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 December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-23388
VIDEO SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
13-3735647
(I.R.S. Employer Identification Number)
240 Pegasus Avenue Northvale, New Jersey 07647
(Address of principal executive offices, including zip code)
(201) 767-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to filed such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, $.01 par value
per share, as of February 4, 2000, was 13,308,307.
<PAGE>
VIDEO SERVICES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
The audited consolidated financial information at June 30, 1999 and the
unaudited consolidated financial information at December 31, 1999 and for the
three and six month periods ended December 31, 1998 and 1999 relate to Video
Services Corporation and its subsidiaries.
Item 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1999 3
Condensed Consolidated Statements of Operations for
the three months ended December 31, 1998 and 1999 4
Condensed Consolidated Statements of Operations for
the six months ended December 31, 1998 and 1999 5
Condensed Consolidated Statements of Cash Flows
for the six months ended December 31, 1998 and 1999 6
Condensed Consolidated Statement of Stockholders' Equity for
the six months ended December 31, 1999 7
Notes to Condensed Consolidated Financial Statements 8
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, 1999 and December 31, 1999
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1999
----------------- ----------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 805 $ 893
Accounts receivable 14,876 16,668
Inventories 694 1,268
Costs and estimated earnings in excess of billings on
uncompleted contracts 934 1,840
Deferred income taxes 1,300 1,300
Prepaid expenses and other current assets 685 1,116
----------------- ----------------
Total current assets 19,294 23,085
----------------- ----------------
Fixed assets, net 39,589 36,870
Excess of cost over fair value of net assets acquired, net 21,858 21,368
Receivable from affiliates - 44
Deferred income taxes 2,950 3,022
Other assets 1,627 1,791
----------------- ----------------
Total assets $ 85,318 $ 86,180
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,248 $ 8,385
Billings in excess of costs and estimated
earnings on uncompleted contracts 985 960
Current portion of long-term debt 7,702 8,976
Income taxes payable 691 560
Other current liabilities 3,105 3,195
----------------- ----------------
Total current liabilities 21,731 22,076
Long-term debt 36,760 38,305
Subordinated debt 5,652 5,718
Other liabilities 2,282 1,507
Payable to affiliates 46 -
----------------- ----------------
Total liabilities 66,471 67,606
----------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 1999
and December 31, 1999 - -
Common stock: $.01 par value, 25,000,000 shares authorized,
and 13,264,307 and 13,286,307 shares issued and
outstanding at June 30, 1999 and December 31, 1999 132 133
Additional paid-in-capital 21,218 21,270
Accumulated deficit (2,503) (2,829)
----------------- ----------------
Total stockholders' equity 18,847 18,574
----------------- ----------------
Total liabilities and stockholders' equity $ 85,318 $ 86,180
================= ================
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended December 31, 1998 and 1999
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1999
----------------- -----------------
Revenues:
<S> <C> <C>
Sales $ 4,799 $ 5,966
Services 16,763 16,586
----------------- -----------------
21,562 22,552
Costs:
Sales 3,983 4,877
Services 9,532 9,135
----------------- -----------------
13,515 14,012
Depreciation 2,015 2,256
----------------- -----------------
Gross profit 6,032 6,284
Selling, general and administrative expenses 5,278 4,950
Amortization 273 271
----------------- -----------------
Operating income 481 1,063
Other (expense) income:
Interest expense (1,023) (1,136)
Interest and other income 16 22
----------------- -----------------
Loss before income taxes (526) (51)
Income tax expense (benefit) (76) 60
----------------- -----------------
Net loss $ (450) $ (111)
================= =================
Earnings per share:
Basic:
Net loss $ (0.03) $ (0.01)
================= =================
Diluted:
Net loss $ (0.03) $ (0.01)
================= =================
Weighted average number of shares outstanding for basic
and diluted earnings per share 13,264,307 13,286,307
================= =================
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended December 31, 1998 and 1999
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1999
----------------- -----------------
Revenues:
<S> <C> <C>
Sales $ 10,518 $ 10,177
Services 32,950 33,179
----------------- -----------------
43,468 43,356
Costs:
Sales 8,428 8,123
Services 18,895 17,975
----------------- -----------------
27,323 26,098
Depreciation 4,151 4,537
----------------- -----------------
Gross profit 11,994 12,721
Selling, general and administrative expenses 10,236 9,917
Amortization 536 548
----------------- -----------------
Operating income 1,222 2,256
Other (expense) income:
Interest expense (2,077) (2,377)
Interest and other income 28 28
----------------- -----------------
Loss before income taxes (827) (93)
Income tax expense (benefit) (91) 233
----------------- -----------------
Net loss $ (736) $ (326)
================= =================
Earnings per share:
Basic:
Net loss $ (0.06) $ (0.02)
================= =================
Diluted:
Net loss $ (0.06) $ (0.02)
================= =================
Weighted average number of shares outstanding for basic
and diluted earnings per share 13,264,307 13,275,785
================= =================
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31, 1998 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1999
----------------- -----------------
Operating Activities
<S> <C> <C>
Net cash used in operating activities $ (33) $ (962)
Investing Activities
Additions to fixed assets (5,199) (2,135)
Proceeds from sales of fixed assets 43 417
Increase in receivable from officers (25) -
Decrease (increase) in receivable from affiliates 40 (117)
----------------- -----------------
Net cash used in investing activities (5,141) (1,835)
Financing Activities
Increase in subordinated debt 102 66
Proceeds from long-term borrowings 15,873 10,401
Repayment of borrowings (11,569) (7,582)
----------------- -----------------
Net cash provided by financing activities 4,406 2,885
Net increase (decrease) in cash (768) 88
Cash and cash equivalents, beginning of period 1,492 805
----------------- -----------------
Cash and cash equivalents, end of period $ 724 $ 893
================= =================
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the six months ended December 31, 1998 and 1999
(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, 1999 13,264,307 $ 132 $ 21,218 $ (2,503) $ 18,847
Stock related compensation 22,000 1 52 - 53
Net loss (326) (326)
-------------- -------------- ------------- --------------- --------------
Balance at December 31, 1999 13,286,307 $ 133 $ 21,270 $ (2,829) $ 18,574
============== ============== ============= =============== ==============
</TABLE>
See accompanying notes
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except for share amounts)
Note 1 - Basis of Presentation
The accompanying condensed consolidated unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended December 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending June 30,
2000. The unaudited interim financial information should be read in conjunction
with the audited consolidated financial statements of Video Services Corporation
and subsidiaries (the Company) as of and for the year ended June 30, 1999
included in the Form 10-K filed by the Company.
The Company is a leading provider of value-added video services to a
diverse base of customers within the television network, cable and syndicated
programming markets. These services are divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services. The Satellite and Distribution Services segment integrates
and distributes broadcast quality video content via a satellite and fiber optic
transmission network routed through its digital/analog switching center and is
an international provider of technical and distribution services to distributors
of television programming. The Systems and Products segment designs, engineers
and produces advanced video facilities for the broadcast and cable television,
post-production and corporate markets. This segment also develops, manufactures
and markets advanced color correcting and manipulation systems for the film,
post-production and multimedia industries and rents professional video equipment
to the sports, entertainment and other segments of the broadcast and cable
television and corporate markets. The Production Services segment is an
international provider of technical and creative services to owners, producers
of television programming, television advertising and other programming content.
On August 27, 1997, Video Services Corporation ("Old Video") merged with
and into International Post Limited ("IPL") with IPL as the surviving
corporation (the "Merger"). At the effective time of the Merger, IPL changed its
name to Video Services Corporation. As part of the Merger, the Company made a
strategic evaluation of facilities and personnel requirements and determined
that certain IPL facilities would be closed with the equipment being
consolidated into other facilities and determined that certain IPL personnel
would be redundant. Accordingly, the Company recorded a reserve for severance
costs of $1,426 and lease related costs of $993 as of August 27, 1997. The
balance of the liability was $915 and $641 at June 30, 1999 and December 31,
1999, respectively. At June 30, 1999 it was estimated that approximately $591 of
such expenditures would be made in fiscal 2000, $196 in fiscal 2001, $128 in
fiscal 2002. The Company anticipates that funding for these amounts will be
provided by operations.
Note 2 - Inventories
Inventories consist of system components and equipment which are valued at
the lower of specific cost or market and tape stock which is valued at the lower
of cost or market on a FIFO basis.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 3 - Accounts Receivable
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
--------------------- ---------------------
<S> <C> <C>
Accounts receivable, trade............................ $ 13,750 $ 14,732
Contracts receivable billed:
Uncompleted contracts.............................. 702 1,294
Completed contracts................................ 1,453 1,703
--------------------- ---------------------
15,905 17,729
Less: Allowance for doubtful accounts
and volume discounts........................ 1,029 1,061
--------------------- ---------------------
$ 14,876 $ 16,668
===================== =====================
</TABLE>
Note 4 - Fixed Assets
Fixed assets, at cost, including equipment under capitalized leases,
summarized by major categories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
--------------------- ---------------------
<S> <C> <C>
Machinery and equipment................................ $ 44,482 $ 42,557
Leasehold improvements................................. 12,389 12,485
Furniture and fixtures................................. 2,222 2,223
Transportation equipment............................... 270 267
Building............................................... 2,199 2,199
Land................................................... 1,967 1,967
Equipment under capital leases......................... 5,256 8,657
--------------------- ---------------------
68,785 70,355
Less: Accumulated depreciation........................ 29,196 33,485
--------------------- ---------------------
$ 39,589 $ 36,870
===================== =====================
</TABLE>
Note 5 - Segment Data
The Company's continuing operations are classified into three reportable
business segments that provide different products and services: (i) Satellite
and Distribution Services, (ii) Systems and Products and (iii) Production
Services (See Note 1). Separate management of each segment is required because
each segment is subject to different marketing, production, and technology
strategies.
The Company evaluates performance and allocates resources based on
operating income from continuing operations. The Company does not allocate
income and expenses that are of a general corporate nature to industry segments
in computing operating income. These include corporate expenses, interest income
and expenses, and certain other income and expenses not directly attributable to
a specific segment.
Inter-segment sales are accounted for on the same basis used to price sales
to similar non-affiliated customers and such sales are eliminated in arriving at
consolidated amounts.
The accounting policies applied by each of the segments are the same as
those used by the company in general.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 5 - Segment Data (Continued)
Assets by segment include assets directly identifiable with those
operations. Other assets primarily consist of corporate cash and cash
equivalents and fixed assets associated with nonsegment activities.
The Company operates primarily in the United States. Revenues from foreign
countries are not significant.
Summarized financial information by business segment for the three and six
month periods ended December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, December 31, December 31,
1998 1999 1998 1999
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers:
Systems and Products................... $ 5,108 $ 6,563 $ 11,329 $ 11,283
Satellite and Distribution Services.... 7,943 8,931 14,986 16,923
Production Services.................... 8,511 7,058 17,153 15,150
------------------ ----------------- ------------------ ------------------
Revenues............................... $ 21,562 $ 22,552 $ 43,468 $ 43,356
================== ================= ================== ==================
Intersegment revenues:
Systems and Products................... $ 244 $ 152 $ 1,569 $ 177
Satellite and Distribution Services.... 281 237 602 564
Production Services.................... 94 110 197 175
------------------ ----------------- ------------------ ------------------
Total intersegment revenues............ $ 619 $ 499 $ 2,368 $ 916
================== ================= ================== ==================
Operating income:
Systems and Products................... $ 246 $ 671 $ 938 $ 1,101
Satellite and Distribution Services.... 1,352 2,113 2,609 3,924
Production Services.................... 218 (487) 265 (313)
Corporate.............................. (1,335) 1,234) (2,590) (2,456)
------------------ ----------------- ------------------ ------------------
Operating income 481 1,063 1,222 2,256
Interest expense....................... (1,023) (1,136) (2,077) (2,377)
Interest and other income.............. 16 22 28 28
------------------ ----------------- ------------------- ------------------
Loss before income taxes............... $ (526) $ (51) $ (827) $ (93)
================== ================= =================== ==================
</TABLE>
<TABLE>
June 30, December 31,
1999 1999
----------------- ------------------
<S> <C> <C>
Identifiable assets at June 30, 1999 and December 31, 1999:
Systems and Products.................................. $ 6,427 $ 7,466
Satellite and Distribution Services................... 20,691 22,557
Production Services................................... 25,698 23,973
Corporate............................................. 32,502 32,184
----------------- ------------------
Total assets.......................................... $ 85,318 $ 86,180
================= ==================
</TABLE>
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 6 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
December 31, December 31, December 31, December 31,
1998 1999 1998 1999
---------------- ------------------ ----------------- -----------------
Numerator:
<S> <C> <C> <C> <C>
Net loss.............................. $ (450) $ (111) $ (736) $ (326)
---------------- ------------------ ----------------- -----------------
Numerator for basic loss per share - net
loss available to common stockholders (450) (111) (736) (326)
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.......... $ (450) $ (111) $ (736) $ (326)
================ ================== ================= =================
Denominator:
Denominator for basic earnings per
share-weighted-average shares...... 13,264,307 13,286,307 13,264,307 13,275,785
Effect of dilutive securities:
4% convertible subordinated notes and
stock options...................... --- --- --- ---
---------------- ------------------ ----------------- -----------------
Denominator for diluted earnings per
share-adjusted weighted-average
share and assumed conversions...... 13,264,307 13,286,307 13,264,307 13,275,785
================ ================== ================= =================
Basic loss per share.................. $ (0.03) $ (0.01) $ (0.06) $ (0.02)
================ ================== ================= =================
Diluted loss per share................ $ (0.03) $ (0.01) $ (0.06) $ (0.02)
================ ================== ================= =================
</TABLE>
Loss per share has been computed using the weighted average number of
shares outstanding during each period.
The effect of 4% convertible subordinated notes and stock options have been
excluded from the diluted earnings per share calculation, because they are
anti-dilutive.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 7 - Long-Term Debt
<TABLE>
<CAPTION>
June 30, December 31,
1999 1999
----------------- -----------------
<S> <C> <C>
Senior secured term loan........................................... $ 25,250 $ 22,250
Senior secured revolving credit loan............................... 12,700 16,000
Mortgage payable to credit institution bearing interest at
8.95% - prime (7.75% at June 30, 1999 and 8.50% at
December 31, 1999) plus 1% collateralized by fixed
assets with net book value at $2,395 and $2,354................. 2,209 2,106
Capitalized lease obligations...................................... 4,303 6,925
----------------- -----------------
44,462 47,281
Less: current maturities.......................................... 7,702 8,976
----------------- -----------------
$ 36,760 $ 38,305
================= =================
</TABLE>
Senior Secured Long-Term Debt - The Company has a $33,000 senior secured
term loan (the "Term Loan") and the Revolving Loan (as defined herein), with a
five-year facility provided by KeyBank, as the agent bank (the "Facility") which
are secured by all assets of the Company and its existing and future directly
and indirectly owned subsidiaries. The Revolving Loan bears interest at the
lenders' prime rate plus or minus certain percentages based upon the Company's
leverage ratio (funded debt divided by EBITDA) or LIBOR (London Interbank
Offered Rate) plus a number of basis points based upon the Company's leverage
ratio. The Term Loan bears interest at LIBOR plus a number of basis points based
upon the Company's leverage ratio. The facility contains various convenants that
require the Company to maintain certain financial ratios, limits capital
expenditures, prohibit dividends and similar payments and restrict the Company's
ability to incur other indebtedness. The Facility is guaranteed by all of the
Company's subsidiaries.
In August 1997, the Company entered into an interest rate swap agreement
with KeyBank to reduce the impact of changes in interest rates on its Term Loan.
The agreement, which matures in five years, has a total beginning notional
principal amount of $33,000, which decreases in accordance with scheduled
principal payments on the Company's Term Loan. The swap agreement effectively
converts the Company's borrowings under its Term Loan to a fixed rate. The
company pays the counterparty a fixed rate of 7.58% per annum and receives
payments based upon the floating one month LIBOR rate. The Company is exposed to
credit loss in the event of nonperformance by the counterparty; however, the
Company does not anticipate nonperformance by the counterparty.
Revolving Credit Facility - The Company has a $17,000 senior secured
revolving credit facility (the "Revolving Loan") with KeyBank. The Company had
outstanding direct borrowings of $16,000 under the Revolving Loan at December
31, 1999. The Company also has outstanding under the Revolving Loan letters of
credit of approximately $776 at December 31, 1999. The Company's Revolving Loan
weighted average interest rate was 9.00% at December 31, 1999.
Subordinated Debt - The Company has $6,350 principal amount of eight year
convertible subordinated notes, due May 4, 2003, with an interest rate of 4.0%,
convertible at $14 per share after five years and redeemable after six years.
The debt was valued at $4,890 at May 5, 1995 using an effective rate of 8.34%.
The valuation discount is being amortized over the life of the notes.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(dollars in thousands)
Overview
The Company's business is currently divided into three segments: (i)
Satellite and Distribution Services, (ii) Systems and Products and (iii)
Production Services (see Note 5). The Satellite and Distribution Services
segment integrates and distributes broadcast quality video content via a
satellite and fiber optic transmission network routed through its digital/analog
switching center. The Systems and Products segment designs, engineers and
produces advanced video facilities for the broadcast and cable television,
post-production and corporate markets. This segment also develops, manufactures
and markets advanced color correcting and manipulations systems for the film,
post-production and multimedia industries and rents professional video equipment
to the sports, entertainment and other segments of the broadcast and cable
television and corporate markets. The Production services segment is an
international provider of technical and creative services to owners, producers
of television programming, television advertising and other programming content.
Results of Continuing Operations
Three Months Ended December 31, 1999 compared to Three Months Ended
December 31, 1998.
Total revenues increased by $990 to $22,552 in 1999 from $21,562 in 1998.
Revenues from the Satellite and Distribution Services segment increased by 12.4%
to $8,931 in 1999 from $7,943 in 1998. This increase was primarily due to the
West Coast facility being fully operational, an increase in syndicated satellite
services, video transmissions and a continued increase in the number of
customers connected to the Company's satellite and fiber optic network. Revenues
from the Systems and Products segment increased by 28.5% to $6,563 in 1999 from
$5,108 in 1998 primarily due to certain contracts for the design and
installation of video systems that were delayed from the prior quarter. The
Production Services segment decreased by 17.1% from $8,511 in 1998 to $7,058 in
1999. The decrease is primarily due to the loss of network operations contracts,
a lower volume of creative editorial services and lower film to videotape
transfer, duplication and visual effects services.
Total costs increased by $497 to $14,012 in 1999 from $13,515 in 1998.
Costs of the Satellite and Distribution Services segment increased by $81 to
$4,354 in 1999 from $4,273 in 1998. This increase consisted primarily of costs
associated with the fully operational West Coast facility offset by lower
syndication costs. Costs of the Systems and Products segment increased by $1,048
to $5,077 in 1999 from $4,029 in 1998. This increase was primarily driven by the
increased volume, caused by the delay in certain contracts from the prior
quarter, in installations of video systems. Costs of the Production Services
segment decreased by $632 from $5,213 in 1998 to $4,581 in 1999. The decrease
was primarily a result of a reduction in fixed salaries and costs.
The Company's overall gross profit margin (excluding depreciation)
increased to 37.9% in 1999 from 37.3% in 1998. Gross profit margin from the
Satellite and Distribution Services segment increased to 51.2% in 1999 from
46.2% in 1998 as a result of the new West Coast facility being fully operational
and higher margins on the syndication revenues. Gross profit margin from the
Systems and Products segment increased to 22.6% in 1999 from 21.1% in 1998
primarily as a result of higher margin video systems contracts. Gross profit
margin from Production Services segment decreased from 38.7% in 1998 to 35.1% in
1999 as a result of a decrease in revenues offset by a reduction in fixed
salaries and costs.
Selling, general and administrative expenses decreased from $5,278 in 1998
to $4,950 in 1999. Selling, general and administrative expenses as a percentage
of revenues decreased by 2.6% from 24.5% in 1998 to 21.9% in 1999. The ratio
decrease was primarily attributable to the increased revenues of the Company.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Continuing Operations (continued)
Depreciation expense increased to $2,256 in 1999 from $2,015 in 1998,
primarily due to the new West Coast facility. Amortization expense decreased
from $273 in 1998 to $271 in 1999 reflecting the amortization of the goodwill
(excess of cost over the fair value of net assets acquired), which is being
amortized over 25 years.
Interest expense increased to $1,136 in 1999 from $1,023 in 1998, as a
result of higher interest rates associated with the term loan and the revolving
loan and increased borrowings associated with the new West Coast facility.
The effective tax rate applied against pre-tax loss was 117.6% in 1999 and
(14.4)% in 1998. The effective tax rate for 1999 as compared to the federal
statutory tax rate of 34% was primarily the result of goodwill amortization,
which is not deductible for income tax purposes and state income taxes. State
income taxes are net of state net operating loss valuations provided for certain
subsidiaries as a result of estimates regarding future operations.
Net loss decreased from $450 in 1998 to $111 in 1999 primarily as a result
of the factors discussed above.
Six Months Ended December 31, 1999 compared to Six Months Ended December
31, 1998.
Total revenues decreased by $112 from $43,468 in 1998 to $43,356 in 1999.
Revenues from the Satellite and Distribution Services segment increased by 12.9%
to $16,923 in 1999 from $14,986 in 1998. This increase was primarily due to the
West Coast facility being fully operational, an increase in syndicated satellite
services, video transmissions and a continued increase in the number of
customers connected to the Company's satellite and fiber optic network. Revenues
from the Systems and Products segment were $11,283 in 1999 and $11,329 in 1998.
The Production Services segment decreased by 11.7% from $17,153 in 1998 to
$15,150 in 1999. The decrease is primarily due to the loss of network operations
contracts, a lower volume of creative editorial services and lower film to
videotape transfer services offset by increased visual effects services.
Total costs decreased by $1,225 from $27,323 in 1998 to $26,098 in 1999.
Costs of the Satellite and Distribution Services segment increased by $255 to
$8,212 in 1999 from $7,957 in 1998. This increase consisted primarily of costs
associated with the fully operational West Coast facility offset by lower
syndication costs. Costs of the Systems and Products segment decreased by $207
from $8,693 in 1998 to $8,486 in 1999. This decrease was primarily a result of
reductions in variable costs in the installation of video systems for certain
contracts. Costs of the Production Services segment decreased by $1,273 from
$10,673 in 1998 to $9,400 in 1999. The decrease was primarily a result of a
reduction in fixed salaries and costs.
The Company's overall gross profit margin (excluding depreciation)
increased to 39.8% in 1999 from 37.1% in 1998. Gross profit margin from the
Satellite and Distribution Services segment increased to 51.5% in 1999 from
46.9% in 1998 as a result of the new West Coast facility being fully operational
and higher margins on the syndication revenues. Gross profit margin from the
Systems and Products segment increased to 24.8% in 1999 from 23.3% in 1998
primarily as a result of higher margin video systems contracts. Gross profit
margin from Production Services segment increased to 38.0% in 1999 from 37.8% in
1998 as a result of a decrease in revenues combined with a greater reduction in
fixed salaries and costs.
Selling, general and administrative expenses decreased from $10,236 in 1998
to $9,917 in 1999. Selling, general and administrative expenses as a percentage
of revenues decreased by .6% from 23.5% in 1998 to 22.9% in 1999. The ratio
decrease was primarily attributable to the reduction in variable costs of the
Company.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Depreciation expense increased to $4,537 in 1999 from $4,151 in 1998,
primarily due to the new West Coast facility. Amortization expense increased to
$548 in 1999 from $536 in 1998 reflecting the amortization of the goodwill
(excess of cost over the fair value of net assets acquired), which is being
amortized over 25 years.
Interest expense increased to $2,377 in 1999 from $2,077 in 1998, as a
result of higher interest rates associated with the term loan and the revolving
loan and increased borrowings associated with the new West Coast facility.
The effective tax rate applied against pre-tax loss was 250.5% in 1999 and
(11.0)% in 1998. The effective tax rate for 1999 as compared to the federal
statutory tax rate of 34% was primarily the result of goodwill amortization,
which is not deductible for income tax purposes and state income taxes. State
income taxes are net of state net operating loss valuations provided for certain
subsidiaries as a result of estimates regarding future operations.
Net loss decreased from $736 in 1998 to $326 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.
In August 1997, the Company entered into a five-year facility with a
$33,000 term loan and a $17,000 revolving line of credit. The facility bears
interest at: (i) the lenders' prime rate plus or minus certain percentages based
upon the Company's leverage ratio (funded debt divided by EBITDA (defined as
earnings before interest, taxes, depreciation and amortization) or (ii) LIBOR
plus a number of basis points based upon the Company's leverage ratio. The
Company has the option to choose the applicable interest rate. The facility is
secured by all of the assets of the Company and its subsidiaries. The facility
contains covenants, which require the Company to maintain certain financial
ratios, prohibit dividends and similar payments and restrict the Company's
ability to incur other indebtedness. The facility is guaranteed by all of the
Company's subsidiaries.
At December 31, 1999, the Company's outstanding indebtedness was
approximately $52,999, including $16,000 under the revolving credit facility. At
December 31, 1999, the weighted average interest rate was approximately 9.18% on
the Company's outstanding indebtedness. The remainder of the facility
(approximately $224) will be available for future working capital requirements
and general corporate purposes.
Cash Flow from Operating Activities. For the six months ended December 31,
1999, net cash used in operating activities was $962, primarily resulting from
EBITDA of $7,369, which was offset by increases in working capital requirements.
At December 31, 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 six months ended December 31, 1998, net cash used in
operating activities was $33, primarily resulting from EBITDA of $5,937, which
was offset by increases in working capital requirements.
Cash Flow from Investing Activities. For the six months ended December 31,
1999, the Company used $1,835 for investing activities, consisting of $2,135 for
the purchase of additional equipment, which was offset by sales of fixed assets.
Approximately $1,850 of additional equipment was used for a high definition
telecine suite.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Liquidity and Capital Resources (continued)
Cash Flow from Financing Activities. For the six months ended December 31,
1999, cash provided by financing activities, net of repayment of borrowings of
long-term indebtedness, was $2,885. Such amount primarily consisted of $7,000 in
borrowings under the revolving line of credit described above and $3,401 of
capital equipment leases. The Company repaid $7,582 of borrowings primarily in
connection with the revolving line of credit and the refinancing described
above.
Impact of Year 2000:
The Company, as of the date of this filing, has not experienced any
material adverse effects on its operations relating to the Year 2000 issues
associated with its systems or those of third parties with whom it has
significant business relationships. The Company has not incurred any material
costs associated with the year 2000.
Quantitative and Qualitative Disclosures about Market Risk:
Market risks relating to the Company's operations result primarily from
change in interest rates as well as credit risk concentrations. To address these
risks the Company entered into an interest rate swap as described below. The
Company does not use financial instruments for trading purposes.
The Company hedges its exposure to changes in interest rates on its senior
secured term loan. In August 1997, the Company entered into a five year interest
rate hedge agreement with a total notional amount of $33,000 to manage interest
costs associated with changing interest rates. This agreement converts
underlying variable rate debt based on LIBOR under the Company's term loan to
fixed rate debt with an interest rate of 8.33%.
There has not been any material changes in the reported market risks since
the fiscal year ended June 30, 1999.
Forward-Looking Statements:
The above discussion contains forward-looking statements. There are certain
important factors that could cause results to differ materially from those
anticipated by the statements made above. These factors include, but are not
limited to: the general performance of the economy, specifically as it affects
the advertising, entertainment and television and video industries; the
international economic and political climate which could impact the sale of
domestic programming overseas; significant changes in video technology in the
post-production, video and communications industries; the loss of key personnel
and the loss of key customers.
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information purposes
only and not filed.
(b) REPORTS ON FORM 8-K
NONE
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDEO SERVICES CORPORATION
(Registrant)
Date: February 4, 2000 /s/Louis H. Siracusano
-------------------------------------------
Name: Louis H. Siracusano
Title: President and Chief Executive Officer
Date: February 4, 2000 /s/Michael E. Fairbourne
-----------------------------------------------
Name: Michael E. Fairbourne
Title: Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME FILED AS PART OF THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
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