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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-23388
VIDEO SERVICES CORPORATION
(Exact name of registrant as
specified in its charter)
DELAWARE 13-3735647
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
240 Pegasus Avenue Northvale, New Jersey 07647
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (201) 767-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, Par Value $.01 Per Share American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].
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The aggregate market value of the registrant's common stock, par value
$.01 per share, held by persons other than affiliates of the registrant as of
August 27, 1999, was approximately $5,845,450.
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The number of outstanding shares of the registrant's common stock, par
value $.01 per share, as of August 27, 1999, was: 13,264,307.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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<PAGE>
PART I
Certain statements contained in this Annual Report on Form 10-K are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are thus prospective. These statements are
generally (but not necessarily) preceded or followed by, or include, such words
as "believes", "expects", "anticipates" or similar expressions. Such statements
reflect management's current views, are based on many assumptions, including,
but not limited to, that no significant changes will occur in the operating
environment of the Company, and are subject to risks, uncertainties and other
factors which could cause these statements to differ materially from what
actually occurs. The Company may execute new agreements, terminate existing
agreements or enter into new financing arrangements that may affect the accuracy
of these statements. Other important factors that could cause results to differ
materially from current views include, but are not limited to, the general
performance of the economy, specifically as it affects the advertising,
entertainment and television and video and broadcast industries; the
international economic and political climate which could impact the sale of
domestic programming overseas; significant changes in video technology in the
post-production, video and communications industries; the loss of key personnel;
and the loss of key customers. None of these events can be predicted with
certainty and, accordingly, are not taken into consideration in the making of
the forward-looking statements contained herein. Readers are cautioned to
carefully consider such factors. There is no assurance that the assumptions used
are necessarily the most likely to occur. The Company does not assume any
obligation to update any forward-looking statement to reflect actual results,
changes in assumptions or changes in other factors affecting such statement.
ITEM 1. BUSINESS
Background
Video Services Corporation, a privately held New Jersey corporation ("Old
Video"), was incorporated in 1979 to service select segments of the video
industry which its founders, Louis H. Siracusano, Arnold P. Ferolito and Martin
Irwin, had identified as being under-serviced. Originally, Old Video focused its
efforts on building advanced video systems and providing professional video
equipment to particular segments of the television and professional video
services industries. Over the years, Old Video identified additional market
segments which it believed presented opportunities for significant revenue
growth and its lines of business gradually expanded to include post-production
and standards conversion, as well as satellite and fiber optic transmission
services. In 1992, Old Video divested itself of its post-production business,
which divestiture ultimately resulted in the formation of International Post
Limited, a Delaware corporation ("IPL"), in October 1993. In February 1994, Old
Video sold its standards conversion business to IPL in connection with IPL's
initial public offering and used the sale proceeds to repay indebtedness and to
expand certain business segments, particularly satellite and fiber optic
transmission services. After such sale, Old Video owned approximately 3% of
IPL's outstanding Common Stock.
On August 27, 1997, Old Video merged with and into IPL, with IPL being the
surviving corporation, and the separate corporate existence of Old Video ceased
(the "Merger"). The Merger was accounted for as a reverse acquisition whereby
the pre-Merger financial statements of Old Video became the historical financial
statements of the company after the Merger. At the effective time of the Merger,
IPL's name was changed to Video Services Corporation. References herein to the
"Company" refer to the combined Company after giving effect to the Merger.
Overview
The Company is a leading provider of value-added video services to a
diverse base of customers within the television network, cable and syndicated
programming markets. These services are divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services (see Note 11). The Satellite and Distribution Services
segment integrates and distributes broadcast quality video content via a
satellite and fiber optic transmission network routed through its digital/analog
switching center and is an international provider of technical and distribution
services to distributors of television programming. The Systems and Products
segment designs, engineers and produces advanced video facilities for the
broadcast and cable television, post-production and corporate markets. This
segment also develops, manufactures and markets advanced color correcting and
manipulation systems for the film, post-production and multimedia industries and
rents professional video equipment to the sports, entertainment and other
segments of the broadcast and cable television and corporate markets. The
Production Services segment is an international provider of technical and
creative services to owners and producers of television programming, television
advertising and other programming content.
<PAGE>
On January 2, 1997, Old Video's management, which had the authority to
approve the action, committed Old Video to a formal plan to discontinue the
operations of its Diversified Products segment as a condition to the Merger. In
August 1997 and prior to the Merger, Old Video spun off the Diversified Products
segment to Old Video's stockholders. On November 30, 1997, management, which had
the authority to approve the action, committed the Company to a formal plan to
dispose of the Consulting Services segment providing strategic consulting
services in the area of communications, design and implementation of intranets,
extranets and internets. Management closed the Consulting Services segment
November 1998.
The Company is a leading single source provider of satellite and fiber
optic video transmission services in the New York metropolitan area and one of
the largest independent (i.e., not affiliated with, or related to, an equipment
manufacturer) providers of technical services and equipment to its target
markets. The Company believes that it will continue to experience increasing
demand for its engineering services as a result of the anticipated
conversion of existing television and cable facilities to digital, emerging
compression technologies and an increasing demand for programming content
worldwide. The Company provides (i) producers of original programming with
technical and creative services necessary to transform original film or video to
final product for airing on network, syndicated, cable or foreign television;
(ii) users of special video effects with services required to digitally create
or manipulate images in high resolution formats for integration into television
commercials and programming; (iii) international programmers with studio
facilities and multi-standard post-production services necessary to assemble
programming; and (iv) international programmers and owners of television and
film libraries with standards conversion, network playback, and duplication and
audio services, all in multiple standards and formats. The Company believes that
its principal strengths in these areas include the depth and breadth of its
client relationships, the depth and continuity of its creative talent, and its
technologically advanced equipment and facilities.
Demand for the Company's post-production services and facilities is
principally derived from the production of new television commercials and the
distribution of previously released motion pictures and television programming
through international syndicators and programmers. Historically, the Company's
post-production clients have outsourced their post- production services
requirements, and the Company expects that such clients will continue to
outsource many of the services required for production, post-production and
distribution of film and television programming. The Company believes that
demand will also be created by the continuing trend toward globalization in the
entertainment and media industries. The worldwide market penetration of
distribution channels such as home video and digital satellite broadcast is also
anticipated to contribute to a growing demand for original and reissued
programming.
Business Strategy
The Company's business strategy is to capitalize on opportunities created
by changes in technology and markets, as well as to become the leading supplier
of services to the market segments in which it currently competes. The Company
has developed good customer relationships with all of the major television
networks and many of the established and developing cable networks by
maintaining high levels of technical capabilities and customer service. For
example, AT&T's SKYNET Satellite Services acknowledged the Company's satellite
uplink performance in 1998, 1997 and 1996 by presenting the Company with the
prestigious SKYNET Uplinker Award, which is awarded to companies that have
accessed AT&T satellites without any interferences, incidents or procedure
violations over a period of one year. The Company believes that it will be able
to continue to grow the businesses by selling additional services to existing
customers and by acquiring new customers as a result of its technological
capabilities, superior service, strong reputation and aggressive sales force.
In August 1999, the Company and British Telecom Broadcast Services agreed
to jointly develop, market and sell each other's video broadcasting services in
the United States. The relationship between British Telecom Broadcast Services
and Waterfront/Atlantic Satellite will create one of the most comprehensive,
efficient and flexible international broadcast networks in the United States.
This agreement also provides the ability for the future growth and development
of new opportunities in the United States to further support this relationship.
<PAGE>
The Company is also focused on capitalizing on opportunities created by
emerging industry trends such as the emergence of digital television and its
more advanced variant, high-definition television; the proliferation of
alternative transmission/distribution methods such as direct-to-home satellite
services and multipoint microwave systems; and the conversion of existing
television facilities from analog to digital and from videotape-based to digital
server-based technologies. The Company believes that the continued proliferation
of new distribution technologies, as well as the industry-wide conversion of
equipment and systems from analog to digital, will create an increasing demand
for technical expertise and resources which can be outsourced by the end-user.
The Company believes that the aggressive timetable associated with such
conversion, which has resulted both from recent mandates by the Federal
Communications Commission (the "FCC") for digital television and high-definition
television as well as competitive forces in the marketplace, is likely to
accelerate the rate of increase in the demand for these services. As a result,
the Company believes that significant opportunities exist for it to provide
services for the upgrading and conversion of the industry's technical
infrastructure.
The Company has implemented several strategies for capitalizing on these
growth opportunities, including the expansion of its engineering staff to meet
market demand, the introduction of additional services, such as repair and
maintenance contracts, and the opening of West Coast engineering and rental
offices.
In addition, the Company seeks to become the leading full-service
post-production house for the United States and international markets and to
continue to seek new ways to enhance its ability to provide one-stop
post-production services while maintaining the high quality of such services.
The Company plans for further growth and the expansion of its range of
post-production and other services through strategic acquisitions and internal
growth. In July 1998, the Company opened an additional 13,000 square foot
facility in Burbank, California to provide technical and distribution services
to international television program originators and distributors. Historically,
the Company invested significant sums in its infrastructure to ensure that each
of its divisions remained at the technological forefront of the post-production
industry.
In August 1999, the Company retained Lazard Freres & Co., LLC as its
investment banker and financial advisor to explore strategic opportunities for
the Company, including but not limited to a sale, merger or joint venture.
Principal Services
Satellite and Distribution Services
This segment, which includes Atlantic Satellite Communications, Inc.
("Atlantic Satellite"), Waterfront Communications Corporation ("Waterfront") and
Audio Plus Video International, Inc. ("Audio Plus Video"), provides a vertically
integrated array of satellite, fiber optic and videotape worldwide distribution
of video and data.
Through Atlantic Satellite and Waterfront, the Company provides integrated
satellite and fiber optic video and data transmission services to a wide range
of customers with whom it has enjoyed long-term relationships, including the
major television broadcast networks and several cable television networks,
independent national and international television stations and producers of
syndicated television shows. Satellite and fiber optic transmission services are
used by these customers independently and in combination to integrate editing
and transmission of video content as quickly as possible. The Company's use of
fiber optic and satellite technologies enables it to provide its customers with
rapid and reliable transmission of broadcast quality video content with a high
level of flexibility. The Company believes that, in the New York metropolitan
area, Atlantic Satellite is a leading single source provider of satellite and
related transmission services and that Waterfront is the leading provider of
"first mile" and "last mile" fiber optic video and data transmission services.
"First mile" transmission services are services whereby content is transmitted
from an origination point, via local transmission means, to a long distance
video network carrier (such as VYVX or AT&T) or satellite earth station (such as
Atlantic Satellite) and "last mile" transmission services are services whereby
content is received into, via local transmission means, the final destination
point for the content (such as a television network local broadcaster or cable
channel). Atlantic Satellite's teleport facilities provide customers with access
to the full complement of satellite and fiber optic transmission services
provided by Atlantic Satellite and Waterfront.
<PAGE>
Atlantic Satellite's teleport facility is located on contiguous properties
in Northvale, New Jersey and Tappan, New York. This facility contains broadcast
quality satellite dishes, which transmit and receive domestic feeds in both
C-Band and KU Band frequencies, and provides international transmission to
PanAmSat satellites. At this facility, Atlantic Satellite provides primary
up-link and down-link services, as well as ancillary services such as tape
playback and recording, tape duplication, syndication services (including spot
insertion and editing), and digitally compressed satellite transmission
expertise. Atlantic Satellite provides over 5,000 hours per year of playback and
uplink services for pre-taped, syndicated television programs produced by BKN,
Inc, Warner Brothers, Hearst Entertainment and KingWorld among others. It also
downlinks and records numerous live sporting events for clients such as the
National Hockey League (NHL) and the National Basketball Association (NBA) and
provides satellite transmission services for clients such as Fox News, Fox
Sports, NHK, Court TV and ABC/Capitol Cities.
Waterfront's services are provided through a video switching facility
located in New York City which is connected to all major news organizations and
all New York area teleports including Atlantic Satellite's. Waterfront's
extensive network of both analog and digital video fiber optic connections and
multiple paths to Atlantic Satellite enable domestic and international
broadcasters to take advantage of the Company's single source transmission
services at competitive rates. The Company believes that Waterfront's fully
manned facility provides it with a competitive advantage over its major
competitors. Waterfront's fiber optic connections are located in local venues
such as the New York Stock Exchange and the United Nations in New York City, as
well as Giants Stadium and the Continental Airlines Arena in New Jersey. These
fiber optic connections enable Waterfront's customers to transmit video content
directly from those venues to their studios or, alternatively, to Atlantic
Satellite for national and international distribution. In addition to local
fiber optic transmission and connections to Atlantic Satellite's transmission
facility, Waterfront provides its customers with access to several long-distance
fiber optic carriers through its remote facility located in downtown Manhattan.
Waterfront also provides transportable services, including point-to-point
microwave transmission, transportable up-link and down-link transmission, and
broadcast quality teleconference services, as well as access to other teleport
facilities. The Company believes that Waterfront's switching facility is the
largest such facility in the New York metropolitan area and that Waterfront's
connections to major events and sports venues within the New York metropolitan
area provide clients with extensive and essential coverage.
The Company believes that its ability to combine "first mile" and "last
mile" fiber optic transmission and satellite transmission services provides it
with a competitive advantage over providers of satellite-only transmission
services. These integrated capabilities offer broadcasters, cable television
networks and others the ability to edit news, sports and other video content in
their Manhattan studios (which are linked to Waterfront) and, after alteration,
to transmit that content anywhere in the world almost instantaneously through
the Waterfront/Atlantic Satellite fiber optic link. The Company believes that
the combined services provided by Atlantic Satellite and Waterfront have
achieved a reputation for quality and reliability in the industry, which has
resulted in contracts with Fox News, Fox Sports, Court TV, PanAmSat, CNBC,
MS/NBC, the NHL, Teleglobe USA, Inc. and Enron Communications.
Through Audio Plus Video, the Company provides the following broad range of
technical and distribution services to distributors of television programming to
the international market and, to a lessor extent, a variety of international
television program originators, including standards conversion, international
duplication and specialized video services.
Standards Conversion: Throughout the world, video signals are recorded in
four principal standards: NTSC-used in several countries, including the U.S.,
Canada, Mexico and Japan; PAL-used in numerous countries, including England,
Italy, Australia and China; PAL-Modified-used exclusively in Brazil; and
SECAM-used in France, Russia and the Middle East. A program recorded in
one-standard cannot be broadcast or played back through equipment employing
another standard unless the program is first "converted" to the other standard.
If, for example, RTL, a German television broadcaster, wants to air "60 Minutes"
(a program produced in the U.S. and, therefore, in the NTSC standard), the video
signal must first be converted to PAL to make it compatible with the German
standard. The Company provides conversion services to and from all of the
standards currently available.
International Duplication: Duplication services are required to accommodate
multiple broadcast locations receiving the same product in the same standard,
but utilizing a variety of videotape formats. Using the same analogy as above,
the German broadcaster received a PAL tape for his 1" equipment, but a
Scandinavian broadcaster needs to receive a PAL tape of that same "60 Minutes"
episode for his D2 equipment. Accordingly, the Company would "duplicate" the
tape to the different format in the same standard.
Specialized Video Services: The Company is meeting an increasing demand for
specialized services using state-of-the art, multistandard film-to-tape, editing
and audio suites. Audio capabilities include restoration, layback, ADR
(automatic dialogue replacement), audio-for-video editing, and the recreation,
or enhancement of music and sound effects tracks. Additional services include
screen-by-screen color correction of film or tape, video restoration and I3
(International Image Interpretation), an innovative standards conversion
technology, which achieves extremely high quality for film-originated material.
The Company's services that are provided to the television industry and
program originators, and the specialized video services that are provided to
television program distributors to the international market, are generally
offered on an hourly or daily rate basis. Standards conversion and duplication
services provided to television program distributors to the international market
are offered at rates that are based on program length. The Company maintains an
in-house engineering staff to facilitate the modification of equipment to meet
client requirements.
Through fiber optic connections, Audio Plus Video is linked to Atlantic
Satellite giving them the ability to send and receive signals both domestically
and internationally. This service is especially essential with time sensitive
material such as sporting events. For example, satellite services aid in the
rapid international distribution the Company provides for the National
Basketball Association.
In the fourth quarter of fiscal year 1998, Audio Plus Video began an
expansion to the West Coast with the leasing of a new 13,000 square foot
facility in Burbank, California. That business became operational in July 1998.
Audio Plus Video is beginning its tenth year of worldwide distribution for
the NBA and the twelfth year for Hearst Entertainment supplying movies and
series programming. Other programs include "Samurai - X", "Baywatch", "Ricki
Lake", "Spin City", "60 Minutes 1 and 2", "Bewitched", "South Park" and "Dr.
Katz". Specials during the year included The Academy Awards, NCAA Basketball
Tournament, The Oscars, The Golden Globe Awards and The Grammy's.
Audio Plus Video clients include: Sony Pictures Entertainment, CBS
International, NBC International, ABC, Buena Vista International, Warner
Brothers, Hearst Entertainment, Worldvision, NBA, Dream Works, Children's
Television Workshop and Discovery Channel.
Systems and Products
Through A.F. Associates, Inc. ("AFA"), the Company designs, builds,
installs and services advanced video systems worldwide for the broadcast and
cable television industries, and for professional and corporate markets. AFA's
services include project management; design and engineering; consultation with
architects and building contractors; drafting and technical documentation,
equipment and materials specification and procurement; pre-wiring and assembly;
site installation; system testing and commissioning; and training. The Company
believes that AFA is one of the leading independent providers of such services
in the world.
Systems are designed by AFA's in-house engineers utilizing computerized
design programs and are assembled in AFA's facility in Northvale, New Jersey.
Assembly includes custom fabrication of all audio, video and control
interconnect wiring, mounting of equipment into rack enclosures and custom
operating consoles, pre-wiring of all interconnecting cabling and subsystem
testing. The entire system is then shipped to the customer's location, where it
is installed and tested by AFA's technicians and engineers. The end product is a
professionally designed and built system, utilizing advanced design and
construction concepts and incorporating state-of-the-art broadcast equipment.
Through the use of AFA's systems integration services, the client need only set
overall system and operational requirements. AFA engineers and constructs the
entire system and manages all aspects of technical construction.
AFA's clients include the four (4) major networks, numerous cable channel
networks (e.g.,Turner Entertainment, Cable News Network, Inc., CNBC, Fox News
Channel, Lifetime Television, USA Networks, Inc. and Home and Garden Cable
Network), satellite broadcasters (e.g., Direct TV and SKY Latin America),
corporate television networks (e.g., Merrill Lynch & Co., Inc., Pfizer, AT&T and
Toys R Us), and numerous production and post-production facilities. Over 50% of
AFA's business is repeat business from clients who seek AFA's technical and
engineering expertise. The Company believes that increases in cable, direct
satellite and independent broadcasting made possible by emerging compression
technologies, as well as the migration of broadcasting standards from analog to
digital, will provide significant opportunities for AFA to expand its customer
base.
Projects recently completed by AFA include: new network operations
facilities for Turner Entertainment; a complete digital TV station for the PBS
flagship, WNET-13; and a major cable headend for Israel's largest cable operator
- - "Golden Channels". Current projects include a new all digital television
station for NBC owned WTVJ-TV, in Miami; a direct-to-home satellite broadcast
center in Argentina; and a major expansion of the Home and Garden cable network.
In May 1998, AFA acquired a product group with the objective of developing,
manufacturing and marketing advanced color correcting and manipulation systems
for the film, post-production and multimedia industries. Its products enhance
any visual representation medium that requires a true color image where a better
picture is essential. The AFA Products Group has developed an advanced image
processing and manipulation software tool. "Traxim", based on artificial
intelligence algorithms, automates the time-consuming task of creating "windows"
or "mattes" for special effects applications in video, film and desktop
publishing.
<PAGE>
Through Video Rentals, Inc. ("VRI"), the Company supplies broadcast and
industrial video equipment for rental to the broadcast and professional video
industries and provides support and maintenance services for such equipment. VRI
rents cameras, super slo-mo systems, interformat portable editing systems,
character generators, graphic equipment and specialized equipment for sports
production. Equipment rentals may range from a period of one (1) day to as long
as a year. Specialized equipment packages, such as editing systems, are also
rented for longer periods by certain customers, including Fox Sports. VRI's
purchases of equipment to be held for rental are made both on the basis of
anticipated rental demand and in response to specific customer orders and
commitments from such customers for minimum rental terms (in the case of more
specialized equipment).
VRI specializes in network sports production. As the exclusive field shop
for Fox Sports, VRI is responsible for storing, shipping and maintaining
equipment owned by the network and used for their coverage of major sporting
events, including the NFL and Major League Baseball. VRI also serves as a rental
agent for the rental of this equipment to third parties. Major customers of VRI
include all the major networks, as well as major mobile truck operators.
Production Services
The production of every commercial, television program or corporate
communications video involves the recording of the image on film or videotape.
This is done on location or in a studio by a production company. Once the
footage has been recorded, the post-production process begins in order to
transform the raw recorded footage into a final usable product. Creative and
technical input, which includes the transfer of film-to-tape, color correction,
editing, addition of special effects utilizing 3D and computer-generated
graphics and audio, is needed to complete the process and generate a videotape
master for duplication and distribution to broadcasters. The master tape may
need additional post-production services, such as standards or format
conversion, audio layback of a foreign language track, or the enhancement of the
music and effects tracks to facilitate international distribution.
Through CABANA corp. ("CABANA"), the Company provides creative editorial
services to the television advertising industry. The creative editing process,
or the first stage of post production, for a television commercial generally
involves the selection of the best footage from several thousand feet of film
and the combination of that footage through editing along with special video
effects to create a cohesive message with audience appeal. The creative editor
typically is involved with all facets of the post-production process and usually
selects the post-production facilities (such as Manhattan Transfer and
MT-Miami), in which the remaining and final stages of the television
commercial's post-production takes place. Television commercials created by
CABANA during the year include ads for Tyco, Air Force, Marine Midland,
Gatorade, Fleet Bank, Folgers, Sprint, L'Oreal and Phillips, among others.
Through two of its operating subsidiaries Manhattan Transfer/Edit, Inc.
("Manhattan Transfer") and Manhattan Transfer - Miami ("MT-Miami"), formerly The
Post Edge, Inc., the Company provides the art and science of completing high-end
television commercials and programs with the finest quality to the television
advertising industry. Their services include the following:
Film-to-Videotape Transfer: The Company has film to videotape transfer
suites for the transferring of images and sound from film to videotape. This
process can be used for either positive or negative, 16 or 35 millimeter film
and for both composite and multi-track systems. The Company's skilled colorists
operate state-of-the-art electronic equipment, which provides color correction
and expansion or repositioning of film images. In addition, the Company can
correct and enhance the color of projects originated on videotape. The videotape
element masters resulting from the transfer process can be edited to create the
final product which can then be duplicated for a variety of markets including
television advertising, corporate video cassettes, home video cassettes, cable
television, television program syndication, airline in-flight entertainment,
foreign distribution and ancillary applications. Transfers are made in both the
PAL (Europe and South America) and NTSC (North America and Japan) standards.
Computer-Generated Visual Effects: Company artists create
computer-generated television imagery working with sophisticated computer
software for applications such as main titles for television shows, credits and
various electronic special visual effects including computer animation and
electronic graphics in both two and three dimensions.
Electronic Video Editing: The Company operates digital edit suites;
traditional and non-linear computer work stations. The editing process ranges
from simple cuts and assembly with dissolves, wipes and titles, to complicated
layering of images and special effects. Videotape is edited in many tape formats
(sizes) for use in commercials, shows, corporate and educational videos and
other presentations.
<PAGE>
Videotape Duplication: The Company offers videotape duplication in all
professional broadcast formats, including D1, D2, BetaCam SP, 1" and 3/4", to
meet the needs of the commercial advertising, corporate video, motion picture,
television production and syndicated television program distribution industries.
The Company also creates duplication masters with closed captioning for the
hearing impaired.
Commercials finished this past year at Manhattan Transfer include: the
Volkswagen Beetle Campaign, Visa, Pepsi, Pizza Hut, Macy's, US Navy, Wendy's,
IBM, MCI, Burger King, Bell Atlantic and Ameritech. In addition to Manhattan
Transfer's commercial activities, it provided post-production services for the
Peabody Award winning episode network television series "Homicide", for "Oz",
the episodic series on HBO and for the network situation comedy, "Cosby".
Commercials finished this last year at MT-Miami include Pier 1 Imports,
McDonalds, Bell South, Burdines, American Express, Huggies, and Florida Lottery
among others.
The Company's major post-production clients include advertising agencies,
film editors and video production companies. Among the advertising agencies to
which the Company provides services are BBDO New York, Saatchi & Saatchi, Grey
Advertising, Uniworld Group, Ammirati Puris Lintas, Ogilvy & Mather, J. Walter
Thompson, Jordan McGrath Case, McCann Erickson and Young and Rubicam.
The Company's post-production business is dependent on the success of the
television programming and advertising industries, which success in turn is
highly dependent upon a number of factors, including the quality of content
produced, the availability of alternative forms of entertainment and leisure
activities, general economic conditions and international demand for content
originated in the United States. The Company's business also is subject to
downturns in the television, programming and advertising industries. Although
the Company generally does not have long-term or exclusive agreements with its
post-production clients, the Company has long-term relationships with many of
such clients. Because post-production clients generally do not make arrangements
with the Company until shortly before its services are required, the Company
usually does not have any significant backlog of service orders.
Sales and Marketing
Historically, the Company markets its services through its management's
efforts to exploit its industry contacts and attendance at industry trade shows,
as well as advertisements in trade journals and referrals from existing
customers and suppliers. Atlantic Satellite and Waterfront jointly market their
services through the efforts of management and a full-time sales force which
emphasizes quality and the range of their offered services. In addition, AFA
maintains a full-time sales force which emphasizes to potential customers the
extensive experience of its professional engineers, AFA's leadership role in
systems technology and its comprehensive project management services. VRI
focuses on its market leadership position, round-the-clock customer service,
diversity and reliability of its inventory and its competitive pricing
structure, as well as the value-added services it provides to its larger
customers, such as logistics and inventory management.
In August 1999, the Company and British Telecom Broadcast Services agreed
to jointly develop, market and sell each other's video broadcasting services in
the United States. British Telecom Broadcast Services and Waterfront/Atlantic
Satellite will market and sell each other's products and services. Customers
will be better served through enhanced, more flexible offerings and cost
benefits resulting from economies of scale.
A full-time sales force, together with editors, graphic artists and senior
management, actively market the Company's post-production services through
industry contacts and through advertising in the major industry trade magazines
such as Shoot, Ad Week and Post. The focus of this advertising is to promote the
Company's image for quality services, its technical capabilities and its
state-of-the-art facilities.
The Company's marketing strategy, with respect to the services it provides
for television program distributors to the international market is to focus on
the needs of the end-users as well as on the needs of the clients. The Company
actively develops relationships with overseas facilities and broadcasters
through visits and multi-lingual communication, to learn and respond to their
individual technical and operational requirements. This strategy has resulted in
end-users requesting that their international television program distributors
utilize the Company's services and has alleviated many problems between the
distributors and the broadcasters. Sales and marketing efforts emphasize the
needs of the client and the end-user, technical proficiency, and the Company's
global perspective.
The Company had sales to one Systems and Products segment customer in 1997
in excess of 10% of consolidated 1997 revenues. Sales to such customers
aggregated 15% of 1997 revenues. Revenues from such customers were derived from
one-time contracts for services provided by AFA and do not necessarily represent
a recurring source of revenues.
<PAGE>
Supply of Services and Equipment
In most situations where Atlantic Satellite is providing satellite up-link
services, the customer has secured the transponder time and instructs Atlantic
Satellite as to which satellite and transponder to transmit the signal. In those
situations where Atlantic Satellite is providing transponder time as part of a
service package to a customer, Atlantic Satellite obtains transponder time from
third-party re-sellers of transponder time. Satellite owners do not sell
occasional transponder time directly to end-users or service providers. Rather,
they sell or lease transponders on a full-time basis for a minimum of one year.
However, the success of Atlantic Satellite's business depends in part upon the
price and availability of satellite transponders. A shortage of transponders can
be caused by several factors, including the malfunctioning or expiration of the
useful lives of existing satellites or the unsuccessful launch of additional or
replacement satellites, all of which are beyond the control of Atlantic
Satellite or its customers. A shortage of satellite transponders would be likely
to increase the price of available transponders, which would have an adverse
impact upon Atlantic Satellite's, and thus the Company's, ability to operate
profitably. Waterfront may either order fiber optic lines from third party
providers to be installed between Waterfront's facility and the customer or the
customer may order these items directly from a third party provider, with
Waterfront providing only the connection with its switch. AFA and VRI obtain
their equipment from a variety of sources, including the major equipment
manufacturers such as Sony Corporation of America, BTS Broadcast Television
Systems and Tektronix. AFA orders equipment used in the production of its video
systems based upon customer purchase orders after receipt of deposits. Larger
systems are funded through periodic customer payments, which relate closely to
the capital needs of the project. Although the Company did not experience any
significant difficulty in obtaining equipment, there can be no assurance that
shortages will not arise in the future. The loss of any one or more
manufacturing sources could have an adverse effect on the Company until
alternative arrangements could be secured. The Company believes that there are
alternative adequate sources of components of sufficient quality and quantity.
Competition
The competitive video services industry is both specialized and fragmented.
Major competitors for Atlantic Satellite's transmission services include ATC
Teleport (a subsidiary of American Tower Corporation), Group W (a subsidiary of
CBS), Globecast (a subsidiary of French Telecom) and National Gateway (a
subsidiary of Williams Communications, Inc.). Some of these competitors have
significantly greater resources than the Company. Atlantic Satellite competes
primarily based upon customer service and its large and valued subscriber base,
which permits a high degree of inter-subscriber connections. Although the
Company believes that Waterfront's video switching facility is the largest in
the New York metropolitan area, "The Switch" (operated by Globecast) has "first
mile" and "last mile" capabilities and competes with Waterfront. AT&T also
competes in the switching business to some extent. However, the Company believes
that its fully manned facility provides it with an advantage over its
competitors, which do not provide the same level of service. AFA's primary
competitors are Sony Corporation, The Systems Group, Communications Engineering
Inc. and National TeleConsultants, as well as small, regionally based
integrators and dealers. Competition is based upon technical expertise,
experience and price. VRI's major competitors are Bexel Corporation, Duke City
and Charter (ABS Broadcast), which have locations in several metropolitan areas,
as well as smaller companies, which do not offer the variety of services
provided by VRI. Competition is based upon price, diversity and availability of
inventory and customer service. The Company believes that the ability of its
operating subsidiaries to cross-market to existing customers using other
services offered by the Company's other subsidiaries provides the Company with a
competitive advantage over many competitors who lack the full complement of
services provided by the Company.
Certain post-production services businesses (both independent companies and
divisions of diversified companies) provide most of the same services provided
the Company, while others specialize in one or several of these services.
Certain film production companies also provide post-production services. Many of
the Company's competitors for post-production services are located in New York
City, one of the principal domestic markets for such services. Certain of these,
as well as other competitors of the Company, have greater financial resources
than the Company.
With regard to its post-production services, the Company competes on the
basis of customer satisfaction with the range, quality and pricing of its
offered services. The Company also competes in this area on the basis of its
ability to attract and retain qualified, highly skilled personnel. The Company
believes that prices for its post-production services are competitive within its
industry, although some competitors may offer certain of their services at lower
rates than the Company. The post-production services industry has been and is
likely to continue to be subject to technological change to which the Company
must respond in order to remain competitive. The Company has no long-term or
exclusive agreements with customers for which it provides post-production
services; however, the Company has had long-term relationships with many of such
customers.
<PAGE>
Major competitors of the Company in providing standards conversion services
include Devlin Video Services, Magno Sound & Video, Four Media Corporation,
Vidfilms, Intercontinental Televideo and International Image based in Toronto,
Canada. Major competitors of the Company in providing creative editorial
services include Crew Cuts Film & Tape, Red Car, Blue Rock Editing Company, Mad
River Post and Progressive Image Group. Major competitors of the Company in
providing film-to-videotape transfer, electronic video editing and
computer-generated graphic services include Post Perfect (a subsidiary of The
New York Media Group), The Tape House Editorial Co., PrinczCo Productions, Nice
Shoes, L.L.C., Click 3X and Broadcast Video, Inc.
Government Regulation
The Communications Act of 1934, as amended by the Telecommunications Act of
1996, prohibits the operation of satellite earth station facilities such as
those operated by Atlantic Satellite, except under licenses issued by the FCC.
Atlantic Satellite holds the following five satellite earth station FCC
licenses:
Call Sign License Expiration Date
--------- -----------------------
E960405 September 6, 2006
E910152 March 22, 2001
E881160 February 17, 2009
E4626 September 10, 2002
E970418 October 10, 2007
No FCC authorization is required for reception of transmission from
domestic satellites to points within the United States. When applicable, the
Company will continue to rely on third party FCC licenses or authorizations when
it transmits certain domestic satellite traffic through earth stations operated
by such third parties.
The FCC establishes technical standards for satellite transmission
equipment, which change from time to time, and it also requires coordination of
earth stations with land-based microwave systems at certain frequencies to
assure non- interference. Transmission equipment must also be installed and
operated in a manner that avoids exposing humans to harmful levels of
radio-frequency radiation. The placement of earth stations or other antennae is
typically subject to regulation under local zoning ordinances. The Company
believes that Atlantic Satellite's equipment meets and is operated in material
compliance with all applicable laws, regulations and industry standards.
Waterfront holds two point-to-point microwave licenses from the FCC for the
transmission of signals from a single point to temporary fixed locations within
25 miles of the license coordinates. There are two microwave licenses:
Call Sign License Expiration Date
--------- -----------------------
WNEI382 June 23, 2009
WMQ-537 February 1, 2001
While the FCC generally renews satellite earth station and point-to-point
microwave licenses on a routine basis, there can be no assurance that Atlantic
Satellite's and Waterfront's licenses will be renewed at their expiration dates.
Failure to obtain renewal of such licenses would have a material adverse effect
on the Company.
Employees
The Company and its subsidiaries have approximately 493 full-time
employees. None of the Company's employees are represented by a labor union or
are subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and believes that its employee relations are
satisfactory.
<PAGE>
The Company's success depends in large part on the continued service of its
executive officers, key creative artists and skilled technicians, and other key
personnel. The Company has employment agreements containing non-compete
provisions with most of its current key executive officers, including the
president and chief executive officer. However, the Company does not have any
long-term employment agreements and/or any covenants not to compete with most of
its key artists and technicians. A significant percentage of the Company's
revenues can be attributed to services requiring highly compensated creative
technicians. Competition for highly qualified employees is intense and the
process of acquiring key technical, creative and management personnel with the
requisite combination of skills and attributes is often lengthy. There can be no
assurance that the Company will continue to attract, motivate and retain key
personnel. Failure by the Company to attract and retain qualified key personnel
could have a material adverse effect on the Company.
Backlog
At June 30, 1999 and June 30, 1998, the Company had backlogs of
approximately $6,000,000 and $11,144,000 respectively. All of such backlog is
attributable to AFA's video production systems projects.
ITEM 2. PROPERTIES
The Company's corporate headquarters (which are owned by the Company) are
located at 240 Pegasus Avenue, Northvale, New Jersey ("240 Pegasus") where
Atlantic Satellite also occupies an aggregate of approximately 15,000 square
feet plus outdoor antenna pads. The Company owns another facility at 183 Oak
Tree Road in Tappan, New York ("183 Oak Tree"), which is adjacent to the 240
Pegasus property in which Atlantic Satellite and VRI also occupy approximately
13,000 and 7,000 square feet, respectively. Atlantic Satellite has leased 10,000
square feet at 183 Oak Tree Road to the NHL. Atlantic Satellite's teleport
facility is located at 240 Pegasus and 183 Oak Tree. In addition, the Company
subleases approximately 50,000 square feet at 235 Pegasus Avenue, Northvale, New
Jersey from an unaffiliated entity, which in turn leases such property from an
unaffiliated third party. The terms of the lease and the sublease are
substantially identical. Approximately 38,000 square feet of such facility is
used by Audio Plus Video for production purposes and approximately 12,000 square
feet is used for general and warehouse purposes. In addition, the Company also
owns approximately 8 acres of vacant land in Northvale, New Jersey.
The Company leases five principal production facilities, two located in New
York City, two located in South Florida and one in Burbank, California. The
Company's two New York City production facilities consist of approximately
68,000 square feet in midtown Manhattan where CABANA leases one 18,000 square
foot facility and Manhattan Transfer leases approximately 50,000 square feet.
MT-Miami leases two South Florida production facilities of approximately 21,000
square feet. MT-Miami moved and consolidated its 9,000 square foot Hollywood,
Florida facility to the South Beach Miami facility in the first quarter of
fiscal year 1999. Audio Plus Video leased a new 13,000 square foot facility in
Burbank, California during the fourth quarter of fiscal year 1998.
Waterfront leases approximately 7,200 square feet in midtown Manhattan
which houses Waterfront's Technical Operation Center and executive offices and
approximately 2,600 square feet in downtown Manhattan which is used for
Waterfront's remote switching hub. AFA leases from an entity owned by Messrs.
Siracusano and Ferolito approximately 30,000 square feet at another facility
located in Northvale, New Jersey, which facility serves as its executive offices
and its engineering and fabrication facility.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various claims and legal
proceedings related to employment agreements and business acquisitions as well
as other legal proceeedings of a nature considered normal to its business. While
it is not possible to predict or determine the outcome of these claims and
proceedings, it is the opinion of management that their outcomes will not have a
material adverse effect on the financial position, liquidity or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the American Stock Exchange
("AMEX") under the symbol "VS". The common stock began trading on February 8,
1994 at the effective time of IPL's initial public offering on the NASDAQ
National Market under the symbol "POST". Prior to such time, there was no public
market for the common stock. Following the Merger and until February 11, 1998,
the common stock traded on the NASDAQ National Market under the symbol "VSCX".
As of August 27, 1999, there were approximately 212 holders of record of
the Common Stock.
The following table sets forth the high and low bid prices of the Common
Stock on the American Stock Exchange/Nasdaq National Market for each full
quarterly period within the two most recent fiscal years.
Fiscal Year 1998 High Low
---------------- ---- ---
First Quarter.................................. 3 13/16 2 3/4
(July 1 to September 30)
Second Quarter................................. 3 3/4 2 15/16
(October 1 to December 31)
Third Quarter.................................. 3 1/2 2 13/16
(January 1 to March 31)
Fourth Quarter................................. 4 3/8 2 7/8
(April 1 to June 30)
Fiscal Year 1999 High Low
----------------- ----- ----
First Quarter.................................. 3 15/16 2 5/8
(July 1 to September 30)
Second Quarter................................. 3 11/16 1 7/8
(October 1 to December 31)
Third Quarter.................................. 3 1/2 2 1/4
(January 1 to March 31)
Fourth Quarter................................. 2 5/8 1 5/8
(April 1 to June 30)
No cash dividends have ever been declared by the Company on the Common
Stock. The Company intends to retain earnings to finance the development and
growth of its business. Accordingly, the Company does not anticipate that any
dividends will be declared on the Common Stock for the foreseeable future.
Future payment of cash dividends, if any, will depend on the Company's financial
condition, results of operations, business conditions, capital requirements,
restrictions contained in agreements, future prospects and other factors deemed
relevant by the Company's Board of Directors. Presently the Company is
prohibited from paying any dividends per the Credit Agreement.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth selected historical consolidated financial
data for Video and its subsidiaries for the periods and at the dates indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, June 30, June 30, June 30, June 30,
1995 1996 1997(1) 1998(3) 1999
------------ ------------ ------------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (3)
Revenues ................................. $ 19,439 $ 29,740 $ 27,610 $ 72,995 $ 89,411
Depreciation and amortization ............ 1,629 1,653 1,824 7,958 9,836
Operating income from continuing
operations ........................... 490 2,387 1,750 6,692 2,138
Income (loss) before income taxes and
discontinued operations .............. 223 1,999 1,825 3,290 (1,958)
Income before discontinued operations .... 223 1,212 1,638 1,699 (1,900)
Loss from discontinued operations,
net of tax (2) (4) ................... (74) (388) (1,688) (1,860) ---
Net income (loss) ........................ $ 149 $ 824 $ (50) $ (161) $ (1,900)
Pro forma income(loss) per share before
discontinued operations - basic (3) .. $ --- $ 0.17 $ 0.23 $ 0.14 $ (0.14)
Pro forma net income (loss) per share -
basic (3) ........................... $ --- $ 0.12 $ (0.01) $ (0.01) $ (0.14)
Weighted average number of shares
outstanding (3) ...................... --- 6,961 7,011 12,276 13,264
</TABLE>
<TABLE>
<CAPTION>
As of As of As of As of As of
June 30, June 30, June 30, June 30, June 30,
1995 1996 1997 1998(3) 1999
------------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data: (3)
Total assets........................... $ 16,005 $ 17,672 $ 20,801 $ 81,860 $ 85,318
Long-term debt, net of current portion. 2,388 2,140 5,330 30,968 36,760
Subordinated debt, net of
current portion................... --- --- --- 5,442 5,652
Stockholders' equity................... $ 1,812 $ 2,655 $ 2,733 $ 20,725 $ 18,847
</TABLE>
...........................
(1) Included in the year ended June 30, 1997 is approximately $500 of other
income pertaining to the payment of a note receivable for which Old Video
had established a full valuation allowance. The note receivable was partial
consideration for the sale of a radio station in fiscal 1991.
(2) The operating results of Old Video's Diversified Products segment have been
reflected as discontinued operations for the years ended June 30, 1995,
1996, and 1997.
(3) Reflects the Merger with and into IPL as of August 27, 1997. The Merger was
accounted for as a reverse acquisition whereby the pre-Merger financial
statements of Old Video became the historical financial statements of the
Company after the Merger. Pro forma income (loss) before discontinued
operations and extraordinary item per share and pro forma net income per
share gave effect to the conversion of Old Video Common Stock into common
stock (i.e., shares of the combined company) in the Merger.
(4) The operating results of the Consulting Services segment providing
strategic consulting services have been reflected as discontinued
operations for the year ended June 30, 1998.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
On August 27, 1997, Video Services Corporation ("Old Video") merged with
and into International Post Limited ("IPL") with IPL being the surviving
corporation (the "Merger"). At the effective time of the Merger, IPL changed its
name to Video Services Corporation. References herein to the "Company" refer to
the combined company after giving effect to the Merger. The Merger was accounted
for as a reverse acquisition whereby the pre-Merger financial statements of Old
Video became the historical financial statements of the Company. As a result of
the Merger, the results of operations and cash flows reported for the Company
for the year ended June 30, 1999 are not necessarily comparable to those periods
prior to the Merger. The results of operations and cash flows as reported
represent those of the Company for the years ended June 30, 1999 and 1998 and
Old Video for the year ended June 30, 1997, and include the results of
operations and cash flows of IPL from the date of the Merger. Certain comparable
references to IPL's 1998 and 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 and prior
to the Merger: (i) Old Video discontinued the operations of its Diversified
Products segment through a spin-off of the Diversified Products segment to Old
Video's stockholders and (ii) the principal stockholders of Old Video
contributed by merger (the "Contribution") the stock of two S corporations
holding all of the general and limited partnership interests in MAL Partners and
L.I.M.A. Partners, which partnerships owned real estate and equipment which was
leased solely to Old Video and IPL. The Contribution, which represents a
transfer between entities under common control, has been recorded at the lower
of historical amortized cost or fair value. See Note 1 to the Company's
consolidated financial statements included herein. The following discussion and
analysis should be read in conjunction with such historical consolidated
financial statements and the notes thereto.
Overview
The Company's business is currently divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services (see Note 11). The Satellite and Distribution Services
segment integrates and distributes broadcast quality video content via a
satellite and fiber optic transmission network routed through its digital/analog
switching center and is an international provider of technical and distribution
services to distributors of television programming. The Systems and Products
segment designs, engineers and produces advanced video facilities for the
broadcast and cable television, post-production and corporate markets. This
segment also develops, manufactures and markets advanced color correcting and
manipulation systems for the film, post-production and multimedia industries and
rents professional video equipment to the sports, entertainment and other
segments of the broadcast and cable television and corporate markets. The
Production Services segment is an international provider of technical and
creative services to owners and producers of television programming, television
advertising and other programming content.
Discontinued Operations
On January 2, 1997, Old Video's management, which had the authority to
approve the action, committed Old Video to a formal plan to discontinue the
operations of its Diversified Products segment as a condition to the Merger. In
August 1997 and prior to the Merger, Old Video spun off the Diversified Products
segment to Old Video's stockholders. On November 30, 1997, management, which had
the authority to approve the action, committed the Company to a formal plan to
dispose of the Consulting Services segment providing strategic consulting
services in the area of communications, design and implementation of intranets,
extranets and internets. The Consulting Services segment was acquired in the
Merger. Management closed the Consulting Services segment November 1998 (See
Note 16).
Results of Continuing Operations
Year Ended June 30, 1999 compared to Year Ended June 30, 1998 (dollars in
thousands)
Total revenues increased by $16,416 to $89,411 in 1999 from $72,995 in
1998, of which $7,391 was attributable to a full year of IPL operating results
in 1999, compared to ten months in 1998. Revenues from the Satellite and
Distribution Services segment increased by 46.3% to $31,280 in 1999 from $21,384
in 1998. $16,372 of the $31,280 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
31.2% to $14,908 in 1999 from $11,367 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 34.5% to $16,372 in 1999 from $12,171 in
1998 (includes $2,154 of pre-Merger revenues). The increase is primarily due to
the opening of the new facility in Burbank, California. Revenues from the
Systems and Products segment increased by 37.5% to $25,615 in 1999 from $18,631
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. The Production Services segment revenues of $32,516 and $32,980
in 1999 and 1998, respectively, was solely attributable to post-Merger
contributions provided by IPL. Revenues provided by IPL decreased by 15.0% from
$38,265 in 1998(includes $5,285 of pre-Merger revenues) to $32,516 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 $15,726 to $56,901
in 1999 from $41,175 in 1998, of which $3,721 was attributable to a full year of
IPL operating results in 1999, compared to ten months in 1998. Costs of the
Satellite and Distribution Services segment increased by $6,575 to $16,086 in
1999 from $9,511 in 1998. This increase was primarily attributable to costs of
Satellite and Distribution Services provided by IPL of $4,557 and a $2,019
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 $3,729 to $8,840 in 1999 from $5,111 in 1998 (includes $828
of pre-Merger costs). This increase consisted primarily of costs associated with
the new West Coast facility. Costs of the Systems and Products segment increased
by $7,537 to $20,650 in 1999 from $13,113 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 $20,165 in 1999 and $18,551 in 1998 was solely
attributed to costs provided by IPL. Cost of Production Services provided by IPL
decreased by $1,326 from $21,491 in 1998 (includes $2,940 of pre-Merger costs)
to $20,165 in 1999.
The Company's overall gross profit margin (excluding depreciation)
decreased to 36.4% in 1999 from 43.6% in 1998. Gross profit margin from the
Satellite and Distribution Services segment decreased from 55.5% in 1998 to
48.6% in 1999. Gross profit margin from the Satellite and Distribution Services
segment other than services provided by IPL decreased from 54.0% in 1998 to
51.4% 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
57.2% in 1998 to 46.0% in 1999 as a result of the opening of the new West Coast
facility. Gross profit margin from the Systems and Products segment decreased
from 29.6% in 1998 to 19.4% 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 from 43.8% in 1998 to 38.0% in 1999 as a result of
a decrease in revenues combined with stable fixed costs. Since a high proportion
of costs attributable to the Production Service segment are fixed, decreases in
revenues do not result in proportionate decreases in costs.
Selling, general and administrative expenses increased to $20,205 in 1999
from $17,170 in 1998, which primarily resulted from a full year of IPL operating
results in 1999, compared to ten months in 1998 and 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 22.6% in 1999 from 23.5% in 1998.
Depreciation expense increased to $8,743 in 1999 from $7,109 in 1998,
primarily due to a full year of IPL operating results in 1999, compared to ten
months in 1998 and the new West Coast facility. Amortization expense increased
to $1,093 in 1999 from $849 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 $4,149 in 1999 from $3,619 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 (3.0)% in
1999 and 48.4% in 1998. The effective tax rate for 1999 as compared to the
federal statutory tax rate of 34% was primarily the result of state income taxes
and goodwill amortization created by the Merger which is not deductible for
income tax purposes. The state net operating loss valuation increased by $1,341
in 1999, as a result of additional operating losses in certain subsidiaries. The
state net operating loss valuation decreased by $258 in 1998 as a result of the
use of net operating losses. A valuation allowance of $2,020 remains as of June
30, 1999 for state net operating losses. The state valuation allowance is
provided as a result of estimates regarding future operations for certain
subsidiaries.
Income (loss) from continuing operations decreased from $1,699 in 1998 to
$(1,900) in 1999 primarily as a result of the factors discussed above.
<PAGE>
Year Ended June 30, 1998 compared to Year Ended June 30, 1997 (dollars in
thousands
Total revenues increased by $45,385 to $72,995 in 1998 from $27,610 in
1997. Revenues from the Satellite and Distribution Services segment increased by
$11,405 to $21,384 in 1998 from $9,979 in 1997. $10,017 of the $21,384 of 1998
Satellite and Distribution Services segment revenue was attributable to
post-Merger contribution to revenues from Satellite and Distribution Services
provided by IPL. Revenues from the Satellite and Distribution Services segment
other than those provided by IPL increased by 14.0% to $11,367 in 1998 from
$9,979 in 1997. This increase was due primarily to an increase in the number of
customers connected to the Company's satellite and fiber optic network and the
receipt of additional transmission revenue from existing customers, which was
partially offset by a decrease in syndication revenues due to programming
cancellations. Revenues from the Satellite and Distribution Services segment
provided by IPL decreased by 19.0% from $12,360 in 1997 to $10,017 in 1998. The
decrease is primarily due to reduced volume of standards conversion services and
duplication. Revenues from the Systems and Products segment increased by 5.7% to
$18,631 in 1998 from $17,631 in 1997 due to increased demand for design and
installation of video systems; however, the amount of the increase was reduced
as a result of a change in the structure of certain contracts pursuant to which
the Company now receives a commission based upon equipment used in such video
systems which is purchased directly by the customer from third parties.
Previously, the Company had recorded revenues from the sale of such equipment as
well as the cost related to the purchase thereof. The equipment rental division,
of the Systems and Products segment, revenue decreased 20.5% to $1,989 in 1998
from $2,501 in 1997 as a result of strong demand for video equipment in 1997
generated by the Atlanta Olympics, 1996 presidential election, and the 1996
professional baseball World Series. The Production Services segment revenues of
$32,980 in 1998 was solely attributable to post-Merger contributions provided by
IPL. Revenues provided by IPL increased by 6.4% to $32,980 in 1998 from $31,004
in 1997. The increase is primarily due to a higher volume of creative editorial
and visual effects services.
Total costs of sales, services and rentals increased by $23,903 to $41,175
in 1998 from $17,272 in 1997. Costs of the Satellite and Distribution Services
segment increased by $4,689 to $9,511 in 1998 from $4,822 in 1997. This increase
was primarily attributable to costs of Satellite and Distribution Services
provided by IPL of $4,283 and a $406 increase in costs of non-IPL services.
Costs of IPL Satellite and Distribution Services decreased $760 to $4,283 in
1998 from $5,043 in 1997. This decrease consisted primarily of reduced tape
stock usage, lower equipment repairs and reduced usage of part time and per diem
personnel. Costs of the Systems and Products segment increased by $663 to
$13,113 in 1998 from $12,450 in 1997. The growth in costs of the Systems and
Products segment was driven by the increased volume of installations of video
systems and additional salaries of engineers. These increases were offset by the
decrease in the cost of equipment rentals of $233 to $576 in 1998 from $809 in
1997 as a result of lower demand for video equipment. Costs of the Production
Services segment of $18,551 in 1998 was solely attributed to costs provided by
IPL. Cost of Production Services provided by IPL increased by $152 to $18,551 in
1998 from $18,399 in 1997.
The Company's overall gross profit margin (excluding depreciation)
increased to 43.6% in 1998 from 37.4% in 1997. Gross profit margin from the
Systems and Products segment increased to 29.6% in 1998 from 29.4% in 1997
primarily as a result of the change in contract structure discussed above and
from reduced amount of sub-rentals, which were required in 1997 to meet
increased demand for equipment rentals in connection with the Atlanta Olympics.
Gross profit margin from the Satellite and Distribution Services segment other
than services provided by IPL increased to 54.0% in 1998 from 51.7% in 1997 as a
result of an increase in revenues combined with stable fixed costs for materials
and equipment. Gross profit margin from Satellite and Distribution Services
provided by IPL decreased from 59.2% in 1997 to 57.2% in 1998 as a result of a
decrease in revenues without a corresponding decrease in costs. Since a high
proportion of costs attributable to the Satellite and Distribution Services
segment are fixed, decreases in revenues do not result in proportionate
decreases in costs. Gross profit margin from Production Services increased to
43.8% in 1998 from 40.7% in 1997 as a result of an increase in revenues combined
with stable fixed costs.
Selling, general and administrative expenses increased to $17,170 in 1998
from $6,764 in 1997, which primarily resulted from the additional administrative
salaries and occupancy costs associated with IPL's operations. However, as a
result of the Company's increased revenue, selling, general and administrative
expenses as a percentage of revenues decreased to 23.5% in 1998 from 24.5% in
1997.
Depreciation expense increased to $7,109 in 1998 from $1,807 in 1997,
primarily due to the significant amount of fixed assets of IPL acquired in the
Merger. Amortization expense increased to $849 in 1998 from $17 in 1997
reflecting the amortization of the goodwill (excess of cost over the fair value
of net assets acquired) recorded in connection with the Merger, which is being
amortized over 25 years.
Interest expense increased to $3,619 in 1998 from $517 in 1997 primarily
due to the assumption and refinancing by the Company of IPL's existing long-term
indebtedness as part of the Merger. See "Liquidity and Capital Resources."
The effective tax rate applied against pre-tax income was 48.4% in 1998 and
10.2% in 1997. The effective tax rate for 1998 as compared to the federal
statutory tax rate of 34% was primarily the result of state income taxes and
goodwill amortization created by the Merger which is not deductible for income
tax purposes. The State net operating loss valuation decreased by $258 in 1998
as a result of the use of net operating losses. The Federal net operating loss
valuation allowance decreased by approximately $622 in 1997 as a result of
revised estimates of future taxable income principally as a result of
discontinuing the Old Video's Diversified Products segment. A valuation
allowance of $679 remains as of June 30, 1998 for state net operating losses.
The state valuation allowance is provided as a result of estimates regarding
future operations for certain subsidiaries.
Income from continuing operations increased 3.7% to $1,699 in 1998 from
$1,638 in 1997 primarily as a result of the factors discussed above.
Liquidity and Capital Resources (dollars in thousands)
The Company meets its liquidity needs and capital expenditures requirements
with internally generated funds, borrowing under its bank credit facility
(including line of credit), equipment financing and capital leases. Such funds
are used for capital expenditures, working capital needs and repayment of
outstanding indebtedness.
In connection with the Merger, the Company refinanced substantially all of
Old Video's and IPL's long-term indebtedness (excluding convertible subordinated
debt, Old Video's mortgage payable, note payable to Cognitive Communications,
Inc. and obligations under capital leases), including lines of credit, with a
$33,000 term loan and a $17,000 revolving line of credit (the "Credit
Agreement"). 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 operating 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 to the term loan portion of the facility were due beginning
December 31, 1997. Such quarterly principal payments increased 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 incurrence of other indebtedness. The facility is guaranteed by all
of the Company's subsidiaries.
In July and May 1999, the lenders amended the credit agreement, pursuant to
which certain covenants and levels were changed. Without these amendments the
Company would be in default of certain requirements of its Credit Agreement.
At June 30, 1999, the Company's outstanding indebtedness was approximately
$50,114 including $12,700 under the revolving credit facility. At June 30, 1999,
the weighted average interest rate was approximately 8.55% on the Company's
outstanding indebtedness. The remainder of the facility (approximately $3,509)
will be available for future working capital requirements and general corporate
purposes.
The 4% convertible subordinated notes due May 4, 2003 in the principal
amount of $6,350 issued by IPL, in connection with the CABANA acquisition in May
1995 still remain outstanding after the refinancing described above. These notes
are convertible into Common Stock at a conversion price of $14.00 per share
after May 2000 and are redeemable after May 2001.
In July 1998, the Company opened an additional 13,000 square foot facility
in Burbank, California. The new facility provides technical and distribution
services to international television program originators and distributors; such
services will include standards conversion and international duplication.
Management believes that the facility will give the Company an opportunity to
recapture business lost to those of its competitors operating in California, as
well as to attract additional customers located on the West Coast. This
expansion required approximately $5,200 in cumulative capital expenditures. The
principle source of the capital expenditures and operating funds was a
combination of internally generated funds and secured equipment financing.
Cash Flow from Operating Activities. For the year ended June 30, 1999, net
cash provided in operating activities was $2,567 primarily resulting from
earnings before interest, taxes, depreciation and amortization ("EBITDA") of
$12,027 which was offset by increases in working capital requirements. At June
30, 1999, the net deferred tax asset includes the benefit for net operating loss
carryforwards. Realization is not assured, however, the Company believes it will
generate sufficient taxable income to realize the entire deferred tax asset. For
the year ended June 30, 1998, net cash provided in operating activities was
$5,536 primarily resulting from EBITDA of $14,867 which was offset by increases
in working capital requirements, primarily the payment of transaction costs
associated with the Merger.
Cash Flows from Investing Activities. For the year ended June 30, 1999, the
Company used $11,355 for investing activities, consisting of $11,619 for the
purchase of additional equipment, which was offset by a sale of fixed assets and
repayment of an advance to an affiliate. Approximately $2,200 of additional
equipment was purchased for the new West Coast facility. For the year ended June
30, 1998, the Company used $6,669 for investing activities, consisting of $6,448
for the purchase of additional equipment, which was offset by a sale of fixed
assets and repayment of an advance to an affiliate.
Cash Flow from Financing Activities. For the year ended June 30, 1999, cash
provided by financing activities, net of repayments of borrowings of long-term
indebtedness, was $8,101. Such amount primarily consisted of $22,025 in
borrowings under the revolving line of credit described above and $3,544 of
secured equipment financing. The Company repaid $17,678 of borrowings primarily
in connection with the revolving line of credit and the refinancing described
above. For the year ended June 30, 1998, cash provided by financing activities,
net of repayment of long-term indebtedness, was $2,235. Such amount primarily
consisted of $33,000 in proceeds from the senior secured term loan and $2,600 in
net borrowings under the revolving line of credit described above. The Company
repaid $29,685 of borrowings primarily in connection with the refinancing
described above and $3,787 of scheduled repayments of long term debt.
The foregoing activities resulted in a net decrease in cash of $687 in
1999. It is the Company's belief that annual cash flows from operating
activities, along with the flexibility provided by the Credit Agreement, will be
, sufficient to fund, for the foreseeable future, operating requirements,
capital investments and commitments.
Forward-Looking Statements
The above discussion contains forward-looking statements. There are certain
important factors that could cause results to differ materially from those
anticipated by the statements made above. These factors include, but are not
limited to: general performance of the economy, specifically as it affects the
advertising industry, entertainment, television, video and broadcast industries;
the international economic and political climate which could impact the sale of
domestic programming overseas: significant changes in video technology in the
post-production, video and communication industries; and the loss of key
personnel; and the loss of key customers.
Impact of Year 2000
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of data-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failure. The Company has
conducted a review of its computer information systems and its technological
operating equipment to identify the systems that could be affected by the year
2000 compliance issue.
Below are summaries of the review areas:
Business Systems: All systems supported by the Company's corporate
information group and all programs used in operations have been inventoried as
part of the year 2000 readiness. Inventoried programs and systems have been
reviewed and modified to be year 2000 compliant. The Company uses purchased
software programs for a variety of functions, including general ledger, accounts
payable, and accounts receivable accounting packages as well as comprehensive
facility management packages. These programs are generally year 2000 compliant
or have been repaired or upgraded and are now year 2000 compliant. Software
and/or computer systems not currently compliant will be upgraded during calendar
1999 under existing maintenance and other agreements and through normal
replacement programs currently in place.
The Company has moved to its fiscal 2000 accounting calendar commencing on
July 1, 1999 without incident.
Facilities: The scope of the facilities project includes facilities
management systems (for example, temperature, humidity, automatic toilets)
building access, un-interruptable power systems and elevators. The facilities
review was substantially complete at June 1999, with no significant year 2000
issues noted.
Equipment used in operations: This review area includes the audio video
equipment, switching equipment, graphics and special effects equipment, film to
tape transfer and color correction equipment, standards conversion equipment,
transmission and reception equipment and computer added design equipment. The
operations equipment project was substantially complete at June 1999, with no
significant year 2000 issues noted. A review of the Company's equipment
containing embedded microprocessors or other technology has not revealed year
2000 compliance issues. Operation of this equipment is generally not
time-sensitive and, if necessary, equipment settings can be adjusted without
posing any significant operational problems for the Company.
Suppliers' Products and Readiness: The company has reviewed its suppliers
and identified key suppliers. The key suppliers have been contacted regarding
their year 2000 readiness. Based on responses, cost and the critical nature of
the material involved contingency planning is being developed. More specifically
the inventory levels of blank tape and consumables may be increased. The Systems
and Products Group's purchasing department along with the systems' engineers
have been incorporating year 2000 readiness in their purchase orders.
Company Services and Products: The Company considers it services and
manufactured products to be year 2000 ready. Most of the Company's services and
manufactured products have no date function and therefore have no year 2000
compliance issues. The Systems and Products Group is dependent on the year 2000
readiness of its suppliers and their products.
<PAGE>
The Company's remediation efforts are substantially complete and the focus
is now being directed toward contingency planning. Management is confident in
the Company's ability to transition to the year 2000 without incident but will
establish contingency plans in the event of unforeseen failures. The Company
reasonably believes that its most likely worst-case year 2000 impact would
relate to problems with systems of suppliers and customers rather than with the
Company's internal systems or products. The Company has less control over the
year 2000 assessment and remediation efforts of third parties and believes the
risks are greatest with infrastructure providers (power, water and communication
services), logistics elements (transportation and customs) and suppliers of
materials and services.
Based on these reviews, costs of addressing remaining year 2000 compliance
issues are not expected to exceed $25 and costs incurred to date approximate
$50.
To date, the Company has not identified any system which presents a
material risk of not being year 2000 ready in a timely fashion or for which a
suitable alternative cannot be implemented. As the Company progresses with its
year 2000 conversion, however, it may identify systems that do present a
material risk of year 2000 disruption. Such disruption may include, among other
things, the inability to process transactions or information, to record, access
data, or engage in similar normal business activities. If the Company, its
customers or vendors are unable to resolve such processing issues in a timely
manner, it could result in a material financial risk. Accordingly, the Company
will devote the necessary resources to resolve all significant year 2000 issues
in a timely manner.
The discussion above contains certain forward-looking statements. The costs
of the year 2000 conversion, the date which the Company has set to complete such
conversion, and possible risks associated with the year 2000 issue are based on
the Company's current estimates and are subject to various uncertainties that
could cause the actual results to differ materially from the Company's
expectations. Such uncertainties include, among others, the success of the
Company in identifying systems that are not year 2000 compliant, the nature and
amount of programming required to upgrade or replace each of the affected
systems, the availability of qualified personnel, consultants and other
resources, and the success of the year 2000 conversion efforts of others.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from
changes in interest rates as well as credit risk concentrations. To address
these risks the Company entered into an interest rate swap as described below.
The Company does not use financial instruments for trading purposes.
Credit Risks
The Company's customer base is composed of companies in the television
network, cable and advertising industries which are located principally
throughout the United States. No single customer accounted for more than 10% of
the Company's sales during the fiscal year ended June 30, 1998 and 1999.
Interest Rate Risks
The Company hedges its exposure to changes in interest rates on its senior
secured term loan. In August 1997, the Company entered into a five year interest
rate hedge agreement with a total notional principal amount of $33,000 to manage
interest costs associated with changing interest rates. This agreement converts
underlying variable rate debt based on LIBOR under the Company's term loan to
fixed rate debt with an interest rate of 7.58% plus a number of basis points
based upon the Company's leverage ratio.
The following tables provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rate. For debt obligations, the table presents cash flows
and related weighted-average interest rates by expected maturity dates. For
interest swaps, the table presents notional amounts and weighted-average
interest rates by contractual maturity dates. Notional amounts are used to
calculate the contractual cash flows to be exchanged under the contract.
<TABLE>
<CAPTION>
1999 Fair Value
(dollars in thousands) 2000 2001 2002 2003 2004 Total 1999
- ----------------------------- -- ----------- -- ---------- --- ---------- -- ----------- -- ---------- -- ---------- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt including
current portion
Fixed rate............ $ 7,737 $ 8,311 $ 10,747 $ 17,317 $ 350 $ 44,462 $ 44,476
Average interest rate. 8.51% 8.39% 8.06% 7.74% 7.74%
Subordinated Debt
Fixed rate............ $ --- $ 2,117 $ 2,117 $ 2,116 $ --- $ 6,350 $ 5,652
Average interest rate. 8.34% 8.34% 8.34% 8.34% 8.34%
Interest rate swap
Pay variable/receive
fixed................. $ 6,500 $ 7,000 $ 8,000 $ 3,750 $ --- $ 25,250 $ (398)
Average pay rate...... 7.58% 7.58% 7.58% 7.58% 7.58%
Average receive rate.. 6.18% 6.18% 6.18% 6.18% 6.18%
1998 Fair Value
(dollars in thousands) 1999 2000 2001 2002 2003 Total 1998
- ----------------------------- -- ----------- -- ---------- --- ---------- -- ----------- -- ---------- -- ---------- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt including
current portion
Fixed rate............ $ 5,350 $ 7,052 $ 7,568 $ 9,970 $ 6,366 $ 36,306 $ 36,338
Average interest rate. 8.30% 8.29% 8.26% 8.00% 8.00%
Subordinated Debt
Fixed rate............ $ --- $ --- $ 2,117 $ 2,117 $ 2,116 $ 6,350 $ 5,442
Average interest rate. 8.34% 8.34% 8.34% 8.34% 8.34%
Interest rate swap
Pay variable/receive
fixed................. $ 4,750 $ 6,500 $ 7,000 $ 8,000 $ 3,750 $ 30,000 $ (638)
Average pay rate...... 7.58% 7.58% 7.58% 7.58% 7.58%
Average receive rate.. 6.66% 6.66% 6.66% 6.66% 6.66%
</TABLE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item appears in Item 14(a) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10, 11, 12, AND 13
The information called for by Items 10, 11, 12 and 13 of this Form 10-K
will be included in the Company's 1999 Proxy Statement which will be filed not
later than October 28, 1999.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The consolidated financial statements, related notes thereto and report
of independent public accountants required by Item 8 begin at page F-1
herein.
(2) The financial statement schedule appears on page F-27 herein.
(3) Exhibits:
Exhibits
Exhibit Number
3.1 Certificate of incorporation of the Company. (incorporated by reference to
the exhibit of the same number contained in the Company's annual report on
form 10-K for the fiscal year ended July 31, 1997).
3.2+ By-Laws of the Company.
4.1 Form of 4% Convertible Subordinated Note of the Company (incorporated by
reference to the exhibit of the same number contained in the Company's
Current Report on Form 8-K, dated May 18, 1995).
10.1(M) Form of International Post Group Inc. Long-term Incentive Plan, together
with form of International Post Group Inc. Stock Option Agreement.
(incorporated by reference to the exhibit 10.4 contained in Amendment No. 4
of Video's (formerly IPL's) Registration Statement on Form S-1 (the
"Registration Statement, filed with the Securities and Exchange Commission
(the "SEC") on February 4, 1994.)
10.2(M) Form of International Post Group Inc. Restricted Share Plan for
Directors, together with form of Restricted Share Agreement. (incorporated
by reference to the exhibit 10.5 contained in Amendment No. 4 of Video's
(formerly IPL's) Registration Statement on Form S-1 (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
on February 4, 1994.)
10.3 Form of Lease Agreements between Audio Plus Video and L.I.M.A. Partners. (
incorporated by reference to the exhibit 10.7 contained in Amendment No. 3
to Video's (formerly IPL's) Registration Statement filed with the SEC on
January 10, 1994.)
10.4 Lease Agreements, dated as of June 30, 1993, between MTE Co. and Nineteen
New York Properties Limited Partnership. (incorporated by reference to
exhibit 10.9 contained in Amendment No. 1 to Video's (formerly IPL's)
Registration Statement filed with the SEC on October 21, 1993.)
10.5(M) Form of Stock Option Agreement between the Company and Jeffrey J.
Kaplan. (incorporated by reference to the exhibit 10.23 contained in
Amendment No. 3 to Video's (formerly IPL's) Registration Statement filed
with the SEC on January 10, 1994.)
10.6 Form of Services and Option Agreement between Holdings and Kenneth F.
Gorman. (incorporated by reference to the exhibit 10.25 contained in
Amendment No. 3 to Video's (formerly IPL's) Registration Statement filed
with the SEC on January 10, 1994.)
10.7 Form of Services and Option Agreement between Holdings and Terrence A.
Elkes. (incorporated by reference to the exhibit 10.26 contained in
Amendment No. 3 to Video's (formerly IPL's) Registration Statement filed
with the SEC on January 10, 1994.)
10.8 Form of Stock Option Agreement between VSC and Kenneth F. Gorman.
(incorporated by reference to the exhibit 10.27 contained in Amendment No.
3 to Video's (formerly IPL's) Registration Statement filed with the SEC on
January 10, 1994.)
10.9 Form of Stock Option Agreement between VSC and Terrence A. Elkes.
(incorporated by reference to the exhibit 10.28 contained in Amendment No.
3 to Video's (formerly IPL's) Registration Statement filed with the SEC on
January 10, 1994.)
10.10(M) Form of Stock Option Agreement between the Company and Kenneth F.
Gorman. (incorporated by reference to the exhibit 10.29 contained in
Amendment No. 3 to Video's (formerly IPL's) Registration Statement filed
with the SEC on January 10, 1994.)
10.11(M) Form of Stock Option Agreement between the Company and Terrence A.
Elkes. (incorporated by reference to the exhibit 10.30 contained in
Amendment No. 3 to Video's (formerly IPL's) Registration Statement filed
with the SEC on January 10, 1994.)
10.12(M) Employment Agreement dated as of April 21, 1994, between the Company
and Daniel Rosen. (incorporated by reference to the exhibit 10.32 contained
in Video's (formerly IPL's) Annual Report on Form 10-K for the fiscal year
ended July 31, 1994.)
10.13(M) Stock Option Agreement, dated as of April 21, 1994, between the Company
and Daniel Rosen. (incorporated by reference to the exhibit 10.33 contained
in Video's (formerly IPL's) Annual report on Form 10-K for the fiscal year
ended July 31, 1994.)
10.14(M) Employment Agreement dated as of May 4, 1995, among Big Picture/Even
Time Limited, the Company and Barbara D'Ambrogio (incorporated by reference
to exhibit number 10.2 contained in the Company's Current Report on Form
8-K, dated May 18, 1995).
10.15(M) Employment Agreement dated as of May 4, 1995, among Big Picture/Even
Time Limited, the Company and David D'Ambrogio (incorporated by reference
to exhibit number 10.3 contained in the Company's Current Report on Form
8-K, dated May 18, 1995).
10.16(M) Employment Agreement dated as of May 4,1995, among Big Picture/Even
Time Limited, the Company and Gregory Letson (incorporated by reference to
exhibit number 10.4 contained in the Company's Current Report on Form 8-K,
dated May 18, 1995).
10.17(M) Employment Agreement dated as of May 4, 1995, among Big Picture/Even
Time Limited, the Company and Michael Schenkein (incorporated by reference
to exhibit number 10.5 contained in the Company's Current Report Form 8-K,
dated May 18, 1995).
10.18(M) Employment Agreement dated as of May 4, 1995, among Big Picture/Even
Time Limited, the Company and Leonard Smalheiser (incorporated by reference
to exhibit number 10.6 contained in the Company's Current Report on Form
8-K, dated May 18, 1995).
10.19(M) Employment Agreement dated as of May 4, 1995, among Big Picture/Even
Time Limited, the Company and Jane Stuart (incorporated by reference to
exhibit number 10.7 contained in the Company's Current Report on Form 8-K,
dated May 18, 1995).
10.20Put/Call Agreement dated as of May 4, 1995, between Gregory Letson and the
Company (incorporated by reference to exhibit number 10.8 contained in the
Company's Current Report on Form 8-K, dated May 18,1995).
10.21Pledge Agreement, dated as of May 4, 1995, by and among BP Partnership, ET
Partnership, Barbara D'Ambrogio, David D'Ambrogio, Michael Schenkein,
Leonard Smalheiser, Jane Stuart and the Company (incorporated by reference
to exhibit number 10.9 contained in the Company's Current Report on Form
8-K, dated May 18, 1995).
10.22Pledge Agreement, dated as of May 4, 1995, by and between Gregory Letson
and the Company (incorporated by reference to exhibit number 10.10
contained in the Company's Current Report on Form 8-K, dated May 18, 1995).
10.23Escrow Agreement dated as of May 4,1995, by and among ET Partnership,
David D'Ambrogio, Barbara D'Ambrogio, the Company and Cowan, Gold, DeBaets,
Abrahams & Sheppard, as Escrow Agent (incorporated by reference to exhibit
number 10.11 contained in the Company's Current Report on Form 8-K, dated
May 18, 1995).
10.24Escrow Agreement dated as of May 4, 1995, by and among BP Partnership,
Michael Schenkein, Leonard Smalheiser, Jane Stuart, Gregory Letson, the
Company and Cowan, Gold, DeBaets, Abrahams & Sheppard, as Escrow Agent
(incorporated by reference to exhibit number 10.12 contained in the
Company's Current Report on Form 8-K, dated May 18,1995).
10.25Agreement dated as of June 7,1993, by and between MTV Latin America, Inc.
and The Post Edge, Inc. (incorporated by reference to the exhibit 10.51
contained in Video's (formerly IPL's) Annual Report on Form 10-K for the
fiscal year ended July 31, 1995.)
10.26Agreement, dated as of December 9, 1993, by and between Discovery
Communications, Inc. and The Post Edge, Inc., and Amendment No. 1 thereto.
(incorporated by reference to the exhibit 10.52 contained in Video's
(formerly IPL's) Annual Report on Form 10-K for the fiscal year ended July
31, 1995.)
10.27Amendment No. 1, dated as of September 15, 1995, to the Agreement, dated
as of June 7, 1993, by and between MTV Latin America, Inc. and The Post
Edge, Inc. (incorporated by reference to the exhibit 10.55 contained in
Video's (formerly IPL's) Annual Report on Form 10-K for the fiscal year
ended July 31, 1996.)
10.28Voting Agreement, dated as of June 27, 1997, by and among International
Post Limited, Video Services Corporation, Terrence A. Elkes, The Equitable
Life Assurance Society of the United States, Equitable Deal Flow Fund,
L.P., Louis H. Siracusano, Arnold P. Ferolito and Donald H. Buck
(incorporated by reference to exhibit number 10.58 contained in the
Company's Current Report on Form 8-K, dated July 7, 1997).
10.29Asset Purchase Agreement dated as of January 22, 1997, by and among
Cognitive Communications, Inc., Susan Wiener, Michael Rudnick and Cognitive
Communications, LLC (incorporated by reference to exhibit number 10.1
contained in the Company's Quarterly Report on Form 10-Q for the quarterly
period ended January 31, 1997).
10.30Agreement, dated as of January 22,1997, by and among the Company, Susan
Wiener, Michael Rudnick, Cognitive Communications, Inc. and David Leveen
(incorporated by reference to exhibit number 10.2 contained in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 1997).
10.31(M) Employment Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and Susan Wiener (incorporated by reference
to exhibit number 10.3 contained in the Company's Quarterly Report on Form
10-Q for the quarterly period ended January 31, 1997).
10.32(M) Employment Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and Michael Rudnick (incorporated by
reference to exhibit number 10.4 contained in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.33(M) Employment Agreement, dated as of January 22,1997, by and among
Cognitive Communications, LLC and David Leveen (incorporated by reference
to exhibit number 10.5 contained in the Company's Quarterly Report on Form
10-Q for the quarterly period ended January 31, 1997).
10.34Put Agreement, dated as of January 22, 1997, by and among Cognitive
Communications, LLC, the Company, Susan Wiener, Michael Rudnick and David
Leveen (incorporated by reference to exhibit number 10.6 contained in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
January 31, 1997).
10.35Sale Option Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and Susan Wiener (incorporated by reference
to exhibit number 10.7 contained in the Company's Quarterly Report on Form
10-Q for the quarterly period ended January 31, 1997).
10.36Sale Option Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and Michael Rudnick (incorporated by
reference to exhibit number 10.8 contained in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended January 31, 1997).
10.37Sale Option Agreement, dated as of January 22, 1997, by and among
Cognitive Communications, LLC and David Leveen (incorporated by reference
to exhibit number 10.9 contained in the Company's Quarterly Report on Form
10-Q for the quarterly period ended January 31, 1997).
10.38(M) Incentive Compensation Agreement, dated as of January 22, 1997, by and
among Cognitive Communications, LLC, Susan Wiener, Michael Rudnick and
David Leveen (incorporated by reference to exhibit number 10.10. contained
in the Company's Quarterly Report on Form 10-Q for the quarterly period
ended January 31, 1997).
10.39(M) Form of Incentive Option Agreement, undated, by and between Cognitive
Communications, LLC and Optionee (incorporated by reference to exhibit
number 10.11 contained in the Company's Quarterly Report on Form I O-Q for
the quarterly period ended January 31, 1997).
10.40(M) Consulting Agreement, dated February 15, 1997, by and among the Company
and Jeffrey J. Kaplan (incorporated by reference to exhibit number 10. 12
contained in the Company's Quarterly Report on Form 10-Q for the quarterly
period ended January 31, 1997).
10.41Stock Resale Agreement, dated as of August 27, 1997 by and among the
Company. Louis H. Siracusano, Donald H. Buck and Arnold P. Ferolito
(incorporated by reference to exhibit 10.70 contained in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1997.)
10.42Registration Rights Agreements, dated as of August 26, 1997, by and among
the Company, Louis H. Siracusano, Donald H. Buck and Arnold P. Ferolito
(incorporated by reference to exhibit 10.71 contained in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1997).
10.43(M) Employment Agreement, dated as of August 26, 1997, by and between the
Company and Louis H. Siracusano (incorporated by reference to exhibit 10.72
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1997).
10.44(M) Employment Agreement, dated as of August 26, 1997, by and between the
Company and Donald H. Buck (incorporated by reference to exhibit 10.73
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1997).
10.45Losses Escrow Agreement, dated as of August 26, 1997 by and among the
company, Louis H. Siracusano, Donald H. Buck, Arnold P. Ferolito and IBJ
Schroder Bank & Trust Company (incorporated by reference to exhibit 10.74
contained in the Company's Annual Report on Form 10-K for the fiscal year
July 31, 1997).
10.46(M) Agreement, dated as of August 26, 1997, by and between the Company and
Martin Irwin (incorporated by reference to exhibit 10.75 contained in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31,
1997).
10.47(M) Agreement, dated of August 26, 1997, by and between the Company and
Arnold P. Ferolito (incorporated by reference to exhibit 10.76 contained in
the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
1997).
10.48(M) Agreement dated as of October 17, 1997, by and between the Company and
Steven G. Crane. (incorporated by reference to exhibit 10.78 contained in
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997.)
10.49Credit Agreement, dated as of August 27, 1997, by and among Video Services
Corporation, VSC MAL Corp., the Lenders party thereto and KeyBank National
Association. (incorporated by reference to exhibit 10.79 contained in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997.)
10.50Security Agreement dated as of August 27, 1997, by and among Video Services
Corporation and KeyBank National Association. Guaranty and Security
Agreement, dated as of August 27, 1997 by and among the Lender's party
thereto and KeyBank National Association. (incorporated by reference to
exhibit 10.80 contained in the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1997.)
10.51Amendment No.1 and Waiver No.1, dated July 21, 1998 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. (incorporated by reference to exhibit 10.59 contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998.)
10.61Amendment 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.
10.62Engagement letter, dated August 13, 1999, by and between the Company and
Lazard Freres & Co. LLC.
10.63(M)Form of Video Services Corporation 1997 Long Term Incentive Plan.
(incorporated by reference to exhibit number 4.1 contained in the the
Company's current report on Form S-8, dated July 27, 1999.)
10.64(M) Form of Video Services Corporation 1999 Non-Employee Director Stock
Plan. (incorporated by reference to exhibit 4.2 contained in the Company's
current report on Form S-8, dated July 27, 1999.)
21.1 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information purposes only and not
filed.
- -----------------
+ Incorporated by reference to the exhibit of the same number contained in
Amendment No. 1 to IPL's Registration Statement filed with the SEC on
October 21, 1993.
(M) Management contract or compensatory plan or arrangement.
- -----------------
(b) None.
(c) See Item 14(a)(3) above.
(d) Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 24, 1999 VIDEO SERVICES CORPORATION,
By: /s/ Louis H. Siracusano
Name: Louis H. Siracusano
Title:President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacities and on the dates indicated.
Name and Signature Title Date
/s/ Louis H. Siracusano President, Chief Executive Officer 9/24/99
Louis H. Siracusano and Director (Principal Executive
Officer)
/s/ Steven G. Crane Vice President and 9/24/99
Steven G. Crane Chief Financial Officer
(Principal Financial Officer)
/s/ Michael E. Fairbourne Vice President-Administration 9/24/99
Michael E. Fairbourne (Principal Accounting Officer)
/s/ Terrence A. Elkes Chairman of the Board of Directors 9/24/99
Terrence A. Elkes
/s/ Robert H. Alter Director 9/24/99
Robert H. Alter
/s/ Martin Irwin Director 9/24/99
Martin Irwin
/s/ Frank Stillo Director 9/24/99
Frank Stillo
/s/ Raymond L. Steele Director 9/24/99
Raymond L. Steele
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page Number
REPORTS OF INDEPENDENT AUDITORS .....................................F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
June 30, 1998 and 1999 ..............................................F-3
Consolidated Statements of Operations for the
years ended June 30, 1997, 1998 and 1999 ............................F-4
Consolidated Statements of Stockholders'
Equity for the years ended June 30, 1997,
1998 and 1999 .......................................................F-5
Consolidated Statements of Cash Flows for the
years ended June 30, 1997, 1998 and 1999 ............................F-6
Notes to Consolidated Financial Statements ..........................F-7 to F-26
SUPPLEMENTAL SCHEDULE:
II. Valuation and Qualifying Accounts ..............................F-27
NOTE:
Schedules other than those referred to above have been omitted as
inapplicable or not required under the instructions contained in
Regulation S-X or the information is included elsewhere in the
financial statements or the notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Video Services Corporation:
We have audited the accompanying consolidated balance sheets of Video
Services Corporation and subsidiaries as of June 30, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1999. Our audits
also included the financial statement schedule listed in the index at item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Video Services Corporation and subsidiaries as of June 30, 1998 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ERNST & YOUNG LLP
White Plains, New York
September 10, 1999
F-2
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 1998 and June 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
ASSETS 1998 1999
-------------- ---------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,492 $ 805
Accounts receivable, net 14,169 14,876
Inventories 1,083 694
Costs and estimated earnings in excess of billings on
uncompleted contracts 187 934
Deferred income taxes 1,535 1,300
Prepaid expenses and other current assets 907 685
-------------- ---------------
Total current assets 19,373 19,294
Fixed assets, net 36,590 39,589
Excess of cost over fair value of net assets acquired, net 22,289 21,858
Receivable from affiliates 42 -
Deferred income taxes 1,667 2,950
Other assets 1,899 1,627
-------------- ---------------
Total assets $ 81,860 $ 85,318
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,443 $ 9,248
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,290 985
Current portion of long-term debt 5,338 7,702
Income taxes payable 708 691
Other current liabilities 3,881 3,105
-------------- ---------------
Total current liabilities 21,660 21,731
Long-term debt 30,968 36,760
Subordinated debt 5,442 5,652
Other liabilities 3,065 2,282
Payable to affiliates - 46
-------------- ---------------
Total liabilities 61,135 66,471
-------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 1998
and June 30, 1999 - -
Common stock: $.01 par value, 25,000,000 share authorized,
and 13,264,307 shares issued and outstanding
at June 30, 1998 and June 30, 1999 132 132
Additional paid-in-capital 21,196 21,218
Retained deficit (603) (2,503)
-------------- ---------------
Total stockholders' equity 20,725 18,847
-------------- ---------------
Total liabilities and stockholders' equity $ 81,860 $ 85,318
============== ===============
</TABLE>
See accompanying notes
F-3
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30, 1997, 1998 and 1999
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Revenues:
Sales $ 15,130 $ 16,642 $ 23,965
Services 9,979 54,364 63,796
Rentals 2,501 1,989 1,650
------------- ------------ -------------
27,610 72,995 89,411
Costs:
Costs of sales 11,641 12,537 20,060
Costs of services 4,822 28,062 36,251
Costs of rentals 809 576 590
------------- ------------ -------------
17,272 41,175 56,901
Depreciation 1,807 7,109 8,743
------------- ------------ -------------
Gross profit 8,531 24,711 23,767
Selling, general and administrative expenses 6,764 17,170 20,205
Merger related costs - - 331
Amortization 17 849 1,093
------------- ------------ -------------
Operating income from continuing operations 1,750 6,692 2,138
Other (expense) income:
Interest expense (517) (3,619) (4,149)
Interest and other income 592 217 53
------------- ------------ -------------
Income (loss) before income taxes and discontinued operations 1,825 3,290 (1,958)
Income tax expense (benefit) 187 1,591 (58)
------------- ------------ -------------
Income (loss) from continuing operations 1,638 1,699 (1,900)
Discontinued operations:
Loss from operations of the Consulting Services segment
(less applicable income tax benefit of $380, $73 and $--) (776) (140) -
Estimated loss on disposal of Diversified Products and
Consulting Services segments (less applicable income tax
benefit of $447, $1,147 and $--) (912) (1,720) -
------------- ------------ -------------
Net loss $ (50) $ (161) $ (1,900)
============= ============ =============
Earnings per share:
Basic:
Income (loss) from continuing operations $ 0.23 $ 0.14 $ (0.14)
Loss from discontinued operations (0.24) (0.15) -
------------- ------------ -------------
Net loss $ (0.01) $ (0.01) $ (0.14)
============= ============ =============
Diluted:
Income (loss) from continuing operations $ 0.23 $ 0.14 $ (0.14)
Loss from discontinued operations (0.24) (0.15) -
------------- ============ =============
Net loss $ (0.01) $ (0.01) $ (0.14)
============= ============ =============
Non cash dividend per share $ - $ 0.22 $ -
============= ============ =============
Weighted average number of shares outstanding for basic and diluted
earnings per share 7,011,349 12,276,278 13,264,307
============= ============ =============
</TABLE>
See accompanying notes
F-4
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1997, 1998 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Common Common Retained
Stock Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 2,678,162 $ 103 $ 291 $ 2,261 $ 2,655
Issuance of consultant compensatory
stock options 0 0 128 0 128
Net loss 0 0 0 (50) (50)
---------------------------------------------------------------
Balance at June 30, 1997 2,678,162 103 419 2,211 2,733
Merger with IPL 10,560,145 29 21,766 0 21,795
Contribution of real estate affiliates 0 0 (1,263) 0 (1,263)
Issuance of stock options 0 0 199 0 199
Non cash dividend to shareholders 0 0 0 (2,653) (2,653)
Stock related compensation 26,000 0 75 0 75
Net loss 0 0 0 (161) (161)
---------------------------------------------------------------
Balance at June 30, 1998 13,264,307 132 21,196 (603) 20,725
Issuance of independent contractors
compensatory stock options 0 0 22 0 22
Net loss 0 0 0 (1,900) (1,900)
---------------------------------------------------------------
Balance at June 30, 1999 13,264,307 $ 132 $ 21,218 $(2,503) $18,847
===============================================================
</TABLE>
See accompanying notes
F-5
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 1997, 1998 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
Operating Activities
<S> <C> <C> <C>
Net loss $ (50) $ (161) $ (1,900)
Adjustments to reconcile net income to net cash provided
by continuing operations:
Depreciation 2,015 7,109 8,743
Amortization 18 849 1,093
Issuance of independent contractor compensatory stock options 128 - 22
Loss on disposal of discontinued operations 823 481 0
Loss (gain) on sale of equipment 27 (164) (112)
Deferred income taxes (103) 537 (1,048)
Provision for bad debts 76 166 67
(Increase) decrease in operating assets:
Accounts receivable (1,057) 1,156 (751)
Inventories (404) 107 389
Costs and estimated earnings in excess of billings on
uncompleted contracts 53 176 (747)
Prepaid expenses and other assets (1,663) (42) 169
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 2,674 (7,581) 805
Billings in excess of costs and estimated earnings on
uncompleted contracts (459) 2,828 (2,305)
Income taxes payable - - (17)
Other liabilities (1,007) 75 (1,841)
------------ ------------- ------------
Net cash provided by continuing operations 1,071 5,536 2,567
Investing Activities
Additions to fixed assets (3,053) (6,448) (11,619)
Proceeds from sale of fixed assets 99 168 280
(Increase) decrease in receivable from affiliates 562 (389) (16)
------------ ------------- ------------
Net cash used in investing actvities (2,392) (6,669) (11,355)
Financing Activities
Proceeds from subordinated debt - 158 210
Proceeds from long-term borrowing 4,159 54,561 25,569
Repayments of borrowings (2,968) (52,484) (17,678)
------------ ------------- ------------
Net cash provided by financing activites 1,191 2,235 8,101
Net increase (decrease) in cash (130) 1,102 (687)
Cash and cash equivalents, beginning of year 520 390 1,492
------------ ------------ -------------
Cash and cash equivalents, end of year $ 390 $ 1,492 $ 805
============ ============ =============
</TABLE>
See accompanying notes
F-6
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1998 and 1999
and for the years ended June 30, 1997, 1998 and 1999
(dollars in thousands, except for share amounts)
Note 1 - Basis of and Presentation
Video Services Corporation and its subsidiaries (collectively, the
"Company"), is a leading provider of value-added video services to a diverse
base of customers within the television network, cable and syndicated
programming markets. These services are divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services. The Satellite and Distribution Services segment integrates
and distributes broadcast quality video content via a satellite and fiber optic
transmission network routed through its digital/analog switching center and is
an international provider of technical and distribution services to distributors
of television programming. The Systems and Products segment designs, engineers
and produces advanced video facilities for the broadcast and cable television,
post-production and corporate markets. This segment also develops, manufactures
and markets advanced color correcting and manipulation systems for the film,
post-production and multimedia industries and rents professional video equipment
to the sports, entertainment and other segments of the broadcast and cable
television and corporate markets. The Production Services segment is an
international provider of technical and creative services to owners, producers
of television programming, television advertising and other programming content.
On August 27, 1997, Video Services Corporation ("Old Video") merged with
and into International Post Limited ("IPL") with IPL as the surviving
corporation (the "Merger"). At the effective time of the Merger, IPL changed its
name to Video Services Corporation. The "Company" refers to the surviving
corporation after the Merger. The Merger was accounted for as a reverse
acquisition whereby pre-Merger financial statements of Old Video became the
historical financial statements of the Company. As such, the net assets of IPL
have been recorded at fair value and Old Video's pre-Merger stockholders' equity
has been retroactively restated for the equivalent number of shares of common
stock of the Company, with differences between the par value of the IPL common
stock and the Old Video common stock recorded as an adjustment to paid in
capital. An aggregate of 7,011,349 shares of Company common stock were issued to
the stockholders of Old Video in the Merger (plus an additional 212,096 shares
of common stock which were issued to replace an equal number of shares of IPL
common stock owned by Old Video which were canceled upon the Merger). Such newly
issued shares in the aggregate represented approximately 54.6% of the
outstanding shares of common stock immediately after the Merger.
As part of the Merger, the Company made a strategic evaluation of
facilities and personnel requirements and determined that certain IPL facilities
would be closed with the equipment being consolidated into other facilities and
determined that certain IPL personnel would be redundant. Accordingly, the
Company recorded a reserve for severance costs of $1,426 and lease related costs
of $993 as of August 27, 1997. The balance of the liability was $1,805 and $915
at June 30, 1998 and June 30, 1999, respectively. The Company has made payments
of $614 and $890 against reserve in fiscal 1998 and 1999, respectively. At June
30, 1999 it was estimated that approximately $591 of such expenditures would be
made in fiscal 2000, $196 in fiscal 2001, $128 in fiscal 2002. The Company
anticipates that funding for these amounts will be provided by operations.
At the time of the Merger, IPL had combined assets of $43,677, net accounts
receivable ($9,966), prepaid and other current assets ($1,348), net fixed assets
($29,259), net deferred tax assets ($2,324), and other long-term assets ($780).
The combined liabilities consisted of accounts payable and accrued payables
($6,707), long-term debt ($30,464), income taxes payable ($298), and other
liabilities ($1,463). Consideration in applying purchase accounting to the
Merger is based upon the IPL shares of common stock outstanding immediately
prior to the Merger of 6,226,958 at a per share value of $3.50.
The Company recorded goodwill of $22,483 in connection with the Merger,
which is being amortized over 25 years.
F-7
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In connection with, and as a condition to the Merger, immediately prior to
the Merger, the Diversified Products segment and certain assets of Old Video,
including cash surrender value of officers life insurance, were spun-off to the
stockholders of Old Video in a non-cash dividend of approximately $2,653.
Immediately prior to the Merger, the principal stockholders of Old Video
contributed (the "Contribution") the stock of two S corporations holding all of
the general and limited partnership interests in MAL Partners and L.I.M.A.
Partners, which partnerships owned real estate and equipment which was leased
solely to Old Video and IPL. The Contribution, which represents a transfer
between entities under common control, has been recorded at the lower of
historical amortized cost or fair value.
The S corporations, through their ownership of MAL Partners and L.I.M.A.
Partners, at the time of the Contribution had combined assets of $3,801, net
accounts receivable ($9), prepaid expenses and other current assets ($74),
buildings, satellite equipment and land ($3,198), and other long-term assets
($520). The combined liabilities consisted of accounts payable and accrued
expenses ($62), mortgage obligations ($3,588), deferred taxes ($19), payable to
the Company ($1,314), payable to affiliates ($52) and other current liabilities
($29).
The following presents the combined pro forma results of operations for the
years ended June 30, 1997 and 1998, as if the Merger and Contribution had
occurred as of July 1, 1996 and July 1, 1997, respectively. The unaudited
combined pro forma results of operations are not necessarily indicative of the
results of operations that would have occurred had IPL and Old Video actually
combined during the periods presented or of future results of operations of the
combined operations.
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Revenues...................................... $ 78,430 $ 80,386
Income from continuing operations............. 1,955 1,743
Income from continuing operations per share... 0.15 0.13
Net loss...................................... (182) (176)
Net loss per share............................ $ (0.01) $ (0.01)
</TABLE>
Pro forma income from continuing operations and net loss per share are
based on the weighted average number of shares outstanding after the Merger of
13,238,307. Included in the net loss for the year ended June 30, 1997 is
approximately $1,688 of loss from discontinued operations relating to certain
subsidiaries (Diversified Products segment) of Old Video which were discontinued
in connection with the Merger and approximately $449 of loss from the
discontinued operations relating to the Consulting Services segment which was
previously owned by IPL. Also included in the year ended June 30, 1997 is
approximately $500 of other income pertaining to partial consideration for the
sale of a radio station in fiscal 1991. Included in the net loss for the year
ended June 30, 1998 is approximately $1,919 of loss from the discontinued
operations relating to the Consulting Services segment (see Note 16).
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Video
Services Corporation and its subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Revenue Recognition
Revenue from services (except editorial) is recorded at completion of
services for the customer. Revenue for editorial services is recorded as
services are provided to customers on a percentage of completion method. Revenue
from the sales of equipment is recorded at the time of shipment of equipment.
Revenue from long-term contracts is recognized under the
percentage-of-completion method, under which method the Company recognizes
revenues based on the ratio that incurred costs bear to estimated total
completion costs. Provision is made currently for estimated losses, if any, on
uncompleted contracts.
Inventories
Inventories consist of system components and equipment which is valued at
the lower of specific cost or market and tape stock which is valued at the lower
of cost or market on a FIFO basis.
Fixed Assets
Property and equipment are carried at cost and depreciated predominantly by
the straight-line method over their estimated useful lives. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the term of the underlying lease. Estimated useful lives by class of assets are
as follows:
Machinery and equipment.....................3-10 years
Equipment held for rental...................3- 7 years
Furniture and fixtures......................3-10 years
Leasehold improvements......................3-14 years
Transportation equipment....................3- 5 years
Repairs and maintenance are charged to expense as incurred. Expenditures
that result in the enhancement of the value of the facilities involved are
treated as additions to property and equipment. Cost of property and equipment
disposed of and accumulated depreciation thereon are removed from the related
accounts, and gain or loss, if any, is recognized.
Goodwill
The excess of cost over net assets acquired is amortized on a straight-line
basis principally over 25 years. Amortization expense for the years ended June
30, 1997, 1998 and 1999 was $14, $742 and $984, respectively. Accumulated
amortization at June 30, 1998 and 1999 was $847 and $1,843, respectively. The
Company periodically evaluates the carrying value of intangible assets by
relating the estimated cash flows of the underlying businesses. An impairment
loss may be recognized if the expected cash flow is less than book value.
Advertising
The Company expenses advertising costs as incurred. Advertising expense was
$128, $310, and $406 for the years ended June 30, 1997, 1998 and 1999,
respectively.
F-9
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Asset Impairment
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which addresses the accounting and reporting for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The Company adopted the
provisions of this new standard effective August 1, 1996. The effect of adoption
was not material to the Company's financial condition, results of operations or
cash flow.
Long-Lived Assets
Long-lived assets, including intangibles, are reviewed for impairment
whenever events or circumstances indicate that the assets undiscounted expected
cash flows are not sufficient to recover its carrying amount. The Company
measures an impairment loss by comparing the fair value of the asset to its
carrying amount. Fair value of an asset is calculated based upon the present
value of expected future cash flows.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include all highly
liquid investments with a maturity of three months or less at the date of
purchase.
Cash equivalents of $35 at June 30, 1998 and 1999 are used to collateralize
a standby letter of credit, related to an operating lease.
Financial Instruments
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and other accrued liabilities approximate fair
value due to the short maturity of these items. The carrying amount of the
amounts due under the line of credit approximate fair value because the interest
rates vary with market interest rates. The carrying amount of long-term debt
which have no quoted market price, is estimated by discounting projected future
cash flows using the Company's incremental borrowing rate.
The Company entered into an interest-rate swap agreement to modify the
interest characteristics of its outstanding debt (see Note 9). The interest-rate
swap agreement is designated with all or a portion of the principal balance and
term of a specific debt obligation. This agreement involves the exchange of
amounts based on a variable interest rate for amounts based on fixed interest
rate over the life of the agreement without an exchange of the notional amount
upon which the payments are based. The differential to be paid or received as
interest rates change is accrued and recognized as an adjustment of interest
expense related to the debt (the accrual accounting method). The related amount
payable to or receivable from the counterparty is included in other liabilities
or assets. The fair value of the swap agreement and changes in the fair value as
a result of changes in market interest rates are not recognized in the financial
statements. The fair value is the amount at which the swap agreement could be
settled based on quotes provided by counterparty.
Gains and losses on terminations of interest-rate swap agreements are
deferred as an adjustment to the carrying amount of the outstanding debt and
amortized as an adjustment to interest expense related to the debt over the
remaining term of the original contract life of the terminated swap agreement.
In the event of the early extinguishment of a designated debt obligation, any
realized or unrealized gain or loss from the swap would be recognized in income
coincident with the extinguishment gain or loss.
F-10
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The following table presents the carrying amounts and estimated fair values
of material financial instruments used by the Company in the normal cause of its
business.
<TABLE>
<CAPTION>
1998 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Long-term debt......................... $ 36,306 $ 36,338 $ 44,462 $ 44,476
Off - balance sheet financial instruments:
Unrealized loss on swap agreement... $ --- $ (638) $ --- $ (398)
</TABLE>
Customer Concentrations
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade accounts receivable.
The Company conducts most of its operations in the television network, cable and
advertising industries. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. Management believes it has reasonably estimated losses from
uncollectible receivables. Concentration of credit risk with respect to trade
receivables is limited due to the large number of customers included in the
Company's customer base. The Company had sales to one Systems and Products
segment customer in 1997 in excess of 10% of consolidated revenues. Sales to
such customers aggregated 15% of 1997 revenues.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of the
Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes."
The Company uses different methods of accounting for financial reporting
and tax purposes, principally through the utilization of accelerated
depreciation methods for income tax purposes, certain valuation allowances and
net operating loss carryforwards; accordingly, deferred taxes are provided on
the basis of such differences.
F-11
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Supplemental Statement of Cash Flow Information
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------
1997 1998 1999
----------- ----------- -----------
Amounts paid for:
<S> <C> <C> <C>
Interest..................................... $ 517 $ 3,325 $ 3,733
----------- ----------- -----------
Income taxes................................. $ 1,300 $ 420 $ 746
----------- ----------- -----------
Non-cash transactions:
Investing-
Contribution of real estate affiliates
Asset acquired............................... $ 3,801
-----------
Liabilities assumed.......................... $ 5,064
-----------
Merger with and into International Post Limited
Asset acquired............................... $ 43,677
-----------
Liabilities assumed.......................... $ 38,932
-----------
Financing-
Non cash dividend to shareholders............. $ 2,653
-----------
Equipment acquired under capital lease obligations $ 265
-----------
</TABLE>
New Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share are very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which is required to be adopted for fiscal
years beginning after December 15, 1997. Statement No. 131 requires the Company
to disclose revenues, earnings and other financial information pertaining to the
business segments by which the Company is managed, as well as what factors
management used to determine these segments. The Company has adopted Statement
131 for all periods presented.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter. The Company
expects to adopt the new Statement effective July 1, 1999. The Statement will
require the company to recognize all derivatives, which currently consist of an
interest rate swap on the balance sheet at fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet determined what the
effect of Statement 133 will be on their results of operations and financial
position of the Company.
F-12
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 3 - Accounts Receivable
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
------------------- -------------------
<S> <C> <C>
Accounts receivable, trade.................................. $ 12,579 $ 13,750
Contracts receivable billed:
Uncompleted contracts.................................. 2,031 702
Completed contracts.................................... 738 1,453
------------------- -------------------
15,348 15,905
Less: Allowance for doubtful accounts
and volume discounts ............................ 1,179 1,029
------------------- -------------------
$ 14,169 $ 14,876
=================== ===================
</TABLE>
Note 4 - Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
------------------- -------------------
<S> <C> <C>
System components and equipment, net of
obsolescence allowance of $671 and $676................... $ 569 $ 355
Tape stock.................................................. 514 339
------------------- -------------------
$ 1,083 $ 694
=================== ===================
</TABLE>
Note 5 - Costs and Estimated Earnings on Uncompleted Contracts
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
------------------- -------------------
<S> <C> <C>
Costs incurred on uncompleted contracts to date............. $ 8,702 $ 7,808
Estimated earnings to date.................................. 2,380 1,483
------------------- -------------------
11,082 9,291
Less: billings to date..................................... 14,185 9,342
------------------- -------------------
Billings in excess of costs and estimated
earnings on uncompleted contracts......................... $ (3,103) $ (51)
=================== ===================
</TABLE>
Included in accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
------------------- -------------------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts......................... $ 187 $ 934
Billings in excess of costs and estimated
earnings on uncompleted contracts......................... (3,290) (985)
------------------- -------------------
$ (3,103) $ (51)
=================== ===================
</TABLE>
F-13
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 6 - Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
------------------ ------------------
<S> <C> <C>
Prepaid expenses............................................ $ 612 $ 413
Other....................................................... 295 272
------------------ ------------------
$ 907 $ 685
================== ==================
</TABLE>
Note 7 - Fixed Assets
Fixed assets, at cost, summarized by major categories consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
------------------- -------------------
<S> <C> <C>
Machinery and equipment..................................... $ 38,868 $ 44,482
Leasehold improvements...................................... 11,195 12,389
Furniture and fixtures...................................... 2,028 2,222
Transportation equipment.................................... 281 270
Building.................................................... 2,199 2,199
Land........................................................ 1,967 1,967
Equipment under capital lease............................... 1,440 5,256
------------------- -------------------
57,978 68,785
Less: accumulated depreciation, including
accumulated amortization for
equipment under capital lease.................... 21,388 29,196
------------------- -------------------
$ 36,590 $ 39,589
=================== ===================
</TABLE>
Note 8 - Other Current Liabilities
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
------------------- -------------------
<S> <C> <C>
Wages payable............................................... $ 1,874 $ 1,883
Other....................................................... 2,007 1,222
------------------- -------------------
$ 3,881 $ 3,105
=================== ===================
</TABLE>
F-14
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 9 - Long-Term Debt
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
------------------- -------------------
<S> <C> <C>
Senior secured term loan.................................... $ 30,000 $ 25,250
Senior secured revolving credit loan........................ 2,600 12,700
Mortgages payable to credit institution
bearing interest at 8.95% - prime (8.50% and 7.75% at
June30, 1998 and June 30, 1999, respectively) plus 1%,
collateralized by fixed assets with net book value at $2,446
and $2,395................................................ 2,426 2,209
Capitalized lease obligations............................... 1,280 4,303
------------------- -------------------
36,306 44,462
Less: current maturities................................... 5,338 7,702
------------------- -------------------
$ 30,968 $ 36,760
=================== ===================
</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 bears
interest at the lenders' prime rate minus 1.0% or LIBOR (London Interbank
Offered Rate) plus a number of basis points based upon the Company's leverage
ratio (funded debt divided by EBITDA). 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. The Facility is
guaranteed by all of the Company's subsidiaries.
In August 1997, the Company entered into an interest rate swap agreement
with KeyBank to reduce the impact of changes in interest rates on its Term Loan.
The agreement, which matures in five years, has a total beginning notional
principal amount of $33,000, which decreases in accordance with scheduled
principal payments on the Company's Term Loan. The swap agreement effectively
converts the Company's borrowings under its Term Loan to a fixed rate. The
company pays the counterparty a fixed rate of 7.58% per annum and receives
payments based upon the floating one month LIBOR rate. The Company is exposed to
credit loss in the event of nonperformance by the counterparty; however, the
Company does not anticipate nonperformance by the counterparty.
Revolving Credit Facility - The Company established a $17,000 senior
secured revolving credit facility (the "Revolving Loan") with KeyBank. The
Company had outstanding direct borrowings of $12,700 under the Revolving Loan at
June 30, 1999. The Company also has outstanding under the Revolving Loan letters
of credit of approximately $791 at June 30, 1999. The Company's Revolving Loan
weighted average interest rate was 7.79% at June 30, 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.
F-15
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 9 - Long Term Debt (continued)
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).
Required payments of principal on senior and subordinated debt including
accreted interest of approximately $698, exclusive of capitalized leases,
outstanding at June 30, 1999, are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
---------------
<S> <C> <C>
2000.......................................... $ 6,716
2001.......................................... 9,350
2002.......................................... 11,852
2003.......................................... 18,591
---------------
$ 46,509
===============
</TABLE>
The Company leases certain equipment from unaffiliated entities. Further
minimum lease payments under capital leases as of June 30, 1999 are:
<TABLE>
<CAPTION>
Fiscal Year Amount
---------------
<S> <C> <C>
2000.......................................... $ 1,290
2001.......................................... 1,303
2002.......................................... 1,180
2003.......................................... 915
2004.......................................... 357
---------------
Total minimum lease payments.................. 5,045
Less: Amount representing interest........... 742
---------------
Present value of minimum lease payments....... $ 4,303
===============
</TABLE>
Leased property under capital leases are classified in fixed assets as
follows:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
--------------- --------------
<S> <C> <C>
Equipment under capital leases................ $ 1,440 $ 5,256
Less: Accumulated amortization............... 281 1,092
--------------- --------------
$ 1,159 $ 4,164
=============== ==============
</TABLE>
F-16
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 10 - Related Parties
The Company leases a building in Northvale, New Jersey from an entity owned
by certain principal stockholders of the Company, under a lease accounted for as
an operating lease, which facility serves as its engineering and fabrication
facility. Such rental expenses of the Company for the years ended June 30, 1997,
1998 and 1999 amounted to $241, $270 and $272, respectively.
The Company has its corporate headquarters as well as its Satellite and
Distribution facilities in Northvale, New Jersey that was leased from two
partnerships, whose partners then owned a majority interest in Old Video, under
a lease accounted for as an operating lease. In August 1997, immediately prior
to the Merger, the principal stockholders of Old Video contributed the stock of
two S Corporations holding all of the general and limited partnership interest
in the two partnerships (see Note 1). Such rental expense of the Company for the
years ended June 30, 1997 and 1998 amounted to $826 and $130, respectively. At
June 30, 1998 and 1999 the Company also had accounts receivable of $148 and $130
and (accounts payable) of ($106) and ($176), respectively from (to) other
affiliated entities.
At June 30, 1999, future minimum rental payments under non-cancelable
leases with affiliated entities are as follows: (see Note 18).
<TABLE>
<CAPTION>
Fiscal Year Amount
---------------------------------------- ------------------
<S> <C> <C>
2000........................... $ 231
2001........................... 231
2002........................... 231
------------------
$ 693
==================
</TABLE>
Note 11 - Business Segment Information
The Company's continuing operations are classified into three reportable
business segments that provide different products and services: (i) Satellite
and Distribution Services, (ii) Systems and Products and (iii) Production
Services (See Note 1). Separate management of each segment is required because
each business unit is subject to different marketing, production, and technology
strategies. The Diversified Products segment is shown as discontinued operations
for 1997 and the Consulting Services segment is shown as discontinued operations
for 1998 (see Note 16).
The Company evaluates performance and allocates resources based on
operating income from continuing operations. The Company does not allocate
income and expenses that are of a general corporate nature to industry segments
in computing operating income. These include corporate expenses, interest income
and expenses, and certain other income and expenses not directly attributable to
a specific segment.
Inter-segment sales are accounted for on the same basis used to price sales
to similar non-affiliated customers and such sales are eliminated in arriving at
consolidated amounts.
The accounting policies applied by each of the segments are the same as
those used by the company in general (see Note 1).
Assets by segment include assets directly identifiable with those
operations. Other assets primarily consist of corporate cash and cash
equivalents and fixed assets associated with nonsegment activities.
The Company operates primarily in the United States. Revenues from foreign
countries are not significant.
F-17
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 11 - Business Segment Information (continued)
Summarized financial information by business segment for 1997, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
Systems and Products...................................... $ 17,631 $ 18,631 $ 25,615
Satellite and Distribution Services....................... 9,979 21,384 31,280
Production Services....................................... -- 32,980 32,516
----------------- ----------------- -----------------
Net revenues.............................................. $ 27,610 $ 72,995 $ 89,411
================= ================= =================
Intersegment revenues:
Systems and Products...................................... $ 290 $ 1,386 $ 2,067
Satellite and Distribution Services....................... 705 1,160 1,125
Production Services....................................... -- 1,010 492
----------------- ----------------- -----------------
Total intersegment revenues............................... $ 995 $ 3,556 $ 3,684
================= ================= =================
Operating income:
Systems and Products...................................... $ 2,341 $ 2,490 $ 1,372
Satellite and Distribution Services....................... 2,239 5,830 6,075
Production Services....................................... -- 3,542 170
Corporate ................................................ (2,830) (5,170) (5,479)
----------------- ----------------- -----------------
Operating income from continuing operations............... 1,750 6,692 2,138
Interest expense, net..................................... (517) (3,619) (4,149)
Other income.............................................. 592 217 53
----------------- ----------------- -----------------
Income (loss) before income taxes and discontinued operations $ 1,825 $ 3,290 $ (1,958)
================= ================= =================
Depreciation and amortization:
Systems and Products...................................... $ 740 $ 650 $ 754
Satellite and Distribution Services....................... 995 2,076 2,957
Production Services....................................... -- 4,035 4,568
Corporate ................................................ 89 1,197 1,557
----------------- ----------------- -----------------
Total depreciation and amortization ...................... $ 1,824 $ 7,958 $ 9,836
================= ================= =================
Assets:
Systems and Products...................................... $ 6,650 $ 5,971 $ 6,427
Satellite and Distribution Services....................... 5,447 16,460 20,691
Production Services....................................... -- 29,787 25,698
Discontinued operations................................... 634 --- ---
Corporate ................................................ 8,070 29,642 32,502
----------------- ----------------- -----------------
Total assets.............................................. $ 20,801 $ 81,860 $ 85,318
================= ================= =================
Additions to fixed assets:
Systems and Products...................................... $ 461 $ 653 $ 1,349
Satellite and Distribution Services....................... 953 4,591 5,332
Production Services....................................... -- 634 4,575
Discontinued operations................................... 418 119 ---
Corporate ................................................ 1,221 451 628
----------------- ----------------- -----------------
Total additions to fixed assets........................... $ 3,053 $ 6,448 $ 11,884
================= ================= =================
</TABLE>
F-18
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 12 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
Year Ending Year Ending Year Ending
June 30, June 30, June 30,
1997 1998 1999
------------------ ------------------- ------------------
<S> <C> <C> <C>
Numerator:
Income (loss) from continuing operations........... $ 1,638 $ 1,699 $ (1,900)
------------------ ------------------- ------------------
Numerator for basic earnings per share-
Income (loss) available to common stockholders... 1,638 1,699 (1,900)
Effect of dilutive securities:
4% convertible subordinated notes and stock
options.......................................... -- -- --
------------------ ------------------- -------------------
Numerator for dilutive earnings per share-
Income (loss) from continuing operations
available to common stockholders after
assumed conversions................................... $ 1,638 $ 1,699 $ (1,900)
================== =================== ==================
Denominator:
Denominator for basic earnings per share-
weighted-average shares.......................... 7,011,349 12,276,278 13,264,307
Effect of dilutive securities:
4% convertible subordinated notes and stock
options ......................................... -- -- --
------------------ ------------------- ------------------
Denominator for dilutive earnings per share-
adjusted weighted-average shares and assumed
conversions...................................... 7,011,349 12,276,278 13,264,307
=================== =================== ==================
Basic earnings (loss)per share from continuing
operations........................................ $ 0.23 $ 0.14 $ (0.14)
================== =================== ==================
Diluted earnings (loss) per share from continuing
operations........................................ $ 0.23 $ 0.14 $ (0.14)
================== =================== ==================
</TABLE>
Earnings (loss) per share from continuing operations 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.
The average number of options to purchase shares of common stock excluded
from the computation of diluted earnings per share because the options'
excercise prices were greater than the average market price of the common shares
and due to the Company's current year operating loss, therefore, having an
antidilutive effect, were 498,900 and 549,529 for fiscal 1998 and 1999,
respectively.
F-19
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 13 - Income Taxes
The reconciliation between the statutory tax rate and those reflected in
the Company's income tax provision is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- ---------------
<S> <C> <C> <C>
Statutory tax rate....................................... 34.0% 34.0% (34.0)%
Change in valuation allowance............................ (34.0) (5.2) 45.2
Non-deductible intangible amortization................... --- 8.8 16.9
State & local taxes, net of federal benefit.............. 7.0 9.6 (34.7)
Non-deductible meals and entertainment................... 1.0 0.9 2.1
Stock options granted by shareholders.................... 1.6 --- ---
Other.................................................... 0.6 0.3 1.5
-------------- -------------- ---------------
10.2% 48.4% (3.0)%
============== ============== ===============
</TABLE>
The provision for income taxes for the Company is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------- --------------- --------------
<S> <C> <C> <C>
Current
Federal............................................. $ 556 $ --- $ ---
State and local..................................... 202 439 550
Deferred
Federal............................................. 55 1,372 (369)
State and local..................................... (4) 38 (1,580)
Adjustment to valuation allowance................... (622) (258) 1,341
--------------- --------------- --------------
$ 187 $ 1,591 $ (58)
=============== =============== ==============
</TABLE>
The components of net deferred tax assets arising from temporary
differences as of June 30, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1999
--------------------- --------------------
<S> <C> <C>
Receivable allowance............................................ $ 492 $ 542
Inventory reserves.............................................. 318 379
Compensation payable............................................ 479 353
Other........................................................... 246 26
--------------------- --------------------
1,535 1,300
Federal and state net operating loss
carryforwards................................................. 2,310 5,602
Valuation allowance............................................. (679) (2,020)
Purchase accounting reserves.................................... 720 355
Straight lined rent............................................. 475 698
Other........................................................... 267 ---
Accelerated depreciation........................................ --- (259)
--------------------- --------------------
Deferred tax asset.............................................. $ 4,628 $ 5,676
===================== ====================
</TABLE>
F-20
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 13 - Income Taxes (continued)
Included in deferred income taxes are accrued income tax liabilities of
$1,426 as of June 30, 1998 and 1999, respectively.
The Federal net operating loss valuation allowance decreased by
approximately $622 in 1997 as a result of revised estimates of future taxable
income principally as a result of discontinuing Old Video's Diversified Products
segment.
The state net operating loss carryforward valuation allowance increased by
$1,341 in 1999, as a result of additional operating losses in certain
subsidiaries. The state net operating loss carryforward valuation allowance
decreased by $258 in 1998, as a result of the use of certain state net operating
losses. The Company has a state valuation allowance of $2,020 as of June 30
1999. The state valuation allowance is provided as a result of estimates
regarding future operations of certain subsidiaries in certain states.
At June 30, 1999, the Company has potential tax benefits from net operating
loss carryforwards for federal income tax purposes of approximately $2,205,
which begin to expire in 2007. The Company also has potential tax benefits from
net operating loss carryforwards for state income tax purposes of $3,473, which
begin to expire in 2002, and an AMT credit of $418.
Note 14- Retirement Plans
The Company provides retirement benefits through a qualified salary
reduction plan for eligible employees under Section 401(k) of the Internal
Revenue Code (the "Retirement Plans"). The Retirement Plan is funded by salary
reduction contributions by the participants thereof. The Company's contributions
to the retirement plan are based on participant contributions (which are limited
to a fixed percentage of participant compensation) and matching employer
contributions. Additionally, the Company may contribute a discretionary amount.
For the years ended June 30, 1997, 1998 and 1999, the matching employer
contributions amounted to $57, $191 and $275, respectively.
Note 15 - Stock Based Compensation Plans
The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock options. Under APB No. 25, the Company does
not recognize compensation expense since the exercise price of the stock options
granted is equal to the market value of the Company's common stock at the date
of grant. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock Based Compensation" (SFAS 123) requires the Company to disclose the pro
forma impact on net income (loss) as if compensation expense associated with
employee stock options had been calculated under the fair value method.
The stockholders and directors of the Company have approved a long-term
incentive plan (the "Stock Plan") under which eligible employees, consultants,
and independent contractors may receive grants of options, stock appreciation
rights and restricted stock awards and to replace IPL's long-term incentive
plan. An aggregate of 735,000 shares of common stock were reserved for issuance
under the Stock Plan and options or other grants with respect thereto may be
made over a ten-year term. Options may be either incentive options, within the
meaning of the Internal Revenue Code or non-qualified options. The Stock Plan is
administered by the compensation committee of the board of directors of the
Company who determine the employees, consultants, and independent contractors
entitled to grants, the exercise price, which may not be less than the fair
market value of the Company's common stock on the date of grant, and the other
terms of options or grants.
During fiscal years 1998 and 1999, 368,000 and 115,000 shares of common
stock options were granted, respectively. At June 30, 1999, there are 258,000
shares of common stock available for granting.
F-21
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 15 - Stock Based Compensation Plans (continued)
On June 13, 1997, the principal stockholders of the Old Video entered into
stock option agreements (the "Stockholder Options") with various employees of
the Old Video, granting such employees the right to purchase 87,128 shares of
the Company's common stock from such stockholders. The Stockholder Options were
fully vested at June 30, 1997, became exercisable June 1998 and expire on the
fifth anniversary of the vesting date. The exercise prices of the Stockholder
Options upon grant were in excess of the estimated fair market value of the Old
Video's common stock. In conjunction with the Merger, changes were made to the
Stockholder Options to restore the option holder's economic position. The
Stockholder Options converted into options to purchase from such stockholders
235,000 shares of the Company's common stock. The changes to the Stockholder
Option did not impact the aggregate intrinsic value, reduce the ratio of
exercise price per option to the market value per share, or alter vesting
provision of the Stockholder Option. As a result, no expense under APB 25 was
recognized.
The Black-Scholes option pricing model used the following assumptions for
grants in 1997, 1998 and 1999, respectively: expected volatility of 0.4, 0.4 and
0.5, dividend yield of 0% for all years, five year, ten year and ten year
expected lives, and risk free interest rates of 5.52%, 6.38% and 6.09%.
The following table shows the pro forma impact of options on the Company's
net loss for the years ended June 30, 1998 and 1999 in accordance with SFAS 123.
The pro forma impact may not be representative of the effect on the future years
because of the subjective assumptions used in the fair value estimate calculated
under the Black-Scholes model and because new grants are generally made each
year.
<TABLE>
<CAPTION>
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss: As Reported $ (50) $ (161) $ (1,900)
Pro Forma (250) (265) (2,071)
Net loss per common share - Basic: As Reported (.01) (.01) (.14)
Pro Forma (.04) (.02) (.16)
Net loss per common share - Diluted: As Reported (.01) (.01) (.14)
Pro Forma $ (.04) $ (.02) $ (.16)
</TABLE>
A summary of the status of the Stock Plan at June 30, 1998 and 1999, and
changes during the years then ended is presented in the table below.
<TABLE>
<CAPTION>
1998 1999
-------------------------------------- ----------------------------------
Weighted Weighted
Number Average Number Average
Of Exercise Of Exercise
Shares Price Shares Price
----------------- ----------------- ----------------- -------------
<S> <C> <C>
Outstanding at beginning of year.................. --- $ --- 857,800 $ 4.16
IPL vested options assumed in Merger............... 508,800 5.00 --- ---
Granted........................................... 368,000 3.05 115,000 2.95
Exercised......................................... --- --- --- ---
Forfeited......................................... (19,000) 5.00 (7,200) 3.28
Canceled or Expired............................... --- --- --- ---
----------------- ----------------- ----------------- -------------
Outstanding at end of year........................ 857,800 $ 4.16 965,600 $ 4.02
================= ================= ================= =============
Exercisable at end of year........................ 489,800 $ 5.00 609,257 $ 4.61
================= ================= ================= =============
Weighted average fair value of options granted.... $ 1.85 $ 2.10
================= =================
</TABLE>
F-23
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 15 - Stock Based Compensation Plans (continued)
The range of exercise prices for the options outstanding at June 30, 1999
is $2.00 - $5.00 with a weighted average contractual life of 7.6 years. Of the
965,600 options outstanding at June 30, 1999, 162,867 have exercise prices of
$4.00, 162,867 have exercise prices of $5.00 and 162,866 have exercise prices of
$6.00 all with a remaining contractual life of 6.8 years. All of these options
are exercisable. Of the remaining 477,000 options outstanding, 262,000 have
exercise prices of $2.94 with a remaining contractual life of 8.2 years; 75,000
have exercise prices of $3.375 with a remaining contractual life of 8.3 years;
25,000 have exercise prices of $3.25 with a remaining contractual life of 8.6
years; 95,000 have exercise prices of $3.062 with a remaining contractual life
of 9.2 years; 10,000 have exercise prices of $2.00 with a remaining contractual
life of 9.9 years; 5,000 have a exercise prices of $2.50 with a remaining
contractual life of 9.7 years; and 5,000 have exercise prices of $3.0625 with a
remaining contractual life of 9.5 years. Approximately 159,000 options become
exercisable in fiscal 2000, 159,009 options become exercisable in fiscal 2001
and 38,334 options become exercisable in fiscal 2002.
Upon the Merger, the Company assumed 508,800 fully vested IPL options,
which had previously been granted to former employees and directors of IPL.
In May 1999, the directors of the Company have approved a 1999 non-employee
director stock plan for directors who are not employees of the Company. A total
of 120,000 shares of common stock are available for issuance under such plan.
Upon grant, these shares shall be immediately vested and nonforfeitable.
The stockholders and directors of the Company have also approved a
restricted share plan for directors who are not employees of the Company. A
total of 50,000 shares of common stock are available for issuance under such
plan. Upon grant, these options will vest upon the earliest to occur of two
consecutive years of board service, the death or disability of the recipient or
a "change of control date" (as defined in the Company's restricted share plan).
During fiscal year 1998, 6,000 shares of common stock were awarded to the
directors of the Company. All such shares are currently vested. At the date of
grant, the share price was $2.88. Compensation expense charged to operations in
fiscal year 1998 was $17.
In August 1997, in connection with the Merger as part of his severance
agreement, Old Video's stockholders granted the former chief executive officer
of IPL options to purchase an aggregate of 75,000 shares at an exercise price of
$0.75 per share. Such options are fully vested. Given that these options are
below market value, the Company recorded additional paid in capital of $199.
In February 1994, in connection with the acquisition of Audio Plus Video by
IPL, the then chief financial officer of IPL was granted ten-year, non-qualified
stock options to purchase 181,818 shares of the Company's common stock at an
exercise price of $9.35 per share. Such options are fully vested and are
presently exercisable until February 2002.
In February 1994, IPL and Old Video each granted five-year non-qualified
options to purchase an aggregate of 60,000 shares of the Company's common stock
to the two directors of IPL. The exercise price of such options is equal to
IPL's initial pubic offering price of $11 per share. Such options vested three
months after the consummation of the public offering.
Note 16 - 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 provided 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 $1,407
from the date of the Merger through June 30, 1998 and $686 for the nine months
ended June 30, 1999. Included in other current liabilities at June 30, 1999 is a
reserve of $249 principally for remaining lease commitments and severance
arrangements.
F-24
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 16 - Discontinued Operations (continued)
On January 2, 1997, management, which had the authority to approve the
action, committed Old Video Services Corporation to a formal plan to discontinue
the operations of its Diversified Products segment as a condition to the Merger
(see Note 1). In August 1997, immediately prior to the Merger, the Old Video
Services Corporation spun-off the operations of its Diversified Products segment
to the shareholders of Old Video Services Corporation. The Diversified Products
segment principally provided professional and industrial videotape duplication
and blank videotape distribution.
Losses from the operations of the discontinued Diversified Products segment
amounted to $1,688 for the year ended June 30, 1997, net of applicable income
tax benefit of $827, and is shown separately in the consolidated statements of
income. Revenues of the discontinued operations of the Diversified Products
segment were $11,404 and $1,421 for the years ended June 30, 1997 and 1998,
respectively.
Note 17 - Other Income
Included in 1997 other income is $500 pertaining to the payment of a note
receivable for which the Company had established a full valuation allowance. The
note receivable was partial consideration for the sale of a radio station in
fiscal 1991.
Note 18 - Commitments and Contingencies
Lease Commitments - The Company leases property under leases accounted for
as operating leases. Certain leases include escalation clauses. At June 30,
1999, future minimum rental payments, including related party leases (see Note
10), under non-cancelable leases for buildings and equipment are as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
--------------- ---------------
<S> <C> <C>
2000.............................................. $ 4,445
2001.............................................. 4,326
2002.............................................. 3,484
2003.............................................. 2,805
2004.............................................. 2,595
Thereafter........................................ 11,274
---------------
$ 28,929
===============
</TABLE>
Rental expense for the years ended June 30, 1997, 1998 and 1999 amounted to
$1,203, $3,719 and $4,302, respectively. The Company also has non-cancelable
subleases of approximately $1,232.
Employment Agreements - At June 30, 1999, the Company is obligated under
employment contracts with certain key employees providing for base salary and
incentive bonuses based upon the results of operations. Minimum amounts due
under these contracts are as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
--------------- --------------
<S> <C> <C>
2000.............................................. $ 2,260
2001.............................................. 900
2002.............................................. 168
--------------
$ 3,328
==============
</TABLE>
F-25
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 18 - Commitments and Contingencies (continued)
Litigation
The Company is involved in various claims and legal proceedings related to
employment agreements and business acquisitions as well as other legal
proceedings of a nature considered normal to its business. While it is not
possible to predict or determine the outcome of these proceedings, it is the
opinion of management that their outcome will have no material adverse effect on
the financial position, liquidity or results of operations of the Company.
Note 19 - Preferred Stock
The Company's certificate of incorporation authorizes the board of
directors to issue from time to time, in one or more series, shares of preferred
stock with such designations and preferences, relative voting rights (except
that voting rights, if any, in respect of the election of directors shall be
limited to voting with the holders of common stock, with no more than one vote
per share of preferred stock), redemption, conversion, participation and other
rights and qualifications, limitations and restrictions as permitted by law. The
board of directors by its approval of certain series of preferred stock could
adversely affect the voting power of the holders of common stock, and, by
issuing shares of preferred stock with certain voting, conversion, redemption
rights or other terms, could delay, discourage or make more difficult changes of
control or management of the Company.
Note 20- Dividend Policy
The board of directors of the Company does not intend to declare any
dividends in the foreseeable future and intends to retain all earnings in the
Company to finance the growth of operations, including acquisitions. Future
dividend policy will be based upon the Company's results of operations,
financial condition, capital requirements and other circumstances.
F-26
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 21 - Unaudited Quarterly Results
Unaudited quarterly financial information for fiscal year 1998 and 1999 is
set forth below. All dollar amounts are in thousands except per share data.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------
----------------- ---------------- ----------------- ----------------
September 30, December 31, March 31, June 30,
1997 1997 1998 1998(a)
----------------- ---------------- ----------------- ----------------
Fiscal 1998
<S> <C> <C> <C> <C>
Revenues........................ $ 11,418 $ 19,219 $ 20,456 $ 21,902
Gross profit.................... $ 4,227 $ 6,647 $ 6,702 $ 7,135
Income from continuing
operations................... $ 554 $ 392 $ 317 $ 436
Income from continuing
operations per share - basic $ .06 $ .03 $ .02 $ .03
Net income (loss)............... $ 433 $ 373 $ 317 $ (1,284)
Quarter Ended
------------------------------------------------------------------------------
----------------- ---------------- ----------------- ----------------
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
----------------- ---------------- ----------------- ----------------
Fiscal 1999
Revenues........................ $ 21,906 $ 21,562 $ 22,700 $ 23,243
Gross profit.................... $ 5,962 $ 6,032 $ 5,917 $ 5,856
Loss from continuing
operations................... $ (286) $ (450) $ (821) $ (343)
Loss from continuing
operations per share - basic. $ (.02) $ (.03) $ (.06) $ (.03)
Net loss........................ $ (286) $ (450) $ (821) $ (343)
</TABLE>
(a) During the fourth quarter of 1998, the Company recorded an adjustment of
$1,720 to increase the reserve for the estimated loss on disposal associated
with the divestiture of the Consulting Services segment.
F-27
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning of Costs and Deductions End of
Year Expenses Write-Offs Year
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
For the year ended
June 30, 1997:
Allowance for doubtful
accounts and volume
discounts................. $ 180 $ 131 $ 9 $ 302
==================== ==================== ==================== ====================
June 30, 1998:
Allowance for doubtful
accounts and volume
discounts................. $ 1,354(a) $ 214 $ 389 $ 1,179
==================== ==================== ==================== ====================
June 30, 1999:
Allowance for doubtful
accounts and volume
discounts................. $ 1,179 $ 67 $ 217 $ 1,029
==================== ==================== ==================== ====================
</TABLE>
(a)The balance at beginning of year gives effect to the Merger with and
into International Post Limited of $1,052.
F-28
AMENDEMENT 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, 2.5 00%, (ii) with
respect to the Commitment Fee, 0.375%, and (iii) with respect to all ABR
Advances, 0.5 00%.
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 ABR Advances, the applicable margin set
forth below under the heading "ABR", (iii) with respect to the Commitment
Fee, the applicable margin set forth below under the heading
"CommitmentFee", and (iv) with respect to the Letter of Credit Fee, the
applicable margin set forth below under the heading "LC Fee":
When the Commitment
Leverage Ratio is: Eurodollar ABR Fee LC Fee
---------------------------------------------------------------------------
> 4.00 3.00% 0.50% 0.500% 3.00%
> 3.75 <4.00 2.75% 0.50% 0.500% 2.75%
> 3.30 <3.75 2.50% 0.50% 0.375% 2.50%
> 3.00 <3.30 2.00% 0.00% 0.375% 2.00%
> 2.50 <3.00 1.75% 0.00% 0.375% 1.75%
> 2.00 <2.50 1.50% 0.00% 0.375% 1.50%
> 1.25 <2.00 1.25% (1.00%) 0.250% 1.25%
<1.25 1.00% (1.00%) 0.250% 1.00%
(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 Expenditure" 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.
Notwithstanding anything in this definition to the contrary, "Capital
Expenditure" shall exclude all Capital Expenditures of the Borrower and the
Subsidiaries during the fiscal years 1998 and 1999 directly attributable to
establishing a division of Audio plus Video International, Inc. on the West
coast of the contiguous part of the United States of America to the extent not
in excess of $5, 100,000 in the aggregate on a Consolidated basis.
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 3.4(a) of the Credit Agreement is amended by deleting the phrase
"minus 1.00%" appearing therein and inserting in its place the phrase "plus the
Applicable Margin".
9. 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
March31, 1998 3.00:1.00
April 1, 1998 through
December31, 1998 3.30:1.00
January 1, 1999 through
March31, 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
December31, 1999 4.00:1.00
January 1, 2000 through
March31,2000 3.50:1.00
April 1,2000 through
March 3l,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
10. 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
11. 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, I999 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.
12. Section 8.4(e) of the Credit Agreement is deleted in its entirety.
13. Section 8.6(a) of the Credit Agreement is amended by replacing all of
the text thereof following the amount "$8,000,000" appearing therein
with the following:
(y) in respect of the fiscal year ending June 30, 1999. $1 0.000,000, and
(z) in respect of each fiscal year ending after June 30, 1999, the sum
of $6.000,000 plus, for purposes of this clause (z) only, 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.
14. Paragraphs 1 - 13 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.
15. 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.
16. 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.
17. 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.
18. 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
VIDEO SERVICES CORPORATION
By:/s/Steven G Crane
Name:Steven G. Crane
Title:Vice President & CFO
VSC MAL CORP.
By:/s/Steven G Crane
Name:Steven G. Crane
Title:Vice President & CFO
<PAGE>
AMENDMENT NO. 2
VIDEO SERVICES CREDIT AGREEMENT
KEYBANK NATIONAL ASSOCIATION, in its
capacity as a Lender, as the
Issuer, and as the Agent
By:/s/Brendan Sachtjen
Name:Brendan Sachtjen
Title:Senior Vice President
SUMMIT BANK
By:/s/J Gregory Lageman
Name:J Gregory Lageman
Title:Vice President
LAZARD FRERES & Co. LLC
30 ROCKEFELLER PLAZA
NEW York. N.Y. 10020
TELEPHONE (212) 632-6000 New York
FACSIMILE (212) 632-6060
August 13, 1999
Video Services Corporation
240 Pegasus Avenue
North vale, NJ 07647
Gentlemen:
This letter confirms the retention of Lazard Freres & Co. LLC ("Lazard") as
sole and exclusive investment banker to Video Services Corporation (the
"Company") in connection with the possible sale of the Company, an interest in
the Company or a subsidiary or division of the Company to another corporation or
business entity (a "Buyer"), which transaction may take the form of a merger or
a sale of assets or equity or other interests (the "Transaction"). By signing
this letter, we hereby accept our appointment as your investment banker under
the terms hereof.
We will act with respect to the foregoing for a period of one (1) year from
the date hereof, subject to the following conditions:
1. We will assist you as necessary and requested to analyze the business and
financial condition of the Company, formulate appropriate strategy and
structural alternatives, advise you in connection with negotiations and aid
in the consummation of the Transaction.
2. If requested by the Board of Directors of the Company, we will render an
opinion (the "Opinion") as to the fairness to the Company or its
stockholders, from a financial point of view, of the consideration to be
received pursuant to the Transaction, and will furnish to the Company a
letter expressing such Opinion for inclusion in material that may be
provided to the stockholders of the Company and filed with the Securities
and Exchange Commission. The Opinion shall be in such customary form and
with such qualifications as determined appropriate by Lazard, including
that Lazard has relied upon the information furnished to it by the Company
and the Buyer or publicly available, has assumed the accuracy and
completeness of such information and has not assumed any responsibility for
independent verification of such information.
Lazard will not, as part of the Opinion or any other aspect of this
engagement. undertake any independent valuation or appraisal of any of the
assets or liabilities of the Company or the Buyer, or opine or give advice
to the Board of Directors of the Company or management or shareholders of
the Company on any issues of solvency. Any solvency opinion or issues
addressed will be the responsibility of an independent solvency
professional or professionals to be retained by the Board of Directors of
the Company, the Company or the Buyer. We will have no responsibility for
monitoring the work or opinions of such solvency professionals.
3. In connection with our engagement, you will furnish or cause to be
furnished to us such current and historical financial information and other
information regarding the business of the Company as we may request. You
represent and warrant to us that all of the foregoing information will be
accurate and complete at the time it is furnished, and you agree to keep us
advised of all material developments affecting the Company or its financial
position. You also agree to use all reasonable efforts to cause the Buyer
to provide us with such information concerning the Buyer as we deem
necessary for our financial review and analysis and the rendering of the
Opinion. The Company understands that in rendering services hereunder
Lazard will be relying, without independent varification, on the accuracy
and completeness of all information that is or will be furnished to us by
or on behalf of the Company or any other party or potential party to any
transaction contemplated by this letter, and Lazard will not in any respect
be responsible for the accuracy or completeness thereof.
4. In consideration of our services, you agree to pay us the following fees:
(i) A fee of $75,000 payable upon execution of this letter agreement.
Such
(ii) fee shall be credited against any fee payable in Section 4 (ii);
A success fee based on the aggregate consideration calculated as
set forth in Schedule I hereto with respect to a Transaction (it
being understood that in no event will the success fee be less
than $500,000). In the event that there is more than one
Transaction, the fee schedule and minimum fee referred to in the
prior sentence shall apply to each Transaction; and
(iii)A fee of $100,000, payable upon submission of any Opinion to the
Board of Directors of the Company.
For purposes hereof, the term "aggregate consideration" means the total
amount of cash and the fair market value (on the date of payment) of all
other property paid or payable (including amounts paid into escrow) to the
Company or its securityholders in connection with the Transaction (or any
related transaction). including amounts paid or payable in respect of
convertible securities, warrants, stock appreciation rights, options or
similar rights, whether or not vested, plus the principal amount of all
indebtedness for borrowed money as set forth in the most recent
consolidated balance sheet of the Company prior to consummation of the
Transaction or, in the case of a sale of . assets, all indebtedness for
borrowed money assumed by the Buyer. Aggregate consideration shall also
include the aggregate amount of any dividends or other distributions
declared by the Company after the date hereof, other than normal quarterly
cash dividends, and, in case of a sale of assets, the net value of any
current assets not sold by the Company. If the aggregate consideration is
subject to increase by contingent payments related to future events, the
portion of our fee relating thereto shall be calculated by us in good faith
and paid to us upon the consummation of a Transaction.
5. Regardless of whether any Transaction is completed, you agree to reimburse
us for all our expenses incurred in connection with this engagement.
Generally these expenses include travel costs, document production and
other expenses of this type, and will also include the fees of outside
counsel and other professional advisors. All payments to be made by you
pursuant to this agreement shall be made promptly after such payments
accrue hereunder.
6. No fee payable to any other person, by you or any other company in
connection with the subject matter of this engagement, shall reduce or
otherwise affect any fee payable hereunder.
7. Simultaneously herewith, the parties hereto are entering into an
indemnification letter (the "Indemnification Letter") in the form attached
hereto. The Indemnification Letter shall survive any termination or
expiration of this agreement.
8. Our engagement hereunder may be terminated by you or us at any time without
liability or continuing obligation to you or us, except that, following
such termination and any expiration of this agreement, we shall remain
entitled to any fees accrued pursuant to paragraph 4 but not yet paid prior
to such termination or expiration, as the case may be, and to reimbursement
of expenses incurred prior to such termination or expiration, as the case
may be, as contemplated by paragraph 5 hereof. In addition, in the case of
termination by the Company and any expiration of this agreement, we shall
remain entitled to full payment of all fees contemplated by paragraph 4
hereof in respect of any Transaction announced or resulting from
negotiations commenced during the period from the date hereof until 18
months following such termination or expiration, as the case may be.
9. Except as provided in paragraph 2, any financial advice, written or oral,
rendered by us pursuant to this agreement is intended solely for the
benefit and use of management and the Board of Directors of the Company in
considering the matters to which this agreement relates, and the Company
agrees that such advice may not be disclosed publicly or made available to
third parties without the prior written consent of Lazard, which consent
shall not be unreasonably withheld.
10. The provisions hereof shall inure to the benefit of and be binding upon the
successors and assigns of the Company, Lazard and any other person entitled
to indemnity under the Indemnification Letter.
11. Lazard has been retained under this agreement as an independent contractor,
and it is understood and agreed that this agreement does not create a
fiduciary relationship between Lazard and the Company or the Board of
Directors.
12. This agreement and any claim related directly or indirectly to this
agreement (including any claim concerning advice provided pursuant to this
agreement) shall be governed and construed in accordance with the laws of
the State of New York (without giving regard to the conflicts of law
provisions thereof). No such claim shall be commenced, prosecuted or
continued in any forum other than the courts of the State of New York
located in the City and County of New York or in the United States District
Court for the Southern District of New York, and each of the parties hereby
submits to the jurisdiction of such courts. The Company hereby waives on
behalf of itself and its successors and assigns any and all right to argue
that the choice of forum provision is or has become unreasonable in any
legal proceeding. Each of Lazard and the Company waives all right to trial
by jury in any action, proceeding or counterclaim (whether based upon
contract, tort or otherwise) related to or arising out of the engagement of
Lazard pursuant to, or the performance by Lazard of the services
contemplated by, this agreement.
This agreement is the only agreement between us and superscedes any other
arrangement whether written or oral. If the foregoing correctly sets forth
the understanding between us, please so indicate on the enclosed signed
copy of this agreement in the space provided therefor and return it to us,
whereupon this agreement shall constitute a binding agreement between us.
Very truly yours,
LAZARD FRERES & CO. LLC
By/s/Barry W Ridings
Barry W. Ridings
Managing Director
AGREED TO AND ACCEPTED
as of the date first
above written:
Video Services Corporation
By:/s/Louis H Siracusano
Louis H. Siracusano
Chief Executive Officer
<PAGE>
SCHEDULE 1
The following table outlines Lazard's M&A fee schedule. The total fee is
calculated by multiplying the Total Fee percentage by the Aggregate
Consideration. For Aggregate Consideration in an amount between values specified
in the table below, the fee will be determined by a straight-line interpolation
calculation (e.g. $75mm would yield a 1.375% Total Fee %: 1.50% - [($75- $50)!
($100 -$50)] * [1.50% - 1.25% 1 = 1.375%)
Aggregate Consideration Total Fee %
----------------------- ------------
($ in millions)
$25 2.00%
$50 1.50%
$100 or greater 1.25%
<PAGE>
August 13, 1999
Video Services Corporation
240 Pegasus Avenue
Northvale, NJ 07647
Dear Sirs:
In connection with our engagement to advise and assist you with
the matters set forth in the engagement letter of even date herewith,
you and we are entering into this letter agreement. It is understood and agreed
that in the event that Lazard Freres & Co. LLC or any of our members, employees,
agents, affiliates or controlling persons, if any (each of the foregoing,
including Lazard Freres & Co. LLC, being an "Indemnified Person") become
involved in any capacity in any action, claim, proceeding or investigation
brought or threatened by or against any person, including your stockholders,
related to, arising out of or in connection with our engagement, you will
reimburse each such Indemnified Person for its reasonable legal and other
expenses (including the cost of any investigation and preparation) as and when
they are incurred in connection therewith. You will indemnify and hold harmless
each Indemnified Person from and against any losses, claims, damages,
liabilities or expense to which any Indemnified Person may become subject under
any applicable federal or state law, or otherwise, related to, arising out of or
in connection with our engagement, whether or not any pending or threatened
action, claim, proceeding or investigation giving rise to such losses, claims,
damages, liabilities or expense is initiated or brought by or on your behalf and
whether or not in connection with any action, proceeding or investigation in
which you or such Indemnified Persons are a party, except to the extent that any
such loss, claim, damage, liability or expense is found by a court of competent
jurisdiction in a judgment which has become final in that it is no longer
subject to appeal or review to have resulted primarily from such Indemnified
Person's bad faith or gross negligence. You also agree that no Indemnified
Person shall have any liability (whether direct or indirect, in contract or tort
or otherwise) to you or your security holders or creditors related to, arising
out of or in connection with our engagement except to the extent that any loss,
claim, damage or liability is found by a court of competent jurisdiction in a
judgment which has become final in that it is no longer subject to appeal or
review to have resulted primarily from such Indemnified Person's bad faith or
gross negligence. If multiple claims are brought against us in an arbitration
related to, arising out of or in connection with our engagement, with respect to
at least one of which such claims indemnification is permitted under applicable
law, you agree that any arbitration award shall be conclusively deemed to be
based on claims as to which indemnification is permitted and provided for
hereunder, except to the extent the arbitration award expressly states that the
award, or any portion thereof, is based solely on a claim as to which
indemnification is not available.
If for any reason the foregoing indemnification is held unenforceable, then
you shall contribute to the loss, claim, damage, liability or expense for which
such indemnification is held unenforceable in such proportion as is appropriate
to reflect the relative benefits received, or sought to be received, by you and
your stockholders on the one hand and the party entitled to contribution on the
other hand in the matters contemplated by our engagement as well as the relative
fault of yourselves and such party with respect to such loss, claim, damage,
liability or expense and any other relevant equitable considerations. You agree
that for the purposes hereof the relative benefits received, or sought to be
received, by you and your stockholders and ourselves shall be deemed to be in
the same proportion as (i) the total value paid or proposed to be paid or
received by you or your stockholders, as the case may be, pursuant to the
transaction (whether or not consummated) for which we have been engaged to
perform investment banking services bears to (ii) the fees paid or proposed to
be paid to us in connection with such engagement; provided, however, that, to
the extent permitted by applicable law, in no event shall we or any other
Indemnified Person be required to contribute an aggregate amount in excess of
the aggregate fees actually paid to us for such investment banking services.
Your reimbursement, indemnity and contribution obligations under this letter
shall be in addition to any liability which you may otherwise have, shall not be
limited by any rights we or any other Indemnified Person may otherwise have and
shall be binding upon and inure to the benefit of any successors, assigns, heirs
and personal representatives of yourselves, ourselves, and any other Indemnified
Persons.
You agree that, without our prior written consent (which will not be
unreasonably withheld), you will not settle, compromise or consent to the entry
of any judgment in any pending or threatened claim, action, or proceeding or
investigation in respect of which indemnification or contribution could be
sought hereunder (whether or not we or any other Indemnified Persons are an
actual or potential party to such claim, action or proceeding or investigation),
unless such settlement, compromise or consent includes an unconditional release
of each Indemnified Person from all liability arising out of such claim, action
or proceeding or investigation. No waiver, amendment or other modification of
this agreement shall be effective unless in writing and signed by each party to
be bound thereby. This agreement and any claim related directly or indirectly to
this agreement (including any claim concerning advice provided pursuant to this
agreement) shall be governed and construed in accordance with the laws of the
State of New York (without giving regard to the conflicts of law provisions
thereof). No such claim shall be commenced, prosecuted or continued in any forum
other than the courts of the State of New York located in the City and County of
New York or in the United States District Court for the Southern District of New
York, and each of us hereby submits to the jurisdiction of such courts. You
hereby waive on behalf of yourself and your successors and assigns any and all
right to argue that the choice of forum provision is or has become unreasonable
in any legal proceeding. We and you (on your own behalf and, to the extent
permitted by applicable law, on behalf of your stockholders and creditors) waive
all right to trial by jury in any action, proceeding or counterclaim (whether
based upon contract, tort or otherwise) related to or arising out of or in
connection with our engagement. This agreement shall remain in effect
indefinitely, notwithstanding any termination or expiration of our engagement.
Very truly yours,
LAZARD FRERES & CO. LLC
By/s/Barry W Ridings
Barry W. Ridings
Managing Director
AGREED TO AND ACCEPTED
as of the date first
above written:
Video Services Corporation
By/s/Louis H Siracusano
Louis H. Siracusano
Chief Executive Officer
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-83821) pertaining to the 1997 Long Term Incentive Plans and
the 1999 Non-Employee Director Stock Plan, (Form S-8 No. 33- 320557) pertaining
to the 1993 Long Term Incentive Plan, the Restrictive Share Plan for Directors
and Various Stock Option Agreements of Video Services Corporation (formerly
International Post Limited) and (Form S-3 No. 333- 31745) pertaining to the
Registration Statement and related Prospectus of Video Services Corporation
(formerly International Post Limited) of our report dated September 10, 1999,
with respect to the consolidated financial statements and schedule of Video
Services Corporation included in the Annual Report (Form 10- K) for the year
ended June 30, 1999.
/S/ ERNST & YOUNG LLP
White Plains, New York
October 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME FILED AS PART OF THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 805
<SECURITIES> 0
<RECEIVABLES> 15,905
<ALLOWANCES> 1,029
<INVENTORY> 694
<CURRENT-ASSETS> 19,294
<PP&E> 68,785
<DEPRECIATION> 29,196
<TOTAL-ASSETS> 85,318
<CURRENT-LIABILITIES> 21,731
<BONDS> 5,652
0
0
<COMMON> 132
<OTHER-SE> 18,715
<TOTAL-LIABILITY-AND-EQUITY> 85,318
<SALES> 89,411
<TOTAL-REVENUES> 89,411
<CGS> 56,901
<TOTAL-COSTS> 56,901
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 67
<INTEREST-EXPENSE> 4,149
<INCOME-PRETAX> (1,958)
<INCOME-TAX> (58)
<INCOME-CONTINUING> (1,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,900)
<EPS-BASIC> (0.140)
<EPS-DILUTED> (0.140)
</TABLE>
