<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-23388
VIDEO SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
13-3735647
(I.R.S. Employer Identification Number)
240 Pegasus Avenue Northvale, New Jersey 07647
(Address of principal executive offices, including zip code)
(201) 767-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, $.01 par value
per share, as of February 13, 1998, was 13,264,307.
1
<PAGE>
VIDEO SERVICES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
The audited consolidated financial information at June 30, 1997 and the
unaudited consolidated financial information at December 31, 1997 and for the
three and six month period ended December 31, 1996 and 1997 relate to Video
Services Corporation and its subsidiaries.
Item 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheet as of June 30, 1997
and December 31, 1997 3
Condensed Consolidated Statements of Income for
the six months ended December 31, 1996 and 1997 4
Condensed Consolidated Statements of Income for
the three months ended December 31, 1996 and 1997 5
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 1996 and 1997 6
Condensed Consolidated Statement of Stockholders' Equity for
the six months ended December 31, 1997 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
---------------------------------------------
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 18
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
Item 3. DEFAULTS UPON SENIOR SECURITIES 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 18
Item 5. OTHER INFORMATION 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 19
EXHIBIT INDEX 19
2
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
As of June 30, 1997 and December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1997
- ------
--------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................... $ 390 $ 2,250
Accounts receivable, net .................................... 6,173 14,117
Inventories ................................................. 688 982
Costs and estimated earnings in excess of billings on
uncompleted contracts .................................... 363 594
Deferred income taxes ....................................... 674 1,652
Prepaid expenses and other current assets ................... 574 1,774
--------------- ---------------
Total current assets 8,862 21,369
Fixed assets, net .................................................... 5,852 36,980
Excess of cost over fair value of net assets acquired, net ........... 449 20,826
Receivable from affiliates ........................................... 1,192 -
Receivable from officers ............................................. 211 -
Deferred income taxes ................................................ 622 3,929
Net assets to be disposed ............................................ 634 1,420
Other assets ......................................................... 2,979 1,491
--------------- ---------------
Total assets $ 20,801 $ 86,015
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses ....................... $ 7,812 $ 3,935
Billings in excess of costs and estimated
earnings on uncompleted contracts ......................... 462 1,012
Current portion of long-term debt ........................... 149 4,798
Income taxes payable ........................................ - 532
Other current liabilities ................................... 1,789 3,171
--------------- ---------------
Total current liabilities 10,212 13,448
Long-term debt ....................................................... 5,330 40,005
Subordinated debt .................................................... - 5,346
Deferred and other taxes payable ..................................... 2,017 3,348
Payable to affiliates ................................................ - 34
Other liabilities .................................................... 509 2,840
--------------- ---------------
Total liabilities 18,068 65,021
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
- --------------------
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 1997
and December 31, 1997 ................................ - -
Common stock: $.01 par value - 7,500,000 and 25,000,000
shares authorized; 2,678,162 and 13,238,307 shares
issued and outstanding at June 30, 1997 and
December 31, 1997, respectively ...................... 103 132
Additional paid-in-capital .................................. 419 20,498
Retained earnings ........................................... 2,211 364
--------------- ---------------
Total stockholders' equity 2,733 20,994
--------------- ---------------
Total liabilities and stockholders' equity $ 20,801 $ 86,015
=============== ===============
</TABLE>
See accompanying notes
3
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Six Months ended December 31, 1996 and 1997
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
December 31, December 31,
1996 1997
---------------- ---------------
<S> <C> <C
Revenues:
Sales ................................................................ $ 6,780 $ 7,471
Services ............................................................. 5,012 22,146
Rentals .............................................................. 1,464 1,020
---------------- ---------------
>
13,256 30,637
Costs:
Costs of sales ....................................................... 4,987 5,149
Costs of services .................................................... 2,391 11,300
Costs of rentals ..................................................... 470 298
---------------- ---------------
7,848 16,747
Depreciation .............................................................. 830 3,016
---------------- ---------------
Gross profit .............................................................. 4,578 10,874
Selling, general and administrative expenses .............................. 3,222 7,320
Amortization .............................................................. 7 308
---------------- ---------------
Operating income from continuing operations ............................... 1,349 3,246
Other (expense) income:
Interest expense .............................................. (245) (1,490)
Interest income and other ..................................... 510 64
---------------- ---------------
Income before income taxes and discontinued operations .................... 1,614 1,820
Income tax expense ........................................................ 662 874
---------------- ---------------
Income from continuing operations ......................................... 952 946
Discontinued operations:
Loss from operations of Diversified Products segment and
Consulting Services (less applicable income tax benefit
of $474 and $73) ............................................ (682) (140)
---------------- ---------------
Net income ................................................................ $ 270 $ 806
================ ===============
Earnings per share:
Basic:
Income from continuing operations .................................. $ 0.14 $ 0.08
Loss from discontinued operations .................................. (0.10) $(0.01)
---------------- ---------------
Net income ......................................................... $ 0.04 $ 0.07
================ ===============
Diluted:
Income from continuing operations .................................. $ 0.14 $ 0.08
Loss from discontinued operations .................................. (0.10) (0.01)
---------------- ---------------
Net income ......................................................... $ 0.04 $ 0.07
================ ===============
Dividend per share ........................................................ $ - $ 0.23
================ ===============
Weighted average number of shares outstanding
for basic earnings per share.............................................. 7,011,349 11,309,304
================ ===============
</TABLE>
See accompanying notes
4
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months ended December 31, 1996 and 1997
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
December 31, December 31,
1996 1997
--------------- ----------------
<S> <C> <C
Revenues:
Sales ................................................................ $ 3,270 $ 3,296
Services ............................................................. 2,684 15,407
Rentals .............................................................. 575 516
--------------- ----------------
6,529 19,219
Costs:
Costs of sales ....................................................... 2,546 2,448
Costs of services .................................................... 1,155 7,876
Costs of rentals ..................................................... 143 167
--------------- ----------------
3,844 10,491
Depreciation .............................................................. 420 2,081
--------------- ----------------
Gross profit .............................................................. 2,265 6,647
Selling, general and administrative expenses .............................. 1,703 4,669
Amortization .............................................................. 3 225
--------------- ----------------
Operating income from continuing operations ............................... 559 1,753
Other (expense) income:
Interest expense .............................................. (126) (949)
Interest income and other ..................................... 493 33
--------------- ----------------
Income before income taxes and discontinued operations .................... 926 837
Income tax expense ........................................................ 359 445
--------------- ----------------
Income from continuing operations ......................................... 567 392
Discontinued operations:
Loss from operations of Diversified Products segment and
Consulting Services (less applicable income tax benefit
of $337 and $11) ............................................ (442) (19)
--------------- ----------------
Net income ................................................................ $ 125 $ 373
=============== ================
Earnings per share:
Basic:
Income from continuing operations ................................. $ 0.08 $ 0.03
Loss from discontinued operations ................................. (0.06) -
--------------- ----------------
Net income ........................................................ $ 0.02 $ 0.03
=============== ================
Diluted:
Income from continuing operations ................................. $ 0.08 $ 0.03
Loss from discontinued operations ................................. (0.06) -
--------------- ----------------
Net income ......................................................... $ 0.02 $ 0.03
=============== ================
Dividend per share ........................................................ $ - $ -
=============== ================
Weighted average number of shares outstanding
for basic earnings per share............................................. 7,011,349 13,238,307
=============== ================
</TABLE>
See accompanying notes
5
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months ended December 31, 1996 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
December 31, December 31,
1996 1997
---------------- ----------------
<S> <C> <C>
Operating Activities
Net cash provided by (used in) operating activities ....................... $ 718 $ (7,032)
Investing Activities
Additions to fixed assets ................................................. (2,192) (2,108)
Proceeds from sale of fixed assets ........................................ 3 120
(Increase) decrease in receivable from affiliates ......................... 739 (112)
Real estate partnerships contributed ...................................... - 60
---------------- ----------------
Net cash used in investing activities (1,450) (2,040)
Financing Activities
Proceeds from borrowings .................................................. 2,303 41,800
Repayments of borrowings .................................................. (1,301) (31,076)
Cash contributed by merger ................................................ - 208
---------------- ----------------
Net cash provided by financing activities 1,002 10,932
Net increase in cash ...................................................... 270 1,860
Cash and cash equivalents, beginning of period ............................ 520 390
---------------- ---------------
Cash and cash equivalents, end of period $ 790 $ 2,250
================ ================
</TABLE>
See accompanying notes
6
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months ended December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Common Common
Stock Stock Paid-In Retained
Shares Amount Capital Earnings Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 2,678,162 $ 103 $ 419 $ 2,211 $ 2,733
Exchange of common stock with merger of IPL 4,333,187 29 (29) - -
Common stock received in merger with IPL 6,226,958 - 21,172 - 21,172
Real estate partnerships contributed - - (1,263) - (1,263)
Issuance of stock options - - 199 - 199
Dividend to shareholders - - - (2,653) (2,653)
Net income - - - 806 806
------------------------------------------------------------------
Balance at December 31, 1997 13,238,307 $ 132 $ 20,498 $ 364 $ 20,994
==================================================================
</TABLE>
See accompanying notes
7
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six
months ended December 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1998. The unaudited interim
financial information should be read in conjunction with the audited
consolidated financial statements of Video Services Corporation ("Old Video
Services Corporation") as of and for the year ended June 30, 1997 included in
the Form 8-K/A filed by the Company (as defined below).
On August 27, 1997, the Old Video Services Corporation merged with and
into International Post Limited ("IPL") with IPL as the surviving corporation
("the Merger"). At the effective time of the Merger, IPL changed its name to
Video Services Corporation. The "Company" refers to the surviving corporation
after the Merger. The Merger was accounted for as a reverse acquisition whereby
pre-Merger financial statements of Old Video Services Corporation became the
historical financial statements of the Company. As such, the net assets of IPL
have been recorded at fair value. An aggregate of 7,011,349 shares of Company
common stock were issued to the stockholders of Old Video Services Corporation
in the Merger (plus an additional 212,096 shares of common stock which were
issued to replace an equal number of shares of common stock owned by Old Video
Services Corporation which were canceled upon the Merger). Such shares in the
aggregate represented approximately 54.6% of the outstanding shares of common
stock immediately after the Merger.
At the time of the Merger, IPL had combined assets of $43,996,
consisting of cash and cash equivalents ($216), net accounts receivable
($9,885), prepaid and other current assets ($1,349), net fixed assets ($29,474),
net deferred tax assets ($2,323), and other long-term assets ($749). The
combined liabilities consisted of accounts payable and accrued payables
($4,328), long-term debt ($30,464), other current liabilities ($1,901), and
other liabilities ($1,463).
The Company recorded goodwill of $20,659 in connection with the Merger,
which is being amortized over 25 years.
In connection with, and as a condition to the Merger, immediately prior to
the Merger, the Diversified Products segment was spun-off to the stockholders of
Old Video Services Corporation in a non-cash dividend of approximately $2,653.
Immediately prior to the Merger, the principal stockholders of the Old Video
Services Corporation contributed (the "Contribution") the stock of two S
corporations holding all of the general and limited partnership interests in Mal
Partners and L.I.M.A. Partners, which partnerships owned real estate and
equipment which was leased solely to Old Video Services Corporation and IPL. The
Contribution, which represents a transfer between entities under common control,
has been recorded at the lower of historical amortized cost or fair value.
8
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 1 - Basis of Presentation (continued)
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
$3,793, consisting of cash and cash equivalents ($-8), net accounts receivable
($9), prepaid expenses and other current assets ($73), buildings, satellite
equipment and land ($3,198), and other long-term assets ($521). The combined
liabilities consisted of accounts payable and accrued expenses ($54), mortgage
obligations ($3,588), deferred taxes ($18), and other current liabilities ($29).
The following presents the unaudited combined pro forma results of
operations for the six month periods ended December 31, 1996 and 1997, 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 Services Corporation actually combined during the periods
presented or of future results of operations of the combined operations.
(dollars in thousands, except per share amounts)
1996 1997
--------------- ----------------
Revenues $39,626 $38,028
Income from continuing operations 1,808 1,093
Income from continuing operations per share .14 .08
Net income 1,126 894
Net income per share .09 .07
Pro forma income from continuing operations and net income per share are
based on the weighted average number of shares outstanding after the Merger of
13,238,307. Included in the net income for the period ended December 31, 1996 is
approximately $682 of loss from discontinued operations relating to certain
subsidiaries (Diversified Products segment) of Old Video Services Corporation
which were discontinued in connection with the Merger. Included in the net
income for the period ended December 31, 1997 is approximately $199 of losses
from the discontinued operations relating to the consulting company (see Note
8).
Note 2 - Inventories
Inventories, which consist of system components and equipment are
valued at the lower of specific cost or market and tape stock which is valued at
the lower of cost or market on a FIFO basis.
9
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 3 - Accounts Receivable
June 30, December 31,
1997 1997
---------------- ----------------
Accounts Receivable, trade $ 6,475 $ 15,151
Less: Allowance for doubtful account 302 1,034
---------------- ----------------
$ 6,173 $ 14,117
================ ================
Note 4 - Fixed Assets
Fixed assets, at cost, including equipment under capitalized leases,
summarized by major categories consist of the following:
June 30, December 31,
1997 1997
---------------- ----------------
Machinery and equipment $ 17,539 $ 61,206
Leasehold improvements 2,461 15,985
Furniture and fixtures 597 2,705
Transportation equipment 195 311
Building - 3,531
Land 1,000 1,967
Equipment under capital leases 170 2,074
---------------- ----------------
21,962 87,779
Less: Accumulated depreciation 16,110 50,799
---------------- ----------------
$ 5,852 $ 36,980
================ ================
Note 5 - Earnings Per Share
Basic income (loss) per common share is calculated by dividing net
income by the weighted average number of shares of common stock of the Company.
The calculation of fully diluted income (loss) per share of common stock assumes
full conversion of the Company's 4.0% Convertible Subordinated Notes due May 4,
2003 into common stock at the beginning of the year. The weighted average number
of shares outstanding for the six months and three months ended December 31,
1996, reflects the amount of IPL shares (7,011,349) issued in connection with
the Merger. The weighted average number of shares for the six months and three
months ended December 31, 1997 reflects the 7,011,349 shares plus the 6,226,958
shares contributed by IPL in connection with the Merger.
Note 6 - Segment Data
In June 1997 the Financial Accounting Standards Board issued FASB
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Statement 131 requires that segment data be disclosed based on how
management makes decisions about allocating resources to segments and measuring
their performance. While the Company is studying the application of the
disclosure provisions, it does not expect this statement to materially affect
its financial position or results of operations. This Statement will become
effective for the fiscal year ending June 30, 1999.
10
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued)
Note 7 - Long-Term Debt
June 30, December 31,
1997 1997
------------------ -----------------
Senior secured item loan $ - $ 32,000
Senior secured revolving credit loan 1,861 8,800
Notes payable to credit institutions
bearing interest at 10.0% - 13.0% 2,655 -
Notes payable to credit institutions
bearing interest at 8.65% - 12.25% 374 -
Mortgage payable to credit institutions
bearing interest at prime plus 1% 517 2,524
Capitalized lease obligations 72 1,479
------------------ -----------------
5,479 44,803
Less: Current maturities 149 4,798
------------------ -----------------
$ 5,330 $ 40,005
================== =================
In connection with the Merger, the Company refinanced all IPL's and Old
Video Services Corporation's long-term indebtedness (excluding capital lease
obligations, Old Video Services Corporation'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
Company's debt at June 30, 1997, excluding current capital lease obligations and
mortgage payable, has been classified as long-term.
Old Video Services Corporation 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 Term Loan and the
Revolving Loan bear 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%. Principal payments of $1,000 per quarter in respect of the
term loan portion of the facility were due beginning December 31, 1997. Such
quarterly principal payments increase to $1,250 per quarter on December 31, 1998
and then increase to $1,750 per quarter on December 31, 1999 and then further
increase to $2,000 per quarter on September 30, 2001 with a balloon payment of
$3,750 in respect of the Term Loan portion of the facility due on September 30,
2002. The facility contains various covenants that 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. The Company's Term Loan rate was 7.5% at December
31, 1997.
11
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued)
Note 7 - Long-Term Debt (continued)
Revolving Credit Facility - The Company established a $17,000 senior
secured revolving credit facility (the "Revolving Loan") with KeyBank. The
Company had outstanding direct borrowings of $8,800 under the Revolving Loan at
December 31, 1997. The Company also has outstanding under the Revolving Loan
letters of credit of approximately $1,096 at December 31, 1997. The Company's
weighted average interest rate was 7.59% at December 31, 1997.
Subordinated Debt - The Company, in connection with the Merger, assumed
IPL's $6,350 principal amount of eight year convertible subordinated notes, due
May 4, 2003, with an interest rate of 4.0%, convertible at $14 per share after
five years and redeemable after six years. The debt was valued at $4,890 at May
5, 1995 using an effective rate of 8.34%. The valuation discount is being
amortized over the life of the notes.
Also, in connection with the Merger and Contribution, the Company
assumed additional long-term indebtedness of $3,842, consisting of a note
payable to Cognitive Communications, Inc ($196), mortgage payable ($2,103) and
capital lease obligations ($1,543).
Note 8 - Discontinued Operations
On November 30, 1997, management, which had the authority to approve the
action, committed the Company to a formal plan to dispose its interest in the
consulting company providing strategic consulting services in the area of
communications, design and implementation of intranets, extranets and internets.
The Company's management has determined fair value for the assets taking into
account cash flow projections, customer agreements and employment agreements.
The Company has excluded from its results of continuing operations, from the
date of Merger, losses from the operations of the consulting company and
included management's estimates of cash flow that is to be funded. Management
estimates the consulting company will be disposed of by November 1998.
Losses from the discontinued consulting company amounted to $140 from the
date of Merger through November 30, 1997, net of applicable income tax benefit
of $73, and are shown separately in the consolidated statements of income. Post
November 30, 1997 losses of $81 have been deferred as a result of the expected
improved operation of this entity. Revenues of the discontinued consulting
company were $558 from the date of Merger through December 31, 1997.
At November 30, 1997, the consulting company had combined assets of $1,488,
consisting of net accounts receivable ($744), prepaid and other current assets
($29), net fixed assets ($555), and other long-term assets ($160). The combined
liabilities consisted of accounts payable and accrued expenses ($84), other
current liabilities ($95), and net deferred taxes payable ($13).
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.
Losses from the discontinued Diversified Products segment amounted to $682
for the six month period ended December 31, 1996, net of applicable income tax
benefit of $474, and is shown separately in the consolidated statements of
income.
Revenues of the discontinued operations of the Diversified Products segment
were $5,617 and $1,421 for the six month period ended December 31, 1996 and
1997, respectively.
12
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(in thousands, except share amounts)
General
On August 27, 1997, Video Services Corporation ("Old Video") merged with
and into International Post Limited ("IPL") with IPL being the surviving
corporation (the "Merger"). At the effective time of the Merger, IPL changed its
name to Video Services Corporation. References herein to the "Company" refer to
the combined company after giving effect to the Merger. The Merger was accounted
for as a reverse acquisition whereby the pre-Merger financial statements of Old
Video became the historical financial statements of the Company. As a result of
the Merger, the results of operations and cash flows reported for the Company
for the six months ended December 31, 1997 are not necessarily comparable to
those for the six months ended December 31, 1996. The results of operations and
cash flows as reported represent those of the Company for the six month periods
ended December 31, 1997 and 1996, and include the results of operations and cash
flows of IPL from the date of the Merger through December 31, 1997. 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 Video and IPL. The Contribution,
which represents a transfer between entities under common control, has been
recorded at the lower of historical amortized cost or fair value. See Note 1 to
the Company's unaudited condensed consolidated financial statements included
herein. The following discussion and analysis should be read in conjunction with
such historical consolidated financial statements and the notes thereto.
Overview
The Company's business is currently divided into three segments: (i)
Satellite and Fiber Optic Transmission Services ("Transmission Services"), (ii)
Systems and Products and (iii) Production Services. The Transmission Services
segment integrates and distributes broadcast quality video content via a
satellite and fiber optic transmission network routed through its digital/analog
switching center. The Systems and Products segment designs, engineers and
produces advanced video facilities for the broadcast and cable television,
post-production and professional markets and rents professional video equipment
to the sports, entertainment and other segments of the broadcast and cable
television and professional markets. The Production services segment is an
international provider of technical and creative services to owners, producers
and distributors of television programming and other programming content.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Discontinued Operations
On January 2, 1997, Old Video's management, which had the authority to
approve the action, committed Video to a formal plan to discontinue the
operations of its Diversified Products segment as a condition to the Merger. 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 the consulting company providing strategic consulting services in the
area of communications, design and implementation of intranets, extranets and
internets (See Note 8).
Results of Continuing Operations
Three Months Ended December 31, 1997 compared to Three Months Ended
December 31, 1996.
Total revenues increased by $12,690 to $19,219 in 1997 from $6,529 in 1996.
Revenues from services increased by $12,723 to $15,407 in 1997 from $2,684 in
1996. $12,474 of the $15,407 of 1997 services revenue was attributable to
post-Merger contribution to revenues from services provided by IPL. Revenues
from services other than those provided by IPL increased by 9.3% to $2,933 in
1997 from $2,684 in 1996. 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 revenues from existing customers,
which was partially offset by a decrease in syndication revenues due to
programming cancellations. Revenues from sales increased by 0.8% to $3,296 in
1997 from $3,270 in 1996 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 the Company now
receives a commission on equipment used in such video systems 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 costs related to
the purchase thereof. Rental revenue decreased 10.3% to $516 in 1997 from $575
in 1996 as a result of strong demand for video equipment generated by the
presidential election and the professional baseball World Series in 1996, which
did not recur in 1997.
Total costs of sales, services and rentals increased by $6,647 to $10,491
in 1997 from $3,844 in 1996. Costs of services increased by $6,721 to $7,876 in
1997 from $1,155 in 1996. This increase was primarily attributable to costs of
services provided by IPL of $6,641 and a $80 increase in costs of non-IPL
services. Increases in costs of sales were offset by decreases which were due
primarily to the change in the contract structure discussed above. Cost of
rentals increased by $24 to $167 in 1997 from $143 in 1996 as a result of higher
sub-rental costs. The Company's overall gross profit margin decreased to 34.6%
in 1997 from 34.7% in 1996. Gross profit margin from sales increased to 25.7% in
1997 from 22.1% in 1996 primarily as a result of the change in the contract
structure discussed above. Gross profit margin from services other than services
provided by IPL increased to 57.9% in 1997 from 57.0% in 1996 as a result of an
increase in revenues combined with stable fixed costs for materials and
equipment. Gross profit margin from rentals decreased to 67.6% in 1997 from
75.1% in 1996, primarily from a higher amount of sub-rentals.
Selling, general and administrative expenses increased to $4,669 in 1997
from $1,703 in 1996, which increases primarily resulted from the additional
administrative salaries and occupancy costs attributed to 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 24.3% in 1997
from 26.1% in 1996.
Depreciation increased to $2,081 in 1997 from $420 in 1996, primarily due
to the significant amount of fixed assets of IPL acquired in the Merger.
Amortization expense increased to $225 in 1997 from $3 in 1996 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 $949 in 1997 from $126 in 1996 primarily due
to the assumption by the Company in the Merger of IPL's existing long-term
indebtedness. See "-- Liquidity and Capital Resources."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued) (in thousands, except share amounts)
The effective tax rate applied against pre-tax income was 53.2% in 1997 and
38.8% in 1996. The effective tax rate for both periods as compared to the
federal statutory tax rate of 34% was primarily the result of state income taxes
and goodwill amortization created by the Merger which is not deductible for
income tax purposes.
Income from continuing operations decreased 30.9% to $392 in 1997 from $567
in 1996 primarily as a result of the factors discussed above.
Six Months Ended December 31, 1997 compared to Six Months Ended December
31, 1996.
Total revenues increased by $17,381 to $30,637 in 1997 from $13,256 in
1996. Revenues from services increased by $17,134 to $22,146 in 1997 from $5,012
in 1996. $16,768 of the $22,146 of 1997 services revenue was attributable to
post-Merger contribution to revenues from services provided by IPL. Revenues
from services other than those provided by IPL increased by 7.3% to $5,378 in
1997 from $5,012 in 1996. 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 revenues from existing customers,
which was partially offset by a decrease in syndication revenues due to
programming cancellations. Revenues from sales increased by 10.2% to $7,471 in
1997 from $6,780 in 1996 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 the Company now
receives a commission on equipment used in such video systems 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 costs related to
the purchase thereof. Rental revenue decreased 30.3% to $1,020 in 1997 from
$1,464 in 1996 as a result of strong demand for video equipment generated by the
Atlanta Olympics, presidential election, and the professional baseball World
Series in 1996, which did not recur in 1997.
Total costs of sales, services and rentals increased by $8,899 to $16,747
in 1997 from $7,848 in 1996. Costs of services increased by $8,909 to $11,300 in
1997 from $2,391 in 1996. This increase was primarily attributable to costs of
services provided by IPL of $8,923, which was offset by a $14 decrease in costs
of non-IPL services. Increases in costs of sales were offset by decreases which
were due primarily to the change in the contract structure discussed above. Cost
of rentals decreased by $172 to $298 in 1997 from $470 in 1996 as a result of
strong demand for video equipment generated by the Atlanta Olympics,
presidential election, and the professional baseball World Series, which did not
recur in 1997. The Company's overall gross profit margin increased to 35.5% in
1997 from 34.5% in 1996. Gross profit margin from sales increased to 31.1% in
1997 from 26.4% in 1996 primarily as a result of the change in contract
structure discussed above. Gross profit margin from services other than services
provided by IPL increased to 55.8% in 1997 from 52.3% in 1996 as a result of an
increase in revenues combined with stable fixed costs for materials and
equipment. Gross profit margin from rentals increased to 70.8% in 1997 from
67.9% in 1996, primarily from reduced amount of sub-rentals which were required
in 1996 to meet increased demand for equipment rentals in connection with the
Atlanta Olympics.
Selling, general and administrative expenses increased to $7,320 in 1997
from $3,222 in 1996, which increases primarily resulted from the additional
administrative salaries and occupancy costs attributable to IPL's operations.
However, as a result of the Company's increased revenue, selling, general and
administrative expense as a percentage of revenues decreased to 23.9% in 1997
from 24.3% in 1996.
Depreciation increased to $3,016 in 1997 from $830 in 1996, primarily due
to the significant amount of fixed assets of IPL acquired in the Merger.
Amortization expense increased to $308 in 1997 from $7 in 1996 reflecting the
amortization of the goodwill (excess of cost over the fair value of net assets
acquired) recorded in connection with the Merger, which is being amortized over
25 years.
Interest expense increased to $1,490 in 1997 from $245 in 1996 primarily
due to the assumption by the Company in the Merger of IPL's existing long-term
indebtedness. See "-- Liquidity and Capital Resources."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
The effective tax rate applied against pre-tax income was 48.0% in 1997 and
41.0% in 1996. The effective tax rate for both periods as compared to the
federal statutory tax rate of 34% was primarily the result of state income taxes
and goodwill amortization created by the Merger which is not deductible for
income tax purposes.
Income from continuing operations decreased 0.6% to $946 in 1997 from $952
in 1996 primarily as a result of the factors discussed above.
Liquidity and Capital Resources
The Company meets its liquidity needs and capital expenditures requirements
with internally generated funds, borrowing under its bank credit facility
(including line of credit), equipment financing and capital leases. Such funds
are used for capital expenditures, working capital needs and repayment of
outstanding indebtedness.
In connection with the Merger, the Company refinanced substantially all of
Video's and IPL's long-term indebtedness (excluding convertible subordinated
debt, Old Video's mortgage payable, note payable to Cognitive Communications,
Inc. and obligations under capital leases), including lines of credit, with a
$33,000 term loan and a $17,000 revolving line of credit. The new facility bears
interest at: (i) the lenders' prime rate minus 1.00% or (ii) LIBOR plus a number
of basis points based upon the Company's leverage ratio (funded debt divided by
EBITDA (defined as earnings before interest, taxes, depreciation and
amortization), which is initially LIBOR plus 1.75% (the Company has the option
to choose the applicable interest rate). Principal payments of $1,000 per
quarter in respect of the term loan portion of the facility were due beginning
December 31, 1997. Such quarterly principal payments increase to $1,250 per
quarter on December 31, 1998 and then increase to $1,750 per quarter on December
31, 1999 and then further increase to $2,000 per quarter on September 30, 2001
with a balloon payment of $3,750 in respect of the term loan portion of the
facility due on September 30, 2002. The facility is secured by all of the assets
of the Company and its subsidiaries (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 proceeds of the new facility were used as follows: approximately
$23,400 to refinance IPL's outstanding long-term indebtedness, approximately
$3,600 to refinance Old Video's outstanding long-term indebtedness and $1,485 of
mortgage obligations of MAL Partners and approximately $1,800 to refinance Old
Video's outstanding short-term line of credit. Approximately $3,500 was used to
pay the fees and expenses incurred in connection with the Merger.
At December 31, 1997, the Company's outstanding indebtedness was
approximately $50,149, including $8,800 under the revolving credit facility. At
December 31, 1997, the interest rate was approximately 7.5%. The remainder of
the facility (approximately $8,200) will be available for future working capital
requirements and general corporate purposes.
Cash Flow from Operating Activities. For the six months ended December 31,
1997, net cash used in operating activities was $7,032, primarily resulting from
EBITDA of $6,634, which was offset by increases in working capital requirements,
primarily the payment of transaction costs associated with the Merger. For the
six months ended December 31, 1996, net cash provided by operating activities
was $718, primarily resulting from EBITDA of $2,696, which was offset by
increases in working capital requirements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Cash Flow from Investing Activities. For the six months ended December 31,
1997, the Company used $2,040 for investing activities, consisting of $2,108 for
the purchase of additional equipment, which was offset by a sale
of fixed assets and repayment of an advance to an affiliate.
Cash Flow from Financing Activities. For the six months ended December 31,
1997, cash provided by financing activities, net of repayments of borrowings of
long-term indebtedness, was $10,932. Such amount primarily consisted of $33,000
in proceeds from the senior secured term loan and $8,800 in borrowings under the
revolving line of credit described above. The Company repaid $31,076 of
borrowings primarily in connection with the refinancing described above.
Impact of Year 2000:
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment and will have to modify portions of
its software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The total year 2000 project cost is
estimated by management to be not material.
17
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
Item 5. OTHER INFORMATION
The Registrant filed with the Securities and Exchange Commission on Form
8-A on February 6, 1998, pursuant to the requirements of Section 12(b) of the
Securities Exchange Act of 1934, in connection with the listing of the Common
Stock on the American Stock Exchange.
18
<PAGE>
PART II
OTHER INFORMATION (con't)
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information purposes only and
not filed.
(b) REPORTS ON FORM 8-K
The Registrant filed a Current Report on Form 8-K on July 8, 1997 to
announce that it had entered into the Merger Agreement and a voting agreement in
connection with the Merger. No financial statements were included therein.
The Registrant filed a Current Report on Form 8-K on September 4, 1997 to
report the consummation of the Merger, its acquisition of assets, a change in
accountants and a change of its fiscal year. No financial statements were
included therein. On October 7, 1997, the Registrant filed an amendment to its
Current Report on Form 8-K filed on September 4, 1997 to include (i) the audited
consolidated financial statements of Video and its subsidiaries as of June 30,
1996 and 1997 and for the years ended June 30, 1995, 1996 and 1997 and (ii) pro
forma financial information required by Article 11 of Regulation S-X with
respect to the Merger.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDEO SERVICES CORPORATION
(Registrant)
Date: February 13, 1998 /s/Louis H. Siracusano
-------------------------------------------
Name: Louis H. Siracusano
Title: President and Chief Executive Officer
Date: February 13, 1998 /s/Steven G. Crane
-------------------------------------------
Steven G. Crane
Vice President and Chief Financial Officer
19
<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
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,250
<SECURITIES> 0
<RECEIVABLES> 15,151
<ALLOWANCES> 1,034
<INVENTORY> 982
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<PP&E> 87,779
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<COMMON> 132
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<SALES> 30,637
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