, addition of special effects utilizing 3D and computer-generated
graphics and audio, is needed to complete the process and generate a videotape
master for duplication and distribution to broadcasters. The master tape may
need additional post-production services, such as standards or format
conversion, audio layback of a foreign language track, or the enhancement of the
music and effects tracks to facilitate international distribution.
Through CABANA corp. ("CABANA"), the Company provides creative editorial
services to the television advertising industry. The creative editing process,
or the first stage of post production, for a television commercial generally
involves the selection of the best footage from several thousand feet of film
and the combination of that footage through editing along with special video
effects to create a cohesive message with audience appeal. The creative editor
typically is involved with all facets of the post-production process and usually
selects the post-production facilities (such as Manhattan Transfer and Post
Edge), in which the remaining and final stages of the television commercial's
post-production takes place. Television commercials created by Cabana during the
year include ads for Beck's Beer, Pearle Vision, Gillette, Lancome, Schering
Plough, IBM, Sprint, L'Oreal and Ford, among others.
Through two of its operating subsidiaries Manhattan Transfer/Edit, Inc.
("Manhattan Transfer") and The Post Edge, Inc. ("Post Edge"), the Company
provides the art and science of completing high-end television commercials and
programs with the finest quality to the television advertising industry. Their
services include the following:
Film-to-Videotape Transfer: The Company has film to videotape transfer
suites for the transferring of images and sound from film to videotape. This
process can be used for either positive or negative, 16 or 35 millimeter film
and for both composite and multi-track systems. The Company's skilled colorists
operate state-of-the-art electronic equipment, which provides color correction
and expansion or repositioning of film images. In addition, the Company can
correct and enhance the color of projects originated on videotape. The videotape
element masters resulting from the transfer process can be edited to create the
final product which can then be duplicated for a variety of markets including
television advertising, corporate video cassettes, home video cassettes, cable
television, television program syndication, airline in-flight entertainment,
foreign distribution and ancillary applications. Transfers are made in both the
PAL (Europe and South America) and NTSC (North America and Japan) standards.
Computer-Generated Visual Effects: Company artists create
computer-generated television imagery working with sophisticated computer
software for applications such as main titles for television shows, credits and
various electronic special visual effects including computer animation and
electronic graphics in both two and three dimensions.
Electronic Video Editing: The Company operates a combination of analog and
digital edit suites. The editing process ranges from simple cuts and assembly
with dissolves, wipes and titles, to complicated layering of images and special
effects. Videotape is edited in many tape formats (sizes) for use in
commercials, shows, corporate and educational videos and other presentations.
Videotape Duplication: The Company offers videotape duplication in all
professional broadcast formats, including D1, D2, BetaCam SP, 1" and 3/4", to
meet the needs of the commercial advertising, corporate video, motion picture,
television production and syndicated television program distribution industries.
The Company also creates duplication masters with closed captioning for the
hearing impaired.
<PAGE>
Additional Services: In addition, Post Edge provides studio facilities and
technical personnel for MTV Latino and network playback operations for the
Cisneros Locomotion Channel.
Commercials finished this past year at Manhattan Transfer include: Visa,
Pepsi, Pizza Hut, Macy's, Hawaiian Punch, Wendy's, Pringle's, MCI, Burger King,
Bell South, Bell Atlantic and Volkswagen. In addition to Manhattan Transfer's
commercial activities, it provides post-production services for the Peabody
Award winning episode network television series "Homicide", for "Oz", the
episodic series on HBO and for the network situation comedy, "Cosby".
Commercials finished this last year at Post Edge include American Express
Latin, Red Global, Pepsi, Gloria Estefan, Burdines, Citibank, Miami Heat and
Florida Lottery among others.
The Company's major post-production clients include advertising agencies,
film editors and video production companies. Among the advertising agencies to
which the Company provides services are BBDO New York, Saatchi & Saatchi, Grey
Advertising, Uniworld Group, Lintas, Ogilvy & Mather, J. Walter Thompson, Jordan
McGrath Case, McCann Erickson and Young and Rubicam.
The Company's post-production business is dependent on the success of the
television programming and advertising industries, which success in turn is
highly dependent upon a number of factors, including the quality of content
produced, the availability of alternative forms of entertainment and leisure
activities, general economic conditions and international demand for content
originated in the United States. The Company's business also is subject to
downturns in the television, programming and advertising industries. Although
the Company generally does not have long-term or exclusive agreements with its
post-production clients, the Company has long-term relationships with many of
such clients. Because post-production clients generally do not make arrangements
with the Company until shortly before its services are required, the Company
usually does not have any significant backlog of service orders.
Sales and Marketing
Historically, the Company markets its services through its management's
efforts to exploit its industry contacts and attendance at industry trade shows,
as well as advertisements in trade journals and referrals from existing
customers and suppliers. Atlantic Satellite and Waterfront jointly market their
services through the efforts of management and a full-time sales force which
emphasizes quality and the range of their offered services. In addition, AFA
maintains a full-time sales force which emphasizes to potential customers the
extensive experience of its professional engineers, AFA's leadership role in
systems technology and its comprehensive project management services. VRI
focuses on its market leadership position, round-the-clock customer service,
diversity and reliability of its inventory and its competitive pricing
structure, as well as the value-added services it provides to its larger
customers, such as logistics and inventory management.
A full-time sales force, together with editors, graphic artists and senior
management, actively market the Company's post-production services through
industry contacts and through advertising in the major industry trade magazines
such as Shoot, Ad Week and Post. The focus of this advertising is to promote the
Company's image for quality services, its technical capabilities and its
state-of-the-art facilities.
The Company's marketing strategy, with respect to the services it provides
for television program distributors to the international market is to focus on
the needs of the end-users as well as on the needs of the clients. The Company
actively develops relationships with overseas facilities and broadcasters
through visits and multi-lingual communication, to learn and respond to their
individual technical and operational requirements. This strategy has resulted in
end-users requesting that their international television program distributors
utilize the Company's services and has alleviated many problems between the
distributors and the broadcasters. Sales and marketing efforts emphasize the
needs of the client and the end-user, technical proficiency, and the Company's
global perspective.
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.
Revenues from such customers were derived from one-time contracts for services
provided by AFA and do not necessarily represent a recurring source of revenues.
<PAGE>
Supply of Services and Equipment
In most situations where Atlantic Satellite is providing satellite up-link
services, the customer has secured the transponder time and instructs Atlantic
Satellite as to which satellite and transponder to transmit the signal. In those
situations where Atlantic Satellite is providing transponder time as part of a
service package to a customer, Atlantic Satellite obtains transponder time from
third-party re-sellers of transponder time. Satellite owners do not sell
occasional transponder time directly to end-users or service providers. Rather,
they sell or lease transponders on a full-time basis for a minimum of one year.
However, the success of Atlantic Satellite's business depends in part upon the
price and availability of satellite transponders. A shortage of transponders can
be caused by several factors, including the malfunctioning or expiration of the
useful lives of existing satellites or the unsuccessful launch of additional or
replacement satellites, all of which are beyond the control of Atlantic
Satellite or its customers. A shortage of satellite transponders would be likely
to increase the price of available transponders, which would have an adverse
impact upon Atlantic Satellite's, and thus the Company's, ability to operate
profitably. Waterfront may either order fiber optic lines from third party
providers to be installed between Waterfront's facility and the customer or the
customer may order these items directly from a third party provider, with
Waterfront providing only the connection with its switch. AFA and VRI obtain
their equipment from a variety of sources, including the major equipment
manufacturers such as Sony Corporation of America, BTS Broadcast Television
Systems and Tektronix. AFA orders equipment used in the production of its video
systems based upon customer purchase orders after receipt of deposits. Larger
systems are funded through periodic customer payments, which relate closely to
the capital needs of the project. Although the Company did not experience any
significant difficulty in obtaining equipment, there can be no assurance that
shortages will not arise in the future. The loss of any one or more
manufacturing sources could have an adverse effect on the Company until
alternative arrangements could be secured. The Company believes that there are
alternative adequate sources of components of sufficient quality and quantity.
Competition
The competitive video services industry is both specialized and fragmented.
Major competitors for Atlantic Satellite's transmission services include
Micronet (a subsidiary of American Tower Corporation), Group W (a subsidiary of
Westinghouse Electric Corporation), Globecast (a subsidiary of French Telecom)
and National Gateway (a subsidiary of Williams Communications, Inc.). Some of
these competitors have significantly greater resources than the Company.
Atlantic Satellite competes primarily based upon customer service and its large
and valued subscriber base, which permits a high degree of inter-subscriber
connections. Although the Company believes that Waterfront's video switching
facility is the largest in the New York metropolitan area, "The Switch"
(operated by Globecast) has "first mile" and "last mile" capabilities and
competes with Waterfront. AT&T also competes in the switching business to some
extent. However, the Company believes that its fully manned facility provides it
with an advantage over its competitors, which do not provide the same level of
service. AFA's primary competitors are Sony Corporation, The Systems Group,
Communications Engineering Inc. and National TeleConsultants, as well as small,
regionally based integrators and dealers. Competition is based upon technical
expertise, experience and price. VRI's major competitors are Bexel Corporation,
which has locations in several metropolitan areas, as well as smaller companies,
which do not offer the variety of services provided by VRI. Competition is based
upon price, diversity and availability of inventory and customer service. The
Company believes that the ability of its operating subsidiaries to cross-market
to existing customers using other services offered by the Company's other
subsidiaries provides the Company with a competitive advantage over many
competitors who lack the full complement of services provided by the Company.
Certain post-production services businesses (both independent companies and
divisions of diversified companies) provide most of the same services provided
the Company, while others specialize in one or several of these services.
Certain film production companies also provide post-production services. Many of
the Company's competitors for post-production services are located in New York
City, one of the principal domestic markets for such services. Certain of these,
as well as other competitors of the Company, have greater financial resources
than the Company.
With regard to its post-production services, the Company competes on the
basis of customer satisfaction with the range, quality and pricing of its
offered services. The Company also competes in this area on the basis of its
ability to attract and retain qualified, highly skilled personnel. The Company
believes that prices for its post-production services are competitive within its
industry, although some competitors may offer certain of their services at lower
rates than the Company. The post-production services industry has been and is
likely to continue to be subject to technological change to which the Company
must respond in order to remain competitive. The Company has no long-term or
exclusive agreements with customers for which it provides post-production
services (other than with MTV Latin America, Inc. with respect to providing
services to MTV Latino); however, the Company has had long-term relationships
with many of such customers.
<PAGE>
Major competitors of the Company in providing standards conversion services
include Devlin Video Services, Magno Sound & Video, Four Media Corporation,
Vidfilms, Intercontinental Televideo and International Image based in Toronto,
Canada. Major competitors of the Company in providing creative editorial
services include Crew Cuts Film & Tape, Red Car, Blue Rock Editing Company and
Progressive Image Group. Major competitors of the Company in providing
film-to-videotape transfer, electronic video editing and computer-generated
graphic services include Post Perfect (a subsidiary of The New York Media
Group), The Tape House Editorial Co., PrinczCo Productions, Nice Shoes, L.L.C.,
Click 3X and Broadcast Video, Inc.
Government Regulation
The Communications Act of 1934, as amended by the Telecommunications Act of
1996, prohibits the operation of satellite earth station facilities such as
those operated by Atlantic Satellite, except under licenses issued by the FCC.
Atlantic Satellite holds the following five satellite earth station FCC
licenses:
Call Sign License Expiration Date
E960405 September 6, 2006
E910152 March 22, 2001
E881160 February 17, 1999
E4626 September 10, 2002
E970418 October 10, 2007
No FCC authorization is required for reception of transmission from
domestic satellites to points within the United States. When applicable, the
Company will continue to rely on third party FCC licenses or authorizations when
it transmits certain domestic satellite traffic through earth stations operated
by such third parties.
The FCC establishes technical standards for satellite transmission
equipment, which change from time to time, and it also requires coordination of
earth stations with land-based microwave systems at certain frequencies to
assure noninterference. Transmission equipment must also be installed and
operated in a manner that avoids exposing humans to harmful levels of
radio-frequency radiation. The placement of earth stations or other antennae is
typically subject to regulation under local zoning ordinances. The Company
believes that Atlantic Satellite's equipment meets and is operated in material
compliance with all applicable laws, regulations and industry standards.
Waterfront holds two point-to-point microwave licenses from the FCC for the
transmission of signals from a single point to temporary fixed locations within
25 miles of the license coordinates. There are two microwave licenses:
Call Sign License Expiration Date
WNEI382 June 23, 1999
WMQ-537 February 1, 2001
While the FCC generally renews satellite earth station and point-to-point
microwave licenses on a routine basis, there can be no assurance that Atlantic
Satellite's and Waterfront's licenses will be renewed at their expiration dates.
Failure to obtain renewal of such licenses would have a material adverse effect
on the Company.
Employees
The Company and its subsidiaries have approximately 516 full-time
employees. None of the Company's employees is represented by a labor union or is
subject to a collective bargaining agreement. The Company has never experienced
a work stoppage and believes that its employee relations are satisfactory.
<PAGE>
The Company's success depends in large part on the continued service of its
executive officers, key creative artists and skilled technicians, and other key
personnel. The Company has employment agreements containing non-compete
provisions with most of its current key executive officers, including the
president and chief executive officer. However, the Company does not have any
long-term employment agreements and/or any covenants not to compete with most of
its key artists and technicians. A significant percentage of the Company's
revenues can be attributed to services requiring highly compensated creative
technicians. Competition for highly qualified employees is intense and the
process of acquiring key technical, creative and management personnel with the
requisite combination of skills and attributes is often lengthy. There can be no
assurance that the Company will continue to attract, motivate and retain key
personnel. Failure by the Company to attract and retain qualified key personnel
could have a material adverse effect on the Company.
Backlog
At June 30, 1998 and June 30, 1997, the Company had backlogs of
approximately $11,144,000 and $6,815,000 respectively. All of such backlog is
attributable to AFA's video production systems projects.
ITEM 2. PROPERTIES
The Company's corporate headquarters (which are owned by the Company) are
located at 240 Pegasus Avenue, Northvale, New Jersey ("240 Pegasus") where
Atlantic Satellite also occupies an aggregate of approximately 15,000 square
feet plus outdoor antenna pads. The Company owns another facility at 183 Oak
Tree Road in Tappan, New York ("183 Oak Tree"), which is adjacent to the 240
Pegasus property in which Atlantic Satellite and VRI also occupy approximately
13,000 and 7,000 square feet, respectively. Atlantic Satellite has leased 10,000
square feet at 183 Oak Tree Road to the NHL. Atlantic Satellite's teleport
facility is located at 240 Pegasus and 183 Oak Tree. In addition, the Company
subleases approximately 50,000 square feet at 235 Pegasus Avenue, Northvale, New
Jersey from an unaffiliated entity, which in turn leases such property from an
unaffiliated third party. The terms of the lease and the sublease are
substantially identical. Approximately 38,000 square feet of such facility is
used by Audio Plus Video for production purposes and approximately 12,000 square
feet is used for general and warehouse purposes. In addition, the Company also
owns approximately 8 acres of vacant land in Northvale, New Jersey.
The Company leases six principal production facilities, two located in New
York City, three located in South Florida and one in Burbank, California. The
Company's two New York City production facilities consist of approximately
68,000 square feet in midtown Manhattan where CABANA leases one 18,000 square
foot facility and Manhattan Transfer leases approximately 50,000 square feet.
Post Edge leases three South Florida production facilities of approximately
30,000 square feet. Post Edge is moving and consolidating its 9,000 square foot
Hollywood, Florida facility to the South Beach Miami facility in the first
quarter of fiscal year 1999. Audio Plus Video leased a new 13,000 square foot
facility in Burbank, California during the fourth quarter of fiscal year 1998.
Waterfront leases approximately 7,200 square feet in midtown Manhattan
which houses Waterfront's Technical Operation Center and executive offices and
approximately 2,600 square feet in downtown Manhattan which is used for
Waterfront's remote switching hub. AFA leases from an entity owned by Messrs.
Siracusano and Ferolito approximately 30,000 square feet at another facility
located in Northvale, New Jersey, which facility serves as its executive offices
and its engineering and fabrication facility.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various claims and legal
proceedings of a nature considered normal to its business. While it is not
possible to predict or determine the outcome of these claims and proceedings, it
is the opinion of management that their outcomes will not have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the American Stock Exchange ("AMEX")
under the symbol "VS". The common stock began trading on February 8, 1994 at the
effective time of IPL's initial public offering on the NASDAQ National Market
under the symbol "POST". Prior to such time, there was no public market for the
common stock. Following the merger and until February 11, 1998, the common stock
traded on the NASDAQ National Market under the symbol "VSCX".
As of August 31, 1998, there were approximately 176 holders of record of the
Common Stock.
The following table sets forth the high and low bid prices of the Common
Stock on the Nasdaq National Market for each full quarterly period within the
two most recent fiscal years.
Fiscal Year 1997 High Low
---------------- ---- ---
First Quarter......................................4 1/8 3 5/8
(August 1 to October 31)
Second Quarter.....................................4 3/4 3 1/2
(November 1 to January 31)
Third Quarter......................................4 1/8 3 3/8
(February 1 to April 30)
Fourth Quarter ....................................3 1/2 2 7/8
(May 1 to July 31)
Fiscal Year 1998 High Low
----------------- ----- ---
First Quarter......................................3 13/16 2 3/4
(July 1 to September 30)
Second Quarter.....................................3 3/4 2 15/16
(October 1 to December 31)
Third Quarter......................................3 1/2 2 13/16
(January 1 to March 31)
Fourth Quarter.....................................4 3/8 2 7/8
(April 1 to June 30)
No cash dividends have ever been declared by the Company on the Common
Stock. The Company intends to retain earnings to finance the development and
growth of its business. Accordingly, the Company does not anticipate that any
dividends will be declared on the Common Stock for the foreseeable future.
Future payment of cash dividends, if any, will depend on the Company's financial
condition, results of operations, business conditions, capital requirements,
restrictions contained in agreements, future prospects and other factors deemed
relevant by the Company's Board of Directors. Presently the Company is
prohibited from paying any dividends per the Credit Agreement.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial
data for Video and its subsidiaries for the periods and at the dates indicated.
<TABLE>
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, June 30, June 30, June 30, June 30,
1994 1995 1996 1997(1) 1998(3)
------- ------- ------- ------- -------
(in thousands, except per share amounts)
Statement of Operations Data: (3)
<S> <C> <C> <C> <C> <C>
Revenues ............................................................ $20,391 $19,439 $29,740 $27,610 $72,995
Depreciation and amortization ....................................... 2,170 1,629 1,653 1,824 7,958
Operating income (loss) from
continuing operations .......................................... (2,169) 490 2,387 1,750 6,692
Income (loss) before income taxes,
discontinued operations, and
extraordinary item ............................................. (4,321) 223 1,999 1,825 3,290
Income before discontinued
operations and extraordinary item .............................. 8,824 223 1,212 1,638 1,699
Income (loss) from discontinued
operations, net of tax (2) (4) ................................. 12,508 (74) (388) (1,688) (1,860)
Gain on debt extinguishment,
net of tax ..................................................... 5,951 -- -- -- --
Net (loss) income .................................................. $27,283 $149 $824 $(50) $(161)
Pro forma income before discontinued
Operations - basic (3) ......................................... -- -- $0.17 $0.23 $0.14
Pro forma net (loss) income per share -
basic (3) ....................................................... -- -- $0.12 $(0.01) $(0.01)
Weighted average number of shares -
Outstanding (3) ............................................... -- -- $6,961 $7,011 $12,276
</TABLE>
<TABLE>
As of As of As of As of As of
June 30, June 30, June 30, June 30, June 30,
1994 1995 1996 1997 1998(3)
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data: (3)
Total assets ...................................................... $13,731 $16,005 $17,672 $20,801 $81,860
Long-term debt, net of current portion ............................ 2,042 2,388 2,140 5,330 30,968
Subordinated debt, net of
current portion .............................................. -- -- -- -- 5,442
Stockholders' equity .............................................. $ 1,663 $ 1,812 $ 2,655 $2,733 $20,725
</TABLE>
...........................
(1) Included in the year ended June 30, 1997 is approximately $500 of other
income pertaining to the payment of a note receivable for which Old Video
had established a full valuation allowance. The note receivable was partial
consideration for the sale of a radio station in fiscal 1991.
(2) The operating results of Old Video's Diversified Products segment have been
reflected as discontinued operations for the years ended June 30, 1994,
1995, 1996 and 1997. The operating results of Old Video's International
Services Group have been reflected as discontinued operations for the year
ended June 30, 1994. The operating results of Old Video's Post Production
Group have been reflected as discontinued operations for the year ended
June 30, 1994.
(3) Reflects the Merger with and into IPL as of August 27, 1997. 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 after the Merger. Pro forma income (loss) before discontinued
operations and extraordinary item per share and pro forma net income per
share gave effect to the conversion of Old Video Common Stock into common
stock (i.e., shares of the combined company) in the merger.
(4) The operating results of the Consulting Services segment providing
strategic consulting services have been reflected as discontinued
operations for the year ended June 30, 1998.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 year ended June 30, 1998 are not necessarily comparable to those periods
prior to the Merger. The results of operations and cash flows as reported
represent those of the Company for the year ended June 30, 1998 and Old Video
for the years ended June 30, 1997 and 1996, and include the results of
operations and cash flows of IPL from the date of the Merger through June 30,
1998. All references to IPL's 1997 figures represent pre-acquisition amounts and
are not included in the financial statements, but are included in the following
discussions for comparative purposes only. In addition, in August 1997 and prior
to the Merger: (i) Old Video discontinued the operations of its Diversified
Products segment through a spinoff of the Diversified Products segment to Old
Video's stockholders and (ii) 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 Old 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
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 12). 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 January 2, 1997, Old Video's management, which had the authority to approve
the action, committed Old Video to a formal plan to discontinue the operations
of its Diversified Products segment as a condition to the Merger. In August 1997
and prior to the Merger, Old Video spun off the Diversified Products segment to
Old Video's stockholders. 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 17).
Results of Continuing Operations
Year Ended June 30, 1998 compared to Year Ended June 30, 1997 (dollars in
thousands)
Total revenues increased by $45,385 to $72,995 in 1998 from $27,610 in
1997. Revenues from the Satellite and Distribution Services segment increased by
$11,405 to $21,384 in 1998 from $9,979 in 1997. $10,017 of the $21,384 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 14.0% to $11,367 in 1998 from
$9,979 in 1997. This increase was due primarily to an increase in the number of
customers connected to the Company's satellite and fiber optic network and the
receipt of additional transmission revenue from existing customers, which was
partially offset by a decrease in syndication revenues due to programming
cancellations. Revenues from the Satellite and Distribution Services segment
provided by IPL decreased by 19.0% from $12,360 in 1997 to $10,017 in 1998. The
decrease is primarily due to reduced volume of standards conversion services and
duplication. Revenues from the Systems and Products segment increased by 5.7% to
$18,631 in 1998 from $17,631 in 1997 due to increased demand for design and
installation of video systems; however, the amount of the increase was reduced
as a result of a change in the structure of certain contracts pursuant to which
<PAGE>
the Company now receives a commission based upon equipment used in such
videosystems which is purchased directly by the customer from third parties.
Previously, the Company had recorded revenues from the sale of such equipment as
well as the cost related to the purchase thereof. The equipment rental division,
of the Systems and Products segment, revenue decreased 20.5% to $1,989 from
$2,501 in 1997 as a result of strong demand for video equipment in 1997
generated by the Atlanta Olympics, 1996 presidential election, and the 1996
professional baseball World Series. The Production Services segment revenues of
$32,980 in 1998 was solely attributable to post-Merger contributions provided by
IPL. Revenues provided by IPL increased by 6.4% to $32,980 in 1998 from $31,004
in 1997. The increase is primarily due to a higher volume of creative editorial
and visual effects services.
Total costs of sales, services and rentals increased by $23,903 to $41,175
in 1998 from $17,272 in 1997. Costs of the Satellite and Distribution Services
segment increased by $4,689 to $9,511 in 1998 from $4,822 in 1997. This increase
was primarily attributable to costs of Satellite and Distribution Services
provided by IPL of $4,283 and a $406 increase in costs of non-IPL services.
Costs of IPL Satellite and Distribution Services decreased $760 to $4,283 in
1998 from $5,043 in 1997. This decrease consisted primarily of reduced tape
stock usage, lower equipment repairs and reduced usage of part time and per diem
personnel. Costs of the Systems and Products segment increased by $663 to
$13,113 in 1998 from $12,450 in 1997. The growth in costs of the Systems and
Products segment was driven by the increased volume of installations of video
systems and additional salaries of engineers. These increases were offset by the
decrease in the cost of equipment rentals of $233 to $576 in 1998 from $809 in
1997 as a result of lower demand for video equipment. Costs of the Production
Services segment of $18,551 in 1998 was solely attributed to costs provided by
IPL. Cost of Production Services provided by IPL increased by $152 to $18,551 in
1998 from $18,399 in 1997.
The Company's overall gross profit margin (excluding depreciation) increased
to 43.6% in 1998 from 37.4% in 1997. Gross profit margin from the Systems and
Products segment increased to 29.6% in 1998 from 29.4% in 1997 primarily as
result of the change in contract structure discussed above and from reduced
amount of sub-rentals, which were required in 1997 to meet increased demand for
equipment rentals in connection with the Atlanta Olympics. Gross profit margin
from the Satellite and Distribution Services segment other than services
provided by IPL increased to 54.0% in 1998 from 51.7% in 1997 as a result of an
increase in revenues combined with stable fixed costs for materials and
equipment. Gross profit margin from Satellite and Distribution Services provided
by IPL decreased from 59.2% in 1997 to 57.2% in 1998 as a result of a decrease
in revenues without a corresponding decrease in costs. Since a high proportion
of costs attributable to the Satellite and Distribution Services segment are
fixed, decreases in revenues do not result in proportionate decreases in costs.
Gross profit margin from Production Services increased to 43.8% in 1998 from
40.7% in 1997 as a result of an increase in revenues combined with stable fixed
costs.
Selling, general and administrative expenses increased to $17,170 in 1998
from $6,764 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 23.5% in 1998
from 24.5% in 1997.
Depreciation expense increased to $7,109 in 1998 from $1,807 in 1997,
primarily due to the significant amount of fixed assets of IPL acquired in the
Merger. Amortization expense increased to $849 in 1998 from $17 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 $3,619 in 1998 from $517 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 was 48.4% in 1998 and
10.2% 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. The State net operating loss valuation decreased by $258 in 1998
as a result of the use of net operating losses. 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 Old Video's Diversified Products segment. A valuation
allowance of $679 remains as of June 30, 1998 for state net operating losses.
The state valuation allowance is provided as a result of estimates regarding
future operations for certain subsidiaries.
Income from continuing operations increased 3.7% to $1,699 in 1998 from $1,638
in 1997 primarily as a result of the factors discussed above.
<PAGE>
Fiscal Year Ended June 30, 1997 compared to Year Ended June 30, 1996 (dollars in
thousands)
Total revenues decreased 7.2% to $27,610 in 1997 from $29,740 in 1996. The
decrease in total revenues was due to a decrease in revenues of the Systems and
Products segment to $17,631 in 1997 from $20,499 in 1996, which was partially
offset by an increase in revenues of the Satellite and Distribution Services
segment to $9,979 in 1997 from $9,241 in 1996. The decrease in revenues of the
Systems and Products segment resulted primarily from a mid-year change in the
structure of a significant contract pursuant to which Old Video received a
commission on equipment purchased by the customer from third parties.
Previously, Old Video had recorded revenues from the sale of such equipment as
well as costs related to the purchase thereof. The increase in revenues of the
Satellite and Distribution Services segment was due primarily to an increase in
the number of customers connected to Old Video's satellite and fiber optic
network and the receipt of additional transmission revenues from existing
customers, partially offset by a decrease in syndication revenues due to
programming cancellations.
Total cost of sales, services and rentals decreased to $17,272 in 1997 from
$19,691 in 1996 primarily as a result of the change in the structure of the
contract described above. Gross profit margins increased to 37.4% in 1997 from
33.8% in 1996 as a result of a change in the service mix, which favored higher
margin services. Gross profit margins of the Systems and Products segment
increased to 29.4% in 1997 from 26.6% in 1996 due to a higher proportion of
revenues contributed by the equipment rental division in 1997 as well as the
effects of the significant contract pursuant to which Old Video received a
commission as discussed above. Gross profit margins of the Satellite and
Distribution Services segment increased to 51.7% in 1997 from 49.8% in 1996
primarily as a result of increased revenues without a corresponding increase in
costs. Since a high proportion of costs attributable to the Satellite and
Distribution Services segment are fixed increases in revenues do not result in
proportionate increases in costs.
Selling, general and administrative expenses increased 12.6% to $6,764 in
1997 from $6,009 in 1996. Such expenses as a percentage of revenues increased to
24.5% in 1997 from 20.2% in 1996, primarily due to the initiation of a marketing
study, preparation of sales brochures and the payment of increased sales
commissions, combined with the reduction of revenues. Old Video believed that
these additional costs would continue to be incurred.
Operating income from continuing operations decreased 26.7% to $1,750 in
1997 from $2,387 in 1996. This decrease was due to increased selling, general
and administrative expenses partially offset by the increased gross profits in
both the Systems and Products and Satellite and Distribution Services.
Depreciation and amortization expenses increased 12.4% to $1,807 in 1997
from $1,608 in 1996 due to the acquisition of additional equipment for expansion
and replacement.
Interest expense increased 6.6% to $517 in 1997 from $485 in 1996 as a
result of increased borrowings under Old Video's credit facility.
Other income increased to $592 in 1997 from $97 in 1996 as a result of the
payment on a note receivable, previously fully reserved, relating to the 1991
sale of a radio station.
The effective income tax rate applied against pre-tax income was 10.2% in
1997 and 39.4% in 1996. 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 Old Video's
Diversified Products segment.
Income before discontinued operations increased to $1,638 in 1997 from
$1,212 in 1996 primarily as a result of the tax factors discussed above.
Liquidity and Capital Resources (dollars in thousands)
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
<PAGE>
$17,000 revolving line of credit (the "Credit Agreement"). The revolving line of
credit 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 operating earnings before interest, taxes,
depreciation and amortization), which is initially LIBOR plus 1.75% (the Company
has the option to choose the applicable interest rate). The term loan bears
interest at LIBOR plus a number of basis points based upon the Company's
leverage rate, which is initially LIBOR plus 1.75%. Principal payments of $1,000
per quarter in respect to 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 (after giving effect to
the Merger). 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
incurrence of other indebtedness. The facility is guaranteed by all of the
Company's subsidiaries (after giving effect to the Merger).
The Company, made capital expenditures totaling $8,486 on a pro forma
basis, which was a breach under the Credit Agreement as the Company was limited
to $8,000 of capital expenditures on a pro forma basis for fiscal year ended
June 30, 1998. The lenders have waived that requirement of the facility for
fiscal year ended June 30, 1998.
The proceeds of the new facility were used as follows: approximately
$23,400 to refinance IPL's outstanding long-term indebtedness, approximately
$2,900 to refinance Old Video's outstanding long-term indebtedness and $1,485 of
mortgage obligations of MAL Partners and approximately $1,900 to refinance Old
Video's outstanding short-term line of credit. Approximately $3,300 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 8.33% per annum.
At June 30, 1998, the Company's outstanding indebtedness was approximately
$41,748 including $2,600 under the revolving credit facility. At June 30, 1998,
the weighted average interest rate was approximately 8.31% on the Company's
outstanding indebtedness. The remainder of the facility (approximately $13,383)
will be available for future working capital requirements and general corporate
purposes.
The Company opened an additional 13,000-sq. ft. facility in Burbank,
California in the first quarter of fiscal year 1999. The new facility will
provide Technical and Distribution services to international television program
originators and distributors; such services will 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 in California, as well as to attract additional customers
located on the West Coast. Management currently estimates this expansion will
require approximately $5,100 in capital expenditures, and will result in
increased revenues and operating expenses. The source of the capital
expenditures and operating funds is expected to be a combination of internally
generated funds and borrowings under the Company's Credit Agreement.
The 4% convertible subordinated notes due May 4, 2003 in the principal
amount of $6,350 issued by IPL, in connection with the CABANA acquisition in May
1995 still remain outstanding after the refinancing described above. These notes
are convertible into Common Stock at a conversion price of $14.00 per share
after May 2000 and are redeemable after May 2001.
Cash Flow from Operating Activities. For the year ended June 30, 1998, net
cash provided in operating activities was $5,536 primarily resulting from
earnings before interest, taxes, depreciation and amortization ("EBITDA") of
$14,867 which was offset by increases in working capital requirements, primarily
the payment of transaction costs associated with the Merger. For the year ended
June 30, 1997, net cash provided by operating activities was $1,071 primarily
resulting from EBITDA of $4,166 which was offset by increases in working capital
requirements.
Cash Flows from Investing Activities. For the year ended June 30, 1998, the
Company used $6,669 for investing activities, consisting of $6,448 for the
purchase of additional equipment, which was offset by a sale of fixed assets and
repayment of an advance to an affiliate. Approximately $3,000 of additional
equipment was used for the new West Coast facility. For the year ended June 30,
1997, Old Video used $2,392 for investing activities, consisting of $1,000 for
the purchase of vacant land from an affiliate with the remainder utilized
primarily for the purchase of new rental equipment which was offset by a $562
repayment of an advance to an affiliate.
<PAGE>
Cash Flow from Financing Activities. For the year ended June 30, 1998, cash
provided by financing activities, net of repayments of borrowings of long-term
indebtedness, was $2,235. Such amount primarily consisted of $33,000 in proceeds
from the senior secured term loan and $2,600 in net borrowings under the
revolving line of credit described above. The Company repaid $29,685 of
borrowings primarily in connection with the refinancing described above and
$3,787 of scheduled repayments of long term debt. For the year ended June 30,
1997, cash provided by financing activities, net of repayment of long-term
indebtedness, was $1,191, consisting of $904 in increased borrowings under Old
Video's line of credit, $2,655 of equipment financing and capital leases and a
$600 mortgage secured by the vacant land from an affiliate.
The foregoing activities resulted in a net increase in cash of $1,102 in
1998, a net decrease in cash of $130 in fiscal year 1997, and a net decrease in
cash of $775 in 1996.
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: general performance of the economy, specifically as it affects the
advertising industry, entertainment, television, video and broadcast 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 industry and the loss of key personnel.
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 disruption 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 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 years.
ITEM 7A. QUANTATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from
changes in interest rates as well as 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.
Credit Risks
The Company's customer base is composed of companies in the television
network, cable and advertising industries which are located principally
throughout the United States. No single customer accounted for more than 10% of
the Company's sales during the fiscal year ended June 30, 1998.
Interest Rate Risks
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%.
<PAGE>
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rate. For debt obligations, the table presents cash flows
and related weighted-average interest rates by expected maturity dates. For
interest swaps, the table presents notional amounts and weighted-average
interest rates by contractual maturity dates. Notional amounts are used to
calculate the contractual cash flows to be exchanged under the contract.
<TABLE>
Fair Value
(dollars in thousands) 1999 2000 2001 2002 2003 Total 1998
- --------------------------- -- ---------- --- ---------- -- ----------- -- ----------- - ----------- -- ---------- --- -----------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt including
Current portion
Fixed rate $ 5,350 $ 7,052 $ 7,568 $ 9,970 $ 6,366 $ 36,306 $ 36,338
Average interest rate 8.30% 8.29% 8.26% 8.00% 8.00%
Subordinated Debt
Fixed rate $ --- $ --- $ 2,117 $ 2,117 $ 2,116 $ 6,350 $ 5,442
Average interest rate 8.34% 8.34% 8.34% 8.34% 8.34%
Interest rate swap
Pay variable/receive fixed $ 4,750 $ 6,500 $ 7,000 $ 8,000 $ 3,750 $ 30,000 $ (638)
Average pay rate 7.58% 7.58% 7.58% 7.58% 7.58%
Average receive rate 6.66% 6.66% 6.66% 6.66% 6.66%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item appears in Item 14(a) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10, 11, 12, AND 13
The information called for by Items 10, 11, 12 and 13 of this Form 10-K will
be included in an amendment to this Form 10-K which will be filed not later than
October 28, 1998.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The consolidated financial statements, related notes thereto and
report of independent public accountants required by Item 8 begin at
page F-1 herein.
(2) The financial statement schedule appears on page F-29 herein.
(3) Exhibits:
Exhibits
Exhibit Number
3.1 Certificate of incorporation of the Company.
3.2+ By-Laws of the Company.
4.1 Form of 4% Convertible Subordinated Note of the Company(incorporated
by reference to the exhibit of the same number contained in the
Company's Current Report on Form 8-K, dated May 18, 1995).
10.1*(M) Form of International Post Group Inc. Long-term Incentive Plan,
together with form of International Post Group Inc. Stock Option
Agreement.
10.2*(M) Form of International Post Group Inc. Restricted Share Plan for
Directors, together with form of Restricted Share Agreement.
10.3** Form of Lease Agreements between Audio Plus Video and L.I.M.A.
Partners.
10.4+ Lease Agreements, dated as of June 30, 1993, between MTE Co. and
Nineteen New York Properties Limited Partnership.
10.5**(M) Form of Stock Option Agreement between the Company and Jeffrey J.
Kaplan.
10.6** Form of Services and Option Agreement between Holdings and Kenneth F.
Gorman.
10.7** Form of Services and Option Agreement between Holdings and Terrence
A. Elkes.
10.8** Form of Stock Option Agreement between VSC and Kenneth F. Gorman.
10.9** Form of Stock Option Agreement between VSC and Terrence A. Elkes.
10.10**(M)Form of Stock Option Agreement between the Company and Kenneth F.
Gorman.
10.11**(M)Form of Stock Option Agreement between the Company and Terrence A.
Elkes.
10.12++(M)Employment Agreement dated as of April 21, 1994, between the Company
and Daniel Rosen.
10.13++(M)Stock Option Agreement, dated as of April 21, 1994, between the
Company and Daniel Rosen.
10.14(M) Employment Agreement dated as of May 4, 1995, among Big Picture/Even
Time Limited, the Company and Barbara D'Ambrogio (incorporated by
reference to exhibit number 10.2 contained in the Company's Current
Report on Form 8-K, dated May 18, 1995).
10.15(M) Employment Agreement dated as of May 4, 1995, among Big Picture/Even
Time Limited, the Company and David D'Ambrogio (incorporated by
reference to exhibit number 10.3 contained in the Company's Current
Report on Form 8-K, dated May 18, 1995).
10.16(M) Employment Agreement dated as of May 4,1995, among Big Picture/Even
Time Limited, the Company and Gregory Letson (incorporated by
reference to exhibit number 10.4 contained in the Company's Current
Report on Form 8-K, dated May 18, 1995).
10.17 (M) Employment Agreement dated as of May 4, 1995, among Big
Picture/Even Time Limited, the Company and Michael Schenkein
(incorporated by reference to exhibit number 10.5 contained in the
Company's Current Report Form 8-K, dated May 18, 1995).
10.18(M) Employment Agreement dated as of May 4, 1995, among Big Picture/Even
Time Limited, the Company and Leonard Smalheiser (incorporated by
reference to exhibit number 10.6 contained in the Company's Current
Report on Form 8-K, dated May 18, 1995).
10.19(M) Employment Agreement dated as of May 4, 1995, among Big Picture/Even
Time Limited, the Company and Jane Stuart (incorporated by reference
to exhibit number 10.7 contained in the Company's Current Report on
Form 8-K, dated May 18, 1995).
10.20 Put/Call Agreement dated as of May 4, 1995, between Gregory Letson and
the Company (incorporated by reference to exhibit number 10.8
contained in the Company's Current Report on Form 8-K, dated May
18,1995).
10.21 Pledge Agreement, dated as of May 4, 1995, by and among BP
Partnership, ET Partnership, Barbara D'Ambrogio, David D'Ambrogio,
Michael Schenkein, Leonard Smalheiser, Jane Stuart and the Company
(incorporated by reference to exhibit number 10.9 contained in the
Company's Current Report on Form 8-K, dated May 18, 1995).
10.22 Pledge Agreement, dated as of May 4, 1995, by and between Gregory
Letson and the Company (incorporated by reference to exhibit number
10.10 contained in the Company's Current Report on Form 8-K, dated May
18, 1995).
10.23 Escrow Agreement dated as of May 4,1995, by and among ET Partnership,
David D'Ambrogio, Barbara D'Ambrogio, the Company and Cowan, Gold,
DeBaets, Abrahams & Sheppard, as Escrow Agent (incorporated by
reference to exhibit number 10.11 contained in the Company's Current
Report on Form 8-K, dated May 18, 1995).
10.24 Escrow Agreement dated as of May 4, 1995, by and among BP Partnership,
Michael Schenkein, Leonard Smalheiser, Jane Stuart, Gregory Letson,
the Company and Cowan, Gold, DeBaets, Abrahams & Sheppard, as Escrow
Agent (incorporated by reference to exhibit number 10.12 contained in
the Company's Current Report on Form 8-K, dated May 18,1995).
10.25*** Agreement dated as of June 7,1993, by and between MTV Latin America,
Inc. and The Post Edge, Inc.
10.26*** Agreement, dated as of December 9, 1993, by and between Discovery
Communications, Inc. and The Post Edge, Inc., and Amendment No. 1
thereto.
10.27+++ Amendment No. 1, dated as of September 15, 1995, to the Agreement,
dated as of June 7, 1993, by and between MTV Latin America, Inc.
and The Post Edge, Inc.
10.28 Voting Agreement, dated as of June 27, 1997, by and among
International Post Limited, Video Services Corporation, Terrence A.
Elkes, The Equitable Life Assurance Society of the United States,
Equitable Deal Flow Fund, L.P., Louis H. Siracusano, Arnold P.
Ferolito and Donald H. Buck (incorporated by reference to exhibit
number 10.58 contained in the Company's Current Report on Form 8-K,
dated July 7, 1997).
10.29 Asset Purchase Agreement dated as of January 22, 1997, by and among
Cognitive Communications, Inc., Susan Wiener, Michael Rudnick and
Cognitive Communications, LLC (incorporated by reference to exhibit
number 10.1 contained in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended January 31, 1997).
10.30 Agreement, dated as of January 22,1997, by and among the Company,
Susan Wiener, Michael Rudnick, Cognitive Communications, Inc. and
David Leveen (incorporated by reference to exhibit number 10.2
contained in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 1997).
10.31(M) Employment Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and Susan Wiener (incorporated by
reference to exhibit number 10.3 contained in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.32(M) Employment Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and Michael Rudnick (incorporated by
reference to exhibit number 10.4 contained in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.33(M ) Employment Agreement, dated as of January 22,1997, by and among
Cognitive Communications, LLC and David Leveen (incorporated by
reference to exhibit number 10.5 contained in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.34 Put Agreement, dated as of January 22, 1997, by and among Cognitive
Communications, LLC, the Company, Susan Wiener, Michael Rudnick and
David Leveen (incorporated by reference to exhibit number 10.6
contained in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 1997).
10.35 Sale Option Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and Susan Wiener (incorporated by
reference to exhibit number 10.7 contained in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.36 Sale Option Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and Michael Rudnick (incorporated by
reference to exhibit number 10.8 contained in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.37 Sale Option Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and David Leveen (incorporated by
reference to exhibit number 10.9 contained in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.38(M) Incentive Compensation Agreement, dated as of January 22, 1997, by and
among Cognitive Communications, LLC, Susan Wiener, Michael Rudnick and
David Leveen (incorporated by reference to exhibit number 10.10.
contained in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 1997).
10.39(M) Form of Incentive Option Agreement, undated, by and between Cognitive
Communications, LLC and Optionee (incorporated by reference to exhibit
number 10.11 contained in the Company's Quarterly Report on Form I O-Q
for the quarterly period ended January 31, 1997).
10.40(M) Consulting Agreement, dated February 15, 1997, by and among the
Company and Jeffrey J. Kaplan (incorporated by reference to exhibit
number 10. 12 contained in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended January 31, 1997).
10.41 Stock Resale Agreement, dated as of August 26,1997, by and among the
Company, Louis H. Siracusano, Donald H. Buck and Arnold P.
Ferolito.
10.42 Registration Rights Agreement dated as of August 26, 1997, by and
among the Company, Louis H. Siracusano, Donald H. Buck and Arnold P.
Ferolito.
10.43(M) Employment Agreement dated as of August 26, 1997, by and between the
Company and Louis H. Siracusano.
10.44(M) Employment Agreement dated as of August 26, 1997, by and between the
Company and Donald H. Buck.
10.45 Losses Escrow Agreement, dated as of August 26, 1997, by and among the
Company, Louis H. Siracusano, Donald H. Buck, Arnold P. Ferolito and
IBJ Schroder Bank & Trust Company.
10.46(M) Agreement dated as of August 26, 1997, by and between the Company and
Martin Irwin.
10.47(M) Agreement dated as of August 26, 1997, by and between the Company
and Arnold P. Ferolito.
10.48(M) Consulting Agreement, dated February 15, 1997, by and among the
Company and Jeffrey J. Kaplan (incorporated by reference to exhibit
number 10.12 contained in the Company's Quarterly Report on Form 10-Q
for the quarterly period ended January 31, 1997).
<PAGE>
10.49 Stock Resale Agreement, dated as of August 26, 1997 by and among the
Company, Louis H. Siracusano, Donald H. Buck and Arnold P. Ferolito
(incorporated by reference to exhibit 10.70 contained in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1997
10.50 Registration Rights Agreement, dated as of August 26, 1997, by and
among the Company, Louis H. Siracusano, Donald H. Buck and Arnold P.
Ferolito (incorporated by reference to exibit of the same number
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1997).
10.51(M) Employment Agreement, dated as of August 26, 1997, by and between the
Company and Louis H. Siracusano (incorporated by reference to exhibit
of the same number contained in the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1997).
10.52(M) Employment Agreement, dated as of August 26, 1997, by and between the
Company and Donald H. Buck (incorporated by reference to exhibit of
the same number contained in the Company's Anuual Report on Form 10-K
for the fiscal year ended July 31, 1997.
10.53 Losses Escrow Agreement, dated as of August 26, 1997, by and among the
Company, Louis H. Siracusano, Donald H. Buck, Arnold P. Ferolito and
IBJ Schroder Bank & Trust Company (incorporated by reference to
exhibit of the same number contained in the Company's Annual Report on
Form 10-K for the fiscal year July 31, 1997).
10.54(M) Agreement, dated as of August 26, 1997, by and between the Company and
Martin Irwin (incorporated by reference to exhibit of the same number
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1997).
10.55(M) Agreement, dated as of August 26, 1997 by and between the Company and
Arnold P. Ferolito (incorporated by reference to exhibit of the same
number contained in the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1997).
10.56(M) Agreement, dated as of October 17, 1997, by and between the Company
and Steven G. Crane.
10.57 Credit Agreement, dated as of August 27, 1997, by and among Video
Services Corporation, VSC MAL Corp., the Lenders party thereto and
KeyBank National Association.
10.58 Security Agreement, dated as of August 27, 2997, by and between Video
Services Corporation and KeyBank National Association. 10.81 Guaranty
and Secuity Agreement, dated as of August 27, 1997, by and among the
Guarators and KeyBank National Association.
10.59 Amendement No.1 and Waiver No.1, dated July 21, 1998 to the Credit
Agreement, dated as of August 27, 1998 by and among the Company, the
Lenders party thereto and KeyBank National Association, as the Issuer
and as Agent.
21.1 Subsidiaries of the Company.
23. Consent of Ernst & Young LLP.
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information purposes only and
not filed.
- -----------------
* Incorporated by reference to the exhibit of the same number contained in
Amendment No. 4 to IPL's Registration Statement on Form S-1 (the
"Registration Statement"), filed with the Securities and Exchange
Commission (the "SEC" on February 4, 1994.
+ Incorporated by reference to the exhibit of the same number contained in
Amendment No. 1 to IPL's Registration Statement filed with the SEC on
October 21, 1993.
** Incorporated by reference to the exhibit of the same number contained in
Amendment No. 3 to IPL's Registration Statement filed with the SEC on
January 10, 1994.
++ Incorporated by reference to the exhibit of the same number contained in
IPL's Annual Report on Form 10-K for the fiscal year ended July 31, 1994.
*** Incorporated by reference to the exhibit of the same number contained in
IPL's Annual Report on Form 10-K for the fiscal year ended July 31, 1995.
+++ Incorporated by reference to the exhibit of the same number contained in
IPL's Annual Report on Form 10-K for the fiscal year ended July 31, 1996.
(M) Management contract or compensatory plan or arrangement.
- -----------------
(b) None.
(c) See Item 14(a)(3) above.
(d) Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 28, 1998 VIDEO SERVICES CORPORATION,
By: /s/ Louis H. Siracusano
Name: Louis H. Siracusano
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacities and on the dates indicated.
Name and Signature Title Date
/s/ Louis H. Siracusano President, Chief Executive Officer 9/28/98
Louis H. Siracusano and Director (Principal Executive
Officer)
/s/ Steven G. Crane Vice President and 9/28/98
Steven G. Crane Chief Financial Officer
(Principal Financial Officer)
/s/ Michael E. Fairbourne Vice President-Administration 9/28/98
Michael E. Fairbourne (Principal Accounting Officer)
/s/ Terrence A. Elkes Chairman of the Board of Directors 9/28/98
Terrence A. Elkes
/s/ Robert H. Alter Director 9/28/98
Robert H. Alter
/s/ Martin Irwin Director 9/28/98
Martin Irwin
/s/ Frank Stillo Director 9/28/98
Frank Stillo
/s/ Raymond L. Steele Director 9/28/98
Raymond L. Steele
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page Number
REPORTS OF INDEPENDENT AUDITORS F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
June 30, 1997 and 1998 F-3
Consolidated Statements of Operations for the
years ended June 30, 1996, 1997 and 1998. F-4
Consolidated Statements of Stockholders'
Equity for the years ended June 30, 1996,
1997 and 1998 F-5
Consolidated Statements of Cash Flows for the
years ended June 30, 1996, 1997 and 1998. F-6
Notes to Consolidated Financial Statements. F-7 to F-28
SUPPLEMENTAL SCHEDULE:
II. Valuation and Qualifying Accounts F-29
NOTE:
Schedules other than those referred to above have been omitted as
inapplicable or not required under the instructions contained in
Regulation S-X or the information is included elsewhere in the
financial statements or the notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Video Services Corporation:
We have audited the accompanying consolidated balance sheets of Video
Services Corporation and subsidiaries as of June 30, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1998. Our audits
also included the financial statement schedule listed in the index at item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Video Services Corporation and subsidiaries as of June 30, 1997 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
White Plains, New York
September 15, 1998
F-2
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 1997 and June 30, 1998
(dollars in thousands)
<TABLE>
June 30, June 30,
ASSETS 1997 1998
- ------
--------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 390 $ 1,492
Accounts receivable, net 6,173 14,169
Inventories 688 1,083
Costs and estimated earnings in excess of billings on
uncompleted contracts 363 187
Deferred income taxes 674 1,535
Prepaid expenses and other current assets 574 907
--------------- --------------
Total current assets 8,862 19,373
Fixed assets, net 5,852 36,590
Excess of cost over fair value of net assets acquired, net 449 22,289
Receivable from affiliates 1,192 42
Receivable from officers 211 -
Deferred income taxes 622 1,667
Net assets to be disposed 634 -
Other assets 2,979 1,899
--------------- --------------
Total assets $ 20,801 $ 81,860
=============== ==============
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 7,812 $ 8,443
Billings in excess of costs and estimated
earnings on uncompleted contracts 462 3,290
Current portion of long-term debt 149 5,338
Income taxes payable - 708
Other current liabilities 1,789 3,881
--------------- --------------
Total current liabilities 10,212 21,660
Long-term debt 5,330 30,968
Subordinated debt - 5,442
Deferred income taxes 2,017 -
Other liabilities 509 3,065
--------------- --------------
Total liabilities 18,068 61,135
--------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 1997
and June 30, 1998 - -
Common stock: no and $.01 par value, 7,500,000 and 25,000,000
shares authorized, and 2,678,162 and 13,264,307 shares issued
and outstanding at June 30, 1997 and June 30, 1998,
respectively 103 132
Additional paid-in-capital 419 21,196
Retained earnings (deficit) 2,211 (603)
--------------- --------------
Total stockholders' equity 2,733 20,725
--------------- --------------
Total liabilities and stockholders' equity $ 20,801 $ 81,860
=============== ==============
</TABLE>
See accompanying notes
F-3
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1996, 1997 and 1998
(dollars in thousands, except per share amounts)
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- -------------
Revenues:
Sales $ 18,258 $ 15,130 $ 16,642
Services 9,241 9,979 54,364
Rentals 2,241 2,501 1,989
------------- ------------- -------------
29,740 27,610 72,995
Costs:
Costs of sales 14,512 11,641 12,537
Costs of services 4,643 4,822 28,062
Costs of rentals 536 809 576
------------- ------------- -------------
19,691 17,272 41,175
Depreciation 1,608 1,807 7,109
------------- ------------- -------------
Gross profit 8,441 8,531 24,711
Selling, general and administrative expenses 6,009 6,764 17,170
Amortization 45 17 849
------------- ------------- -------------
Operating income from continuing operations 2,387 1,750 6,692
Other (expense) income:
Interest expense (485) (517) (3,619)
Interest income and other 97 592 217
------------- ------------- -------------
Income before income taxes and discontinued operations 1,999 1,825 3,290
Income tax expense 787 187 1,591
------------- ------------- -------------
Income from continuing operations 1,212 1,638 1,699
Discontinued operations:
Loss from operations of Diversified Products and
Consulting Services segments (less applicable income
tax benefit of $248, $380 and $73) (388) (776) (140)
Estimated loss on disposal of Diversified Products and
Consulting Services segments (less applicable income
tax benefit of $--, $447 and $1,147) - (912) (1,720)
------------- ------------- -------------
Net (loss) income $ 824 $ (50) $ (161)
============= ============= =============
Earnings per share:
Basic:
Income from continuing operations $ 0.17 $ 0.23 $ 0.14
Loss from discontinued operations (0.05) (0.24) (0.15)
------------- ------------- -------------
Net (loss) income $ 0.12 $ (0.01) $ (0.01)
============= ============= =============
Diluted:
Income from continuing operations $ 0.17 $ 0.23 $ 0.14
Loss from discontinued operations (0.05) (0.24) (0.15)
============= ============= =============
Net (loss) income $ 0.12 $ (0.01) $ (0.01)
============= ============= =============
Non cash dividend per share $ - $ - $ 0.22
============= ============= =============
Weighted average number of shares outstanding for basic and
diluted earnings per share 6,961,183 7,011,349 12,276,278
============= ============= =============
</TABLE>
See accompanying notes
F-4
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1996, 1997 and 1998
(dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Common
Stock Stock Paid-In Retained
Shares Amount Capital Earnings Total
------------------------------------------------------------------
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
Merger with IPL 10,560,145 29 21,766 - 21,795
Contribution of real estate affiliates - - (1,263) - (1,263)
Issuance of stock options - - 199 - 199
Non cash dividend to shareholders - - - (2,653) (2,653)
Stock related compensation 26,000 - 75 - 75
Net loss - - - (161) (161)
------------------------------------------------------------------
Balance at June 30, 1998 13,264,307 $ 132 $ 21,196 $ (603) $ 20,725
==================================================================
</TABLE>
See accompanying notes
F-5
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1996, 1997 and 1998
(dollars in thousands)
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
-------------- -------------- --------------
Operating Activities
Net (loss) income $ 824 $ (50) $ (161)
Adjustments to reconcile net income to net cash provided
by continuing operations:
Depreciation 1,868 2,015 7,109
Amortization 46 18 849
Issuance of consultant compensatory stock options - 128 -
Loss on disposal of discontinued operations - 823 481
Loss (gain) on sale of equipment (351) 27 (164)
Deferred income taxes 411 (103) 537
Provision for bad debts 133 76 166
(Increase) decrease in operating assets:
Accounts receivable (1,488) (1,057) 1,156
Inventories (369) (404) 107
Costs and estimated earnings in excess of billings on
uncompleted contracts (252) 53 176
Prepaid expenses and other assets (399) (1,663) (42)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 2,277 2,674 (7,581)
Billings in excess of costs and estimated earnings on
uncompleted contracts 5 (459) 2,828
Other liabilities (754) (1,007) 75
-------------- -------------- -------------
Net cash provided by continuing operations 1,951 1,071 5,536
Investing Activities
Additions to fixed assets (2,970) (3,053) (6,448)
Proceeds from sale of fixed assets 380 99 168
(Increase) decrease in receivable from affiliates (581) 562 (389)
-------------- -------------- --------------
Net cash used in investing actvities (3,171) (2,392) (6,669)
Financing Activities
Proceeds from issuance of stock 19 - -
Proceeds from subordinated debt - - 158
Proceeds from long-term borrowing 1,663 4,159 54,561
Repayments of borrowings (1,237) (2,968) (52,484)
-------------- -------------- --------------
Net cash provided by financing activites 445 1,191 2,235
Net increase (decrease) in cash (775) (130) 1,102
Cash and cash equivalents, beginning of year 1,295 520 390
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 520 $ 390 $ 1,492
============== ============== ==============
</TABLE>
See accompanying notes
F-6
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1997 and 1998 and for the years ended
June 30, 1996, 1997 and 1998
(dollars in thousands, except for share amounts)
Note 1 - Basis of and Presentation
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, Video Services Corporation ("Old Video") 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 became the
historical financial statements of the Company. As such, the net assets of IPL
have been recorded at fair value and Old Video's pre-Merger stockholders' equity
has been retroactively restated for the equivalent number of shares of common
stock of the Company, with differences between the par value of the IPL common
stock and the Old Video common stock recorded as an adjustment to paid in
capital. An aggregate of 7,011,349 shares of Company common stock were issued to
the stockholders of Old Video 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 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 Company has made payments of $614 against
this reserve in fiscal 1998. 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.
The Company recorded goodwill of $22,483 in connection with the Merger,
which is being amortized over 25 years.
F-7
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In connection with, and as a condition to the Merger, immediately prior to
the Merger, the Diversified Products segment and certain assets of Old Video,
including cash surrender value of officers life insurance, was spun-off to the
stockholders of Old Video in a non-cash dividend of approximately $2,653.
Immediately prior to the Merger, the principal stockholders of Old Video
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 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 combined pro forma results of operations for the
years ended June 30, 1997 and 1998, as if the Merger and Contribution had
occurred as of July 1, 1996 and July 1, 1997, respectively. 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 actually
combined during the periods presented or of future results of operations of the
combined operations.
(dollars in thousands, except per share amounts)
<TABLE>
1997 1998
<S> <C> <C>
--------------- ---------------
Revenues $78,430 $80,386
Income from continuing operations 1,955 1,743
Income from continuing operations per share 0.15 0.13
Net loss (182) (176)
Net loss per share $ (0.01) (0.01)
</TABLE>
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
13,238,307. Included in the net loss for the year ended June 30, 1997 is
approximately $1,688 of loss from discontinued operations relating to certain
subsidiaries (Diversified Products segment) of Old Video which were discontinued
in connection with the Merger and approximately $449 of loss from the
discontinued operations relating to the Consulting Services segment which was
previously owned by IPL. Also included in the year ended June 30, 1997 is
approximately $500 of other income pertaining to partial consideration for the
sale of a radio station in fiscal 1991. Included in the net loss for the year
ended June 30, 1998 is approximately $1,919 of loss from the discontinued
operations relating to the Consulting Services segment (see Note 17).
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Video
Services Corporation and its subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
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.
F-8
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Revenue Recognition
Revenue from services (except editorial) is recorded at completion of
services for the customer. Revenue for editorial services is recorded as
services are provided to customers on a percentage of completion method. Revenue
from the sales of equipment is recorded at the time of shipment of equipment.
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.
Inventories
Inventories consist of system components and equipment which is valued at
the lower of specific cost or market and tape stock which is valued at the lower
of cost or market on a FIFO basis.
Fixed Assets
Property and equipment are carried 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.
Goodwill
The excess of cost over net assets acquired is amortized on a
straight-line basis principally over 25 years. Amortization expense for the
years ended June 30, 1996, 1997 and 1998 was $14, $14 and $742, respectively.
Accumulated amortization at June 30, 1997 and 1998 was $105 and $847,
respectively. The Company periodically evaluates the carrying value of
intangible assets by relating the estimated cash flows of the underlying
businesses. An impairment loss may be recognized if the expected cash flow is
less than book value.
Advertising
The Company expenses advertising costs as incurred. Advertising expense was
$143, $128, and $310 for the years ended June 30, 1996, 1997 and 1998,
respectively.
F-9
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Asset Impairment
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which addresses the accounting and reporting for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The Company adopted the
provisions of this new standard effective August 1, 1996. The effect of adoption
was not material to the Company's financial condition, results of operation or
cash flow.
Long-Lived Assets
Long-lived assets, including intangibles, are reviewed for impairment
whenever events or circumstances indicate that the assets 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 based upon the present
value of expected future cash flows.
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, 1997 and 1998 of $34 and $35, respectively are
used to collateralize a standby letter of credit, related to an operating lease.
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
which have no quoted market price, is estimated by discounting projected future
cash flows using the Company's incremental borrowing rate.
The Company entered into an interest-rate swap agreement to modify the
interest characteristics of its outstanding debt (see Note 10). The
interest-rate swap agreement is designated with all or a portion of the
principal balance and term of a specific debt obligation. This agreement
involves the exchange of amounts based on a variable interest rate for amounts
based on fixed interest rate over the life of the agreement without an exchange
of the notional amount upon which the payments are based. The differential to be
paid or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt (the accrual accounting
method). The related amount payable to or receivable from the counterparty is
included in other liabilities or assets. The fair value of the swap agreement
and changes in the fair value as a result of changes in market interest rates
are not recognized in the financial statements. The fair value is the amount at
which the swap agreement could be settled based on quotes provided by
counterparty.
Gains and losses on terminations of interest-rate swap agreements are
deferred as an adjustment to the carrying amount of the outstanding debt and
amortized as an adjustment to interest expense related to the debt over the
remaining term of the original contract life of the terminated swap agreement.
In the event of the early extinguishment of a designated debt obligation, any
realized or unrealized gain or loss from the swap would be recognized in income
coincident with the extinguishment gain or loss.
F-10
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table presents the carrying amounts and estimated fair values
of material financial instruments used by the Company in the normal cause of its
business.
<TABLE>
1998
Carrying Fair
Amount Value
----------------- -----------------
<S> <C> <C>
Long-term debt $ 36,306 $ 36,338
Off - balance sheet financial instruments:
Unrealized loss on swap agreement $ --- (638)
</TABLE>
For June 30, 1997, 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.
Customer Concentrations
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade accounts receivable.
The Company conducts most of its operations in the television network, cable and
advertising industries. 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. Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers included in the
Company's customer base. 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.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of the
Statement of Financial Accounting Standards ("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-11
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Supplemental Statement of Cash Flow Information
<TABLE>
(In Thousands)
-------------------------------------------
------------ ----------- -----------
1996 1997 1998
------------ ----------- -----------
Amounts paid for:
<S> <C> <C> <C>
Interest $ 522 $ 517 $ 3,325
------------ ----------- -----------
Income taxes $ 500 $ 1,300 $ 420
------------ ----------- -----------
Non-cash transactions:
Investing-
Contribution of real estate affiliates
Asset acquired $ 3,801
-----------
Liabilities assumed $ 5,064
-----------
Merger with and into International Post Limited
Asset acquired $ 43,677
-----------
Liabilities assumed $ 38,932
-----------
Financing-
Non cash dividend to shareholders $ 2,653
-----------
</TABLE>
New Accounting Standards
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 are 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.
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.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter. The Company
expects to adopt the new Statement effective July 1, 1999. The Statement will
require the company to recognize all derivatives, which currently consist of an
interest rate swap on the balance sheet at fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair
F-12
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
The Company has not yet determined what the effect of Statement 133 will be
on their results of operations and financial position of the Company.
Note 3 - Accounts Receivable
<TABLE>
June 30, June 30,
1997 1998
------------------- -------------------
<S> <C> <C>
Accounts receivable, trade $ 4,720 $ 12,579
Contracts receivable billed:
Uncompleted contracts 1,738 2,031
Completed contracts 17 738
------------------- -------------------
6,475 15,348
Less: Allowance for doubtful accounts
and volume discounts 302 1,179
------------------- -------------------
$ 6,173 $ 14,169
=================== ===================
Note 4 - Inventories
Inventories are summarized as follows:
June 30, June 30,
1997 1998
------------------- -------------------
System components and equipment, net of
obsolescence allowance of $592 and $671 $ 688 $ 569
Tape stock --- 514
------------------- -------------------
$ 688 $ 1,083
=================== ===================
Note 5 - Costs and Estimated Earnings on Uncompleted Contracts
June 30, June 30,
1997 1998
------------------- -------------------
Costs incurred on uncompleted contracts to date $ 8,758 $ 8,702
Estimated earnings to date 1,167 2,380
------------------- -------------------
9,925 11,082
Less: billings to date 10,024 14,185
------------------- -------------------
Billings in excess of costs and estimated
earnings on uncompleted contracts $ (99) $ (3,103)
=================== ===================
</TABLE>
F-13
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Included in accompanying balance sheets under the following captions:
<TABLE>
June 30, June 30,
1997 1998
------------------- -------------------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 363 $ 187
Billings in excess of costs and estimated
earnings on uncompleted contracts (462) (3,290)
------------------- --------------------
$ (99) $ (3,103)
=================== ===================
</TABLE>
Note 6 - Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
<TABLE>
June 30, June 30,
1997 1998
------------------- -------------------
<S> <C> <C>
Prepaid expenses $ 113 $ 612
Prepaid federal and state income taxes 442 ---
Other 19 295
------------------- -------------------
$ 574 $ 907
=================== ===================
</TABLE>
Note 7 - Fixed Assets
Fixed assets, at cost, summarized by major categories consist of the following:
<TABLE>
June 30, June 30,
1997 1998
------------------- -------------------
<S> <C> <C>
Machinery and equipment $ 17,539 $ 38,868
Leasehold improvements 2,461 11,195
Furniture and fixtures 597 2,028
Transportation equipment 195 281
Building --- 2,199
Land 1,000 1,967
Equipment under capital lease 170 1,440
------------------- -------------------
21,962 57,978
Less: accumulated depreciation, including
accumulated amortization for
equipment under capital lease 16,110 21,388
------------------- -------------------
$ 5,852 $ 36,590
=================== ===================
</TABLE>
F-14
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 8 - Other Assets
Other assets, net of amortization, consist of the following:
<TABLE>
June 30, June 30,
1997 1998
------------------- -------------------
<S> <C> <C>
Cash value of officers' life insurance (net of
borrowings of $132 and $17) $ 1,336 $ 5
Transaction costs 1,358 ---
Other 285 1,894
------------------- -------------------
$ 2,979 $ 1,899
=================== ===================
</TABLE>
Note 9 - Other Current Liabilities
Other current liabilities consist of the following:
<TABLE>
June 30, June 30,
1997 1998
------------------- -------------------
<S> <C> <C>
Wages payable $ 553 1,874
Customer deposits 728 376
Sales and payroll taxes payable 221 488
Reserves for loss on disposal - Diversified Products segment 151 ---
Reserves for loss on disposal - Consulting Services segment --- 645
Other 136 498
------------------- -------------------
$ 1,789 $ 3,881
=================== ===================
</TABLE>
Note 10 - Long-Term Debt
<TABLE>
June 30, June 30,
1997 1998
------------------- -------------------
<S> <C> <C>
Senior secured term loan $ -- $ 30,000
Senior secured revolving credit loan 1,861 2,600
Notes payable to credit institutions bearing
interest at 10.0% - 13.0%, collateralized by fixed assets
with a net book value of $4,566 2,665 ---
Notes payable to equipment manufacturer bearing
interest at 8.65% - 12.25%, collateralized by fixed assets
with a book value of $286 374 ---
Mortgages payable to credit institution bearing interest at
8.95% - prime (8.50% at June 30, 1997 and 1998) plus 1%,
collateralized by fixed assets with net book value at $1000
book value at $1,000 and $2,446 517 2,426
Capitalized lease obligations 72 1,280
------------------- -------------------
5,479 36,306
Less: current maturities 149 5,338
------------------- -------------------
$ 5,330 $ 30,968
=================== ===================
</TABLE>
F-15
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. The Company's current debt obligations at June
30, 1997 were approximately $3,900 after giving effect to the Merger,
refinancing and Contribution (see Note 1), which was less than IPL's
pre-refinancing current portion of long- term debt of approximately $4,200.
Consequently, all of the Old Video's debt at June 30, 1997, excluding current
capital lease obligations and mortgage payable, have been classified as
long-term. Old Video had a short-term line of credit of $2,100 at June 30, 1997,
under which $1,861 was outstanding.
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 initially LIBOR plus 1.75%. The
Term Loan bears interest at LIBOR plus a number of basis points based upon the
Company's leverage ration, which is initially 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.
The Company made capital expenditures totaling $8,486 on a pro forma basis,
which was a breach of the loan agreement as the Company was limited to $8,000 of
capital expenditures on a pro forma basis for fiscal year ended June 30, 1998.
The bank has waived that requirement of the Facility for fiscal year ended June
30, 1998.
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.
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 $2,600 under the Revolving Loan at
June 30, 1998. The Company also has outstanding under the Revolving Loan letters
of credit of approximately $1,016 at June 30, 1998. The Company's Revolving Loan
weighted average interest rate was 7.5% for the period ended June 30, 1998 and
7.5% at June 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).
F-16
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Required payments of principal on senior and subordinated debt including
accreted interest of approximately $908, exclusive of capitalized leases,
outstanding at June 30, 1998, are summarized as follows:
<TABLE>
Fiscal Year Amount
---------------
<S> <C> <C>
1999 $ 4,971
2000 6,725
2001 9,350
2002 11,848
2003 8,482
---------------
$ 41,376
===============
</TABLE>
The Company leases certain equipment from unaffiliated entities. Further
minimum lease payments under capital leases as of June 30, 1998 are:
<TABLE>
<S> <C> <C>
Fiscal Year Amount
---------------
1999 $ 467
2000 386
2001 369
2002 246
---------------
Total minimum lease payments 1,468
Less: Amount representing interest 188
---------------
Present value of minimum lease payments $ 1,280
===============
</TABLE>
Leased property under capital leases are classified in fixed assets as
follows:
<TABLE>
June 30, June 30, 1998
1997
--------------- --------------
<S> <C> <C>
Equipment under capital leases $ 170 1,440
Less: Accumulated amortization 118 281
=============== ==============
$ 52 1,159
=============== ==============
</TABLE>
Note 11 - Related Parties
The Company leases a building from an entity owned by certain principal
stockholders of the Company, under a lease accounted for as an operating lease,
approximately 30,000 sq. ft. located in Northvale, New Jersey, which facility
serves as its engineering and fabrication facility. Such rental expenses of the
Company for the years ended June 30, 1996, 1997 and 1998 amounted to $250, $241
and $270, respectively.
The Company has its corporate headquarters as well as its Satellite and
Distribution facilities in Northvale, New Jersey that was leased from two
partnerships, whose partners then owned a majority interest in Old Video, under
a lease accounted for as an operating lease. In August 1997, immediately prior
to the Merger, the principal stockholders of Old Video contributed the stock of
two S Corporations holding all of the general and limited partnership interest
in the two partnerships (see Note 1). Such rental expense of the Company for the
years ended June 30, 1996, 1997 and 1998 amounted to $927, $826, and $130,
respectively. At June 30, 1997, Old Video had accounts receivable of $1,233 from
the two partnerships referred to above, to whom Old Video has made working
capital loans. At June 30, 1997 and 1998 the Company also had accounts
receivable of $0 and $148 and (accounts payable) of ($41) and ($106),
respectively from (to) other affiliated entities.
F-17
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In August 1996, the Company acquired undeveloped real estate from a
partnership, whose partners then owned a majority interest in Old Video, for
$1,000 and entered into a six year mortgage with a financial institution for
$600. The transaction, which represented a transfer between entities under
common control, was recorded at the lower of historical cost or fair value.
At June 30, 1997, Old Video had amounts receivable from officers of $211.
At June 30, 1998, future minimum rental payments under non-cancelable
leases with affiliated entities are as follows: (see Note 19).
<TABLE>
Fiscal Year Amount
-------------------------------------- ------------------
<S> <C> <C>
1999 $ 270
2000 270
2001 270
------------------
$ 810
==================
</TABLE>
Note 12 - Business Segment Information
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 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 Diversified Products segment is shown as discontinued
operations for 1996 and 1997 and the Consulting Services segment is shown as
discontinued operations for 1998 (see Note 17).
The Company operates primarily in the United States; foreign operations are
not significant. Intersegment sales are accounted for at cost.
The Company does not allocate income and expenses that are of a general
corporate nature to industry segments in computing operating income. These
include general corporate expenses, interest income and expense, and certain
other income and expenses not directly attributable to a specific segment.
Identifiable assets by segment include assets directly identifiable with those
operations. Other assets primarily consist of corporate cash and cash
equivalents and fixed assets associated with nonsegment activities.
F-18
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Summarized financial information by business segment for 1996, 1997 and
1998 is as follows:
<TABLE>
1996 1997 1998
----------------- ---------------- ----------------
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
Systems and Products $ 20,499 $ 17,631 $ 18,631
Satellite and Distribution Services 9,241 9,979 21,384
Production Services --- --- 32,980
----------------- ---------------- ----------------
Net revenues $ 29,740 $ 27,610 $ 72,995
================= ================ ================
Intersegment revenues:
Systems and Products $ 795 $ 290 $ 1,386
Satellite and Distribution Services 792 705 1,160
Production Services --- --- 1,010
----------------- ---------------- ----------------
Total intersegment revenues $ 1587 $ 995 $ 3,556
================= ================ ================
Operating income:
Systems and Products $ 2,881 $ 2,341 $ 2,490
Satellite and Distribution Services 1,794 2,239 5,830
Production Services --- --- 3,542
Corporate (2,288) (2,830) (5,170)
----------------- ---------------- ----------------
Operating income from continuing operations 2,387 1,750 6,692
Interest expense, net (485) (517) (3,619)
Other income 97 592 217
----------------- ---------------- ----------------
Income before income taxes and discontinued operations $ 1,999 $ 1,825 $ 3,290
================= ================ ================
Identifiable assets at June 30:
Systems and Products $ 6,025 $ 6,650 $ 5,971
Satellite and Distribution Services 5,255 5,447 16,460
Production Services --- --- 29,787
Discontinued operations 1,542 634 ---
Corporate 4,850 8,070 29,642
---------------- ---------------- ----------------
Total assets $ 17,672 $ 20,801 $ 81,860
================= ================ ================
Additions to fixed assets:
Systems and Products $ 1,231 $ 461 $ 653
Satellite and Distribution Services 1,117 953 4,591
Production Services --- --- 634
Discontinued operations 557 418 119
Corporate 65 1,221 451
----------------- ---------------- ----------------
Net capital expenditures $ 2,970 $ 3,053 $ 6,448
================= ================ ================
Depreciation:
Systems and Products $ 632 $ 740 $ 638
Satellite and Distribution Services 900 981 2,054
Production Services --- --- 4,010
Corporate 76 86 407
----------------- ---------------- ----------------
Total depreciation from continuing operations $ 1,608 $ 1,807 $ 7,109
================= ================ ================
</TABLE>
F-19
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 13 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
Year Ending Year Ending Year Ending
June 30, June 30, June 30,
1996 1997 1998
------------------ -- ------------------ ------------------
<S> <C> <C> <C>
Numerator:
Income from continuing operations $ 1,212 $ 1,638 $ 1,699
------------------ ------------------ ------------------
Numerator for basic earnings per share-
Income available to common stockholders 1,212 1,638 1,699
Effect of dilutive securities:
4% convertible subordinated notes and stock
options --- --- ---
------------------ ------------------ ------------------
Numerator for dilutive earnings per share-
income from continuing operations available to
common stockholders after assumed conversions $ 1,212 $ 1,638 $ 1,699
================== ================== ==================
Denominator:
Denominator for basic earnings per share-
weighted-average shares 6,961,183 7,011,349 12,276,278
Effect of dilutive securities:
4% convertible subordinated notes and stock
options --- --- ---
------------------ ------------------ ------------------
Denominator for dilutive earnings per share-
adjusted weighted-average shares and assumed
conversions 6,961,183 7,011,349 12,276,278
================== ================== =================
Basic earnings per share from continuing operations $ 0.17 $ 0.23 $ 0.14
================== ================== =================
Diluted earnings per share from continuing operations $ 0.17 $ 0.23 $ 0.14
================== ================== ==================
</TABLE>
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.
F-20
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 14 - Income Taxes
The reconciliation between the statutory tax rate and those reflected in
the Company's income tax provision is as follows:
<TABLE>
1996 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Statutory tax rate 34% 34% 34%
Change in valuation allowance (3.2) (34) (5.2)
Non-deductible intangible amortization --- --- 8.8
State & local taxes, net of federal benefit 7.4 7.0 9.6
Non-deductible meals and entertainment --- 1.0 0.9
Stock options granted by shareholders --- 1.6 ---
Other 1.2 0.6 0.3
-------------- -------------- ---------------
39.4% 10.2% 48.4%
============== ============== ===============
</TABLE>
The provision for income taxes for the Company is as follows:
<TABLE>
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Current
Federal $ 21 $ 556 $ ---
State and local 104 202 439
Deferred
Federal 633 55 1,372
State and local 124 (4) 38
Adjustment to valuation allowance (95) (622) (258)
--------------- --------------- ---------------
$ 787 187 1,591
=============== =============== ===============
</TABLE>
F-21
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The components of net deferred tax assets arising from temporary
differences as of June 30, 1997 and 1998 were as follows:
<TABLE>
June 30, June 30,
1997 1998
--------------------- --------------------
<S> <C> <C>
Receivable allowance $ 309 $ 492
Inventory reserves 262 318
Compensation payable --- 479
Other 103 246
--------------------- --------------------
674 1,535
Federal and state net operating loss
carryforwards 1,808 2,310
Valuation allowance (1,186) (679)
Purchase accounting reserves --- 720
Straight lined rent --- 475
Other --- 267
Accelerated depreciation (830) ---
--------------------- --------------------
Deferred tax asset $ 466 $ 4,628
===================== ====================
</TABLE>
Included in deferred income taxes are accrued income tax liabilities of
$1,187 and $1,426 as of June 30, 1997 and 1998, respectively.
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 Old Video's Diversified Products
segment.
The state net operating loss carryforward valuation allowance decreased by
$258 in 1998 as a result of the use of net operating losses. A state valuation
allowance of $679 remains as of June 30 1998. The state valuation allowance is
provided as a result of estimates regarding future operations of certain
subsidiaries in certain states.
At June 30, 1998, the Company has potential tax benefits from net operating
loss carryforwards for federal income tax purposes of approximately $346, which
begin to expire in 2007. The Company also has potential tax benefits from net
operating loss carryforwards for state income tax purposes of $1,523, which
begin to expire in 2002, and an AMT credit of $441.
Note 15- Retirement Plans
The Company provides retirement benefits through two qualified salary
reduction plans for eligible employees under Section 401(k) of the Internal
Revenue Code (the "Retirement Plans"). The Retirement Plans are funded by salary
reduction contributions by the participants thereof. The Company's contributions
to the retirement plans are based on participant contributions (which are
limited to a fixed percentage of participant compensation) and matching employer
contributions. Additionally, the Company may contribute a discretionary amount.
The Retirement Plans will be merged into one plan during the first quarter of
fiscal year 1999. For the years ended June 30, 1996, 1997 and 1998, the matching
employer contributions amounted to $50, $57 and $191, respectively.
F-22
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 16 - 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.
The stockholders and directors of the Company have approved a long-term
incentive plan (the "Stock Plan") under which eligible employees, consultants,
and independent contractors may receive grants of options, stock appreciation
rights and restricted stock awards and to replace IPL's long-term incentive
plan. An aggregate of 735,000 shares of common stock were reserved for issuance
under the Stock Plan and options or other grants with respect thereto may be
made over a ten-year term. Options may be either incentive options, within the
meaning of the Internal Revenue Code or non-qualified options. The Stock Plan is
administered by the compensation committee of the board of directors of the
Company who determine the employees, consultants, and independent contractors
entitled to grants, the exercise price, which may not be less than the fair
market value of the Company's common stock on the date of grant, and the other
terms of options or grants.
During fiscal year 1998, 368,000 shares of common stock options were
granted. At June 30, 1998, there are 367,000 shares of common stock available
for granting.
On June 13, 1997, the principal stockholders of the Old Video entered into
stock option agreements (the "Stockholder Options") with various employees of
the Old Video to purchase 87,128 shares of the Company's common stock from such
stockholders. The Stockholder Options were fully vested at June 30, 1997, became
exercisable June 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 Old Video's common stock. In conjunction with
the Merger, changes were made to the Stockholders Options to restore the option
holder's economic position. The stockholders options converted into options to
purchase from such stockholders 235,000 shares of the Company's common stock.
The changes to the Stockholders Option did not impact the aggregate intrinsic
value, reduce the ratio of exercise price per option to the market value per
share, or alter vesting provision of the option. As a result, no expense under
APB 25 was recognized.
The Black-Scholes option pricing model used the following assumptions for
grants in 1997 and 1998, respectively: expected volatility of 0.4 for both
years, dividend yield of 0% for both years, five year and ten year expected
lives, and risk free interest rates of 5.52% and 6.38%.
F-23
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table shows the pro forma impact of options on the Company's
net loss for the years ended June 30, 1997 and 1998 in accordance with SFAS 123.
The 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>
1997 1998
----------------- -----------------
<S> <C> <C>
Net loss: As Reported $ (50) (161)
Pro Forma (250) (265)
Net loss per common share - Basic: As Reported (.01) (.01)
Pro Forma (.04) (.02)
Net loss per common share - Diluted: As Reported (.01) (.01)
Pro Forma (.04) (.02)
</TABLE>
A summary of the status of the Stock Plan at June 30, 1998 and changes
during the years then ended is presented in the table below.
<TABLE>
1998
--------------------------------------------
Weighted
Number Average
of Exercise
Shares Price
-------------------- --------------------
<S> <C> <C>
Outstanding at beginning of year --- $ ---
IPL vested options assumed in Merger 508,800 5.00
Granted 368,000 3.05
Exercised --- ---
Forfeited (19,000) 5.00
Canceled or Expired --- ---
-------------------- --------------------
Outstanding at end of year 857,800 4.16
==================== ====================
Exercisable at end of year 489,800 5.00
==================== ====================
Weighted average fair value of options granted $1.85
====================
</TABLE>
The range of exercise prices for the options outstanding at June 30, 1998
is $2.94 - $5.00 with a weighted average contractual life of 8.4 years. Of the
857,800 options outstanding at June 30, 1998, 163,267 have exercise prices of
$4.00, 163,267 have exercise prices of $5.00 and 163,266 have exercise prices of
$6.00 with remaining contractual life of 7.7 years. All of these options are
exercisable. Of the remaining 368,000 options outstanding, 268,000 have exercise
prices of $2.94 with a remaining contractual life of 9.2 years; 75,000 have
exercise prices of $3.375 with a remaining contractual life of 9.3 years; and
25,000 have exercise prices of $3.25 with a remaining contractual life of 9.5
years. Approximately 122,667 options become exercisable in fiscal 1999, 122,667
options become exercisable in fiscal 2000 and 122,666 options become exercisable
in fiscal 2001.
Upon the Merger, the Company assumed 508,800 fully vested IPL options,
which had previously been granted to former employees and directors of IPL.
The stockholders and directors of the Company have also approved a
restricted share plan for directors who are not employees of the Company. A
total of 50,000 shares of common stock are available for issuance under such
plan. Upon grant, these options will vest upon the earliest to occur of two
consecutive years of board service, the death or disability of the recipient or
a "change of control date" (as defined in the Company's restricted share plan).
During fiscal year 1998, 6,000 shares of common stock were awarded to the
directors of the Company. All such shares are currently vested. At the
F-24
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
date of grant, the share price was $2.88. Compensation expense charged to
operations in fiscal year 1998 was $17. During fiscal 1996, the directors of IPL
received 13,000 shares previously awarded under the Company's restricted share
plan by IPL.
In August 1997, in connection with the Merger as part of his severance
agreement, Old Video's stockholders granted the former chief executive officer
of IPL options to purchase an aggregate of 75,000 shares at an exercise price of
$0.75 per share. Such options are fully vested. Given that these options are
below market value, the Company recorded additional paid in capital of $199.
In February 1994, in connection with the acquisition of Audio Plus Video by
IPL, the then chief financial officer of the IPL was granted ten-year,
non-qualified stock options to purchase 181,818 shares of the Company's common
stock at an exercise price of $9.35 per share. Such options are fully vested and
are presently exercisable until February 2002.
In February 1994, IPL and Old Video each granted five-year non-qualified
options to purchase an aggregate of 60,000 shares of the Company's common stock
to two directors of IPL. The exercise price of such options is equal to IPL's
initial pubic offering price of $11 per share. Such options vested three months
after the consummation of the public offering.
Note 17 - 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 disposed of by sale before
December 1998.
Losses from the discontinued Consulting Services segment amounted to $140
from the date of the Merger through November 30, 1997, net of applicable income
tax benefit of $73, and are shown separately in the consolidated statements of
income. Estimated loss on disposal of the discontinued Consulting Services
segment of $1,720, net of applicable income tax benefit of $1,147, has been
recorded based upon estimated future operating losses and loss on disposal.
Revenues of the discontinued Consulting Services segment were $1,407 from the
date of the Merger through June 30, 1998. Included in other current liabilities
at June 30, 1998 is a reserve of $645 for future net operating losses expected
to be incurred prior to disposal of the Consulting Services segment.
Discontinued operations include managements best estimate of future losses
through disposal and amounts expected to be realized on the sale of the
Consulting Services segment. The amounts the Company will ultimately realize as
well as future losses could differ materially in the near term from the amounts
assumed in arriving at the loss on disposal of the discontinued operations.
On January 2, 1997, management, which had the authority to approve the
action, committed Old Video Services Corporation to a formal plan to discontinue
the operations of its Diversified Products segment as a condition to the Merger
(see Note 1). In August 1997, immediately prior to the Merger, the Old Video
Services Corporation spun-off the operations of its Diversified Products segment
to the shareholders of Old Video Services Corporation. The Diversified Products
segment principally provided professional and industrial videotape duplication
and blank videotape distribution.
Losses from the operations of the discontinued Diversified Products segment
amounted to $388 and $1,688 for the years ended June 30, 1996 and 1997, net of
applicable income tax benefit of $246 and $827, respectively, and is shown
separately in the consolidated statements of income. Revenues of the
discontinued operations of the Diversified Products segment were $13,175,
$11,404 and $1,421 for the years ended June 30, 1996, 1997 and 1998,
respectively.
F-25
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Net assets of the discontinued operations of the Diversified Products
Segment consisted of the following:
<TABLE>
June 30,
1997
-------------
<S> <C>
Accounts receivable, net $ 1,661
Inventories 470
Prepaid expenses and other current assets 15
Fixed assets, net 195
Other assets 121
Accounts payable and accrued expense (1,601)
Other current liabilities (227)
Investment in company 422
Allowance for losses in investment in company (422)
-------------
$ 634
=============
</TABLE>
Included in other current liabilities at June 30, 1997 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. The interest in the new
entity 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.
Note 18 - 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 1991.
Note 19 - Commitments and Contingencies
Lease Commitments - The Company leases property under leases accounted for as
operating leases. Certain leases include escalation clauses. At June 30, 1998,
future minimum rental payments, including related party leases (see Note 11),
under non-cancelable leases for buildings and equipment are as follows:
<TABLE>
Fiscal Year Amount
---------------
<S> <C> <C>
1999 $ 4,757
2000 4,415
2001 4,276
2002 3,193
2003 2,805
Thereafter 13,870
---------------
$ 33,316
===============
</TABLE>
Rent expense for the years ended June 30, 1996, 1997 and 1998 amounted to
$1,286, $1,203 and $3,719, respectively. The Company also has non-cancelable
subleases of approximately $577 of which approximately $125 and $452 expire in
year 1999 and year 2002.
F-26
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Employment Agreements - At June 30, 1998, the Company is obligated under
employment contracts with certain key employees providing for base salary and
incentive bonuses based upon the results of operations. Minimum amounts due
under these contracts are as follows:
<TABLE>
Fiscal Year Amount
---------------
<S> <C> <C>
1999 $ 2,644
2000 2,008
2001 1,225
2002 483
2003 38
---------------
$ 6,398
===============
</TABLE>
Litigation
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business. While it is not possible to predict or
determine the outcome of these proceedings, it is the opinion of management that
their outcome will have no material adverse effect on the financial position,
liquidity or results of operations of the Company.
Note 20 - Registration Rights
The Company has agreed to register for sale shares of common stock held by
the Old Video's stockholders, upon their requests. The Company has also agreed
to register shares, on a pro-rata basis, held by the then principal stockholder
of IPL, certain options granted to principals of the trustee at such time as the
chief executive officer of the Company demands registration of its shares of
Common Stock. In addition, the Company is required to file a shelf registration
statement on Form S-3 under the securities act over the sale of such shares of
common stock. The Company will bear all expenses on such registration
statements, except for fees and expenses of counsel for the selling stockholders
and underwriters' discounts, fees and expenses, if any.
Note 21 - Preferred Stock
The Company's certificate of incorporation authorizes the board of
directors to issue from time to time, in one or more series, shares of preferred
stock with such designations and preferences, relative voting rights (except
that voting rights, if any, in respect of the election of directors shall be
limited to voting with the holders of common stock, with no more than one vote
per share of preferred stock), redemption, conversion, participation and other
rights and qualifications, limitations and restrictions as permitted by law. The
board of directors by its approval of certain series of preferred stock could
adversely affect the voting power of the holders of common stock, and, by
issuing shares of preferred stock with certain voting, conversion, redemption
rights or other terms, could delay, discourage or make more difficult changes of
control or management of the Company.
Note 22- Dividend Policy
The board of directors of the Company does not intend to declare any
dividends in the foreseeable future and intends to retain all earnings in the
Company to finance the growth of operations, including acquisitions. Future
dividend policy will be based upon the Company's results of operations,
financial condition, capital requirements and other circumstances.
F-27
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 23 - Unaudited Quarterly Results
Unaudited quarterly financial information for fiscal year 1997 and 1998 is
set forth below. All dollar amounts are in thousands except per share data.
<TABLE>
Quarter Ended
Old Video
------------------------------------------------------------------------------
----------------- ---------------- ----------------- ----------------
September 30, December 31, March 31, June 30,
1996 1996 1997 1997
----------------- ---------------- ----------------- ----------------
Fiscal 1997
<S> <C> <C> <C> <C>
Revenues $ 6,727 $ 6,529 $ 5,698 $ 8,656
Gross profit $ 2,313 $ 2,265 $ 1,974 $ 1,979
Income from continuing
operations $ 385 $ 567 $ 232 $ 454
Income from continuing
operations per share - basic $ .05 $ .08 $ .03 $ .07
Net income (loss) $ 145 $ 125 $ (797) $ 477
Quarter Ended
Company
------------------------------------------------------------------------------
----------------- ---------------- ----------------- ----------------
September 30, December 31, March 31, June 30,
1997 1997 1998 1998(a)
----------------- ---------------- ----------------- ----------------
Fiscal 1998
Revenues $ 11,418 $ 19,219 $ 20,456 $ 21,902
Gross profit $ 4,227 $ 6,647 $ 6,702 $ 7,135
Income from continuing
operations $ 554 $ 392 $ 317 $ 436
Income from continuing
operations per share - basic $ .06 $ .03 $ .02 $ .03
Net income (loss) $ 433 $ 373 $ 317 $ (1,284)
</TABLE>
(a) During the fourth quarter of 1998, the Company recorded an adjustment of
$1,720 to increase the reserve for the estimated loss on disposal associated
with the divestiture of the Consulting Services segment. The adjustment is
primarily the result of revised estimates of sale proceeds.
F-28
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE
Schedule II - Valuation and Qualifying Accounts
<TABLE>
Additions
Balance at Charged to Balance at
Beginning of Costs and Deductions End of
Year Expenses Write-Offs Year
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
For the year ended
June 30, 1996:
Allowance for doubtful
accounts and volume
discounts $121 $156 $97 $180
==================== ==================== ==================== ====================
June 30, 1997:
Allowance for doubtful
accounts and volume
discounts................. $180 $131 $ 9 $302
==================== ==================== ==================== ====================
June 30, 1998:
Allowance for doubtful
Accounts and volume
discounts $1,354(a) $214 $389 $1,179
==================== ==================== ==================== ====================
</TABLE>
(a) The balance at beginning of year gives effect to the Merger with and into
International Post Limited of $1,052.
F-29
AMENDMENT NO. 1 AND WAIVER NO. 1
Amendment No. 1 and Waiver No. 1 (this "Amendment"), dated as of July
21, 1998, to the Credit Agreement (as amended, supplemented or otherwise
modified from time to time, the "Credit Agreement"), dated as of August 27,
1997, by and among VIDEO SERVICES CORPORATION, VSC MAL CORP., the Lenders party
thereto, and KEYBANK NATIONAL ASSOCIATION, as the Issuer and as the Agent.
RECITALS
I. Capitalized terms used herein which are not otherwise defined herein
shall have the respective meanings ascribed thereto in the Credit Agreement.
II. The Borrower and the Agent wish to amend the Credit Agreement upon
the terms, and subject to the conditions, herein contained.
Therefore, in consideration of the Recitals, the terms and conditions
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Agent hereby
agree as follows:
1. The Borrower has reported to the Agent and the Lenders that, with
respect to the Borrower's fiscal year ended June 30, 1998, the Borrower and its
Subsidiaries on a Consolidated basis made Capital Expenditures in an aggregate
amount totalling nearly $9,800,000 and, therefore, the Borrower was in default
of its obligations under Section 8.6. The Agent hereby waives such default and
any Event of Default arising solely therefrom, provided that the aggregate
Capital Expenditures of the Borrower and its Subsidiaries on a Consolidated
basis for such fiscal year did not exceed $9,800,000.
2. The definition "Adjusted EBITDA" contained in Section 1.1(b) of the
Credit Agreement is amended by adding the following to the end thereof:
Notwithstanding anything in this definition to the contrary, for
purposes of this definition only, Capital Expenditures shall exclude
all Capital Expenditures of the Borrower and the Subsidiaries during
the fiscal years 1998 and 1999 directly attributable to establishing a
division of Audio plus Video International, Inc. on the West coast of
the contiguous part of the United States of America to the extent not
in excess of $5,100,000 in the aggregate on a Consolidated basis.
<PAGE>
3. The grid contained in the definition "Applicable Margin" contained
in Section 1.1(b) of the Credit Agreement is amended and restated in its
entirety as follows:
<TABLE>
<S> <C> <C> <C>
Whenever the Commitment
Leverage Ratio is: Eurodollar Fee LC Fee
> 3.00 2.000% 0.375% 2.000%
- -
> 2.50 < 3.00 1.750% 0.375% 1.750%
- - -
> 2.00 < 2.50 1.500% 0.375% 1.500%
- - -
> 1.25 < 2.00 1.250% 0.250% 1.250%
- - -
< 1.25 1.000% 0.250% 1.000%
</TABLE>
4. Section 7.11 of the Credit Agreement is amended and restated in its
entirety as follows:
7.11 Leverage Ratio
At each fiscal quarter end occurring during each period set forth below,
have a Leverage Ratio not greater than the ratio set forth adjacent to such
period:
Period Ratio
September 30, 1997 through
March 31, 1998 3.00:1.00
April 1, 1998 through
March 31, 1999 3.30:1.00
April 1, 1999 through
March 31, 2000 3.00:1.00
April 1, 2000 through
March 31, 2001 2.50:1.00
April 1, 2001 through
September 30, 2002 2.00:1.00
<PAGE>
5. Section 7.12 of the Credit Agreement is amended and restated in its
entirety as follows:
7.12 Fixed Charge Coverage Ratio
At each fiscal quarter end occurring during each period set forth below,
have a Fixed Charge Coverage Ratio not greater than the ratio set forth adjacent
to such period:
Period Ratio
September 30, 1997 through
June 30, 1998 1.00:1.00
July 1, 1998 through
September 30, 1998 0.90:1.00
October 1, 1998 through
December 31, 1998 0.80:1.00
January 1, 1999 through
March 31, 1999 0.75:1.00
April 1, 1999 through
March 31, 2000 0.90:1.00
April 1, 2000 through
September 30, 2002 1.00:1.00.
6. The first paragraph of Section 8.4(e) of the Credit Agreement is amended
and restated in its entirety as follows:
(e) at any time on or after the date, if any, occurring
after July 1, 1998 upon which the Borrower shall have delivered to each
Lender (x) a Compliance Certificate pursuant to Section 7.7(d) showing
that the Fixed Charge Coverage Ratio was not less than 1.00:1.00 for
the second consecutive fiscal quarter, and (y) financial projections
indicating that the Borrower will be in compliance with Sections 7.11,
7.12 and 7.13 through September 30, 2002, other Acquisitions by the
Borrower or any Guarantor, in either case of one or more Operating
Entities (each an "Additional Permitted Acquisition"), provided that
7. Section 9.1(p) of the Credit Agreement is amended and restated in its
entirety as follows:
(p)(1) The Borrower shall have failed to deliver to the Agent, by no later
than October 31, 1997, the Environmental Questionnaire provided by Summit
Bank, duly completed in all material respects by all of the Loan Parties,
or (2) for the fiscal year ended 1998, the Borrower shall not have positive
net income on a Consolidated basis in accordance with GAAP.
<PAGE>
8. Paragraphs 1 - 7 of this Amendment shall not be effective until such
date as each of the following conditions shall have been satisfied:
(a) Required Lenders shall have consented to the execution and delivery
hereof by the Agent.
(b) The Borrower shall have paid to the Agent, for the account of the
Lenders pro rata based upon their respective credit exposures under the
Credit Agreement, an amendment fee in the sum of $100,000.
(c) The Borrower shall have paid the reasonable fees and disbursements of
Special Counsel incurred in connection with this Amendment.
9. The Borrower hereby (a) reaffirms and admits the validity and
enforceability of all the Loan Documents and its obligations thereunder, (b)
agrees and admits that it has no valid defenses to or offsets against any such
obligation, (c) represents and warrants that no Default or Event of Default has
occurred or is continuing, (d) agrees to pay the reasonable fees and
disbursements of Special Counsel to the Agent incurred in connection with the
preparation, negotiation and closing of this Amendment, and (e) represents and
warrants that each of the representations and warranties made by it in the Loan
Documents is true and correct with the same effect as though such representation
and warranty had been made on the date hereof.
10. In all other respects, the Loan Documents shall remain in full force
and effect, and no amendment in respect of any term or condition of any Loan
Document contained herein shall be deemed to be an amendment in respect of any
other term or condition contained in any Loan Document.
11. This Amendment may be executed in any number of counterparts all of
which, taken together, shall constitute one Amendment. In making proof of this
Amendment, it shall only be necessary to produce the counterpart executed and
delivered by the party to be charged.
12. THIS AMENDMENT IS BEING EXECUTED AND DELIVERED IN, AND IS INTENDED TO
BE PERFORMED IN, THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCEABLE IN
ACCORDANCE WITH, AND BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
<PAGE>
AMENDMENT NO. 1 AND WAIVER NO. 1
VIDEO SERVICES CORPORATION
AS EVIDENCE of the agreement by the parties hereto to the terms and
conditions herein contained, each such party has caused this Amendment to be
duly executed on its behalf.
VIDEO SERVICES CORPORATION
By:/S/ Steven G. Crane
Name:Steven G. Crane
Title:Vice President & Chief
Financial Officer
VSC MAL CORP.
By:/s/ Steven G. Crane
Name:Steven G. Crane
Title:Vice President & Chief
Financial Officer
KEYBANK NATIONAL ASSOCIATION, in its
capacity as a Lender, as the
Issuer, and as the Agent
By:/s/ Brendan Sachtjen
Name:Brendan Sachtjen
Title:Senior Vice President
SUMMIT BANK
By:/s/ Thomas Knoop
Name:Thomas Knoop
Title:Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME FILED AS PART OF THE ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,492
<SECURITIES> 0
<RECEIVABLES> 15,348
<ALLOWANCES> 1,179
<INVENTORY> 1,083
<CURRENT-ASSETS> 19,373
<PP&E> 57,978
<DEPRECIATION> 21,388
<TOTAL-ASSETS> 81,860
<CURRENT-LIABILITIES> 21,660
<BONDS> 5,442
0
0
<COMMON> 132
<OTHER-SE> 20,593
<TOTAL-LIABILITY-AND-EQUITY> 81,860
<SALES> 72,995
<TOTAL-REVENUES> 72,995
<CGS> 41,175
<TOTAL-COSTS> 41,175
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 166
<INTEREST-EXPENSE> 3,619
<INCOME-PRETAX> 3,290
<INCOME-TAX> 1,591
<INCOME-CONTINUING> 1,699
<DISCONTINUED> (1,860)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (161)
<EPS-PRIMARY> (0.010)
<EPS-DILUTED> (0.010)
</TABLE>
