<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 March 31, 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 issuer's common stock, $.01 par value
per share, as of May 14, 1999, was 13,264,307.
<PAGE>
VIDEO SERVICES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
The audited consolidated financial information at June 30, 1998 and the
unaudited consolidated financial information at March 31, 1999 and for the three
and nine month periods ended March 31, 1998 and 1999 relate to Video Services
Corporation and its subsidiaries.
Item 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets as of June 30, 1998
and March 31, 1999 3
Condensed Consolidated Statements of Operations for
the nine months ended March 31, 1998 and 1999 4
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1998 and 1999 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended March 31, 1998 and 1999 6
Condensed Consolidated Statement of Stockholders' Equity for
the nine months ended March 31, 1999 7
Notes to Condensed Consolidated Financial Statements 8
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
----------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
---------------------------------------------
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDING.....................................................23
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................23
Item 3. DEFAULTS UPON SENIOR SECURITIES......................................23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS..............................................................23
Item 5. OTHER INFORMATION....................................................23
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................23
SIGNATURES....................................................................24
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 1998 and March 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 1998 1999
- ------ ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,492 $ 1,314
Accounts receivable, net 14,169 13,489
Inventories 1,083 721
Costs and estimated earnings in excess of billings on
uncompleted contracts 187 365
Deferred income taxes 1,535 1,535
Prepaid expenses and other current assets 907 3,034
------------- --------------
Total current assets 19,373 20,458
Fixed assets, net 36,590 37,448
Excess of cost over fair value of net assets acquired, net 22,289 21,707
Receivable from affiliates 42 132
Receivable from officer - 25
Deferred income taxes 1,667 2,708
Other assets 1,899 1,792
-------------- --------------
Total assets $ 81,860 $ 84,270
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 8,443 $ 9,529
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,290 1,200
Current portion of long-term debt 5,338 7,195
Income taxes payable 708 551
Other current liabilities 3,881 4,287
-------------- ---------------
Total current liabilities 21,660 22,762
Long-term debt 30,968 34,080
Subordinated debt 5,442 5,598
Other liabilities 3,065 2,640
-------------- ---------------
Total liabilities 61,135 65,080
-------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 1998
and March 31, 1999 - -
Common stock: $.01 par value, 25,000,000 share authorized,
and 13,264,307 shares issued and outstanding
at June 30, 1998 and March 31, 1999 132 132
Additional paid-in-capital 21,196 21,218
Retained deficit (603) (2,160)
-------------- --------------
Total stockholders' equity 20,725 19,190
-------------- --------------
Total liabilities and stockholders' equity $ 81,860 $ 84,270
============== ==============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended March 31, 1998 and 1999
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1999
-------------- --------------
<S> <C> <C>
Revenues:
Sales $ 11,567 $ 16,518
Services 38,003 48,442
Rentals 1,523 1,208
-------------- --------------
51,093 66,168
Costs:
Costs of sales 8,508 13,744
Costs of services 19,545 27,658
Costs of rentals 440 398
-------------- --------------
28,493 41,800
Depreciation 5,024 6,457
-------------- --------------
Gross profit 17,576 17,911
Selling, general and administrative expenses 12,067 15,420
Merger related costs - 331
Amortization 563 819
-------------- --------------
Operating income from continuing operations 4,946 1,341
Other (expense) income:
Interest expense (2,618) (3,074)
Interest and other income 101 26
-------------- --------------
Income (loss) before income taxes and discontinued operations 2,429 (1,707)
Income tax expense (benefit) 1,166 (150)
-------------- --------------
Income (loss) from continuing operations 1,263 (1,557)
Discontinued operations:
Loss from operations of the Consulting Services segment
(less applicable income tax benefit of $73) (140) -
-------------- --------------
Net income (loss) $ 1,123 $ (1,557)
============== ==============
Earnings per share:
Basic:
Income (loss) from continuing operations $ 0.11 $ (0.12)
Loss from discontinued operations (0.02) -
-------------- --------------
Net income (loss) $ 0.09 $ (0.12)
============== ==============
Diluted:
Income (loss) from continuing operations $ 0.11 $ (0.12)
Loss from discontinued operations (0.02) -
--------------- ---------------
Net income (loss) $ 0.09 $ (0.12)
=============== ===============
Weighted average number of shares outstanding for basic and diluted
earnings per share 11,948,137 13,264,307
=============== ===============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1998 and 1999
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1999
--------------- ---------------
<S> <C> <C>
Revenues:
Sales $ 4,096 $ 6,000
Services 15,857 16,303
Rentals 503 397
--------------- ---------------
20,456 22,700
Costs:
Costs of sales 3,359 5,316
Costs of services 8,245 9,028
Costs of rentals 142 133
--------------- ---------------
11,746 14,477
Depreciation 2,008 2,306
--------------- ---------------
Gross profit 6,702 5,917
Selling, general and administrative expenses 4,747 5,184
Merger related costs - 331
Amortization 255 283
--------------- ---------------
Operating income from continuing operations 1,700 119
Other (expense) income:
Interest expense (1,128) (997)
Interest and other income 37 (2)
--------------- ---------------
Income (loss) before income taxes 609 (880)
Income tax expense (benefit) 292 (59)
--------------- ---------------
Net income (loss) $ 317 $ (821)
=============== ===============
Earnings per share:
Basic:
Net income (loss) $ 0.02 $ (0.06)
=============== ===============
Diluted:
Net income (loss) $ 0.02 $ (0.06)
=============== ===============
Weighted average number of shares outstanding for basic and diluted
earnings per share 13,254,196 13,264,307
=============== ===============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31, 1998 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1999
--------------- ---------------
<S> <C> <C>
Operating Activities
Net cash (used in) provided by operating activities $ (1,273) $ 2,131
Investing Activities
Additions to fixed assets (2,367) (7,223)
Proceeds from sale of fixed assets 122 209
Increase in receivable from officers - (25)
Increase in receivable from affiliates (118) (180)
--------------- ---------------
Net cash used in investing actvities (2,363) (7,219)
Financing Activities
Increase in subordinated debt 110 156
Proceeds from long-term borrowing 45,100 20,868
Repayments of borrowings (41,070) (16,114)
--------------- ---------------
Net cash provided by financing activites 4,140 4,910
Net increase (decrease) in cash 504 (178)
Cash and cash equivalents, beginning of period 390 1,492
--------------- ---------------
Cash and cash equivalents, end of period $ 894 $ 1,314
=============== ===============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended March 31, 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, 1998 13,264,307 $ 132 $ 21,196 $ (603) $ 20,725
Issuance of independent contractors
compensatory stock options - - 22 - 22
Net loss - - - (1,557) (1,557)
----------------------------------------------------------------
Balance at March 31, 1999 13,264,307 $ 132 $ 21,218 $ (2,160) $ 19,190
================================================================
</TABLE>
See accompanying notes
<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 nine
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending June 30, 1999. The unaudited interim
financial information should be read in conjunction with the audited
consolidated financial statements of Video Services Corporation ("Old Video
Services Corporation") as of and for the year ended June 30, 1998 included in
the Form 10-K filed by the Company (as defined below).
Video Services Corporation and its subsidiaries (collectively, the
"Company"), is a leading provider of value-added video services to a diverse
base of customers within the television network, cable and syndicated
programming markets. These services are divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services. The Satellite and Distribution Services segment integrates
and distributes broadcast quality video content via a satellite and fiber optic
transmission network routed through its digital/analog switching center and is
an international provider of technical and distribution services to distributors
of television programming. The Systems and Products segment designs, engineers
and produces advanced video facilities for the broadcast and cable television,
post-production and corporate markets. This segment also develops, manufactures
and markets advanced color correcting and manipulation systems for the film,
post-production and multimedia industries and rents professional video equipment
to the sports, entertainment and other segments of the broadcast and cable
television and corporate markets. The Production Services segment is an
international provider of technical and creative services to owners, producers
of television programming, television advertising and other programming content.
On August 27, 1997, 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 IPL common stock owned by Old
Video Services Corporation which were canceled upon the Merger). Such newly
issued shares in the aggregate represented approximately 54.6% of the
outstanding shares of common stock immediately after the Merger.
As part of the Merger, the Company made a strategic evaluation of
facilities and personnel requirements and determined that certain IPL facilities
would be closed with the equipment being consolidated into other facilities and
determined that certain IPL personnel would be redundant. Accordingly, the
Company recorded a reserve for severance costs of $1,426 and lease related costs
of $993 as of August 27, 1997. The balance of the liability was $1,805 and
$1,083 at June 30, 1998 and March 31, 1999, respectively. At June 30, 1998 it
was estimated that approximately $1,101 of such expenditures would be made in
fiscal 1999, $380 in fiscal 2000, $196 in fiscal 2001 and $128 in fiscal 2002.
The Company anticipates that funding for these amounts will be provided by
operations.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 1 - Basis of Presentation (continued)
At the time of the merger, IPL had combined assets of $43,677, which
consisted of 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 tax
payables ($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.
In connection with, and as a condition to the Merger, immediately prior to
the Merger, the Diversified Products segment was spun-off to the stockholders of
Old Video Services Corporation in a non-cash dividend of approximately $2,653.
Immediately prior to the Merger, the principal stockholders of Old Video
Services Corporation contributed (the "Contribution") the stock of two S
corporations holding all of the general and limited partnership interests in MAL
Partners and L.I.M.A. Partners, which partnerships owned real estate and
equipment which was leased solely to Old Video Services Corporation and IPL. The
Contribution, which represents a transfer between entities under common control,
has been recorded at the lower of historical amortized cost or fair value.
The S corporations, through their ownership of MAL Partners and L.I.M.A.
Partners, at the time of the Contribution had combined assets of $3,801, which
consisted of net accounts receivable ($9), prepaid expenses and other current
assets ($74), buildings, satellite equipment and land ($3,198), and other
long-term assets ($520). The combined liabilities consisted of accounts payable
and accrued expenses ($62), mortgage obligations ($3,588), deferred taxes ($19),
payable to the Company ($1,314), payable to affiliates ($52) and other current
liabilities ($29).
The following presents the unaudited combined pro forma results of
operations for the nine month period ended March 31, 1998, as if the Merger and
Contribution had occurred as of July 1, 1997. The unaudited combined pro forma
results of operations are not necessarily indicative of the results of
operations that would have occurred had IPL and Old Video Services Corporation
actually combined during the periods presented or of future results of
operations of the combined operations.
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998
------------------
<S> <C>
Revenues..................................................... $ 58,484
Income from continuing operations............................ 1,311
Income from continuing operations per share.................. .10
Net income................................................... 1,112
Net income per share......................................... .08
</TABLE>
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
13,243,526. Included in the net income for the period ended March 31, 1998 is
approximately $199 of loss from discontinued operations relating to the
Consulting Services segment which was previously owned by IPL (see Note 8).
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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.
Note 3 - Accounts Receivable
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
--------------------- ---------------------
<S> <C> <C>
Accounts receivable, trade............................ $ 12,579 $ 13,374
Contracts receivable billed:
Uncompleted contracts.............................. 2,031 1,026
Completed contracts................................ 738 223
--------------------- ---------------------
15,348 14,623
Less: Allowance for doubtful accounts
and volume discounts........................ 1,179 1,134
--------------------- ---------------------
$ 14,169 $ 13,489
===================== =====================
</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, March 31,
1998 1999
--------------------- ---------------------
<S> <C> <C>
Machinery and equipment................................ $ 38,868 $ 40,841
Leasehold improvements................................. 11,195 11,846
Furniture and fixtures................................. 2,028 2,135
Transportation equipment............................... 281 281
Building............................................... 2,199 2,199
Land................................................... 1,967 1,967
Equipment under capital leases......................... 1,440 5,203
--------------------- ---------------------
57,978 64,472
Less: Accumulated depreciation........................ 21,388 27,024
--------------------- ---------------------
$ 36,590 $ 37,448
===================== =====================
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 5 - Segment Data
In June 1997, the Financial Accounting Standards Board issued Statements 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 facts management used to determine these segments. The Company is currently
evaluating the effects Statement No. 131 will have on its financial statements
and related disclosures. This statement will become effective for the fiscal
year ending June 30, 1999.
The Company's continuing operations are divided into three segments (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services (See Note 1).
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 corporate expenses, interest income and expenses, and certain other
income and expenses not directly attributable to a specific segment.
Identifiable assets by segment include assets directly identifiable with those
operations. Other assets primarily consist of corporate cash and cash
equivalents and fixed assets associated with nonsegment activities.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 5 - Segment Data (Continued)
Summarized financial information by business segment for the three and nine
month periods ended March 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
March 31, March 31, March 31, March 31,
1998 1999 1998 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers:
Systems and Products................... $ 4,598 $ 6,397 $ 13,089 $ 17,726
Satellite and Distribution Services.... 6,015 8,226 15,235 23,212
Production Services.................... 9,843 8,077 22,769 25,230
----------------- ----------------- ----------------- -----------------
Revenues............................... $ 20,456 $ 22,700 $ 51,093 $ 66,168
================= ================= ================= =================
Intersegment revenues:
Systems and Products................... $ 56 $ 212 $ 98 $ 1,781
Satellite and Distribution Services.... 325 305 847 907
Production Services.................... 351 69 832 266
----------------- ----------------- ----------------- -----------------
Total intersegment revenues............ $ 732 $ 586 $ 1,777 $ 2,954
================= ================= ================= =================
Operating income:
Systems and Products................... $ 394 $ (3) $ 2,078 $ 935
Satellite and Distribution Services.... 1,583 1,804 3,990 4,413
Production Services.................... 1,035 54 2,419 319
Corporate.............................. (1,312) (1,736) (3,541) (4,326)
----------------- ----------------- ----------------- -----------------
Operating income from continuing
operations.......................... $ 1,700 $ 119 $ 4,946 $ 1,341
Interest expense....................... (1,128) (997) (2,618) (3,074)
Interest and other income.............. 37 (2) 101 26
----------------- ----------------- ------------------ -----------------
Income (loss) before income taxes and
discontinued operations............. $ 609 $ (880) $ 2,429 $ (1,707)
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
----------------- -----------------
<S> <C> <C>
Identifiable assets at June 30, 1998 and March 31, 1999:
Systems and Products............................................................ $ 5,971 $ 3,641
Satellite and Distribution Services............................................. 16,460 21,772
Production Services............................................................. 29,787 25,805
Corporate....................................................................... 29,642 33,052
----------------- ----------------
Total assets.................................................................... $ 81,860 $ 84,270
================= =================
</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>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
March 31, March 31, March 31, March 31,
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations $ 317 $ (821) $ 1,263 $ (1,557)
=============== =============== =============== ===============
Numerator for basic earnings (loss) per
share-income (loss) available to common
stockholders....................... $ 317 $ (821) $ 1,263 $ (1,557)
Effect of dilutive securities:
4% convertible subordinated notes and
stock options...................... --- --- --- ---
--------------- ---------------- -------------- ---------------
Numerator for diluted earnings (loss) per
share-income (loss) from continuing
operations available to common
stockholders after assumed conversions $ 317 $ (821) $ 1,263 $ (1,557)
=============== ================ ============== ===============
Denominator:
Denominator for basic earnings per
share-weighted-average shares...... 13,254,196 13,264,307 11,948,137 13,264,307
Effect of dilutive securities:
4% convertible subordinated notes and
stock options...................... --- --- --- ---
--------------- ---------------- -------------- ---------------
Denominator for diluted earnings per
share-adjusted weighted-average
share and assumed conversions...... 13,254,196 13,264,307 11,948,137 13,264,307
=============== ================ ============== ===============
Basic earnings (loss) per share from
continued operations............... $ 0.02 $ (0.06) $ 0.11 $ (0.12)
=============== ================ ============== ===============
Diluted earnings (loss) per share from
continued operations............... $ 0.02 $ (0.06) $ 0.11 $ (0.12)
=============== ================ ============== ===============
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 6 - Earnings Per Share (continued)
Net income per share has been computed using the weighted average number of
shares outstanding during each period. Pre-Merger weighted average number of
shares outstanding has been retroactively restated for the equivalent number of
shares of common stock of the Company.
The effect of 4% convertible subordinated notes and stock options have been
excluded from the diluted earnings per share calculation, because they are
anti-dilutive.
Note 7 - Long-Term Debt
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
-------------- --------------
<S> <C> <C>
Senior secured term loan........................................... $ 30,000 $ 26,500
Senior secured revolving credit loan............................... 2,600 8,000
Mortgage payable to credit institution bearing interest at 8.95% -
prime (8.5% at June 30, 1998 and 7.75% at March 31, 1999) plus 1%
collateralized by fixed assets with net book value at $2,478 and
$2,416............................................................. 2,426 2,264
Capitalized lease obligations...................................... 1,280 4,511
-------------- -------------
36,306 41,275
Less: current maturities.......................................... 5,338 7,195
-------------- --------------
$ 30,968 $ 34,080
============== ==============
</TABLE>
In connection with the Merger, the Company refinanced all IPL's and Old
Video's long-term indebtedness (excluding capital lease obligations, Old Video's
mortgage payable, IPL's subordinated debt and IPL's note payable to Cognitive
Communications, Inc.)including lines of credit, with a $33,000 term loan and a
$17,000 revolving line of credit.
Senior Secured Long-Term Debt - The Company established a $33,000 senior
secured term loan (the "Term Loan") and the Revolving Loan (as defined herein),
with a five-year facility provided by KeyBank, as the agent bank (the
"Facility") which are secured by all assets of the Company and its existing and
future directly and indirectly owned subsidiaries. The Revolving Loan 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). 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.
During May 1999, the lenders amended the credit agreement, pursuant to which
certain covenants and levels were changed for quarter ended March 31, 1999 and
prospective periods. The Facility is guaranteed by all of the Company's
subsidiaries.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 7 - Long Term Debt (continued)
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 $8,000 under the Revolving Loan at
March 31, 1999. The Company also has outstanding under the Revolving Loan
letters of credit of approximately $996 at March 31, 1999. The Company's
Revolving Loan weighted average interest rate was 6.82% at March 31, 1999.
Subordinated Debt - The Company, in connection with the Merger, assumed
IPL's $6,350 principal amount of eight year convertible subordinated notes, due
May 4, 2003, with an interest rate of 4.0%, convertible at $14 per share after
five years and redeemable after six years. The debt was valued at $4,890 at May
5, 1995 using an effective rate of 8.34%. The valuation discount is being
amortized over the life of the notes.
Also, in connection with the merger and Contribution, the Company assumed
additional long-term indebtedness of $3,842, consisting of a note payable to
Cognitive Communications, Inc. ($196), mortgage payable ($2,103) and capital
lease obligations ($1,543).
Note 8 - Discontinued Operations
On November 30, 1997, management, which had the authority to approve the
action, committed the Company to a formal plan to dispose of its interest in the
Consulting Services segment, acquired in the Merger, which provides strategic
consulting services in the area of communications, design and implementation of
intranets, extranets and internets. Management closed the Consulting Services
segment November 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. Revenues of the discontinued Consulting Services segment were $1,004
from the date of the Merger through March 31, 1998 and $686 for the nine months
ended March 31, 1999. Included in other current liabilities at March 31, 1999 is
a reserve of $244 for future losses expected to be incurred, relating to the
disposal of the Consulting Services segment.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(in thousands, except share amounts)
General
On August 27, 1997, Video Services Corporation ("Old Video") merged with
and into International Post Limited ("IPL") with IPL being the surviving
corporation (the "Merger"). At the effective time of the Merger, IPL changed its
name to Video Services Corporation. References herein to the "Company" refer to
the combined company after giving effect to the Merger. The Merger was accounted
for as a reverse acquisition whereby the pre-Merger financial statements of Old
Video became the historical financial statements of the Company. As a result of
the Merger, the results of operations and cash flows reported for the Company
for the nine months ended March 31, 1999 are not necessarily comparable to those
for the nine months ended March 31, 1998. The results of operations and cash
flows as reported represent those of the Company for the nine month periods
ended March 31, 1999 and 1998, and include the results of operations and cash
flows of IPL from the date of the Merger. Certain comparable references to IPL's
1997 figures include pre-acquisition amounts that are not included in the
financial statements, but are included in the following discussions for
comparative purposes only. In addition, in August 1997 the principal
stockholders of Old Video contributed by merger (the "Contribution") the stock
of two S corporations holding all of the general and limited partnership
interests in MAL Partners and L.I.M.A. Partners, which partnerships owned real
estate and equipment which was leased solely to Video and IPL. The Contribution,
which represents a transfer between entities under common control, has been
recorded at the lower of historical amortized cost or fair value. See Note 1 to
the Company's unaudited condensed consolidated financial statements included
herein. The following discussion and analysis should be read in conjunction with
such historical consolidated financial statements and the notes thereto.
Overview
The Company's business is currently divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services (see Note 5). The Satellite and Distribution Services
segment integrates and distributes broadcast quality video content via a
satellite and fiber optic transmission network routed through its digital/analog
switching center. 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.
Discontinued Operations
On November 30, 1997, management, which had the authority to approve the
action, committed the Company to a formal plan to dispose of the Consulting
Services segment providing strategic consulting services in the area of
communications, design and implementation of intranets, extranets and internets.
The Consulting Services segment was acquired in the Merger. Management closed
the Consulting Services segment November 1998 (See Note 8).
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Results of Continuing Operations
Three Months Ended March 31, 1999 compared to Three Months Ended March 31, 1998.
- --------------------------------------------------------------------------------
Total revenues increased by $2,244 to $22,700 in 1999 from $20,456 in 1998.
Revenues from the Satellite and Distribution Services segment increased by 36.8%
to $8,226 in 1999 from $6,015 in 1998. This increase was primarily due to the
opening of the new facility in Burbank, California, an increase in syndicated
satellite services, international duplication, video transmissions and an
increase in the number of customers connected to the Company's satellite and
fiber optic network. Revenues from the Systems and Products segment increased by
39.1% to $6,397 in 1999 from $4,598 in 1998 due to increased demand for design
and installation of video systems. The amount of the increase was greater as a
result of a prior year significant contract pursuant to which the Company
received a commission based on equipment used in such video systems which were
purchased directly by the customer from third parties. For other contracts, the
Company records revenues from the sale of such equipment as well as the cost
related to the purchases thereof. The Production Services segment decreased by
17.9% from $9,843 in 1998 to $8,077 in 1999. The decrease is primarily due to a
lower volume of creative editorial services and the loss of Discovery Channel's
network operations.
Total costs of sales, services and rentals increased by $2,731 to $14,477
in 1999 from $11,746 in 1998. Costs of the Satellite and Distribution Services
segment increased by $1,451 to $4,074 in 1999 from $2,623 in 1998. This increase
consisted primarily of costs associated with the new West Coast facility, higher
syndication costs, higher equipment repairs and increased usage of part time and
per diem personnel. Costs of the Systems and Products segment increased by
$1,959 to $5,448 in 1999 from $3,489 in 1998. The growth in costs of the Systems
and Products segment was driven by the increased volume of installations of
video systems as well as the effects of the significant contract pursuant to
which the Company received a commission as discussed above. Costs of the
Production Services segment decreased by $679 from $5,634 in 1998 to $4,955 in
1999.
The Company's overall gross profit margin (excluding depreciation)
decreased to 36.2% in 1999 from 42.6% in 1998. Gross profit margin from the
Satellite and Distribution Services segment decreased from 56.4% in 1998 to
50.5% in 1999 as a result of the opening of the new West Coast facility and a
greater proportion of syndication revenues. Gross profit margin from the Systems
and Products segment decreased to 14.8% in 1999 from 24.1% in 1998 primarily as
a result of the change in contract structure discussed above and from a lower
proportion of revenue contributed by the equipment rental division in 1999.
Gross profit margin from Production Services segment decreased to 38.7% in 1999
from 42.8% in 1998 as a result of a decrease in revenues combined with stable
fixed costs. Since a high proportion of costs attributable to the Production
Services segment are fixed, decreases in revenues do not result in proportionate
decreases in costs.
Selling, general and administrative expenses increased to $5,184 in 1999
from $4,747 in 1998, which increases primarily resulted from the additional
administrative salaries and occupancy costs associated with the opening of the
new West Coast facility. However, as a result of the Company's increased
revenue, selling, general and administrative expenses as a percentage of
revenues decreased by 0.4% from 23.2% in 1998 to 22.8% in 1999.
Merger related costs were incurred during the 1999 fiscal year. The Company
received unsolicited expressions of interest in acquiring the Company from third
parties. The Company incurred $331 of advisory and legal fees in connection with
its evaluation of these expressions of interest. Since discussions have
terminated, these costs were expensed.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Results of Continuing Operations (continued)
Depreciation expense increased to $2,306 in 1999 from $2,008 in 1998,
primarily due to the new West Coast facility. Amortization expense increased to
$283 in 1999 from $255 in 1998 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 decreased from $1,128 in 1998 to $997 in 1999, as a result
of lower interest rates associated with the revolving line of credit.
The effective tax rate applied against pre-tax income (loss) was (6.7)% in
1999 and 48.0% 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 created by the Merger, which is not deductible for income tax
purposes and state income taxes.
Net income (loss) decreased to $(821) in 1999 from $317 in 1998 primarily
as a result of the factors discussed above.
Nine Months Ended March 31, 1999 compared to Nine Months Ended March 31, 1998.
------------------------------------------------------------------------------
Total revenues increased by $15,075 to $66,168 in 1999 from $51,093 in
1998. Revenues from the Satellite and Distribution Services segment increased by
52.4% to $23,212 in 1999 from $15,235 in 1998. $12,146 of the $23,212 of 1999
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 31.9% to $11,066 in 1999 from
$8,387 in 1998. This increase was primarily generated by the Goodwill Games, an
increase in syndicated satellite services and an increase in the number of
customers connected to the Company's satellite and fiber optic network. Revenues
from the Satellite and Distribution Services segment provided by IPL increased
by 34.9% from $9,003 in 1998 to $12,146 in 1999. The increase is primarily due
to the opening of the new facility in Burbank, California. Revenues from the
Systems and Products segment increased by 35.4% to $17,726 in 1999 from $13,089
in 1998 due to increased demand for design and installation of video systems.
The amount of the increase was greater as a result of a prior year significant
contract pursuant to which the Company received a commission based on equipment
used in such video systems which were purchased directly by the customer from
third parties. For other contracts, the Company records revenues from the sale
of such equipment as well as the cost related to the purchases thereof. The
Production Services segment revenues of $22,769 and $25,230 in 1998 and 1999,
respectively, was solely attributable to post-Merger contributions provided by
IPL. Revenues provided by IPL decreased by 10.1% from $28,054 in 1998 to $25,230
in 1999. The decrease is primarily due to a lower volume of creative editorial
services.
Total costs of sales, services and rentals increased by $13,307 to $41,800
in 1999 from $28,493 in 1998. Costs of the Satellite and Distribution Services
segment increased by $5,341 to $12,031 in 1999 from $6,690 in 1998. This
increase was primarily attributable to costs of Satellite and Distribution
Services by IPL of $3,649 and a $1,692 increase in costs of non-IPL services
associated with the Goodwill Games, higher syndication costs and fiber usage.
Costs of IPL Satellite and Distribution Services increased $2,820 to $6,588 in
1999 from $3,768 in 1998. This increase consisted primarily of costs associated
with the new West Coast facility. Costs of the Systems and Products segment
increased by $5,224 to $14,141 in 1999 from $8,917 in 1998. The growth in costs
of the Systems and Products segment was driven by the increased volume of
installations of video systems as well as the effects of the significant
contract pursuant to which the Company received a commission as discussed above.
Costs of the Production Services segment of $15,628 in 1999 and $12,886 in 1998
was solely attributed to costs provided by IPL. Costs of Production Services
provided by IPL decreased by $198 from $15,826 in 1998 to $15,628 in 1999.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Results of Continuing Operations (continued)
The Company's overall gross profit margin (excluding depreciation)
decreased to 36.8% in 1999 from 44.2% in 1998. Gross profit margin from the
Satellite and Distribution Services segment decreased from 56.1% in 1998 to
48.2% in 1999. Gross profit margin from the Satellite and Distribution Services
segment other than services provided by IPL decreased from 55.3% in 1998 to
50.8% in 1999 as a result of a greater proportion of syndication revenues as
well as incremental costs associated with the Goodwill Games. Gross profit
margin from Satellite and Distribution Services provided by IPL decreased from
58.1% in 1998 to 45.8% in 1999 as a result of the opening of the new West Coast
facility. Gross profit margin from the Systems and Product segment decreased to
20.2% in 1999 from 31.9% in 1998 primarily as a result of the change in contract
structure discussed above and from a lower proportion of revenues contributed by
the equipment rental division in 1999. Gross profit margin from Production
Services decreased to 38.1% in 1999 from 43.4% in 1998 as a result of a decrease
in revenues combined with stable fixed costs. Since a high proportion of costs
attributable to the Production Services segment are fixed, decreases in revenues
do not result in proportionate decreases in costs.
Selling, general and administrative expenses increased to $15,420 in 1999
from $12,067 in 1998, which increases primarily resulted from the additional
administrative salaries and occupancy costs associated with the opening of the
new West Coast facility. However, as a result of the Company's increased
revenue, selling, general and administrative expenses as a percentage of
revenues decreased to 23.3% in 1999 from 23.6% in 1998.
Merger related costs were incurred during the 1999 fiscal year. The Company
received unsolicited expressions of interest in acquiring the Company from third
parties. The Company incurred $331 of advisory and legal fees in connection with
its evaluation of these expressions of interest. Since discussions have
terminated, these costs were expensed.
Depreciation expense increased to $6,457 in 1999 from $5,024 in 1998,
primarily due to the significant amount of fixed assets of IPL acquired by the
Merger and the new West Coast facility. Amortization expense increased to $819
in 1999 from $563 in 1998 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 $3,074 in 1999 from $2,618 in 1998 primarily
due to the assumption and refinancing by the Company of IPL's existing long-term
indebtedness as part of the Merger and the increased borrowings associated with
the new West Coast facility. See "Liquidity and Capital Resources".
The effective tax rate applied against pre-tax income (loss) was (8.8)% in
1999 and 48.0% 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 created by the Merger, which is not deductible for income tax
purposes and state income taxes.
Income (loss) from continuing operations decreased to $(1,557) in 1999 from
$1,263 in 1998 primarily as a result of the factors discussed above.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Liquidity and Capital Resources
The Company meets its liquidity needs and capital expenditures requirements
with internally generated funds, borrowing under its bank credit facility
(including line of credit), equipment financing and capital leases. Such funds
are used for capital expenditures, working capital needs and repayment of
outstanding indebtedness.
In connection with the Merger, the Company refinanced substantially all of
Old Video's and IPL's long-term indebtedness (excluding convertible subordinated
debt, Old Video's mortgage payable, note payable to Cognitive Communications,
Inc. and obligations under capital leases), including lines of credit, with a
$33,000 term loan and a $17,000 revolving line of credit. The 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). The Company has the option to choose the applicable interest
rate. Principal payments of $1,000 per quarter in respect of the term loan
portion of the facility were due beginning December 31, 1997. Such quarterly
principal payments increase to $1,250 per quarter on December 31, 1998 and then
increase to $1,750 per quarter on December 31, 1999 and then further increase to
$2,000 per quarter on September 30, 2001 with a balloon payment of $3,750 in
respect of the term loan portion of the facility due on September 30, 2002. The
facility is secured by all of the assets of the Company and its subsidiaries. No
significant gain or loss resulted from the refinancing. The facility contains
covenants, which require the Company to maintain certain financial ratios,
prohibit dividends and similar payments and restrict the Company's ability to
incur other indebtedness. The facility is guaranteed by all of the Company's
subsidiaries.
During May 1999, the lenders amended the credit agreement, pursuant to
which certain covenants and levels were changed for quarter ended March 31, 1999
and prospective periods. Without this amendment the Company would be in default
of certain requirements of its credit agreement.
The proceeds of the facility were used as follows: approximately $23,400 to
refinance IPL's outstanding long-term indebtedness, approximately $3,600 to
refinance Old Video's outstanding long-term indebtedness and $1,485 of mortgage
obligations of MAL Partners and approximately $1,800 to refinance Old Video's
outstanding short-term line of credit. Approximately $3,500 was used to pay the
fees and expenses incurred in connection with the Merger.
In August 1997, the Company entered into an interest rate swap agreement on
the $33,000 term loan, which decreases in accordance with scheduled principal
payments on the Company's Term Loan. The swap agreement effectively converts the
Company's borrowings under its Term Loan to a fixed rate of 7.58% per annum.
At March 31, 1999, the Company's outstanding indebtedness was approximately
$46,873, including $8,000 under the revolving credit facility. At March 31,
1999, the weighted average interest rate was approximately 8.05% on the
Company's outstanding indebtedness. The remainder of the facility (approximately
$8,004) will be available for future working capital requirements and general
corporate purposes.
In July 1998, the Company opened an additional facility in California. The
new facility provides distribution services to international television program
originators and distributors: such services include standards conversion,
syndication and international duplication. Management believes that the facility
will give the company an opportunity to recapture business lost to those of its
competitors operating on the West Coast, as well as to attract additional
customers located on the West Coast. This expansion required approximately $5.7
million in cumulative capital expenditures. The source of the capital
expenditures and operating funds was a combination of internally generated funds
and secured equipment financings.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Liquidity and Capital Resources (continued)
Cash Flow from Operating Activities. For the nine months ended March 31,
1999, net cash provided by operating activities was $2,131, primarily resulting
from EBITDA of $8,643, which was offset by increases in working capital
requirements, primarily the operating costs associated with the new West Coast
facility. For the nine months ended March 31, 1998, net cash used in operating
activities was $1,273, primarily resulting from EBITDA of $10,634, which was
offset by increases in working capital requirements, primarily the payment of
transaction costs associated with the Merger.
Cash Flow from Investing Activities. For the nine months ended March 31,
1999, the Company used $7,219 for investing activities, consisting of $7,223 for
the purchase of additional equipment, which was offset by sales of fixed assets.
Approximately $2,142 of additional equipment was used for the West Coast
facility.
Cash Flow from Financing Activities. For the nine months ended March 31,
1999, cash provided by financing activities, net of repayment of borrowings of
long-term indebtedness, was $4,910. Such amount primarily consisted of $17,325
in borrowings under the revolving line of credit described above and $3,543 of
secured equipment financings. The Company repaid $16,114 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 date-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.
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, and any software and/or computer systems not
currently compliant will be upgraded during fiscal 1999 under existing
maintenance and other agreements and through normal replacement programs
currently in place. A review of the Company's equipment containing embedded
microprocessors or other technology has revealed few systems that are not Year
2000 compliant and those that are not compliant are expected to be upgraded
through normal maintenance replacements in 1999. Operation of these systems is
generally not time-sensitive and, if necessary, equipment settings can be
adjusted without posing any significant operational problems for the Company.
Based on these reviews, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods.
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 which 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
matter, 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.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Impact of Year 2000 (continued)
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.
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, 1998.
Forward-Looking Statements:
The above discussion contains forward-looking statements. There are certain
important factors that could cause results to differ materially from those
anticipated by the statements made above. These factors include, but are not
limited to: the general performance of the economy, specifically as it affects
the advertising, entertainment and television and video industries; the
international economic and political climate which could impact the sale of
domestic programming overseas; significant changes in video technology in the
post-production, video and communications industries; the loss of key personnel
and the loss of key customers.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.60 Amendment No. 2, dated May 12, 1999 to the credit agreement,
dated as of August 27, 1997 by and among the Company, the
Lenders party thereto and KeyBank National Association, as the
Issuer and as Agent.
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: May 14, 1999 /s/Louis H. Siracusano
---------------------------
Name: Louis H. Siracusano
Title: President and Chief Executive Officer
Date: May 14, 1999 /s/Steven G. Crane
---------------------------
Name: Steven G. Crane
Title: Vice President and Chief Financial Officer
AMENDMENT NO. 2
Amendment No. 2 (this "Amendment"), dated as of May 12, 1999, 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. Paragraph (a) of the definition of "Applicable Margin" contained in
Section 1.1(b) of the Credit Agreement is amended by adding the following
at the end thereof:
During the period commencing on May 12, 1999 and ending on the last
date that the Compliance Certificate in respect of the fiscal quarter
ended March 31, 1999 is due (but not overdue) in accordance with
Section 7.7(d), (i) with respect to Revolving Credit Eurodollar
Advances, Term Loan Eurodollar Advances and the Letter of Credit Fee,
2.500%, and (ii) with respect to the Commitment Fee, 0.375%.
2. Paragraphs (b) and (c) of the definition of "Applicable Margin"
contained in Section 1.1(b) of the Credit Agreement are amended and
restated in their entirety as follows:
(b) Except as otherwise provided in paragraph (a) above, at
all times during which the applicable period set forth below is in
effect: (i) with respect to Revolving Credit Eurodollar Advances and
Term Loan Eurodollar Advances, the applicable margin set forth below
under the heading "Eurodollar", (ii) with respect to the Commitment
Fee, the applicable margin set forth below under the heading
"Commitment Fee", and (iii) with respect to the Letter of Credit Fee,
the applicable margin set forth below under the heading "LC Fee":
<TABLE>
<CAPTION>
When the Commitment
Leverage Ratio is : Eurodollar Fee LC Fee
<S> <C> <C> <C> <C> <C>
> 4.00 3.00% 0.500% 3.00%
> 3.75 < 4.00 2.75% 0.500% 2.75%
-
> 3.30 < 3.75 2.50% 0.375% 2.50%
-
> 3.00 < 3.30 2.00% 0.375% 2.00%
-
> 2.50 < 3.00 1.75% 0.375% 1.75%
-
> 2.00 < 2.50 1.50% 0.375% 1.50%
-
> 1.25 < 2.00 1.25% 0.250% 1.25%
-
<1.25 1.00% 0.250% 1.00%
</TABLE>
(c) Changes in the Applicable Margin resulting from a change
in the Leverage Ratio shall become effective on the last date upon
which the Compliance Certificate with respect to each fiscal quarter is
due (but not overdue) pursuant to Section 7.7(d).
3. The definition of "Adjusted EBITDA" contained in Section 1.1(b) of
the Credit Agreement is deleted in its entirety.
4. The definition of "Capital Expenditures" contained in Section
1.1(b) of the Credit Agreement is amended and restated in its entirety as
follows:
"Capital Expenditures": shall mean, with respect to any Person
for any period, (a) the aggregate of all expenditures incurred by such
Person during that period which, in accordance with GAAP, are or should
be included in "additions to property, plant or equipment" or similar
items reflected in the statement of cash flows of such Person (other
than the portion of the purchase price of any Operating Entity which,
under GAAP, would be recorded as such additions), plus (b) for purposes
of Section 8.6 only, on and after July 1, 1999, the fair market value
of Property subject to an operating lease determined as of the time
such Person enters into or renews the operating lease.
5. The definition of "Fixed Charge Coverage Ratio" contained in
Section 1.1(b) of the Credit Agreement is amended by deleting the word
"Adjusted" in each place it appears therein.
6. Clause (d) of the first sentence of the definition of "Fixed
Charges" contained in Section 1.1(b) of the Credit Agreement is amended and
restated in its entirety as follows:
(d) all income taxes paid by the Borrower and the Subsidiaries during
such period net of all tax refunds received by the Borrower and the
Subsidiaries during such period.
7. Section 2.4(i) of the Credit Agreement is amended and restated in
its entirety as follows:
(i) in the case of Revolving Credit Loans (x) through May 15, 1999, (a)
for general working capital purposes, (b) up to $10,000,000 in
aggregate principal amount, for Additional Permitted Acquisitions, and
(c) to pay fees and expenses in connection with the Merger, and (y)
thereafter, for general working capital purposes, and
8. 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
December 31, 1998 3.30:1.00
January 1, 1999 through
March 31, 1999 4.00:1.00
April 1, 1999 through
June 30, 1999 4.35:1.00
July 1, 1999 through
September 30, 1999 4.25:1.00
October 1, 1999 through
December 31, 1999 4.00:1.00
January 1, 2000 through
March 31, 2000 3.50:1.00
April 1, 2000 through
March 31, 2001 3.00:1.00
April 1, 2001 through
March 31, 2002 2.50:1.00
April 1, 2002
and thereafter 2.00:1.00
9. 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 less
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 and
thereafter 1.00:1.00
10. Section 7.13 of the Credit Agreement is amended and restated in
its entirety as follows:
7.13 Minimum Net Worth
At each fiscal quarter end during each period set
forth below, have a Net Worth equal to no less than the amount set
forth below adjacent to such period:
Period Net Worth
January 1, 1999 through
March 31, 1999 $19,000,000
April 1, 1999 through
March 31, 2000 $18,500,000
April 1, 2000 through
March 31, 2001 $19,000,000
April 1, 2001 through
March 31, 2002 $19,500,000
April 1, 2002 and
thereafter $20,000,000
For purposes of this Section 7.13, "Net Worth" shall mean, as of any
date, (i) all assets of the Borrower and the Subsidiaries on a
Consolidated basis, minus (ii) all liabilities of the Borrower and the
Subsidiaries on a Consolidated basis.
11. Section 8.4(e) of the Credit Agreement is deleted in its entirety.
12. Section 8.6(a) of the Credit Agreement is amended by replacing the
amount "$10,000,000" at the end thereof with the following phrase:
the sum of $6,000,000 plus the net cash proceeds, if any, received by
the Borrower and the Subsidiaries during such fiscal year arising out
of equipment dispositions by the Borrower and the Subsidiaries.
13. Paragraphs 1 - 12 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.
14. 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, immediately after
giving effect to this Amendment, 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.
15. 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.
16. 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.
17. 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. 2
VIDEO SERVICES CREDIT AGREEMENT
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:President
<PAGE>
KEYBANK NATIONAL ASSOCIATION, in its
capacity as a Lender, as the
Issuer, and as the Agent
By:/s/Brendan Sachtjen
-----------------------
Name: Brendan Sachtjen
Title:Sr. Vice President
<PAGE>
SUMMIT BANK
By: /s/J. Gregory Lageman
--------------------------
Name:J. Gregory Lageman
Title:Vice President and Regional Manager
<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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,314
<SECURITIES> 0
<RECEIVABLES> 14,623
<ALLOWANCES> 1,134
<INVENTORY> 721
<CURRENT-ASSETS> 20,458
<PP&E> 64,472
<DEPRECIATION> 27,024
<TOTAL-ASSETS> 84,270
<CURRENT-LIABILITIES> 22,762
<BONDS> 5,598
0
0
<COMMON> 132
<OTHER-SE> 19,058
<TOTAL-LIABILITY-AND-EQUITY> 84,270
<SALES> 66,168
<TOTAL-REVENUES> 66,168
<CGS> 41,800
<TOTAL-COSTS> 41,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 3,074
<INCOME-PRETAX> (1,707)
<INCOME-TAX> (150)
<INCOME-CONTINUING> (1,557)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,557)
<EPS-PRIMARY> (0.120)
<EPS-DILUTED> (0.120)
</TABLE>
