SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-23388
VIDEO SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
13-3735647
(I.R.S. Employer Identification Number)
240 Pegasus Avenue Northvale, New Jersey 07647 (Address of
principal executive offices, including zip code)
(201) 767-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, $.01 par value
per share, as of February 12, 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 December 31, 1998 and for the
three and six month periods ended December 31, 1997 and 1998 relate to Video
Services Corporation and its subsidiaries.
Item 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1998 3
Condensed Consolidated Statements of Operations for
the six months ended December 31, 1997 and 1998 4
Condensed Consolidated Statements of Operations for
the three months ended December 31, 1997 and 1998 5
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 1997 and 1998 6
Condensed Consolidated Statement of Stockholders' Equity for
the six months ended December 31, 1998 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
CONSOLIDATED BALANCE SHEETS
As of June 30, 1998 and December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,492 $ 724
Accounts receivable, net 14,169 14,374
Inventories 1,083 902
Costs and estimated earnings in excess of billings on
uncompleted contracts 187 330
Deferred income taxes 1,535 1,535
Prepaid expenses and other current assets 907 1,380
------------- -------------
Total current assets 19,373 19,245
Fixed assets, net 36,590 37,872
Excess of cost over fair value of net assets acquired, net 22,289 21,850
Receivable from affiliates 42 -
Receivable from officers - 25
Deferred income taxes 1,667 2,462
Other assets 1,899 2,387
------------- -------------
Total assets $ 81,860 $ 83,841
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,443 $ 8,728
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,290 2,264
Current portion of long-term debt 5,338 6,695
Income taxes payable 708 388
Other current liabilities 3,881 3,452
------------- -------------
Total current liabilities 21,660 21,527
Long-term debt 30,968 34,130
Subordinated debt 5,442 5,544
Payable to affiliates - 75
Other liabilities 3,065 2,554
------------- -------------
Total liabilities $ 61,135 $63,830
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 1998
and December 31, 1998 - -
Common stock: $.01 par value, 25,000,000 share authorized,
and 13,264,307 shares issued and outstanding
at June 30, 1998 and December 31, 1998 132 132
Additional paid-in-capital 21,196 21,218
Retained deficit (603) (1,339)
------------- -------------
Total stockholders' equity 20,725 20,011
------------- -------------
Total liabilities and stockholders' equity $ 81,860 $83,841
============= =============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended December 31, 1997 and 1998
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Revenues:
Sales $ 7,471 $ 10,077
Services 22,146 32,580
Rentals 1,020 811
------------- -------------
30,637 43,468
Costs:
Costs of sales 5,149 8,138
Costs of services 11,300 18,920
Costs of rentals 298 265
------------- -------------
16,747 27,323
Depreciation 3,016 4,151
------------- -------------
Gross profit 10,874 11,994
Selling, general and administrative expenses 7,320 10,236
Amortization 308 536
------------- -------------
Operating income from continuing operations 3,246 1,222
Other (expense) income:
Interest expense (1,490) (2,077)
Interest income and other 64 28
------------- -------------
Income (loss) before income taxes and discontinued operations 1,820 (827)
Income tax expense (benefit) 874 (91)
------------- -------------
Income (loss) from continuing operations 946 (736)
Discontinued operations:
Loss from operations of the Consulting Services segment
(less applicable income tax benefit of $73) (140) -
------------- -------------
Net income (loss) $ 806 $ (736)
============= =============
Earnings per share:
Basic:
Income (loss) from continuing operations $ 0.08 $ (0.06)
Loss from discontinued operations (0.01) -
------------- -------------
Net income (loss) $ 0.07 $ (0.06)
============= =============
Diluted:
Income (loss) from continuing operations $ 0.08 $ (0.06)
Loss from discontinued operations (0.01) -
------------- -------------
Net income (loss) $ 0.07 $ (0.06)
============= =============
Weighted average number of shares outstanding for basic and diluted
earnings per share 11,309,304 13,264,307
============= =============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 1997 and 1998
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Revenues:
Sales $ 3,296 $ 4,716
Services 15,407 16,536
Rentals 516 310
-------------- -------------
19,219 21,562
Costs:
Costs of sales 2,448 3,883
Costs of services 7,876 9,587
Costs of rentals 167 45
------------- -------------
10,491 13,515
Depreciation 2,081 2,015
------------- -------------
Gross profit 6,647 6,032
Selling, general and administrative expenses 4,669 5,278
Amortization 225 273
------------- -------------
Operating income from continuing operations 1,753 481
Other (expense) income:
Interest expense (949) (1,023)
Interest income and other 33 16
------------- -------------
Income (loss) before income taxes and discontinued operations 837 (526)
Income tax expense (benefit) 445 (76)
------------- -------------
Income (loss) from continuing operations 392 (450)
Discontinued operations:
Loss from operations of the Consulting Services segment
(less applicable income tax benefit of $11) (19) -
------------- -------------
Net income (loss) $ 373 $ (450)
============= =============
Earnings per share:
Basic:
Income (loss) from continuing operations $ 0.03 $ (0.03)
Loss from discontinued operations - -
------------- -------------
Net income (loss) $ 0.03 $ (0.03)
============= =============
Diluted:
Income (loss) from continuing operations $ 0.03 $ (0.03)
Loss from discontinued operations - -
------------- ------------
Net income (loss) $ 0.03 $ (0.03)
============= ============
Weighted average number of shares outstanding for basic and diluted
earnings per share 13,238,307 13,264,307
============= ============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 1997 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
December 31, December 31,
1997 1998
<S> <C> <C>
Operating Activities
Net cash used in operating activities $ (6,818) $ (33)
Investing Activities
Additions to fixed assets (2,108) (5,199)
Proceeds from sale of fixed assets 120 43
Increase in receivable from officers - (25)
(Increase) decrease in receivable from affiliates (121) 40
------------- ------------
Net cash used in investing actvities (2,109) (5,141)
Financing Activities
Increase in subordinated debt 63 102
Proceeds from long-term borrowing 41,800 15,873
Repayments of borrowings (31,076) (11,569)
------------ ------------
Net cash provided by financing activites 10,787 4,406
Net increase (decrease) in cash 1,860 (768)
Cash and cash equivalents, beginning of period 390 1,492
------------ ------------
Cash and cash equivalents, end of period $ 2,250 $ 724
============= =============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended December 31, 1998
(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 - - - (736) (736)
------------------------------------------------------------------
Balance at December 31, 1998 13,264,307 $ 132 $ 21,218 $ (1,339) $ 20,011
==================================================================
</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 six
months ended December 31, 1998 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1999. The unaudited interim
financial information should be read in conjunction with the audited
consolidated financial statements of Video Services Corporation ("Old Video
Services Corporation") as of and for the year ended June 30, 1998 included in
the Form 10-K filed by the Company (as defined below).
Video Services Corporation and its subsidiaries (collectively, the
"Company"), is a leading provider of value-added video services to a diverse
base of customers within the television network, cable and syndicated
programming markets. These services are divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services. The Satellite and Distribution Services segment integrates
and distributes broadcast quality video content via a satellite and fiber optic
transmission network routed through its digital/analog switching center and is
an international provider of technical and distribution services to distributors
of television programming. The Systems and Products segment designs, engineers
and produces advanced video facilities for the broadcast and cable television,
post-production and corporate markets. This segment also develops, manufactures
and markets advanced color correcting and manipulation systems for the film,
post-production and multimedia industries and rents professional video equipment
to the sports, entertainment and other segments of the broadcast and cable
television and corporate markets. The Production Services segment is an
international provider of technical and creative services to owners, producers
of television programming, television advertising and other programming content.
On August 27, 1997, 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
$1,246 at June 30, 1998 and December 31, 1998, respectively. At June 30, 1998 it
was estimated that approximately $1,101 of such expenditures would be made in
fiscal 1999, $380 in fiscal 2000, $196 in fiscal 2001 and $128 in fiscal 2002.
The Company anticipates that funding for these amounts will be provided by
operations.
<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 six month period ended December 31, 1997, as if the Merger
and Contribution had occurred as of July 1, 1997. The unaudited combined pro
forma results of operations are not necessarily indicative of the results of
operations that would have occurred had IPL and Old Video Services Corporation
actually combined during the periods presented or of future results of
operations of the combined operations.
(dollars in thousands, except per share amounts)
1997
--------------
Revenues....................................... $ 38,028
Income from continuing operations.............. 1,006
Income from continuing operations per share.... .08
Net income..................................... 807
Net income per share........................... .06
Pro forma income from continuing operations and net income per share are
based on the weighted average number of shares outstanding after the Merger of
13,238,307. Included in the net income for the period ended December 31, 1997 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, December 31,
1998 1998
--------------------- ---------------------
<S> <C> <C>
Accounts receivable, trade............................ $ 12,579 $ 14,147
Contracts receivable billed:
Uncompleted contracts.............................. 2,031 1,346
Completed contracts................................ 738 25
--------------------- ---------------------
15,348 15,518
Less: Allowance for doubtful accounts
and volume discounts........................ 1,179 1,144
===================== =====================
$ 14,169 $ 14,374
===================== =====================
</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, December 31,
1998 1998
--------------------- ---------------------
<S> <C> <C>
Machinery and equipment................................ $ 38,868 $ 39,703
Leasehold improvements................................. 11,195 11,839
Furniture and fixtures................................. 2,028 2,125
Transportation equipment............................... 281 281
Building............................................... 2,199 2,199
Land................................................... 1,967 1,967
Equipment under capital leases......................... 1,440 5,201
--------------------- ---------------------
57,978 63,315
Less: Accumulated depreciation........................ 21,388 25,443
===================== =====================
$ 36,590 $ 37,872
===================== =====================
</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)
Productions 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, manufacturers
and markets advanced color correcting and manipulation systems for the film,
post-production and multimedia industries and rents professional video equipment
to the sports, entertainment and other segments of the broadcast and cable
television and corporate markets. The Production Services segment is an
international provider of technical and creative services to owners and
producers of television programming, television advertising and other
programming content.
The Company operates primarily in the United States; foreign operations
are not significant. Intersegment sales are accounted for at cost.
The Company does not allocate income and expenses that are of a general
corporate nature to industry segments in computing operating income. These
include 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 six
month periods ended December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, December 31, December 31,
1997 1998 1997 1998
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net revenue from unaffiliated customers:
Systems and Products....................... $ 3,822 $ 5,108 $ 8,491 $ 11,329
Satellite and Distribution Services........ 5,874 7,943 9,220 14,986
Production Services........................ 9,523 8,511 12,926 17,153
================= ================= ================= ================
Net revenue................................ $ 19,219 $ 21,562 $ 30,637 $ 43,468
================= ================= ================= ================
Intersegment revenues:
Systems and Products....................... $ 14 $ 244 $ 42 $ 1,569
Satellite and Distribution Services........ 304 281 522 602
Production Services........................ 386 94 481 197
================= ================= ================= ================
Total intersegment revenues................ $ 704 $ 619 $ 1,045 $ 2,368
================= ================= ================= ================
Operating income:
Systems and Products....................... $ 493 $ 246 $ 1,684 $ 938
Satellite and Distribution Services........ 1,672 1,352 2,407 2,609
Production Services........................ 913 218 1,384 265
Corporate.................................. (1,325) (1,335) (2,229) (2,590)
----------------- ----------------- ----------------- ----------------
Operating income from continuing
operations.............................. $ 1,753 $ 481 $ 3,246 $ 1,555
Interest expense, net...................... (949) (1,023) (1,490) (2,077)
Other income............................... 33 16 64 28
================= ================= ================= ================
Income (loss) before income taxes and
discontinued operations................. $ 837 $ (526) $ 1,820 $ (827)
================= ================= ================= ================
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1998
----------------- ----------------
<S> <C> <C>
Identifiable assets at June 30, and December 31, 1998:
Systems and Products............................................................ $ 5,971 $ 4,880
Satellite and Distribution Services............................................. 16,460 20,826
Production Services............................................................. 29,787 25,282
Corporate....................................................................... 29,642 32,853
================= ================
Total assets.................................................................... $ 81,860 $ 83,841
================= ================
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 6 - Earnings Per Share
In 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 128, Earnings per share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities, Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Three Three Months Six Six
Months Ended Ended Months Ended Months Ended
December 31, December 31, December 31, December 31,
1997 1998 1997 1998
---------------- --------------- --------------- ---------------
Numerator:
<S> <C> <C> <C> <C>
Income (loss) from continuing operations $ 392 $ (450) $ 946 $ (736)
---------------- --------------- --------------- ---------------
Numerator for basic earnings (loss) per
share-income (loss) available to
common stockholders................ $ 392 $ (450) $ 946 $ (736)
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 $ 392 $ (450) $ 946 $ (736)
================ =============== =============== ===============
Denominator:
Denominator for basic earnings per
share-weighted-average shares...... 13,238,307 13,264,307 11,309,304 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...... 13,238,307 13,264,307 11,309,304 13,264,307
================ =============== =============== ===============
Basic earnings (loss) per share from
continued operations............... $ 0.03 $ (0.03) $ 0.08 $ (0.06)
================ =============== =============== ===============
Diluted earnings (loss) per share from
continued operations............... $ 0.03 $ (0.03) $ 0.08 $ (0.06)
================ =============== =============== ===============
</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, December 31,
1998 1998
-------------- -----------------
<S> <C> <C>
Senior secured term loan........................................... $ 30,000 $ 27,750
Senior secured revolving credit loan............................... 2,600 6,000
Mortgage payable to credit institution bearing interest at 8.95%-
prime (8.5% at June 30, 1998 and 7.75% at December 31, 1998)plus 1%
collateralized by fixed assets with net book value at $2,478 and
$2,437............................................................. 2,426 2,318
Capitalized lease obligations...................................... 1,280 4,757
-------------- -----------------
36,306 40,825
Less: current maturities.......................................... 5,338 6,695
============== =================
$ 30,968 $ 34,130
============== =================
</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), which is LIBOR plus 1.75%. The Term Loan
bears interest at LIBOR plus a number of basis points based upon the Company's
leverage ratio, which is LIBOR plus 1.75%. The facility contains various
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.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 7 - Long Term Debt (continued)
Revolving Credit Facility - The Company established a $17,000 senior
secured revolving credit facility (the "Revolving Loan") with KeyBank. The
Company had outstanding direct borrowings of $6,000 under the Revolving Loan at
December 31, 1998. The Company also has outstanding under the Revolving Loan
letters of credit of approximately $996 at December 31, 1998. The Company's
Revolving Loan weighted average interest rate was 6.84% at December 31, 1998.
Subordinated Debt - The Company, in connection with the Merger, assumed
IPL's $6,350 principal amount of eight year convertible subordinated notes, due
May 4, 2003, with an interest rate of 4.0%, convertible at $14 per share after
five years and redeemable after six years. The debt was valued at $4,890 at May
5, 1995 using an effective rate of 8.34%. The valuation discount is being
amortized over the life of the notes.
Also, in connection with the merger and Contribution, the Company assumed
additional long-term indebtedness of $3,842, consisting of a note payable to
Cognitive Communications, Inc. ($196), mortgage payable ($2,103) and capital
lease obligations ($1,543).
Note 8 - Discontinued Operations
On November 30, 1997, management, which had the authority to approve the
action, committed the Company to a formal plan to dispose of its interest in the
Consulting Services segment, acquired in the Merger, which provides strategic
consulting services in the area of communications, design and implementation of
intranets, extranets and internets. 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, 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 $558 from
the date of the Merger through December 31, 1997 and $581 for the six months
ended December 31, 1998. Included in other current liabilities at December 31,
1998 is a reserve of $417 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 six months ended December 31, 1998 are not necessarily comparable to
those for the six months ended December 31, 1997. The results of operations and
cash flows as reported represent those of the Company for the six month periods
ended December 31, 1998 and 1997, and include the results of operations and cash
flows of IPL from the date of the Merger through December 31, 1998. Certain
comparable references to IPL's 1997 figures include pre-acquisition amounts that
are not included in the financial statements, but are included in the following
discussions for comparative purposes only. In addition, in August 1997 the
principal stockholders of Old Video contributed to 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
and distributors of television programming and other programming content.
Discontinued Operations
On November 30, 1997, management, which had the authority to approve the
action, committed the Company to a formal plan to dispose of the Consulting
Services segment providing strategic consulting services in the area of
communications, design and implementation of intranets, extranets and internets.
The Consulting Services segment was acquired in the Merger (See Note 8).
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Results of Continuing Operations
Three Months Ended December 31, 1998 compared to Three Months
Ended December 31,1997.
Total revenues increased by $2,343 to $21,562 in 1998 from $19,219 in
1997. Revenues from the Satellite and Distribution Services segment increased by
$2,069 to $7,943 in 1998 from $5,874 in 1997. This increase was primarily due to
the opening of the new facility in Burbank, California, 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
Systems and Products segment increased by 33.6% to $5,108 in 1998 from $3,822 in
1997 due to increased demand for design and installation of video systems. The
amount of the increase was greater as a result of a prior year significant
contract pursuant to which the Company received a commission based on equipment
used in such video systems which were purchased directly by the customer from
third parties. For other contracts, the Company records revenues from the sale
of such equipment as well as the cost related to the purchases thereof. The
Production Services segment decreased by 10.6% from $9,523 in 1997 to $8,511 in
1998. The decrease is primarily due to a lower volume of creative editorial
services and reduced commercial post production services offset by increased
episodic services.
Total costs of sales, services and rentals increased by $3,024 to $13,515
in 1998 from $10,491 in 1997. Costs of the Satellite and Distribution Services
segment increased by $1,740 to $4,273 in 1998 from $2,533 in 1997. This increase
consisted primarily of costs associated with the new West Coast facility, higher
syndication costs and fiber usage. Costs of the Systems and Products segment
increased by $1,425 to $4,029 in 1998 from $2,604 in 1997. The growth in costs
of the Systems and Products segment was driven by the increased volume of
installations of video systems as well as the effects of the significant
contract pursuant to which the Company received a commission as discussed above.
Costs of the Production Services segment decreased by $141 to $5,213 in 1998
from $5,354 in 1997.
The Company's overall gross profit margin (excluding depreciation)
decreased to 37.3% in 1998 from 45.4% in 1997. Gross profit margin from the
Satellite and Distribution Services segment decreased from 56.9% in 1997 to
46.2% in 1998 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 21.1% in 1998 from 31.9% in 1997 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 1998.
Gross profit margin from Production Services segment decreased to 38.7% in 1998
from 43.8% in 1997 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 $5,278 in 1998
from $4,669 in 1997, 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 increased by only 0.2% to 24.5% in 1998 from 24.3% in 1997.
Depreciation expense decreased to $2,015 in 1998 from $2,081 in 1997.
Amortization expense increased to $273 in 1998 from $225 in 1997 reflecting the
amortization of the goodwill (excess of cost over the fair value of net assets
acquired) recorded in connection with the Merger, which is being amortized over
25 years.
<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)
Interest expense increased to $1,023 in 1998 from $949 in 1997 primarily
due to the increased borrowings associated with the new West Coast facility.
The effective tax rate applied against pre-tax income (loss) was (14.4)%
in 1998 and 53.2% in 1997. The effective tax rate for 1998 as compared to the
federal statutory tax rate of 34% was primarily the result of state income taxes
and goodwill amortization created by the Merger which is not deductible for
income tax purposes.
Income (loss) from continuing operations decreased to $(450) in 1998 from
$392 in 1997 primarily as a result of the factors discussed above.
Six Months Ended December 31, 1998 compared to Six Months
Ended December 31, 1997.
Total revenues increased by $12,831 to $43,468 in 1998 from $30,637 in
1997. Revenues from the Satellite and Distribution Services segment increased by
$5,766 to $14,986 in 1998 from $9,220 in 1997. $7,578 of the $14,986 of 1998
Satellite and Distribution Services segment revenue was attributable to
post-Merger contribution to revenues from Satellite and Distribution Services
provided by IPL. Revenues from the Satellite and Distribution Services segment
other than those provided by IPL increased by 37.8% to $7,408 in 1998 from
$5,374 in 1997. 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 26.3% from $6,000 in 1997 to $7,578 in 1998. The increase is primarily due to
the opening of the new facility in Burbank, California. Revenues from the
Systems and products segment increased by 33.4% to $11,329 in 1998 from $8,491
in 1997 due to increased demand for design and installation of video systems.
The amount of the increase was greater as a result of a prior year significant
contract pursuant to which the Company received a commission based on equipment
used in such video systems which were purchased directly by the customer from
third parties. For other contracts, the Company records revenues from the sale
of such equipment as well as the cost related to the purchases thereof. The
Production Services segment revenues of $12,926 and $17,153 in 1997 and 1998,
respectively, was solely attributable to post-Merger contributions provided by
IPL. Revenues provided by IPL decreased by 5.8% from $18,211 in 1997 to $17,153
in 1998. The decrease is primarily due to a lower volume of creative editorial
services.
Total costs of sales, services and rentals increased by $10,576 to
$27,323 in 1998 from $16,747 in 1997. Costs of the Satellite and Distribution
Services segment increased by $3,890 to $7,957 in 1998 from $4,067 in 1997. This
increase was primarily attributable to costs of Satellite and Distribution
Services by IPL of $2,576 and a $1,314 increase in costs of non-IPL services
associated with the Goodwill Games and higher syndication costs and fiber usage.
Costs of IPL Satellite and Distribution Services increased $1,748 to $4,250 in
1998 from $2,502 in 1997. This increase consisted primarily of costs associated
with the new West Coast facility. Costs of the Systems and Products segment
increased by $3,266 to $8,693 in 1998 from $5,427 in 1997. The growth in costs
of the Systems and Products segment was driven by the increased volume of
installations of video systems as well as the effects of the significant
contract pursuant to which the Company received a commission as discussed above.
Costs of the Production Services segment of $7,253 in 1997 and $10,673 in 1998
was solely attributed to costs provided by IPL. Costs of Production Services
provided by IPL increased by $480 to $10,673 in 1998 from $10,193 in 1997.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
(in thousands, except share amounts)
Results of Continuing Operations (continued)
The Company's overall gross profit margin (excluding depreciation)
decreased to 37.1% in 1998 from 45.3% in 1997. Gross profit margin from the
Satellite and Distribution Services segment other than services provided by IPL
decreased from 55.5% in 1997 to 50.0% in 1998 as a result of a greater
proportion of syndication revenues as well as incremental costs associated with
the Goodwill Games. Gross profit margin from Satellite and Distribution Services
provided by IPL decreased from 56.5% in 1997 to 43.9% in 1998 as a result of the
opening of the new West Coast facility. Gross profit margin from the Systems and
Product segment decreased to 23.3% in 1998 from 36.1% in 1997 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 1998.
Gross profit margin from Production Services decreased to 37.8% in 1998 from
43.9% in 1997 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 $10,236 in 1998
from $7,320 in 1997, which increases primarily resulted from the additional
administrative salaries and occupancy costs associated with IPL's operations.
However, as a result of the Company's increased revenue, selling, general and
administrative expenses as a percentage of revenues decreased to 23.5% in 1998
from 23.9% in 1997.
Depreciation expense increased to $4,151 in 1998 from $3,016 in 1997,
primarily due to the significant amount of fixed assets of IPL acquired by the
Merger. Amortization expense increased to $536 in 1998 from $308 in 1997
reflecting the amortization of the goodwill (excess of cost over the fair value
of net assets acquired) recorded in connection with the Merger, which is being
amortized over 25 years.
Interest expense increased to $2,077 in 1998 from $1,490 in 1997
primarily due to the assumption and refinancing by the Company of IPL's existing
long-term indebtedness as part of the Merger. See "Liquidity and Capital
Resources".
The effective tax rate applied against pre-tax income (loss) was (11.0)%
in 1998 and 48.0% in 1997. The effective tax rate for 1998 as compared to the
federal statutory tax rate of 34% was primarily the result of state income taxes
and goodwill amortization created by the Merger which is not deductible for
income tax purposes.
Income (loss) from continuing operations decreased to $(736) in 1998 from
$946 in 1997 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), which is LIBOR plus 1.75% (the Company has the option to choose
the applicable interest rate). Principal payments of $1,000 per quarter in
respect of the term loan portion of the facility were due beginning December 31,
1997. Such quarterly principal payments increase to $1,250 per quarter on
December 31, 1998 and then increase to $1,750 per quarter on December 31, 1999
and then further increase to $2,000 per quarter on September 30, 2001 with a
balloon payment of $3,750 in respect of the term loan portion of the facility
due on September 30, 2002. The facility is secured by all of the assets of the
Company and its subsidiaries. No significant gain or loss resulted from the
refinancing. The facility contains covenants, which require the Company to
maintain certain financial ratios, prohibit dividends and similar payments and
restrict the Company's ability to incur other indebtedness. The facility is
guaranteed by all of the Company's subsidiaries.
The proceeds of the 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 December 31, 1998, the Company's outstanding indebtedness was
approximately $40,825, including $6,000 under the revolving credit facility. At
December 31, 1998, the weighted average interest rate was approximately 8.08% on
the Company's outstanding indebtedness. The remainder of the facility
(approximately $10,004) 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 $5.2 million in capital expenditures. The source of the capital
expenditures and operating funds was a combination of internally generated funds
and capital equipment leases.
<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 six months ended December
31, 1998, net cash used in operating activities was $33, primarily resulting
from EBITDA of $5,937, which was offset by increases in working capital
requirements, primarily the operating costs associated with the new West Coast
facility. For the six months ended December 31, 1997, net cash used in operating
activities was $6,818, primarily resulting from EBITDA of $6,634, which was
offset by increases in working capital requirements, primarily the payment of
transaction costs associated with the Merger.
Cash Flow from Investing Activities. For the six months ended December 31,
1998, the Company used $5,141 for investing activities, consisting of $5,199 for
the purchase of additional equipment, which was offset by sales of fixed assets.
Approximately $2,098 of additional equipment was used for the West Coast
facility.
Cash Flow from Financing Activities. For the six months ended December
31, 1998, cash provided by financing activities, net of repayment of borrowings
of long-term indebtedness, was $4,406. Such amount primarily consisted of
$12,330 in borrowings under the revolving line of credit described above and
$3,543 of capital equipment leases. The Company repaid $11,569 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
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: February 12, 1999 /s/Louis H. Siracusano
---------------------------
Name: Louis H. Siracusano
Title: President and
Chief Executive Officer
Date: February 12, 1999 /s/Steven G. Crane
---------------------------
Name: Steven G. Crane
Title: Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME FILED AS PART OF THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 724
<SECURITIES> 0
<RECEIVABLES> 15,518
<ALLOWANCES> 1,144
<INVENTORY> 902
<CURRENT-ASSETS> 19,245
<PP&E> 63,315
<DEPRECIATION> 25,443
<TOTAL-ASSETS> 83,841
<CURRENT-LIABILITIES> 21,527
<BONDS> 5,544
0
0
<COMMON> 132
<OTHER-SE> 19,879
<TOTAL-LIABILITY-AND-EQUITY> 83,841
<SALES> 43,468
<TOTAL-REVENUES> 43,468
<CGS> 27,323
<TOTAL-COSTS> 27,323
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 2,077
<INCOME-PRETAX> (827)
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