SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] 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 issuers common stock, $.01 par value
per share, as of November 5, 1999, was 13,286,307.
<PAGE>
VIDEO SERVICES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
The audited consolidated financial information at June 30, 1999 and the
unaudited consolidated financial information at September 30, 1999 and for the
three month periods ended September 30, 1998 and 1999 relate to Video Services
Corporation and its subsidiaries.
Item 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets as of June 30, 1999
and September 30, 1999 3
Condensed Consolidated Statements of Operations for
the three months ended September 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 1998 and 1999 5
Condensed Consolidated Statement of Stockholders' Equity for
the three months ended September 30, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDING....................................... 17
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............. 17
Item 3. DEFAULTS UPON SENIOR SECURITIES........................ 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................ 17
Item 5. OTHER INFORMATION...................................... 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K....................... 17
SIGNATURES...................................................... 18
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and September 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1999 1999
------------- -------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 805 $ 325
Accounts receivable, net 14,876 15,426
Inventories 694 914
Costs and estimated earnings in excess of billings on
uncompleted contracts 934 1,441
Deferred income taxes 1,300 1,300
Prepaid expenses and other current assets 685 811
------------ ------------
Total current assets 19,294 20,217
Fixed assets, net 39,589 37,610
Excess of cost over fair value of net assets acquired, net 21,858 21,613
Receivable from affiliates - 13
Deferred income taxes 2,950 2,981
Other assets 1,627 1,753
------------ ------------
Total assets $ 85,318 $ 84,187
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,248 $ 7,794
Billings in excess of costs and estimated
earnings on uncompleted contracts 985 430
Current portion of long-term debt 7,702 8,224
Income taxes payable 691 755
Other current liabilities 3,105 4,052
------------ ------------
Total current liabilities 21,731 21,255
Long-term debt 36,760 36,691
Subordinated debt 5,652 5,707
Other liabilities 2,282 1,849
Payable to affiliates 46 -
------------ ------------
Total liabilities 66,471 65,502
============ ============
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 1999
and September 30, 1999 - -
Common stock: $.01 par value, 25,000,000 share authorized,
and 13,264,307 and 13,286,307 shares issued outstanding
at June 30, 1999 and September 30, 1999, respectively 132 133
Additional paid-in-capital 21,218 21,270
Retained deficit (2,503) (2,718)
------------ ------------
Total stockholders' equity 18,847 18,685
------------ ------------
Total liabilities and stockholders' equity $ 85,318 $ 84,187
============ ============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1998 and 1999
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1999
------------ -----------
Revenues:
<S> <C> <C>
Sales $ 5,719 $ 4,211
Services 16,187 16,593
------------ -------------
21,906 20,804
Costs:
Costs of sales 4,445 3,246
Costs of services 9,363 8,840
------------- -------------
13,808 12,086
Depreciation 2,136 2,281
------------- -------------
Gross profit 5,962 6,437
Selling, general and administrative expenses 4,958 4,967
Amortization 263 277
------------- -------------
Operating income 741 1,193
Other (expense) income:
Interest expense (1,054) (1,241)
Interest and other income 12 6
------------- -------------
Loss before income taxes (301) (42)
Income tax expense (benefit) (15) 173
------------- -------------
Net loss $ (286) $ (215)
============= =============
Earnings per share:
Basic:
Net loss $ (0.02) $ (0.02)
============= =============
Diluted:
Net loss $ (0.02) $ (0.02)
============= =============
Weighted average number of shares outstanding for basic
and diluted earnings per share 13,264,307 13,265,264
============= =============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 1998 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, September 30,
1998 1999
------------- -------------
Operating Activities
<S> <C> <C>
Net cash used in operating activities $ (1,437) $ (668)
Investing Activities
Additions to fixed assets (3,347) (588)
Proceeds from sale of fixed assets 21 340
Increase in receivable from officers (25) -
Increase in receivable from affiliates 10 (72)
---------- ----------
Net cash used in investing actvities (3,341) (320)
Financing Activities
Increase in subordinated debt 51 55
Proceeds from long-term borrowing 8,200 3,500
Repayments of borrowings (4,019) (3,047)
---------- ----------
Net cash provided by financing activities 4,232 508
Net decrease in cash (546) (480)
Cash and cash equivalents, beginning of period 1,492 805
---------- -----------
Cash and cash equivalents, end of period $ 946 $ 325
========== ===========
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended September 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Common Common
Stock Stock Paid-In Retained
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1999 13,264,307 $ 132 $ 21,218 $ (2,503) $ 18,847
Stock related compensation 22,000 1 52 - 53
Net loss - - - (215) (215)
--------------------------------------------------------
Balance at September 30, 1999 13,286,307 $ 133 $ 21,270 $ (2,718) $ 18,685
========================================================
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except for share amounts)
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending June 30, 2000. The unaudited interim financial
information should be read in conjunction with the audited consolidated
financial statements of Video Services Corporation and subsidiaries (the
Company) as of and for the year ended June 30, 1999 included in the Form 10-K
filed by the Company.
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. As part of the Merger, the Company made a
strategic evaluation of facilities and personnel requirements and determined
that certain IPL facilities would be closed with the equipment being
consolidated into other facilities and determined that certain IPL personnel
would be redundant. Accordingly, the Company recorded a reserve for severance
costs of $1,426 and lease related costs of $993 as of August 27, 1997. The
balance of the liability was $915 and $794 at June 30, 1999 and September 30,
1999, respectively. At June 30, 1999 it was estimated that approximately $591 of
such expenditures would be made in fiscal 2000, $196 in fiscal 2001, $128 in
fiscal 2002. The Company anticipates that funding for these amounts will be
provided by operations.
Note 2 - Inventories
Inventories which consist of system components and equipment which 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.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 3 - Accounts Receivable
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
------------------ ------------------
<S> <C> <C>
Accounts receivable, trade............................ $ 13,750 $ 14,781
Contracts receivable billed:
Uncompleted contracts.............................. 702 1,120
Completed contracts................................ 1,453 523
------------------ ------------------
$ 15,905 $ 16,424
Less: Allowance for doubtful accounts
and volume discounts........................... 1,029 998
------------------ ------------------
$ 14,876 $ 15,426
================== ==================
</TABLE>
Note 4 - Fixed Assets
Fixed assets, at cost, including equipment under capitalized leases,
summarized by major categories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
------------------ ------------------
<S> <C> <C>
Machinery and equipment................................ $ 44,482 $ 44,562
Leasehold improvements................................. 12,389 12,437
Furniture and fixtures................................. 2,222 2,227
Transportation equipment............................... 270 270
Building............................................... 2,199 2,199
Land................................................... 1,967 1,967
Equipment under capital leases......................... 5,256 5,256
------------------ ------------------
68,785 68,918
Less: Accumulated depreciation........................ 29,196 31,308
------------------ ------------------
$ 39,589 $ 37,610
================== ==================
</TABLE>
Note 5 - Segment Data
The Company's continuing operations are classified into three reportable
business segments that provide different products and services: (i) Satellite
and Distribution Services, (ii) Systems and Products and (iii) Production
Services (See Note 1). Separate management of each segment is required because
each segment is subject to different marketing, production, and technology
strategies.
The Company evaluates performance and allocates resources based on
operating income from continuing operations. The Company does not allocate
income and expenses that are of a general corporate nature to industry segments
in computing operating income. These include corporate expenses, interest income
and expenses, and certain other income and expenses not directly attributable to
a specific segment.
Inter-segment sales are accounted for on the same basis used to price sales
to similar non-affiliated customers and such sales are eliminated in arriving at
consolidated amounts.
The accounting policies applied by each of the segments are the same as
those used by the company in general.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 5 - Segment Data (Continued)
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.
The Company operates primarily in the United States. Revenues from foreign
countries are not significant.
Summarized financial information by business segment for the three month
periods ended September 30, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, September 30,
1998 1999
----------------- ----------------
<S> <C> <C>
Revenues from unaffiliated customers:
Systems and Products................................... $ 6,221 $ 4,720
Satellite and Distribution Services.................... 7,043 7,992
Production Services.................................... 8,642 8,092
---------------- ----------------
Revenues............................................... $ 21,906 $ 20,804
================ ================
Intersegment revenues:
Systems and Products................................... $ 1,325 $ 25
Satellite and Distribution Services.................... 321 327
Production Services.................................... 103 65
---------------- ----------------
Total intersegment revenues............................ $ 1,749 $ 417
================ ================
Operating income:
Systems and Products................................... $ 692 $ 430
Satellite and Distribution Services.................... 1,257 1,811
Production Services.................................... 47 174
Corporate.............................................. (1,255) (1,222)
---------------- ----------------
Operating income....................................... $ 741 $ 1,193
Interest expense....................................... (1,054) (1,241)
Interest and other income.............................. 12 6
----------------- ----------------
Loss before income taxes............................... $ (301) $ (42)
================= ================
</TABLE>
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
------------------ ----------------
<S> <C> <C>
Identifiable assets at June 30, 1999 and September 30, 1999:
Systems and Products.................................... $ 6,427 $ 6,352
Satellite and Distribution Services..................... 20,691 20,604
Production Services..................................... 25,698 25,441
Corporate............................................... 32,502 31,790
---------------- ----------------
Total assets............................................ $ 85,318 $ 84,187
================ ================
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 6 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, September 30,
1998 1999
---------------- ----------------
Numerator:
<S> <C> <C>
Net loss............................................... $ (286) $ (215)
================ ================
Numerator for basic loss per share-net loss available
to common stockholders.............................. $ (286) $ (215)
Effect of dilutive securities:
4% convertible subordinated notes and stock options --- ---
---------------- ----------------
Numerator for diluted loss per share-net loss available
to common stockholders after assumed conversions.... $ (286) $ (215)
================ ================
Denominator:
Denominator for basic earnings per share-
weighted-average shares............................. 13,264,307 13,265,264
Effect of dilutive securities:
4% convertible subordinated notes and stock options --- ---
---------------- ----------------
Denominator for diluted earnings per share-adjusted
weighted-average share and assumed conversions..... 13,264,307 13,265,264
================ ================
Basic loss per share................................... $ (0.02) $ (0.02)
================ ================
Diluted loss per share................................. $ (0.02) $ (0.02)
================ ================
</TABLE>
Loss per share has been computed using the weighted average number of
shares outstanding during each period.
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.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 7 - Long-Term Debt
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
----------------- -----------------
<S> <C> <C>
Senior secured term loan........................................... $ 25,250 $ 24,000
Senior secured revolving credit loan............................... 12,700 14,700
Mortgage payable to credit institution bearing interest at
8.95% - prime (7.75% at June 30, 1999 and 8.25% at
September 30, 1999) plus 1% collateralized by fixed
assets with net book value at $2,395 and $2,374................. 2,209 2,162
Capitalized lease obligations...................................... 4,303 4,053
-------------- ---------------
44,462 44,915
Less: current maturities.......................................... 7,702 8,224
-------------- ---------------
$ 36,760 $ 36,691
============== ===============
</TABLE>
Senior Secured Long-Term Debt - The Company has 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 plus or minus certain percentages based upon the Company's
leverage ratio (funded debt divided by EBITDA) or LIBOR (London Interbank
Offered Rate) plus a number of basis points based upon the Company's leverage
ratio. The Term Loan bears interest at LIBOR plus a number of basis points based
upon the Company's leverage ratio. The facility contains various convenants that
require the Company to maintain certain financial ratios, limits capital
expenditures, prohibit dividends and similar payments and restrict the Company's
ability to incur other indebtedness. The Facility is guaranteed by all of the
Company's subsidiaries.
In August 1997, the Company entered into an interest rate swap agreement
with KeyBank to reduce the impact of changes in interest rates on its Term Loan.
The agreement, which matures in five years, has a total beginning notional
principal amount of $33,000, which decreases in accordance with scheduled
principal payments on the Company's Term Loan. The swap agreement effectively
converts the Company's borrowings under its Term Loan to a fixed rate. The
company pays the counterparty a fixed rate of 7.58% per annum and receives
payments based upon the floating one month LIBOR rate. The Company is exposed to
credit loss in the event of nonperformance by the counterparty; however, the
Company does not anticipate nonperformance by the counterparty.
Revolving Credit Facility - The Company has a $17,000 senior secured
revolving credit facility (the "Revolving Loan") with KeyBank. The Company had
outstanding direct borrowings of $14,700 under the Revolving Loan at September
30, 1999. The Company also has outstanding under the Revolving Loan letters of
credit of approximately $791 at September 30, 1999. The Company's Revolving Loan
weighted average interest rate was 7.92% at September 30, 1999.
Subordinated Debt - The Company has $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.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(dollars in thousands)
Overview
The Company's business is currently divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services (see Note 5). The Satellite and Distribution Services
segment integrates and distributes broadcast quality video content via a
satellite and fiber optic transmission network routed through its digital/analog
switching center. 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 manipulations 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.
Results of Continuing Operations
Three Months Ended September 30, 1999 compared to Three Months Ended
September 30, 1998.
Total revenues decreased by $1,102 from $21,906 in 1998 to $20,804 in 1999.
Revenues from the Satellite and Distribution Services segment increased by 13.5%
to $7,992 in 1999 from $7,043 in 1998. This increase was primarily due to the
facility in Burbank, California being fully operational, an increase in
syndicated satellite services, video transmissions and a continued increase in
the number of customers connected to the Company's satellite and fiber optic
network. Revenues from the Systems and Products segment decreased by 24.1% from
$6,221 in 1998 to $4,720 in 1999 primarily due from the delay of certain
contracts for the design and installation of video systems. The Production
Services segment decreased by 6.4% from $8,642 in 1998 to $8,092 in 1999. The
decrease is primarily due to a lower volume of creative editorial services and
the loss of network operations contracts offset by increased visual effects
services.
Total costs decreased by $1,722 from $13,808 in 1998 to $12,086 in 1999.
Costs of the Satellite and Distribution Services segment increased by $174 to
$3,858 in 1999 from $3,684 in 1998. This increase consisted primarily of costs
associated with the fully operational West Coast facility offset by lower
syndication costs. Costs of the Systems and Products segment decreased by $1,255
from $4,664 in 1998 to $3,409 in 1999. This decrease was primarily driven by the
reduced volume, caused by the delay in certain contracts, in installations of
video systems. Costs of the Production Services segment decreased by $641 from
$5,460 in 1998 to $4,819 in 1999. The decrease was primarily a result of a
reduction in fixed salaries and costs.
The Company's overall gross profit margin (excluding depreciation)
increased to 41.9% in 1999 from 37.0% in 1998. Gross profit margin from the
Satellite and Distribution Services segment increased to 51.7% in 1999 from
47.7% in 1998 as a result of the new West Coast facility being fully operational
and higher margins on the syndication revenues. Gross profit margin from the
Systems and Products segment increased to 27.8% in 1999 from 25.0% in 1998
primarily as a result of higher margin video systems contracts and from a higher
proportion of revenues contributed by the equipment rental division in 1999.
Gross profit margin from Production Services segment increased to 40.4% in 1999
from 36.8% in 1998 as a result of a decrease in revenues combined with a greater
reduction in fixed salaries and costs.
Selling, general and administrative expenses increased to $4,967 in 1999
from $4,958 in 1998. Selling, general and administrative expenses as a
percentage of revenues increased by 1.3% to 23.9% in 1999 from 22.6% in 1998.
The ratio increase was primarily attributable to the decreased revenues of the
Company.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Continuing Operations (continued)
Depreciation expense increased to $2,281 in 1999 from $2,136 in 1998,
primarily due to the new West Coast facility. Amortization expense increased to
$277 in 1999 from $263 in 1998 reflecting the amortization of the goodwill
(excess of cost over the fair value of net assets acquired), which is being
amortized over 25 years.
Interest expense increased to $1,241 in 1999 from $1,054 in 1998, as a
result of higher interest rates associated with the term loan and increased
borrowings associated with the new West Coast facility.
The effective tax rate applied against pre-tax loss was 411.9% in 1999 and
(5.0)% in 1998. The effective tax rate for 1999 as compared to the federal
statutory tax rate of 34% was primarily the result of goodwill amortization,
which is not deductible for income tax purposes and state income taxes. State
income taxes is net of state net operating loss valuations provided for certain
subsidiaries as a result of estimates regarding future operations.
Net loss decreased to $215 in 1999 from $286 in 1998 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 August 1997, the Company entered into a five-year facility with a
$33,000 term loan and a $17,000 revolving line of credit. The facility bears
interest at: (i) the lenders prime rate plus or minus certain percentages based
upon the Company's leverage ratio (funded debt divided by EBITDA (defined as
earnings before interest, taxes, depreciation and amortization) or (ii) LIBOR
plus a number of basis points based upon the Company's leverage ratio. The
Company has the option to choose the applicable interest rate. The facility is
secured by all of the assets of the Company and its subsidiaries. The facility
contains covenants, which require the Company to maintain certain financial
ratios, prohibit dividends and similar payments and restrict the Company's
ability to incur other indebtedness. The facility is guaranteed by all of the
Company's subsidiaries.
At September 30, 1999, the Company's outstanding indebtedness was
approximately $50,622, including $14,700 under the revolving credit facility. At
September 30, 1999, the weighted average interest rate was approximately 8.79%
on the Company's outstanding indebtedness. The remainder of the facility
(approximately $1,509) will be available for future working capital requirements
and general corporate purposes.
Cash Flow from Operating Activities. For the three months ended September
30, 1999, net cash used in operating activities was $668, primarily resulting
from EBITDA of $3,757, which was offset by increases in working capital
requirements. At September 30, 1999, the net deferred tax asset includes the
benefit for net operating loss carryforwards. Realization is not assured,
however, the Company believes it will generate sufficient taxable income to
realize the entire deferred net asset. For the three months ended September 30,
1998, net cash used in operating activities was $1,437, primarily resulting from
EBITDA of $3,152, which was offset by increases in working capital requirements.
Cash Flow from Investing Activities. For the three months ended September
30, 1999, the Company used $320 for investing activities, consisting of $588 for
the purchase of additional equipment, which was offset by sales of fixed assets.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
Cash Flow from Financing Activities. For the three months ended September
30, 1999, cash provided by financing activities, net of repayment of borrowings
of long-term indebtedness, was $508. Such amount primarily consisted of $3,500
in borrowings under the revolving line of credit described above. The Company
repaid $3,047 of borrowings primarily in connection with the revolving line of
credit and the refinancing described above.
Impact of Year 2000:
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of data-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failure. The Company has
conducted a review of its computer information systems and its technological
operating equipment to identify the systems that could be affected by the year
2000 compliance issue.
Below are summaries of the review areas:
Business Systems: All systems supported by the Company's corporate
information group and all programs used in operations have been inventoried as
part of the year 2000 readiness. Inventoried programs and systems have been
reviewed and modified to be year 2000 compliant. The Company uses purchased
software programs for a variety of functions, including general ledger, accounts
payable, and accounts receivable accounting packages as well as comprehensive
facility management packages. These programs are generally year 2000 compliant
or have been repaired or upgraded and are now year 2000 compliant. Software
and/or computer systems not currently compliant, will be upgraded during
calendar 1999 under existing maintenance and other agreements and through normal
replacement programs currently in place.
The Company has moved to its fiscal 2000 accounting calendar commencing on
July 1, 1999 without incident.
Facilities: The scope of the facilities project includes facilities
management systems (for example, temperature, humidity, automatic toilets)
building access, un-interruptable power systems and elevators. The facilities
review was substantially complete at June 1999, with no significant year 2000
issues noted.
Equipment used in operations: This review area includes the audio video
equipment, switching equipment, graphics and special effects equipment, film to
tape transfer and color correction equipment, standards conversion equipment,
transmission and reception equipment and computer added design equipment. The
operations equipment project was substantially complete at June 1999, with no
significant year 2000 issues noted. A review of the Company's equipment
containing embedded microprocessors or other technology has not revealed year
2000 compliance issues. Operation of this equipment is generally not
time-sensitive and, if necessary, equipment settings can be adjusted without
posing any significant operational problems for the Company.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Impact of Year 2000 (continued)
Suppliers' Products and Readiness: The company has reviewed its suppliers
and identified key suppliers. The key suppliers have been contacted regarding
their year 2000 readiness. Based on responses, cost and the critical nature of
the material involved contingency planning is being developed. More
specifically, the inventory levels of blank tape and consumables may be
increased. The Systems and Products Group's purchasing department along with the
systems' engineers have been incorporating year 2000 readiness in their purchase
orders.
Company Services and Products: The Company considers its services and
manufactured products to be year 2000 ready. Most of the Company's services and
manufactured products have no date function and therefore have no year 2000
compliance issues. The Systems and Products Group is dependent on the year 2000
readiness of its suppliers and their products.
The Company's remediation efforts are substantially complete and the focus
is now being directed toward contingency planning. Management is confident in
the Company's ability to transition to the year 2000 without incident but will
establish contingency plans in the event of unforeseen failures. The Company
reasonably believes that its most likely worst-case year 2000 impact would
relate to problems with systems of suppliers and customers rather than with the
Company's internal systems or products. The Company has less control over the
year 2000 assessment and remediation efforts of third parties and believes the
risks are greatest with infrastructure providers (power, water and communication
services), logistics elements (transportation and customs) and suppliers of
materials and services.
Based on these reviews, costs of addressing remaining year 2000 compliance
issues are not expected to exceed $25 and costs incurred to date approximate
$50.
To date, the Company has not identified any system which presents a
material risk of not being year 2000 ready in a timely fashion or for which a
suitable alternative cannot be implemented. As the Company progresses with its
year 2000 conversion, however, it may identify systems that do present a
material risk of year 2000 disruption. Such disruption may include, among other
things, the inability to process transactions or information, to record, access
data, or engage in similar normal business activities. If the Company, its
customers or vendors are unable to resolve such processing issues in a timely
manner, it could result in a material financial risk. Accordingly, the Company
will devote the necessary resources to resolve all significant year 2000 issues
in a timely manner.
The discussion above contains certain forward-looking statements. The costs
of the year 2000 conversion, the date which the Company has set to complete such
conversion, and possible risks associated with the year 2000 issue are based on
the Company's current estimates and are subject to various uncertainties that
could cause the actual results to differ materially from the Company's
expectations. Such uncertainties include, among others, the success of the
Company in identifying systems that are not year 2000 compliant, the nature and
amount of programming required to upgrade or replace each of the affected
systems, the availability of qualified personnel, consultants and other
resources, and the success of the year 2000 conversion efforts of others.
Quantitative and Qualitative Disclosures about Market Risk:
Market risks relating to the Company's operations result primarily from
change 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.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Quantitative and Qualitative Disclosures about Market Risk (continued)
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 amount of $33,000 to manage interest
costs associated with changing interest rates. This agreement converts
underlying variable rate debt based on LIBOR under the Company's term loan to
fixed rate debt with an interest rate of 8.33%.
There has not been any material changes in the reported market risks since
the fiscal year ended June 30, 1999.
Forward-Looking Statements:
The above discussion contains forward-looking statements. There are certain
important factors that could cause results to differ materially from those
anticipated by the statements made above. These factors include, but are not
limited to: the general performance of the economy, specifically as it affects
the advertising, entertainment and television and video industries; the
international economic and political climate which could impact the sale of
domestic programming overseas; significant changes in video technology in the
post-production, video and communications industries; the loss of key personnel
and the loss of key customers.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information purposes
only and not filed.
(b) REPORTS ON FORM 8-K
NONE
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDEO SERVICES CORPORATION
(Registrant)
Date: November 5, 1999 /s/Louis H. Siracusano
-----------------------------------------------
Name: Louis H. Siracusano
Title: President and Chief Executive Officer
Date: November 5, 1999 /s/Steven G. Crane
-----------------------------------------------
Name: Steven G. Crane
Title: Vice President and Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME FILED AS PART OF THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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