SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-23388
VIDEO SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
13-3735647
(I.R.S. Employer Identification Number)
240 Pegasus Avenue Northvale, New Jersey 07647
(Address of principal executive offices, including zip code)
(201) 767-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to filed such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, $.01 par value
per share, as of November 13, 2000, was 13,311,307.
<PAGE>
VIDEO SERVICES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED) PAGE
Condensed Consolidated Balance Sheets as of June 30, 2000
and September 30, 2000...........................................3
Condensed Consolidated Statements of Operations for
the three months ended September 30, 1999 and 2000...............4
Condensed Consolidated Statement of Stockholders' Equity for
the three months ended September 30, 2000........................5
Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 1999 and 2000...........6
Notes to Condensed Consolidated Financial Statements.............7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................13
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDING................................................17
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................17
Item 3. DEFAULTS UPON SENIOR SECURITIES.................................17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.........................................................17
Item 5. OTHER INFORMATION...............................................17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K................................17
SIGNATURES ................................................................18
<PAGE>
VIDEO SERVICES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 and September 30, 2000 (unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
2000 2000
------------------- -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,613 $ 406
Accounts receivable 17,738 14,391
Inventories 1,290 1,522
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,034 1,472
Deferred income taxes 1,206 1,167
Prepaid expenses and other current assets 994 1,260
------------------- -------------------
Total current assets 25,875 20,218
Fixed assets, net 34,014 32,383
Excess of cost over fair value of net assets acquired, net 20,878 20,633
Deferred income taxes 2,274 2,424
Other assets 2,991 5,363
------------------- -------------------
Total assets $ 86,032 $ 81,021
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,192 $ 6,974
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,692 2,047
Current portion of long-term debt 5,534 5,585
Current portion of subordinated debt 2,062 1,662
Income taxes payable 193 -
Other current liabilities 2,964 2,785
------------------- -------------------
Total current liabilities 22,637 19,053
Long-term debt 40,752 39,657
Subordinated debt 2,924 2,893
Other liabilities 1,468 1,482
------------------- -------------------
Total liabilities 67,781 63,085
------------------- -------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 2000
and September 30, 2000 - -
Common stock: $.01 par value, 25,000,000 shares authorized,
and 13,311,307 shares issued and outstanding
at June 30, 2000 and September 30, 2000 133 133
Additional paid-in-capital 21,350 21,350
Accumulated deficit (3,232) (3,547)
------------------- -------------------
Total stockholders' equity 18,251 17,936
------------------- -------------------
Total liabilities and stockholders' equity $ 86,032 $ 81,021
=================== ===================
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1999 and 2000 (unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 2000
------------------- -------------------
<S> <C> <C>
Revenues:
Sales $ 4,211 $ 6,199
Services 16,593 16,017
------------------- -------------------
20,804 22,216
Costs:
Sales 3,246 5,329
Services 8,840 9,253
------------------- -------------------
12,086 14,582
Depreciation 2,281 2,152
------------------- -------------------
Gross profit 6,437 5,482
Selling, general and administrative expenses 4,967 4,202
Amortization 277 347
------------------- -------------------
Operating income 1,193 933
Other income (expense):
Interest expense (1,241) (1,275)
Interest and other income 6 40
------------------- -------------------
Loss before income taxes (42) (302)
Income tax expense 173 13
------------------- -------------------
Net loss $ (215) $ (315)
=================== ===================
Earnings per share:
Basic and Diluted:
Net loss $ (0.02) $ (0.02)
=================== ===================
Weighted average number of shares outstanding for basic
and diluted earnings per share 13,265,264 13,311,307
=================== ===================
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three months ended September 30, 2000 (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Common Common
Stock Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 2000 13,311,307 $ 133 $ 21,350 $ (3,232) $ 18,251
Net loss - - - (315) (315)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2000 13,311,307 $ 133 $ 21,350 $ (3,547) $ 17,936
============ ============ ============ ============ ============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30, 1999 and 2000 (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1999 2000
------------------- -------------------
<S> <C> <C>
Operating Activities
Net cash used in operating activities $ (740) $ (1,214)
Investing Activities
Additions to fixed assets (588) (532)
Proceeds from sales of fixed assets 340 14
------------------- -------------------
Net cash used in investing activities (248) (518)
Financing Activities
Increase in subordinated debt 55 36
Repayments of subordinated debt - (467)
Proceeds from long-term borrowings 3,500 1,000
Repayment of borrowings (3,047) (2,044)
------------------- -------------------
Net cash provided by (used in) financing activities 508 (1,475)
Net decrease in cash (480) (3,207)
Cash and cash equivalents, beginning of period 805 3,613
------------------- -------------------
Cash and cash equivalents, end of period $ 325 $ 406
=================== ===================
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2000 and September 30, 2000
and for the three months ended September 30, 1999 and 2000
(dollars in thousands, except per share amounts)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2001.
The balance sheet at June 30, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements.
The unaudited interim financial information should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
Video Services Corporation and Subsidiaries' (the "Company") annual report on
Form 10-K for the year ended June 30, 2000.
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 multi-format technical and distribution services to
distributors of video programming. The Systems and Products segment designs,
engineers and produces advanced video facilities for the broadcast and cable
television, post-production, Internet 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 and the emerging Internet graphics and video market.
On August 27, 1997, Video Services Corporation ("Old Video") merged with
and into International Post Limited ("IPL") with IPL as the surviving
corporation (the "Merger"). At the effective time of the Merger, IPL changed its
name to Video Services Corporation. As part of the Merger, the Company made a
strategic evaluation of facilities and personnel requirements and determined
that certain IPL facilities would be closed with the equipment being
consolidated into other facilities and determined that certain IPL personnel
would be redundant. Accordingly, the Company recorded a reserve for severance
costs of $1,426 and lease related costs of $993 as of August 27, 1997. The
balance of the liability was $418 and $378 at June 30, 2000 and September 30,
2000, respectively. At June 30, 2000 it was estimated that approximately $80 of
such expenditures would be made in fiscal 2001 and $338 in fiscal 2002. The
Company anticipates that funding for these amounts will be provided by
operations.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for the disclosure related to revenue recognition policies. In June
2000, the SEC delayed the implementation of this Staff Accounting Bulletin until
no later than the fourth quarter of 2000. At this time, the company is still
assessing the impact of SAB 101 on its financial position and results of
operations.
Note 2 - Inventories
Inventories consist of system components and equipment which are valued at
the lower of specific cost or market and tape stock which is valued at the lower
of cost or market on a FIFO basis.
Note 3 - Accounts Receivable
<TABLE>
<CAPTION>
June 30, September 30,
2000 2000
----------------------- ---------------------
<S> <C> <C>
Accounts receivable, trade............................ $ 13,812 $ 13,587
Contracts receivable billed:
Uncompleted contracts.............................. 4,217 1,362
Completed contracts................................ 643 407
----------------------- ---------------------
18,672 15,356
Less: Allowance for doubtful accounts
and volume discounts........................ 934 965
----------------------- ---------------------
$ 17,738 $ 14,391
======================= =====================
</TABLE>
Note 4 - Fixed Assets
Fixed assets, at cost, summarized by major categories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
2000 2000
----------------------- ---------------------
<S> <C> <C>
Machinery and equipment............................... $ 39,426 $ 39,828
Leasehold improvements................................ 12,021 12,101
Furniture and fixtures................................ 2,207 2,212
Transportation equipment.............................. 254 272
Building.............................................. 2,199 2,199
Land.................................................. 1,967 1,967
Equipment under capital leases........................ 10,639 10,645
----------------------- ---------------------
68,713 69,224
Less: Accumulated depreciation, including
accumulated amortization for
equipment under capital lease............... 34,699 36,841
----------------------- ---------------------
$ 34,014 $ 32,383
======================= =====================
</TABLE>
Note 5 - Segment Data
The Company's continuing operations are classified into three reportable
business segments that provide different products and services: (i) Satellite
and Distribution Services, (ii) Systems and Products and (iii) Production
Services (See Note 1). Separate management of each segment is required because
each segment is subject to different marketing, production, and technology
strategies.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 5 - Segment Data (continued)
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.
Assets by segment include assets directly identifiable with those
operations. Other assets primarily consist of corporate cash and cash
equivalents and fixed assets associated with nonsegment activities.
The Company operates primarily in the United States. Revenues from foreign
countries are not significant.
Summarized financial information by business segment for the three month
periods ended September 30, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, September 30,
1999 2000
----------------- ----------------
<S> <C> <C>
Revenues from unaffiliated customers:
Systems and Products................... $ 4,720 $ 6,674
Satellite and Distribution Services.... 7,992 8,130
Production Services.................... 8,092 7,412
----------------- ----------------
Revenues............................... $ 20,804 $ 22,216
================= ================
Intersegment revenues:
Systems and Products................... $ 25 $ 62
Satellite and Distribution Services.... 327 230
Production Services.................... 65 1
----------------- ----------------
Total intersegment revenues............ $ 417 $ 293
================= ================
Operating income:
Systems and Products................... $ 430 $ 373
Satellite and Distribution Services.... 1,811 2,003
Production Services.................... 174 (171)
Corporate.............................. (1,222) (1,272)
----------------- ----------------
Operating income....................... 1,193 933
Interest expense (1,241) (1,275)
Interest and other income.............. 6 40
----------------- ----------------
Loss before income taxes............... $ (42) $ (302)
================= ================
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 5 - Segment Data (continued)
<TABLE>
June 30, September 30,
2000 2000
----------------- ----------------
<S> <C> <C>
Identifiable assets at June 30, 2000 and September 30, 2000:
Systems and Products................... $ 9,270 $ 7,017
Satellite and Distribution Services.... 21,062 20,445
Production Services.................... 20,654 21,890
Corporate.............................. 35,046 31,669
----------------- ----------------
Total assets........................... $ 86,032 $ 81,021
================= ================
</TABLE>
Note 6 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, September 30,
1999 2000
------------------------ ------------------------
<S> <C> <C>
Numerator:
Net loss.......................................... $ (215) $ (315)
------------------------ ------------------------
Numerator for basic loss per share - net loss
available to common stockholders............... (215) (315)
Effect of dilutive securities:
4% convertible subordinated notes and stock
options........................................ --- ---
------------------------ ------------------------
Numerator for diluted loss per share - net loss
available to common stockholders after
assumed.conversions............................ $ (215) $ (315)
======================== ========================
Denominator:
Denominator for basic loss per share -
weighted-average shares........................ 13,265,264 13,311,307
Effect of dilutive securities:
4% convertible subordinated notes and stock
options........................................ --- ---
------------------------ ------------------------
Denominator for diluted loss per share-adjusted
weighted - average shares and assumed
conversions.................................... 13,265,264 13,311,307
Basic loss per share.............................. $ (0.02) $ (0.02)
======================== ========================
Diluted loss per share............................ $ (0.02) $ (0.02)
======================== ========================
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 6 - Earnings Per Share (continued)
Loss per share has been computed using the weighted average number of
shares outstanding during each period.
The effect of 4% convertible subordinated notes and stock options have been
excluded from the diluted earnings per share calculation, because they are
anti-dilutive.
Note 7 - Long-Term Debt
<TABLE>
<CAPTION>
June 30, September 30,
2000 2000
----------------- -----------------
<S> <C> <C>
Senior secured Term Loan A........................... $ 15,000 $ 15,000
Senior secured Term Loan B........................... 15,000 15,000
Secondary Collateral Institutional Loan.............. 5,000 5,000
Senior secured revolving credit loan................. 3,642 3,142
Capitalized lease obligations........................ 7,644 7,100
----------------- -----------------
46,286 45,242
Less: current maturities............................ 5,534 5,585
----------------- -----------------
$ 40,752 $ 39,657
================= =================
</TABLE>
Senior Secured Long-Term Debt - The Company refinanced its long-term
indebtedness, including mortgage payables and lines of credit (excluding
existing capital lease obligations), with a $55,000 credit facility comprised of
a $15,000 revolving line of credit, term loans totaling $30,000 and Secondary
Collateral Institutional Loans ("SCIL") totaling $10,000. General Electric
Capital Corporation ("GE Capital"), is Term Agent and Administrative Agent under
the credit agreement and KeyBank National Association ("KeyBank"), is revolver
agent. The revolving line of credit bears interest at the lenders' prime rate
plus .5% or LIBOR (London Interbank Offered Rate) plus 3.25 basis points. Term
Loan A bears interest at the lenders' prime rate plus 1.25% or LIBOR plus 3.25%.
The Term Loan B bears interest at the lenders' prime rate plus 1.50% or LIBOR
plus 3.50%. The SCIL loans bear interest at the lenders' prime rate plus 2.0% or
LIBOR plus 4.0%, commencing November 2001 both rates will bear an additional
4.0% that will be accrued but payable on the commitment termination date.
Commitment termination date, in the case of the revolving line and Term Loan A
is July 1, 2003, Term Loan B is July 1, 2005 and the SCIL loans termination date
is April 1, 2007. As additional compensation for the revolving line commitments
and SCIL Loan commitments, the Company will pay a .5% fee on the unused portion
of the facilities. The Company had outstanding direct borrowings of $3,142 under
the revolving line at September 30, 2000. The Company also has outstanding under
the revolving line letters of credit of approximately $666 at September 30,
2000. The Company's revolving line weighted average interest rate was 9.91% at
September 30, 2000. The facility contains various covenants that require the
Company to maintain certain financial ratios, limits capital expenditures,
prohibit dividends and similar payments and restrict the Company's ability to
incur other indebtedness. The facility is guaranteed by all of the Company's
subsidiaries.
The Company has borrowed $5,000 of the SCIL facility, the remaining balance
of $5,000 is reserved for retiring the Company's existing Subordinated Debt.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 7 - Long Term Debt (continued)
In August 1997, the Company entered into an interest rate swap agreement
with KeyBank to reduce the impact of changes in interest rates on its Term Loan.
Pursuant to the refinancing, the swap agreement was cancelled resulting in an
immaterial gain to the Company. The new credit agreement with GE Capital
requires that 50% of the Term Loan liabilities be converted to a fixed rate
obligation by December 1, 2000.
Subordinated Debt - At June 30, 1999, the Company had $6,350 principal
amount of eight year convertible subordinated notes, due May 4, 2003, with an
interest rate of 4%, 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. The Company entered in to an agreement in February 2000, to
replace and supersede the obligations set forth in the $2,540 principal amount,
4% convertible subordinated note due May 4, 2003. The Company's new obligation
continues to be subordinated to senior indebtedness. Periodic payments will be
made and paid in full by May 2003, with an imputed interest rate of 10%. An
extraordinary gain has been recognized in the year ended June 30, 2000,
amounting to $382, less applicable income tax expense of $254, and is shown
separately in the consolidated statements of operations.
Note 8 - Agreement to Merge
On July 25, 2000, the Company, entered into a definitive agreement with
AT&T Corp. and Liberty Media Corporation ("Liberty Media") pursuant to which
Liberty Media will acquire 100% of the Company's issued and outstanding common
stock by means of a merger. As contemplated by the merger agreement, each share
of common stock outstanding immediately prior to the effective time of the
merger will be converted into 0.104 of a share of Class A Liberty Media Group
Stock and $2.75 in cash. The merger is subject to specified terms and conditions
including the affirmative vote of the Company's stockholders and the receipt of
certain regulatory consents. The Company's stockholders controlling
approximately 71.8% of the Company's outstanding common stock have entered into
a voting agreement with Liberty Media under which these stockholders agreed to
vote in favor of the merger agreement and the merger.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(dollars in thousands)
Overview
The Company 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 multi-format technical and distribution services to
distributors of video programming. The Systems and Products segment designs,
engineers and produces advanced video facilities for the broadcast and cable
television, post-production, Internet 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 and the emerging Internet graphics and video market.
Results of Continuing Operations
Three Months Ended September 30, 2000 compared to Three Months Ended
September 30, 1999.
Total revenues increased by $1,412 to $22,216 in 2000 from $20,804 in 1999.
Revenues from the Satellite and Distribution Services segment increased by 1.7%
to $8,130 in 2000 from $7,992 in 1999. This increase was primarily due to an
increase in video transmissions and a continued increase in the number of
customers connected to the Company's satellite and fiber optic network,
partially offset by a reduced volume of standards conversion, syndicated
satellite services and duplication services. Revenues from the Systems and
Products segment increased by 41.4% to $6,674 in 2000 from $4,720 in 1999. This
increase was primarily due to increased demand for design and installation of
turnkey video systems. The Production Services segment decreased by 8.4% to
$7,412 in 2000 from $8,092 in 1999. This decrease is primarily due to the
reduced volume of creative editorial services and editing services, partially
offset by a higher volume of visual effects, broadcast design and studio
management services.
Total costs increased by $2,496 to $14,582 in 2000 from $12,086 in 1999.
Costs of the Satellite and Distribution Services segment increased by $81 to
$3,939 in 2000 from $3,858 in 1999. Costs of the Systems and Products segment
increased by $2,063 to $5,472 in 2000 from $3,409 in 1999. This increase was
primarily driven by the equipment costs associated with the increased volume in
installations of turnkey video systems. Costs of the Production Services segment
increased by $352 to $5,171 in 2000 from $4,819 in 1999.
The Company's overall gross profit margin (excluding depreciation)
decreased from 41.9% in 1999 to 34.4% in 2000. Gross profit margin from the
Satellite and Distribution Services segment decreased from 51.7% in 1999 to
51.5% in 2000. Gross profit margin from the Systems and Products segment
decreased to 18.0% in 2000 from 27.8% in 1999 primarily as a result of the
reduced margins on large turnkey video systems contracts and product mix. Gross
profit margin from Production Services segment decreased to 30.2% in 2000 from
40.4% in 1999 as a result of a decrease in revenues combined with stable fixed
costs.
Selling, general and administrative expenses decreased to $4,202 in 2000
from $4,967 in 1999. Selling, general and administrative expenses as a
percentage of revenues decreased by 5.0% from 23.9% in 1999 to 18.9% in 2000.
The ratio decrease was attributable to the increased revenues of the Company and
cost reductions related to the creative editorial services.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Continuing Operations (continued)
Depreciation expense decreased to $2,152 in 2000 from $2,281 in 1999,
resulting from the reduced level of capital expenditures and asset dispositions
in the year ended June 30, 2000. Amortization expense increased from $277 in
1999 to $347 in 2000 reflecting the amortization of the goodwill (excess of cost
over the fair value of net assets acquired), which is being amortized over 25
years, and the amortization of costs related to the refinancing discussed below.
Interest expense increased to $1,275 in 2000 from $1,241 in 1999, as a
result of higher interest rates associated with the term and revolving loans and
increased obligations for equipment capital leases.
The effective tax rate applied against pre-tax loss was (4.3)% in 2000 and
(411.9)% in 1999. The effective tax rate for 2000 as compared to the federal
statutory tax rate of 34% was primarily the result of goodwill amortization,
which is not deductible for income tax purposes and state income taxes. State
income taxes are net of state net operating loss valuations provided for certain
subsidiaries as a result of estimates regarding future operations.
Net loss increased to $315 in 2000 from a loss of $215 in 1999 primarily as
a result of the factors discussed above.
Liquidity and Capital Resources
The Company meets its liquidity needs and capital expenditures requirements
with internally generated funds, borrowing under its bank credit facility
(including line of credit), equipment financing and capital leases. Such funds
are used for capital expenditures, working capital needs and repayment of
outstanding indebtedness.
The Company refinanced its long-term indebtedness, including mortgage
payables and lines of credit (excluding existing capital lease obligations),
with a $55,000 credit facility comprised of a $15,000 revolving line of credit,
term loans totaling $30,000 and Secondary Collateral Institutional Loans
("SCIL") totaling $10,000. General Electric Capital Corporation ("GE Capital"),
is Term Agent and Administrative Agent under the credit agreement and KeyBank
National Association ("KeyBank"), is revolver agent. The revolving line of
credit bears interest at the lenders' prime rate plus .5% or LIBOR (London
Interbank Offered Rate) plus 3.25 basis points. Term Loan A bears interest at
the lenders' prime rate plus 1.25% or LIBOR plus 3.25%. The Term Loan B bears
interest at the lenders' prime rate plus 1.50% or LIBOR plus 3.50%. The SCIL
loans bear interest at the lenders' prime rate plus 2.0% or LIBOR plus 4.0%,
commencing November 2001 both rates will bear an additional 4.0% that will be
accrued but payable on the commitment termination date. Commitment termination
date, in the case of the revolving line and Term Loan A is July 1, 2003, Term
Loan B is July 1, 2005 and the SCIL loans termination date is April 1, 2007. The
Company had outstanding direct borrowings of $3,142 under the revolving line at
September 30, 2000. The Company also has outstanding under the revolving line
letters of credit of approximately $666 at September 30, 2000. The Company's
revolving line weighted average interest rate was 9.89% at September 30, 2000.
The facility contains various covenants that require the Company to maintain
certain financial ratios, limits capital expenditures, prohibit dividends and
similar payments and restrict the Company's ability to incur other indebtedness.
The facility is guaranteed by all of the Company's subsidiaries.
The Company has borrowed $5,000 of the SCIL facility, the remaining balance
of $5,000 is reserved for retiring the Company's existing Subordinated Debt.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
Subordinated Debt consists of 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. 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 February 2000, the Company entered into an agreement to replace and
supersede $2,540 principal amount of the obligations. Accordingly, $2,540 of the
principal payment was reduced to $1,980, these obligations are subordinated
debt, and do not have conversion features. An extraordinary gain of $382, net of
tax, has been recognized. Periodic payments will be made and fully paid by May
15, 2003.
At September 30, 2000, the Company's outstanding indebtedness was
approximately $49,800, including the above mentioned revolving credit facility.
At September 30, 2000, the weighted average interest rate was approximately
9.91% on the Company's outstanding indebtedness.
The Company has incurred $233 of advisory and legal fees in connection with
the merger agreement among the Company, AT&T Corp. and Liberty Media Corporation
(see Note 8).
Cash Flow from Operating Activities. For the three months ended September
30, 2000, net cash used in operating activities was $(1,214) primarily resulting
from earnings before interest, taxes, depreciation and amortization ("EBITDA")
of $3,472 which was offset by increases in working capital requirements. At
September 30, 2000, 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 three months ended September 30, 1999, net cash used
in operating activities was $740 primarily resulting from EBITDA of $3,757 which
was offset by increases in working capital requirements.
Cash Flows from Investing Activities. For the three months ended September
30, 2000, the Company used $518 for investing activities, consisting of $532 for
the purchase of additional equipment, which was offset by a sales of fixed
assets. For the three months ended September 30, 1999, the Company used $248 for
investing activities, consisting of $588 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 three months ended September
30, 2000, cash used in financing activities, was $1,475. Proceeds from long-term
borrowings include $1,000 of borrowings under the revolving line of credit.
Repayments of borrowings include $1,500 repaid under the revolving line of
credit, $543 of principal payment on secured equipment financing and $467 of
principal payment on subordinated debt. For the three months ended September 30,
1999, cash provided by financing activities, net of repayment of long-term
indebtedness, was $508. Such amount primarily consisted of $3,500 in borrowings
under the previous revolving line of credit described above. Repayments of
borrowings include $1,500 repaid under the previous revolving line of credit and
$1,547 of principal payment on mortgages, senior secured term loan and secured
equipment financing.
The Company believes its existing cash position, combined with funds
generated from operations and available under the Loan Agreement and the
Revolver will be sufficient to finance its ongoing working capital requirements
for the remainder of the fiscal year.
Quantitative and Qualitative Disclosures about Market Risk:
Market risks relating to the Company's operations result primarily from
change in interest rates as well as credit risk concentrations. To address these
risks the Company entered into an interest rate swap as described below. The
Company does not use financial instruments for trading purposes.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Quantitative and Qualitative Disclosures about Market Risk: (continued)
The Company hedges its exposure to changes in interest rates on its senior
secured term loan. In August 1997, the Company entered into an interest rate
swap agreement with KeyBank to reduce the impact of changes in interest rates on
its Term Loan. Pursuant to the refinancing at June 30, 2000, the swap agreement
was cancelled resulting in a gain of $9, which has been included as an offset to
interest expense, to the Company. The new credit agreement with GE Capital
requires that 50% of the Term Loan liabilities be converted to a fixed rate
obligation by December 1, 2000.
There has not been any material changes in the reported market risks since
the fiscal year ended June 30, 2000.
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, the loss of key personnel,
and the loss of key customers.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information
purposes only and not filed.
(b) REPORTS ON FORM 8-K
NONE
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDEO SERVICES CORPORATION
(Registrant)
Date: November 8, 2000 /s/Louis H. Siracusano
----------------------------------------------------
Name: Louis H. Siracusano
Title: President and Chief Executive Officer
Date: November 8, 2000 /s/Michael E. Fairbourne
----------------------------------------------------
Name: Michael E. Fairbourne
Title: Chief Accounting Officer
