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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, 2000
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 telephone number, including area code (201) 767-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
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 (ss229.405) 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
22, 2000, was approximately $12,827,425.
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The number of outstanding shares of the registrant's common stock, par
value $.01 per share, as of August 22, 2000, was: 13,311,307.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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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-served. 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 business became an element 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.
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. 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 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.
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 to the consolidated financial statements). 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 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 ongoing conversion of
existing television and cable facilities to digital, a growing demand for
internet-related video applications, 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,
syndication, cable, foreign television or the Internet; (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 and for Internet applications; (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 out-sourced 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 and the increasing worldwide market
penetration of distribution channels such as home video, digital satellite
broadcasting and Internet video streaming. The Company also believes that in
addition to creating demand for its traditional post-production services, these
factors will create demand for newer multi-format services and creative graphic
and branding services offered by the Company.
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. 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.
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 June 2000, the Company assigned its leasehold in its Miami studio to a
customer. This customer outsources to the Company its engineering and technical
operations.
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.
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 digital betacam 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, high-definition 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 digital
encoding to MPEG 1/2 and streaming of program content via the Internet.
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 NBA.
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 twelfth year of worldwide distribution
for the NBA and the fourteenth year for Hearst Entertainment supplying movies
and series programming. Other programs include, "Ricki Lake", "Spin City", "60
Minutes 1 and 2", "South Park", "Dr. Katz", "Family Law", "As the World Turns"
and many more. 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, Buena Vista International, Hearst Entertainment, NBA, NFL, NHL,
Dream Works, Sesame Workshop, Discovery Channel and The History 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, Internet "broadcasters" and video streaming
facilities 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 using computerized design
programs and are assembled in AFA's facility in Northvale, New Jersey. Assembly
includes custom fabrication of all audio, video, networking, data 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 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), Internet companies (e.g., Microcast, Inc.) 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: technical facilities for a new
sports network, PSN, for Latin America; a new digital TV station for NBC-owned
WTVJ in Miami, Florida; a major expansion for Scripps Howard's cable networks in
Knoxville; and a state-of-the-art training complex for a major pharmaceutical
manufacturer. Current projects include a major Internet video streaming
operation for Microcast; a complete rebuild of USA Networks' technical plant; a
large expansion of the PSN sports network; and several new digital television
stations.
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. "Trax'Im", 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.
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 slow-motion systems, high-definition TV equipment,
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, Major League Baseball and Nascar. 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 Paine Webber, Cobra Golf, Stop N Shop,
Fleet Bank, Folgers, Sprint, Ocean Spray and Nabisco, 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.
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:
Volkswagen's Beetle and 2000 Cabrio Campaigns, Visa, Pepsi, Pizza Hut, Macy's,
US Navy, Wendy's, IBM, MCI, Burger King, Bell Atlantic Sprint, Urban Fetch and
ChemConnection.com. In addition to Manhattan Transfer's commercial activities,
it provided post-production services for the network television series "The
Beat", for the HBO episodic series "Oz", and for the network situation comedy
"Cosby".
Commercials finished this last year at MT-Miami include Pier 1 Imports,
Huggies, Kodak Latin America, Eureka U.S. and U.K. and Eritmo.com 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, Ogilvy, J. Walter Thompson, Jordan McGrath Case, McCann Erickson,
Young and Rubicam, Arnold Communications, Deutsch and Grey Entertainment.
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 post-production group also use an
aggressive direct mail program. The focus of this advertising and direct mail 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.
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, Phillips and Grass Valley
Group. 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, Communications Engineering Inc. National
TeleConsultants and The Systems Group, as well as small, regionally based
integrators and dealers. Competition is based upon technical expertise,
experience and price. VRI's major competitor is Bexel Corporation, which has
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
by 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.
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
--------- -----------------------
E910152 March 22, 2001
E4626 September 10, 2002
E960405 September 6, 2006
E970418 October 10, 2007
E881160 February 17, 2009
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
--------- -----------------------
WMQ-537 February 1, 2001
WNEI382 June 23, 2009
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 509 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.
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, 2000 and June 30, 1999, the Company had backlogs of
approximately $8,600,000 and $6,000,000 respectively. All of such backlog is
attributable to AFA's video production systems projects and will be completed
within the coming year.
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/West leases a 13,000 square foot facility in
Burbank, California.
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 matters, 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 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 22, 2000, there were approximately 625 holders of record of
the Common Stock.
The following table sets forth the high and low closing 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.
<TABLE>
<CAPTION>
Fiscal Year 1999 High Low
---------------- ---- ---
<S> <C> <C>
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)
Fiscal Year 2000 High Low
---------------- ---- ---
First Quarter.................................3 1/4 1 7/8
(July 1 to September 30)
Second Quarter................................4 1/2 1 5/8
(October 1 to December 31)
Third Quarter.................................5 13/16 2 3/8
(January 1 to March 31)
Fourth Quarter................................6 3
(April 1 to June 30)
</TABLE>
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,
dollars in thousands except share amounts.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, June 30, June 30, June 30, June 30,
1996 1997(1) 1998(3) 1999 2000
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (3)
Revenues ................................. $ 29,740 $ 27,610 $ 72,995 $ 89,411 $ 96,148
Depreciation and amortization ............ 1,653 1,824 7,958 9,836 10,465
Operating income from continuing ......... 2,387 1,750 6,692 2,138 3,989
operations
Income (loss) before income taxes,
discontinued operations and
extraordinary gain .................... 1,999 1,825 3,290 (1,958) (268)
Income (loss) before discontinued
operations and extraordinary gain...... 1,212 1,638 1,699 (1,900) (1,111)
Loss from discontinued operations, ....... (388) (1,688) (1,860) -- --
net of tax (2) (4)
Extraordinary gain (5) ................... 382
Net income (loss) ........................ $ 824 $ (50) $ (161) $ (1,900) $ (729)
Pro forma income (loss) per share before
discontinued operations and .......... $ 0.17 $ 0.23 $ 0.14 $ (0.14) $ (.08)
extraordinary ............................
gain - basic (3)
Pro forma net income (loss) per share - .. $ 0.12 $ (0.01) $ (0.01) $ (0.14) $ (.05)
basic (3) ...........................
Weighted average number of shares ........ 6,961 7,011 12,276 13,264 13,292
outstanding (3)
</TABLE>
<TABLE>
<CAPTION>
As of As of As of As of As of
June 30, June 30, June 30, June 30, June 30,
1996 1997 1998(3) 1999 2000
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data: (3)
Total assets.............................. $ 17,672 $ 20,801 $ 81,860 $ 85,318 $ 86,032
Long-term debt, net of current portion.... 2,140 5,330 30,968 36,760 40,752
Subordinated debt, net of
current portion...................... --- --- 5,442 5,652 2,924
Stockholders' equity...................... $ 2,655 $ 2,733 $ 20,725 $ 18,847 $ 18,251
</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, 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.
(5) Extraordinary gain of $382, net of income tax expense of $254, in fiscal
2000 is attributable to the settlement and replacement of a $2,540 4%
convertible note.
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, 2000 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, 2000, 1999 and 1998,
and include the results of operations and cash flows of IPL from the date of the
Merger. Certain comparable references to IPL's 1999 and 1998 figures include
pre-merger 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.
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. 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 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.
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 to the consolidated financial statements). 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.
Discontinued Operations
On November 30, 1997, management, which had the authority to approve the
action, committed the Company to a formal plan to dispose of the Consulting
Services segment providing strategic consulting services in the area of
communications, design and implementation of intranets, extranets and internets.
The Consulting Services segment was acquired in the Merger. Management closed
the Consulting Services segment November 1998 (See Note 16 to the consolidated
financial statements).
Results of Continuing Operations
Year Ended June 30, 2000 compared to Year Ended June 30, 1999 (dollars in
thousands)
Total revenues increased by $6,737 to $96,148 in 2000 from $89,411 in 1999.
Revenues from the Satellite and Distribution Services segment increased by 9.1%
to $34,130 in 2000 from $31,280 in 1999. 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 19.2% to $30,540 in 2000 from
$25,615 in 1999. This increase was primarily due to increased demand for design
and installation of turnkey video systems. The Production Services segment
decreased by 3.2% from $32,516 in 1999 to $31,478 in 2000. The decrease is
primarily due to the loss of certain network operations contracts, a lower
volume of creative editorial services and lower film to videotape transfer
services offset by increased visual effects and broadcast design services.
Total costs increased by $4,592 to $61,493 in 2000 from $56,901 in 1999.
Costs of the Satellite and Distribution Services segment increased by $822 to
$16,908 in 2000 from $16,086 in 1999. This increase consisted primarily of costs
associated with the ramp up of the fully operational West Coast facility offset
by lower syndication costs. Costs of the Systems and Products segment increased
by $3,926 to $24,576 in 2000 from $20,650 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
decreased by $156 from $20,165 in 1999 to $20,009 in 2000. The decrease was
primarily a result of a reduction in fixed salaries and costs.
The Company's overall gross profit margin (excluding depreciation)
decreased from 36.4% in 1999 to 36.0% in 2000. Gross profit margin from the
Satellite and Distribution Services segment increased to 50.5% in 2000 from
48.6% in 1999. This increase was a result of greater use of existing capacities,
the new West Coast facility being fully operational and higher margins on the
syndication revenues. Gross profit margin from the Systems and Products segment
was basically unchanged, 19.5% in 2000 from 19.4% in 1999. Gross profit margin
from Production Services segment decreased from 38.0% in 1999 to 36.4% in 2000
as a result of a decrease in revenues combined with stable fixed costs
Selling, general and administrative expenses was basically unchanged,
decreasing from $20,205 in 1999 to $20,201 in 2000. Selling, general and
administrative expenses as a percentage of revenues decreased by 1.6% from 22.6%
in 1999 to 21.0% in 2000. The ratio decrease was primarily attributable to the
increased revenues of the Company.
Depreciation expense increased to $9,265 in 2000 from $8,743 in 1999,
primarily due to the new West Coast facility as well as other investments in
capital equipment. Amortization expense was $1,200 in 2000 and $1,093 in 1999
reflecting the amortization of the goodwill (excess of cost over the fair value
of net assets acquired), which is being amortized principally over 25 years.
Merger related costs were incurred during the 1999 fiscal year. The Company
received unsolicited expressions of interest in acquiring the Company from third
parties. The Company incurred $331 of advisory and legal fees in connection with
its evaluation of these expressions of interest. Since discussions were
terminated, these costs were expensed in fiscal year 1999.
Interest expense increased to $4,814 in 2000 from $4,149 in 1999, as a
result of higher interest rates associated with the term loan and the revolving
loan and increased equipment capital lease obligations. See "Liquidity and
Capital Resources."
The effective tax rate applied against pre-tax loss was 314.5% in 2000 and
(3.0)% in 1999. The effective tax rate for 2000 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. In addition, the state net operating loss valuation increased by
$1,341 and $2,600 in 1999 and 2000, respectively as a result of continued
operating losses in certain subsidiaries. The Company has a state valuation
allowance of $4,620 as of June 30, 2000. The state valuation allowance is
provided as a result of estimates regarding future operations for certain
subsidiaries in certain states.
Loss from continuing operations decreased from $1,900 in 1999 to $1,111 in
2000 primarily as a result of the factors discussed above.
Extraordinary gain of $382 (net of income tax expense of $254) in 2000 is
attributable to the settlement and replacement of the $2,540 4% convertible
subordinated note due May 4, 2003, more fully discussed in Liquidity and Capital
Resources.
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 principally over 25 years.
Merger related costs were incurred during the 1999 fiscal year. The Company
received unsolicited expressions of interest in acquiring the Company from third
parties. The Company incurred $331 of advisory and legal fees in connection with
its evaluation of these expressions of interest. Since discussions were
terminated, these costs were expensed in fiscal year 1999.
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.
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.
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 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 $3,642 under the revolving line at June 30, 2000. The Company also has
outstanding under the revolving line letters of credit of approximately $686 at
June 30, 2000. The Company's revolving line weighted average interest rate was
9.89% at June 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.
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 June 30, 2000, the Company's outstanding indebtedness was approximately
$51,272, including the above mentioned revolving credit facility. At June 30,
2000, the weighted average interest rate was approximately 9.92% on the
Company's outstanding indebtedness.
In June 2000, the Company assigned its leasehold in its Miami studio and
sold other assets, cash proceeds from these transactions were $1,295, the
Company recorded a gain of $367 included in other income.
The Company has incurred $79 of advisory and legal fees in connection with
the merger agreement among the Company, AT&T Corp. and Liberty Media Corporation
(see Note 21 to the consolidated financial statements).
Cash Flow from Operating Activities. For the year ended June 30, 2000, net
cash provided by operating activities was $4,125 primarily resulting from
earnings before interest, taxes, depreciation and amortization ("EBITDA") of
$15,011 which was offset by increases in working capital requirements. At June
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 year ended June 30, 1999, net cash provided by operating activities was
$2,567 primarily resulting from EBITDA of $12,027 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, 2000, the
Company used $2,976 for investing activities, consisting of $4,459 for the
purchase of additional equipment, which was offset by a sales of fixed assets
and repayment of an advance to an affiliate. 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.
Cash Flow from Financing Activities. For the year ended June 30, 2000, cash
provided by financing activities, net of repayments of borrowings of long-term
indebtedness, was $1,659. Proceeds from long-term borrowings include $38,642
attributed to the refinancing with GE Capital discussed above, $9,400 of
borrowings under our previous revolving line of credit and $5,240 of secured
equipment financing. Repayments of borrowings include $37,411 attributed to the
refinancing with GE Capital, $7,200 repaid under our previous revolving line of
credit and $6,847 of principal payment on mortgages, senior secured term loan
and secured equipment financing. For the year ended June 30, 1999, cash provided
by financing activities, net of repayment 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.
Repayments of borrowings include $11,925 repaid under our previous revolving
line of credit and $5,753 of principal payment on mortgages, senior secured term
loan and secured equipment financing.
The foregoing activities resulted in a net increase in cash of $2,808 in
2000. 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.
At June 30, 2000, the Company has approximately $3,480 of net deferred tax
assets. The Company believes that it will generate sufficient future taxable
income which coupled with the availability of certain prudent and feasible tax
planning strategies, will enable the Company to realize its net deferred tax
asset.
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.
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, 1999 and 2000.
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 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.
<PAGE>
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>
2000 Fair Value
(dollars in thousands) 2000 2001 2002 2003 Thereafter Total 2000
----------------------------- -- ----------- -- ---------- --- ---------- -- ----------- -- ---------- --- --------- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt including
current portion
Fixed rate............ $ 5,666 $ 6,875 $ 6,866 $ 6,962 $ 19,917 $ 46,286 $ 46,286
Average interest rate. 10.02% 10.05% 10.10% 10.14% 10.40%
Subordinated Debt
Fixed rate............ $ 2,062 $ 1,602 $ 1,605 $ - $ - $ 5,269 $ 4,986
Average interest rate.... 8.96% 8.80% 8.80%
1999 Fair Value
(dollars in thousands) 2000 2001 2002 2003 2004 Total 1999
----------------------------- -- ----------- -- ---------- --- ---------- -- ----------- -- ---------- -- ---------- --- -----------
<S> <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%
</TABLE>
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.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following table sets forth certain information with respect to the
Directors and certain executive officers of the Company at August 22, 2000:
Name.................. Age Position
Robert H. Alter(l)(2). 71 Director
Terrence A. Elkes..... 66 Director and Chairman of the Board
Martin Irwin.......... 64 Director and Vice Chairman of the Board
Louis H. Siracusano... 58 Director, President and Chief Executive
Officer
Raymond L. Steele (l)(2) 65 Director
Frank Stillo (1) (2).. 66 Director
Donald H. Buck........ 61 Vice President
Michael E. Fairbourne. 47 Vice President - Administration,
Chief Accounting Officer and Secretary
Daniel Rosen.......... 63 Vice President - Post Production
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Robert H. Alter, has been a director of the Company since October 1993. Mr.
Alter is a director of Source Media, Inc. and the Vice Chairman and a director
of the Cabletelevision Advertising Bureau ("CAB"), the national trade
association of the cable television industry devoted to marketing and
advertising, a position he has held since October 1991.
Terrence A. Elkes, has been a director and the Chairman of the Board of the
Company since October 1993. Mr. Elkes is a Managing Director of Apollo Partners,
Ltd. ("Apollo"), a private investment firm involved in the acquisition of
companies in the media, communications, entertainment and broadcasting fields,
which he co-founded in 1987. Prior to forming Apollo, Mr. Elkes was employed by
Viacom International, Inc. where he served as President from 1978-1982 and Chief
Executive Officer from 1983-1987.
Martin Irwin, has been a director and the Vice-Chairman of the Board of the
Company since August 1997 and prior thereto, had been a director, President and
Chief Executive Officer of the Company. Mr. Irwin, co-founded with Messrs.
Siracusano and Ferolito Video Services Corporation ("Old Video") which merged
into International Post Limited ("IPL") on August 27, 1997 (the "Merger"),
served in various capacities with Old Video since its formation. Prior to
co-founding Old Video, Mr. Irwin was employed by EUE/Screen Gems, a division of
Columbia Pictures Industries, Inc., where he last served as Senior Vice
President and General Manager.
Louis H. Siracusano, has been President and Chief Executive Officer of the
Company since August 1997 and had been a director of the Company since October
1993. Prior to August 1997, Mr. Siracusano served as the Chairman, Chief
Executive Officer and a director of Old Video since 1986 and President since
1989. Mr. Siracusano also served as President of Audio Plus Video International,
Inc., a Company subsidiary, from July 1989 to February 1994. Mr. Siracusano was
a founder of Old Video and served in various capacities with Old Video since its
formation. Mr. Siracusano was with Ampex Corporation and the American
Broadcasting Company in various sales and engineering management positions prior
to Old Video's formation in 1979.
Raymond L. Steele, has been a director of the Company since August 1997 and
currently serves as Chairman of the Compensation Committee. Prior thereto, Mr.
Steele had been a Principal of Pacholder Associates, Inc., an institutional
money manager and workout specialist, until his retirement in 1991. Since
November 1993, he has been retained as a consultant for Emerson Radio Corp.,
NUWAVE Technologies Inc., a distributor of video enhancement chips, Home
Holdings, Inc., an insurance holding company, and GFTA, a German software
developer. He has served as a director of numerous companies, including Orion
Pictures Corporation and Webcraft Technologies, Inc., and currently serves as a
director of Emerson Radio Corp., ICH Corp., Modernfold, Inc., a manufacturer of
movable walls, and GFTA.
Frank Stillo, has been a director of the Company since August 1997 and
currently serves as Chairman of the Audit Committee. He has been active in the
printing industry since 1950 and co-founded his own printing company in 1968.
Since 1989, Mr. Stillo has been the Chairman and Chief Executive Officer of
Sandy Alexander, Inc., a printing company and Chief Executive Officer of MGA
Printing Co., a subsidiary of Sandy Alexander, Inc. and has served as its
President since 1981. Mr. Stillo also currently serves as the President of The
Metropolitan Lithographers Association, a director of Web Offset ASS-PIA and a
trustee of ALA-S&A Fund and Pension Fund.
Donald Buck became the Company's Vice President and President of Audio Plus
Video International, Inc. upon consummation of the Merger. Prior thereto, Mr.
Buck served as a Senior Vice President of Old Video since August 1987, the
President of Atlantic Satellite Communications, Inc. since August 1992 and the
President of Waterfront Communications Corporation since April 1993. Mr. Buck
served as President of Video Dub, Inc. (formerly, a subsidiary of Old Video)
from 1980. During 1975-1980, he was an Executive Vice President of Sales for
E.U.E. Screen Gems Video Division of Columbia Pictures Industries.
Michael E. Fairbourne became the Company's Vice President-Administration,
Chief Accounting Officer and Secretary upon consummation of the Merger. Prior
thereto, Mr. Fairbourne served as the Senior Vice President-Administration of
Old Video since March 1994. Previously, Mr. Fairbourne was the Vice
President-Controller of Old Video from July 1987 to March 1994 and the
Controller of Old Video from September 1983 to July 1987. Prior to joining Old
Video, from 1976 to 1983, Mr. Fairbourne, a certified public accountant, was in
private practice.
Daniel Rosen was elected the Company's Vice President-Post Production in
May 1998 and was elected President of Manhattan Transfer in May 1994. Prior
thereto, Mr. Rosen served as the Vice President of IPL from May 1994 until
August 1997. Prior to that time, Mr. Rosen was President of Editel NY for twelve
years. During 1991-1992, Mr. Rosen also served as President of Editel LA and was
named President of the New York divisions of Unitel Video, namely Unitel NY,
Editel NY and Windsor Digital, which were acquired by Unitel Video in May 1992.
There are no family relationships among the above directors and executive
officers.
Board of Directors
The Board of Directors of the Company consists of six members. Directors
serve for terms of one year and until their successors are duly elected and have
qualified.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and persons who beneficially own
more than ten percent (10%) of the Company's common stock (the "Common Stock")
(collectively, the "Reporting Persons") to file with the Securities and Exchange
Commission initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Common Stock. Reporting Persons are required to
furnish the Company with copies of all such reports. To the Company's knowledge,
based solely on a review of copies of such reports furnished to the Company and
certain representations of the Reporting Persons, the Company believes that
during the 2000 fiscal year all of the Reporting Persons complied with all
applicable Section 16(a) reporting requirements.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or accrued by the
Company for the 2000 fiscal year with respect to (a) the Company's Chief
Executive Officer and (b) each of the four most highly compensated executive
officers, other than the Chief Executive Officer, of the Company at June 30,
2000, whose salary and bonus from the Company in the 2000 fiscal year exceeded
$100,000 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------------------------- --------------------------------------
Number of
Other Annual Securities
Name and Principal Compensation Underlying All Other
Position Year Salary Bonus (1)(2) Options (3) Compensation
---------------------------- ------- ---------- ---------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Louis H. Siracusano
Chief Executive Officer, 2000 $200,018 --- $2,200 --- $ 28,934(6)
President and Director 1999 200,018 --- 2,038 --- $ 27,209(6)
1998 191,775 $60,000 3,095 --- $ 26,261(6)
Donald H. Buck
Vice President 2000 $175,000 --- $2,275 25,000 ---
Transmission and 1999 173,394 $40,000 2,190 --- ---
Distribution Services 1998 173,394 40,000 2,190 --- ---
Michael E. Fairbourne
Vice President - 2000 $110,000 --- $1,650 25,000 ---
Administration , Chief 1999 110,000 --- 1,809 --- ---
Accounting Officer and 1998 110,000 $27,500 1,913 10,000(5) ---
Secretary
Daniel Rosen (4)
Vice President - 2000 $256,770 --- $2,497 40,000 ---
Post Production, 1999 249,808 --- 2,883 25,000 ---
President of Manhattan 1998 190,385 $25,000 1,606 --- ---
Transfer/Edit, Inc.
(1) The amounts set forth in this column represent matching contributions by the Company on behalf of the Named Executive
Officers under the Company's 401(k) plan.
(2) Excludes items, which are, in the aggregate, the lesser of either $50,000 or 10% of the executive's total annual salary and
bonus.
(3) All options granted to the Named Executive Officers represent options granted under the 1997 Long Term Incentive
Plan ("1997 Plan").
(4) Represents compensation from August 27, 1997 to June 30, 1998.
(5) Does not include options to acquire 60,000 shares of Common Stock from Messrs. Siracusano, Ferolito and Buck at an
exercise price of $2.00 per share.
(6) Includes life and disability insurance paid by the Company.
</TABLE>
<PAGE>
Option Grants in Last Fiscal Year
The following table provides information with respect to the grant of stock
options during the 2000 fiscal year to the Named Executive Officers. Only
information concerning those Named Executive Officers who received option grants
in fiscal 2000 is provided:
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Number of Annual Rates of
Securities % of Total Stock Price
Underlying Options Granted Exercise Appreciation for
Options to Employees in Price Per Expiration Option Term (2)
Name Granted (1) Fiscal Year 2000 Share ($) Date 5%($) 10%($)
------------------------- ------------- ------------------ ------------- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Donald H. Buck 25,000 (3) 13.33 1.625 10/19/09 $25,550 $64,750
Michael E. Fairbourne 25,000 (4) 13.33 2.00 11/02/09 31,450 79,675
Daniel Rosen 40,000 (5) 21.33 2.625 03/06/00 66,040 167,360
</TABLE>
(1) All options granted to the named Executive Officers in the 2000 fiscal year
represent options granted under the 1997 plan.
(2) Valuation is based upon the potential realizable dollar value of the option
grants with assumed rates of appreciation of 5% and 10% per annum from the
date of grant to the end of the option term. These rates are set by the
Securities and Exchange Commission and are not intended to forecast
possible future appreciation of this Company's stock price.
(3) Vests on October 20, 2002.
(4) Vests on November 3, 2002.
(5) Vests on March 7, 2002.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table provides information with respect to the exercise of
stock options during the 2000 fiscal year by the Named Executive Officers and
the value of unexercised options owned by the Named Executive Officers at June
30, 2000:
<TABLE>
<CAPTION>
Number of Securities
Number of Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired on Value June 30, 2000 June 30, 2000(1) (2)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------- ---------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
Louis H. Siracusano --- --- 0/0 0/0
Donald H. Buck --- --- 0/25,000 0/$84,375
Michael E. Fairbourne --- --- 6,666/28,334(3) $13,732/81,868
Daniel Rosen --- --- 83,333/56,667 41,149/127,301
</TABLE>
(1) The value is based on the excess of the market price of the Common Stock at
June 30, 2000 over the exercise price of the unexercised options.
(2) At June 30, 2000, the closing bid price of the Common Stock on the American
Stock Exchange was $5.00 per share.
(3) Does not include options to acquire 60,000 shares of Common Stock from
Messrs. Siracusano, Ferolito and Buck at an exercise price of $2.00 per
share.
Long-Term Incentive Plans - Awards in the Last Fiscal Year
The following table provides information with respect to each award made to
the Named Executive Officers under the Company's long-term incentive plan during
the last fiscal year. Only information concerning those Named Executive Officers
who received such awards in fiscal 2000 is provided.
<TABLE>
<CAPTION>
Number of Shares
Underlying
Name Options Granted (1) Vesting Period
--------------------------------------------------------------- --------------------------- ------------------------
<S> <C> <C>
Donald H. Buck 25,000 10/19/99-10/20/02
Michael E. Fairbourne 25,000 11/02/99-11/03/02
Daniel Rosen 40,000 03/06/00-03/07/02
</TABLE>
All options granted to the Named Executive Officers in the 2000 fiscal year
represent options granted under the 1997 plan.
Compensation of Directors
Each member of the Board who is not an officer of the Company receives
4,000 shares of the Company's Common Stock (6,000 shares in the case of the
Chairman of the Board) for serving on the Board plus $750 ($1,500 in the case of
the Chairman of the Board) and reimbursement of expenses for each Board or
committee meeting attended. Directors who chair committees receive $1,000 plus
reimbursement of expenses for each committee meeting attended.
The stockholders and directors of the Company adopted a restricted share
plan for directors who are not employees of the Company (the "Director Plan"). A
total of 50,000 shares of Common Stock is available for issuance under such
plan. During fiscal year 2000, 44,000 shares of common stock were awarded;
12,000 to Mr. Elkes and 8,000 each to Mr. Alter, Mr. Irwin, Mr. Steele and Mr.
Stillo.
Employment Contracts, Termination of Employment and Change-of-Control
Arrangements
At the time of the Merger, the Company entered into employment agreements
with Messrs. Louis H. Siracusano and Donald H. Buck. Under Mr. Siracusano's
employment agreement with the Company, he serves as the President and Chief
Executive Officer of the Company for a four (4) year period or twenty four (24)
months following notice of termination by the Company or by Mr. Siracusano,
whichever is later. Under Mr. Buck's employment agreement with the Company, he
serves as the Vice President of the Company for a three (3) year period or
twelve (12) months following notice of termination by either party, whichever is
later.
Mr. Siracusano's employment agreement provides for base compensation of
$200,000 per annum, and annual bonuses and a long-term bonus based on the
Company's achievement of certain cash flow and net income targets to be
determined by Mr. Siracusano and the Compensation Committee of the Board. Under
the terms of the employment agreement, Mr. Siracusano is entitled to receive an
annual bonus of between 5% and 40% of his base salary for the relevant year upon
the Company's achievement of a percentage (ranging from 90% to 109.9% or
greater) of the agreed upon cash flow and net income targets for such year,
which bonus is payable within thirty (30) days of delivery to the Board of the
Company's audited financial statements. In addition, the employment agreement
provides that Mr. Siracusano is entitled to receive a long-term bonus of between
12.5% and 100% of his cumulative base salary for the entire contract period if
the Company achieves a percentage (ranging from 90% to 109.9% or greater) of the
agreed upon cash flow and net income targets for such period. The long-term
bonus is payable in a single installment within thirty (30) days following the
delivery of the Company's audited financial statements for the period ended June
30, 2001 and is to be reduced by amounts previously paid to Mr. Siracusano as
annual bonuses. The employment agreement further provides that the Compensation
Committee of the Board may award Mr. Siracusano other bonus payments in its
discretion.
Mr. Buck's employment agreement provides for base compensation of $175,000
per annum and a bonus to be negotiated and agreed upon by the parties.
Each of Messrs. Siracusano's and Buck's employment agreements provides that
(i) the Compensation Committee may award a discretionary bonus to him on an
annual basis, (ii) each is entitled to participate in such compensation plans,
incentive plans, group life, health, accident, disability and hospitalization
insurance plans, pension plans and retirement plans as the Company may make
available to its other executive employees, and (iii) upon termination without
cause, he is entitled to receive his annual base compensation and any incentive
compensation for the remainder of the originally scheduled term of the
employment agreement. Termination for cause includes termination for breach,
nonperformance, fraud or conviction of a felony. Additionally, each such
employment agreement provides that the employee is entitled to terminate his
employment at any time during the six-month period following any "Change in
Control" (as defined in the 1997 plan) that results in a material diminution in
the capacity and terms of his employment. Any such termination is to be treated
as a termination without cause.
IPL entered into an employment agreement with Daniel Rosen, with a term
commencing on May 23, 1994 and ending on May 22, 1997 or twelve months following
a notice of termination by either party, whichever is later. Mr. Rosen's
contract provided for base compensation of $200,000 per annum and a bonus equal
to two percent (2%) of his base salary for each one percent (1%) increase in the
profitability of MTE and its subsidiaries compared to the prior year or base
year, whichever is higher. Effective as of May 1, 1995, Mr. Rosen's base
compensation was increased to $225,000 per annum. Effective as of July 1,1998,
Mr. Rosen's base compensation was increased to $250,000 per annum and as of
March 16, 2000, Mr. Rosen's base compensation was increased to $270,000 per
annum. The agreement further provides that (i) the Compensation Committee may
award a discretionary bonus to Mr. Rosen under certain circumstances, (ii) he is
entitled to participate in such compensation plans, incentive plans, group life,
health, accident, disability and hospitalization insurance plans, pension plans
and retirement plans as the Company may make available to its other executive
employees, and (iii) upon termination without cause, Mr. Rosen is entitled to
receive his annual base compensation and any incentive compensation for the
remainder of the originally scheduled term of the agreement. Termination for
cause includes termination for breach, nonperformance, fraud or conviction of a
felony. Additionally, the agreement provides that Mr. Rosen is entitled to
terminate his employment at any time during the six-month period following any
"change in control" (as defined in the 1993 Long-Term Incentive Plan) that
results in a material diminution in the capacity and terms of his employment.
Any such termination will be treated as a termination without cause.
The Company and Martin Irwin entered into a severance agreement dated as of
August 26, 1997. The agreement provides for Mr. Irwin to be paid severance of:
(i) $150,000 per year for one year, (ii) $100,000 per year for the one year
period thereafter and (iii) $75,000 per year for the one year period thereafter.
Mr. Irwin is also entitled, for a period of three years from the date of the
agreement, to participate in and receive such benefits, services, equipment,
compensation and incentive plans and group life, health, accident, disability
and hospitalization insurance plans, pension plans and retirement plans as the
Company may make available to employees of the Company at the expense of the
Company. In addition, as part of such severance package, Old Video's
stockholders agreed to grant to Mr. Irwin, on a pro rata basis, options to
purchase an aggregate of 75,000 shares of the Common Stock they received in the
Merger at an exercise price of $0.75 per share. Such options are fully vested.
The 1993 Long-Term Incentive Plan ("1993 Plan") provides that in the event
of a "change in control" (as defined in the 1993 Plan), (i) all stock
appreciation rights outstanding for at least six (6) months and all options
awarded under the 1993 Plan not previously vested and exercisable will
immediately become fully vested and exercisable, and (ii) the restrictions
applicable to any restricted shares awarded under the 1993 Plan will lapse and
such shares will be deemed fully vested. Consummation of the Merger was deemed a
change in control under the 1993 Plan, and, as a result of the Merger, the
50,000 stock options held by Daniel Rosen, who was the only Named Executive
Officer under the 1993 Plan, immediately vested and became exercisable. If an
employee's employment is terminated due to a Change in Control, his stock
options under the 1993 Plan remain exercisable for the shorter of five (5) years
or the remainder of the original term and shall thereafter terminate.
The 1997 Long Term Incentive Plan ("1997 Plan") was adopted by the Board
and approved by the Stockholders in connection with the consummation of the
Merger to replace IPL's 1993 Plan which would have expired in 2004. These plans
are similar in their terms except that, among other things, the aggregate number
of shares of Common Stock issuable under the 1997 Plan has been increased to
735,000 from the 84,200 which remained available for issuance under the 1993
Plan, stock options (other than incentive stock options) may be issued under the
1997 Plan below the fair market value of the underlying Common Stock on the date
of grant, awards may be granted under the 1997 Plan to consultants and
independent contractors performing services for the Company, and certain other
revisions in respect of recent changes in federal securities regulations
affecting equity compensation plans, as well as revisions in respect of Section
162(m) of the Internal Revenue Code of 1986, as amended, have been made to the
1997 Plan. The 1997 Plan shall continue in effect until July 9, 2007.
Compensation Committee Interlocks and Insider Participation
During fiscal year 2000, the members of the Compensation Committee of the
Board were Messrs. Steele (Chairman), Stillo and Alter. During such time, none
of Messrs. Steele, Stillo and Alter were employees of the Company.
Performance Graph
The following graph compares the cumulative total stockholder return of the
Company's Common Stock with the cumulative total return of the Russell 2000 and
a selected peer group index for the period from June 30, 1995 until June 30,
2000, the end of the Company's fiscal year. The selected peer group, which
includes companies that are engaged in providing services related to those
provided by the Company and have similar market capitalizations, consists of
Laser-Pacific Media Corp., Broadview Media, and VDI Multimedia. The peer group
has changed since the last proxy due to consolidation in the industry. The graph
assumes that the value of the investment in the Common Stock was $100 on June
30, 1995 and that all dividends were reinvested.
Video Services Corporation
Relative Performance Graph
<TABLE>
<CAPTION>
June 30, June 30, June 30, June 30, June 30, June 30,
1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Video Services Corp. $ 100.00 $ 69.57 $ 59.65 $ 60.87 $ 37.04 $ 53.22
Peer Group $ 100.00 $ 90.18 $ 114.11 $ 60.20 $ 149.56 $ 127.96
Russell 2000 $ 100.00 $ 133.14 $ 141.27 $ 166.19 $ 161.14 $ 181.40
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock at August 22, 2000 by (a) all persons known by the
Company who own beneficially more than five percent (5%) of the outstanding
Common Stock, (b) each Director of the Company, (c) each of the Named Executive
Officers and (d) all Directors and Named Executive Officers of the Company as a
group. Unless otherwise indicated, each of the persons or entities listed below
exercises sole voting and investment power over the shares that each of them
beneficially owns:
<TABLE>
<CAPTION>
Name Common Stock Percent of Class
---------------------------------------------------------------------- ---------------------- ---------------------
<S> <C> <C>
5% Beneficial Owners:
Liberty Media Corporation 9,534,269 (1) 71.80%
The Equitable Companies Incorporated, The Equitable Life
Assurance Society of the United States, Equitable Deal Flow Fund,
L.P. and Equitable Capital Management Corporation................ 2,263,081 (2) 17.00%
Sandler Capital Management, Sandler
Associates and J.K. Media L.P.................................... 2,270,500 (3) 17.06%
Arnold P. Ferolito............................................... 2,959,582 (4)(14) 22.23%
Directors:
Robert H. Alter.................................................. 21,000 *
Terrence A. Elkes................................................ 470,012 (5) 3.53%
Martin Irwin..................................................... 276,417 (6) 2.08%
Louis H. Siracusano.............................................. 3,152,982 (4)(11(12) 23.69%
Raymond L. Steele................................................ 25,000 *
Frank Stillo..................................................... 37,000 (8) *
Named Executive Officers:
Donald H. Buck................................................... 548,681 (4)(12)(13) 4.12%
Michael E. Fairbourne............................................ 95,000 (9) *
Daniel Rosen..................................................... 155,000 (10) *
All Directors and Named Executive Officers as a group,
consisting of 9 persons.......................................... 4,711,864 35.40%
* Less than 1%.
</TABLE>
(1) By virtue of the execution of the voting agreement, described herein,
Liberty Media Corporation is deemed to be the beneficial owner of each
share of the Company's common stock controlled by Arnold P. Ferolito, Louis
H. Siracusano, Sandler Capital Management, Donald H Buck, Sandler
Associates, Theresa Siracusano, Terrence A. Elkes, Kenneth Gorman, J.K.
Media L.P. and Carole Buck. In the voting agreement, these stockholders
agreed with Liberty to vote their shares of the Company's common stock in
favor of the merger agreement, among the Company, AT&T Corp., and Liberty
Media Corporation, the merger and the other transactions contemplated by
the merger agreement for which a stockholder vote is required and against
any alternative acquisition of the Company. Their shares consist of shares
personally owned by them and shares contained in certain trusts over which
they act as trustees. However, these stockholders do not have to vote their
shares in favor of the merger agreement, the merger and the other
transactions contemplated by the merger agreement and against any
alternative transaction (a) if without the consent of the stockholder, the
merger agreement is amended and such amendment materially changes the
consideration to be received by the Company's stockholders in the merger or
(b) at any time following 90 days after the termination of the merger
agreement for any reason.
(2) Based on Amendment No.2 dated March 6, 2000 to Schedule 13D filed on
November 8, 1996, and Amendment No. 1 to the Schedule 13D filed with the
Securities and Exchange Commission on July 8, 1997. The business address of
AXA Financial, Inc. ("AXF"), The Equitable Life Assurance Society of the
United States ("ELAS"), Equitable Deal Flow Fund, L.P. ("EDFF") and ECMC,
LLC ("ECMC") is 1290 Avenue of the Americas, New York, New York. ELAS is an
indirect wholly owned subsidiary of AXF and is the general partner of the
general partner of EDFF. ECMC is the investment manager of EDFF. EDFF is
the holder of record of 1,443,082 shares of Common Stock and ELAS is the
holder of record of 819,999 shares of Common Stock. ELAS also beneficially
owns indirectly the 1,443,082 shares held by EDFF through its control of
EDFF. Because of its indirect ownership of ELAS, AXF may be deemed to
beneficially own indirectly the 2,263,081 shares of Common Stock held by
ELAS and EDFF. Certain other persons and entities (AXA Assurances I.A.R.D.
Mutuelle; AXA Assurances Vie Mutuelle; AXA Conseil Vie Assurance Mutuelle;
AXA Courtage Assurance Mutuelle; Finaxa; AXA; Claude Bebear, Patrice
Garnier and Henri de Clermont-Tonnerre) may also be deemed to beneficially
own indirectly such 2,263,081 shares because of their relationships to AXF;
however, all of these parties expressly disclaim any beneficial ownership
of these shares. As of March 1, 2000, 60.3% of the common stock of AXF was
owned by AXA, a French holding company for an international group of
insurance and related financial services companies.
(3) Based on Form 4 filed October 15, 1999. The Reporting Persons include
Sandler Capital Management, a registered investment adviser and a New York
general partnership ("SCM"), and Harvey Sandler, John Kornreich, Michael
Marocco, Andrew Sandler, Hannah Stone, Douglas Schimmel and David Lee (each
an "Individual", and collectively, the "Individuals"). Includes 1,150,000
shares of Common Stock, in the aggregate, owned by 21st Century
Communications Partners, L.P., 21st Century Communications T-E Partners,
L.P. and 21st Century Communications Foreign Partners, L.P., each of which
is a Delaware limited partnership (collectively, the "Partnerships"). Each
Individual controls a corporation that serves as a general partner of SCM,
which is a general partner of one of the general partners of each of the
Partnerships. Includes 569,000 shares of Common Stock held by accounts
managed by SCM, and 411,000 shares of Common Stock owned by Sandler
Associates, a New York limited partnership (each Individual is a general
partner of Sandler Associates). For John Kornreich, also includes 140,500
shares of Common Stock owned by J.K. Media L.P., a New York limited
partnership, controlled by Mr. Kornreich. The business address of these
entities is 767 Fifth Avenue, New York, New York 10153. Each Reporting
Person disclaims beneficial ownership of the shares held by SCM, the
Partnerships and Sandler Associates, except to the extent of the Reporting
Person's pecuniary interest therein. Mr. Kornreich also disclaims
beneficial ownership of the shares held by J.K. Media L.P., except to the
extent of his pecuniary interest therein.
(4) Mr. Irwin has an option to purchase 36,540, 36,540 and 1,920 of Messrs.
Siracusano's, Ferolito's and Buck's shares, respectively. See footnote (7).
Mr. Fairbourne has an option to purchase 29,232, 29,232 and 1,536 of
Messrs. Siracusano's, Ferolito's and Buck's shares, respectively. See
footnote (9).
(5) Includes 10,000 shares owned by Mr. Elkes' children. Mr. Elkes disclaims
beneficial ownership of all such shares.
(6) Includes options to purchase 120,000 shares of Common Stock granted to Mr.
Irwin under the 1993 Long-Term Incentive Plan (the "1993 Plan"),
exercisable at prices ranging from $4.00 to $6.00 per share.
(7) Includes options to purchase an aggregate of 75,000 shares of Common Stock
at an exercise price of $0.75 per share granted by Messrs. Siracusano,
Ferolito and Buck.
(8) Includes 24,000 shares of Common Stock owned by the Frank Stillo Children's
Trust, of which Mr. Stillo's wife is the trustee. Mr. Stillo disclaims
beneficial ownership of such shares.
(9) Includes options granted in June 1997 to purchase 60,000 shares of Common
Stock from Messrs. Siracusano, Ferolito and Buck at an exercise price of
$2.00 per share. Includes options to purchase 35,000 shares of Common Stock
granted to Mr. Fairbourne under the 1997 Plan, exercisable at prices
ranging from $2.00 to $2.94 per share.
(10) Includes (i) options to purchase 75,000 shares of Common Stock granted to
Mr. Rosen under the 1993 Plan, exercisable at prices ranging from $4.00 to
$6.00 per share, and (ii) shares of Common Stock owned by Mr. Rosen's son
and the Ned Rosen Trust, of which Mr. Rosen is the trustee, in the amounts
of 5,000 and 5,000, respectively. Mr. Rosen disclaims beneficial ownership
of all shares of Common Stock owned by his son and the Ned Rosen Trust also
includes options to purchase 65,000 shares of Common Stock granted to Mr.
Rosen under the 1997 Plan, exercisable at prices ranging from $2.625to
$3.0625 per share.
(11) Includes (i) 39,990 shares of Common Stock transferred by Mr. Siracusano to
seven trusts for the benefit of his family members on September 25, 1998,
(ii) 5,000 shares of Common Stock transferred by Mr. Siracusano to two
trusts for the benefit of his family members on December 28,1998, (iii)
300,000 shares of Common Stock transferred by Mr. Siracusano to his wife on
March 2, 1999, (iv) 39,500 shares of Common Stock transferred by Mr.
Siracusano to five trusts for the benefit of his family members on November
1, 1999, (v) 22,000 shares of Common Stock transferred by Mr. Siracusano to
six trusts for the benefit of his family members on December 6, 1999, (vi)
32,600 shares of Common Stock transferred by Mr. Siracusano to six trusts
for the benefit of his family members on February 10, 2000 and (iv) 300,000
shares of Common Stock transferred by Mr. Siracusano to the Sano Foundation
[a charitable foundation] on July 5, 2000. Mr. Siracusano did not retain
voting power, investment power or other control of or interest in the
439,090 shares of Common Stock, but is a trustee of the Sano Foundation.
(12) Includes options to various employees, directors, consultants and
independent contractors to purchase 248,472, 248,472 and 13,056 of Messrs.
Siracusano's, Ferolito's and Buck's shares, respectively, exercisable at
prices ranging from $0.25 to $6.00 per share.
(13) Includes 85,000 shares of Common Stock transferred by Mr. Buck to his wife
on March 22, 1999. Mr. Buck did not retain voting power, investment power
or other control of or interest in the 85,000 shares of Common Stock also
includes options granted in October 1999 to purchase 25,000 shares of
Common Stock granted to Mr. Buck under the 1997 Long-Term Incentive Plan
Exercisable at $1.625 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
The Company leases a building from an entity owned by certain principal
stockholders of the Company, one of whom is Mr. Siracusano, under a lease
accounted for as an operating lease. The rental expense under the lease for the
fiscal year 2000 amounted to $238,000.
The Company agreed to provide office services to certain former
subsidiaries of Old Video which are owned by Messrs. Siracusano, Ferolito and
Buck following the Merger for a monthly fee of $1,000. The fee for the fiscal
year 2000 amounted to $12,000.
<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 auditors 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(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.)
10.7(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.)
10.8(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).
10.09(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).
10.10(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).
10.11Losses 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).
10.12(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).
10.13Engagement Letter, dated August 13, 1999, by and between the Company and
Lazard Freres & Co., LLC (incorporated by reference to exhibit 10.62
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999).
10.14(M) Form of Video Services Corporation 1997 Long Term Incentive Plan
(incorporated by reference to exhibit number 4.1 contained in the Company's
current report on Form S-8, dated July 27, 1999).
10.15(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).
10.16Credit Agreement dated June 30, 2000, by and among Video Services
Corporation and General Electric Capital Corporation as Term Agent and
Administrative Agent and KeyBank National Association as Revolver Agent.
10.17Amendment No.1 dated June 30, 2000 to the Credit Agreement dated June 30,
2000 by and among the Company, the Lenders party thereto and General
Electric Capital Corporation, as the Term Agent and Administrative Agent.
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.
99.1 Merger Agreement dated July 25, 2000 by and among AT&T Corp., E-Group
Merger Corp., Liberty Media Corporation and Video Services Corporation
(incorporated by reference to exhibit 99.1 contained in the Company's Form
8-K, dated August 4, 2000).
99.2 Voting Agreement dated July 25, 2000 by and among Liberty Media
Corporation, Arnold P. Ferolito, Louis H. Siracusano, Theresa Siracusano,
Donald H. Buck, Carole Buck, Terrence A. Elkes, Kenneth Gorman, Sandler
Associates, Sandler Capital Management and J.K. Media L.P. (incorporated by
reference to exhibit 99.1 contained in the Company's Form 8-K, dated August
4, 2000).
-----------------
+ 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: August 25, 2000 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 8/25/00
Louis H. Siracusano and Director (Principal Executive
Officer)
/s/ Michael E. Fairbourne Vice President-Administration 8/25/00
Michael E. Fairbourne (Chief Accounting Officer)
/s/ Terrence A. Elkes Chairman of the Board of Directors 8/25/00
Terrence A. Elkes
/s/ Robert H. Alter Director 8/25/00
Robert H. Alter
/s/ Martin Irwin Director 8/25/00
Martin Irwin
/s/ Frank Stillo Director 8/25/00
Frank Stillo
/s/ Raymond L. Steele Director 8/25/00
Raymond L. Steele
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page Number
REPORT OF INDEPENDENT AUDITORS.......................................F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
June 30, 1999 and 2000...............................................F-3
Consolidated Statements of Operations for the
years ended June 30, 1998, 1999 and 2000.............................F-4
Consolidated Statements of Stockholders'
Equity for the years ended June 30, 1998,
1999 and 2000....................................................... F-5
Consolidated Statements of Cash Flows for the
years ended June 30, 1998, 1999 and 2000.............................F-6
Notes to Consolidated Financial Statements...........................F-7 to F-25
SUPPLEMENTAL SCHEDULE:
II. Valuation and Qualifying Accounts................................F-26
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, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2000. 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 auditing standards generally
accepted in the United States. 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, 1999 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States. 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
Stamford, Connecticut
August 18, 2000
F-2
<PAGE>
VIDEO SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30, 1999 and June 30, 2000
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, June 30,
ASSETS 1999 2000
----------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 805 $ 3,613
Accounts receivable, net 14,876 17,738
Inventories 694 1,290
Costs and estimated earnings in excess of billings on
uncompleted contracts 934 1,034
Deferred income taxes 1,300 1,206
Prepaid expenses and other current assets 685 994
----------------- ----------------
Total current assets 19,294 25,875
Fixed assets, net 39,589 34,014
Excess of cost over fair value of net assets acquired, net 21,858 20,878
Deferred income taxes 2,950 2,274
Other assets 1,627 2,991
----------------- ----------------
Total assets $ 85,318 $ 86,032
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,248 $ 8,192
Billings in excess of costs and estimated
earnings on uncompleted contracts 985 3,692
Current portion of long-term debt 7,702 5,534
Current portion of subordinated debt - 2,062
Income taxes payable 691 193
Other current liabilities 3,105 2,964
----------------- ----------------
Total current liabilities 21,731 22,637
Long-term debt 36,760 40,752
Subordinated debt 5,652 2,924
Other liabilities 2,328 1,468
----------------- ----------------
Total liabilities 66,471 67,781
----------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock: $.01 par value - 3,000,000 shares
authorized; no shares outstanding at June 30, 1999
and June 30, 2000 -
Common stock: $.01 par value, 25,000,000 shares authorized,
and 13,264,307 and 13,311,307 shares issued and
outstanding at June 30, 1999 and June 30, 2000 132 133
Additional paid-in-capital 21,218 21,350
Accumulated deficit (2,503) (3,232)
----------------- ----------------
Total stockholders' equity 18,847 18,251
----------------- ----------------
Total liabilities and stockholders' equity $ 85,318 $ 86,032
================= ================
</TABLE>
See accompanying notes
F-3
<PAGE>
VIDEO SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30, 1998, 1999 and 2000
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1999 2000
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
Sales $ 16,642 $ 23,965 $ 28,327
Services 56,353 65,446 67,821
--------------- -------------- ---------------
72,995 89,411 96,148
Costs:
Sales 12,537 20,060 23,891
Services 28,638 36,841 37,602
--------------- -------------- ---------------
41,175 56,901 61,493
Depreciation 7,109 8,743 9,265
--------------- -------------- ---------------
Gross profit 24,711 23,767 25,390
Selling, general and administrative expenses 17,170 20,205 20,201
Merger related costs - 331 -
Amortization 849 1,093 1,200
--------------- -------------- ---------------
Operating income 6,692 2,138 3,989
Other income (expense):
Interest expense (3,619) (4,149) (4,814)
Interest and other income 217 53 557
--------------- -------------- ---------------
Income (loss) before income taxes, discontinued
operations and extraordinary gain 3,290 (1,958) (268)
Income tax expense (benefit) 1,591 (58) 843
--------------- -------------- ---------------
Income (loss) before discontinued operations and
extraordinary gain 1,699 (1,900) (1,111)
Discontinued operations:
Loss from operations of the Consulting Services
segment (less applicable income tax benefit of $73) (140) - -
Estimated loss on disposal of Consulting Services
segment (less applicable income tax benefit of $1,147) (1,720) - -
Extraordinary gain (less applicable income tax
expense of $254) - - 382
--------------- -------------- ---------------
Net loss $ (161) $ (1,900) $ (729)
=============== ============== ===============
Earnings per share:
Basic and Diluted:
Income (loss) before discontinued operations and
extraordinary gain $ 0.14 $ (0.14) (0.08)
Loss from discontinued operations (0.15) - -
Extraordinary gain - - 0.03
--------------- -------------- ---------------
Net loss $ (0.01) $ (0.14) $ (0.05)
=============== ============== ===============
Weighted average number of shares outstanding for basic
and diluted earnings per share 12,276,278 13,264,307 13,291,649
=============== ============== ===============
</TABLE>
See accompanying notes
F-4
<PAGE>
VIDEO SERVICES CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1998, 1999 and 2000
(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, 1997 2,678,162 $ 103 $ 419 $ 2,211 $ 2,733
Merger with IPL 10,560,145 29 21,766 - 21,795
Contribution of real estate affiliates - - (1,263) - (1,263)
Issuance of stock options - - 199 - 199
Non cash dividend to shareholders - - - (2,653) (2,653)
Stock related compensation 26,000 - 75 - 75
Net loss - - - (161) (161)
-------------- ------------- -------------- --------------- --------------
Balance at June 30, 1998 13,264,307 132 21,196 (603) 20,725
Issuance of independent contractors - - 22 - 22
Net loss - - - (1,900) (1,900)
-------------- ------------- -------------- --------------- --------------
Balance at June 30, 1999 13,264,307 132 21,218 (2,503) 18,847
Stock related compensation 44,000 1 123 - 124
Exercised stock options 3,000 - 9 9
-
Net loss - - - (729) (729)
-------------- ------------- -------------- --------------- --------------
Balance at June 30, 2000 13,311,307 $ 133 $ 21,350 $ (3,232) $ 18,251
============== ============= ============== =============== ==============
</TABLE>
See accompanying notes
F-5
<PAGE>
VIDEO SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 1998, 1999 and 2000
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1999 2000
--------------- --------------- ---------------
Operating Activities
<S> <C> <C> <C>
Net loss $ (161) $ (1,900) $ (729)
Adjustments to reconcile net loss to net cash provided
by continuing operations:
Depreciation 7,109 8,743 9,265
Amortization 849 1,093 1,200
Issuance of compensatory stock and options 75 22 124
Loss on disposal of discontinued operations 481 - -
Gain on settlement of subordinated debt - - (636)
Loss (gain) on sale of fixed assets (164) (112) (471)
Deferred income taxes 537 (1,048) 770
Provision for bad debts 166 67 371
(Increase) decrease in operating assets:
Accounts receivable 1,156 (751) (3,233)
Inventories 107 389 (596)
Costs and estimated earnings in excess of billings on
uncompleted contracts 176 (747) (100)
Prepaid expenses and other assets (42) 169 (1,406)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (7,656) 805 (1,777)
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,828 (2,305) 2,707
Income taxes payable - (17) (498)
Other liabilities (314) (1,857) (866)
--------------- --------------- ---------------
Net cash provided by operating activities 5,147 2,551 4,125
Investing Activities
Additions to fixed assets (6,448) (11,619) (4,459)
Proceeds from sales of fixed assets 168 280 1,483
--------------- --------------- ---------------
Net cash used for investing activities (6,280) (11,339) (2,976)
Financing Activities
Increase in subordinated debt 158 210 136
Repayments of subordinated debt - - (310)
Proceeds from long-term borrowings 54,561 25,569 53,282
Repayment of borrowings (52,484) (17,678) (51,458)
Proceeds from exercised stock options - - 9
--------------- --------------- ---------------
Net cash provided by financing activities 2,235 8,101 1,659
Net increase (decrease) in cash 1,102 (687) 2,808
Cash and cash equivalents, beginning of period 390 1,492 805
--------------- --------------- ---------------
Cash and cash equivalents, end of period $ 1,492 $ 805 $ 3,613
=============== =============== ===============
</TABLE>
See accompanying notes
F-6
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1999 and 2000
and for the years ended June 30, 1998, 1999 and 2000
(dollars in thousands, except per 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 (see Note 11 to the consolidated financial statements). 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. 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 $915 and $418 at
June 30, 1999 and June 30, 2000, respectively. The Company has made payments of
$890 and $497 against the reserve in fiscal 1999 and 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.
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
year ended June 30, 1998, as if the Merger and Contribution had occurred as of
July 1, 1997. The unaudited combined pro forma results of operations are not
necessarily indicative of the results of operations that would have occurred had
IPL and Old Video actually combined during the periods presented or of future
results of operations of the combined operations.
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998
---------------
<S> <C>
Revenues...................................... $ 80,386
Income from continuing operations............. 1,743
Income from continuing operations per share... 0.13
Net loss...................................... (176)
Net loss per share............................ $ (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, 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 upon the 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.....................3-12 years
Equipment held for rental...................3- 7 years
Furniture and fixtures......................3-10 years
Leasehold improvements......................1-14 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.
Excess Of Cost Over Net Assets Acquired
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, 1998, 1999 and 2000 was $742, $984 and $980, respectively.
Accumulated amortization at June 30, 1999 and 2000 was $1,843 and $2,823,
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 $310, $406, and $319 for the years ended June 30, 1998, 1999 and 2000,
respectively.
F-9
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Long-Lived Assets
Long-lived assets, including the excess of cost over net assets acquired
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, 1999 were 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 senior secured term loan, line of credit and secondary
collateral institutional loans 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.
In August 1997, the Company entered into an interest-rate swap agreement to
modify the interest characteristics of its outstanding debt, which has
subsequently been cancelled pursuant to a refinancing in June 2000 (see Note 9).
The interest-rate swap agreement was designated with all or a portion of the
principal balance and term of a specific debt obligation. This agreement
involved 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 were based. The differential to
be paid or received as interest rates change was 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 was
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
were not recognized in the financial statements. The fair value was the amount
at which the swap agreement could be settled based on quotes provided by the
counterparty.
Gains and losses on terminations of interest-rate swap agreements were
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.
Upon the early extinguishment of the designated debt obligation, the realized
gain from the swap was recognized in income.
The following table presents the carrying amounts and estimated fair values
of material financial instruments used by the Company in the normal course of
its business.
<TABLE>
<CAPTION> 1999 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Long-term debt......................... $ 44,462 $ 44,476 $ 46,286 $ 46,286
Off - balance sheet financial instruments:
Unrealized loss on swap agreement... $ --- $ (398) $ --- $ ---
</TABLE>
F-10
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
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.
Supplemental Statement of Cash Flow Information
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
Amounts paid for:
<S> <C> <C> <C>
Interest..................................... $ 3,325 $ 3,733 $ 4,649
----------- ----------- -----------
Income taxes................................. $ 420 $ 746 $ 1,172
----------- ----------- -----------
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>
F-11
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
New Accounting Standards
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, 2000. The Statement
permits early adoption as of the beginning of any fiscal quarter. The Company
expects to adopt the new Statement effective July 1, 2000. The Statement will
require the Company to recognize all derivatives 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 at June 30, 2000, does not have any derivatives, accordingly this
Statement would have no effect. However, the current debt agreements do require
the Company to fix a portion of its term debt interest rate no later than
December 1, 2000.
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 3 - Accounts Receivable
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
------------------- -------------------
<S> <C> <C>
Accounts receivable, trade.................................. $ 13,750 $ 13,812
Contracts receivable billed:
Uncompleted contracts.................................. 702 4,217
Completed contracts.................................... 1,453 643
------------------- -------------------
15,905 18,672
Less: Allowance for doubtful accounts
and volume discounts ............................ 1,029 934
------------------- -------------------
$ 14,876 $ 17,738
=================== ===================
</TABLE>
Note 4 - Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
------------------- -------------------
<S> <C> <C>
System components and equipment, net of
obsolescence allowance of $676 and $612................... $ 355 $ 823
Tape stock.................................................. 339 467
------------------- -------------------
$ 694 $ 1,290
=================== ===================
</TABLE>
F-12
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 5 - Costs and Estimated Earnings on Uncompleted Contracts
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
------------------- -------------------
<S> <C> <C>
Costs incurred on uncompleted contracts to date............. $ 7,808 $ 13,678
Estimated earnings to date.................................. 1,483 2,314
------------------- -------------------
9,291 15,992
Less: billings to date..................................... 9,342 18,650
------------------- -------------------
Billings in excess of costs and estimated
earnings on uncompleted contracts......................... $ (51) $ (2,658)
=================== ===================
</TABLE>
Included in accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
------------------- -------------------
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts......................... $ 934 $ 1,034
Billings in excess of costs and estimated
earnings on uncompleted contracts......................... (985) (3,692)
------------------- -------------------
$ (51) $ ( 2,658)
=================== ===================
</TABLE>
Note 6 - Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
------------------- -------------------
<S> <C> <C>
Prepaid expenses............................................ $ 413 $ 705
Other....................................................... 272 289
------------------- -------------------
$ 685 $ 994
=================== ===================
</TABLE>
Note 7 - Fixed Assets
Fixed assets, at cost, summarized by major categories consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
------------------- -------------------
<S> <C> <C>
Machinery and equipment..................................... $ 44,482 $ 39,426
Leasehold improvements...................................... 12,389 12,021
Furniture and fixtures...................................... 2,222 2,207
Transportation equipment.................................... 270 254
Building.................................................... 2,199 2,199
Land........................................................ 1,967 1,967
Equipment under capital lease............................... 5,256 10,639
------------------- -------------------
68,785 68,713
Less: accumulated depreciation, including
accumulated amortization for
equipment under capital lease................ 29,196 34,699
------------------- -------------------
$ 39,589 $ 34,014
=================== ===================
</TABLE>
F-13
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 8 - Other Current Liabilities
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
------------------- -------------------
<S> <C> <C>
Wages payable............................................... $ 1,883 $ 1,698
Other....................................................... 1,222 1,266
------------------- -------------------
$ 3,105 $ 2,964
=================== ===================
</TABLE>
Note 9 - Long-Term Debt
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
------------------- -------------------
<S> <C> <C>
Senior secured term loan ................................... $ 25,250 $ ---
Senior secured Term Loan A.................................. 15,000
Senior secured Term Loan B.................................. 15,000
Secondary Collateral Institutional Loan --- 5,000
Senior secured revolving credit loan........................ 12,700 3,642
Mortgages payable to credit institution bearing interest at
8.95% - prime (7.75% at June 30, 1999) plus 1%,
collateralized by fixed assets with net book value at $2,395 2,209 ---
Capitalized lease obligations............................... 4,303 7,644
------------------- -------------------
44,462 46,286
Less: current maturities................................... 7,702 5,534
------------------- -------------------
$ 36,760 $ 40,752
=================== ===================
</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 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 $3,642 under the revolving line at June 30, 2000. The
Company also has outstanding under the revolving line letters of credit of
approximately $686 at June 30, 2000. The Company's revolving line weighted
average interest rate was 9.89% at June 30, 2000. 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.
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.
F-14
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 9 - 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.
Required payments of principal on senior and subordinated debt including
accreted interest of approximately $283, exclusive of capitalized leases,
outstanding at June 30, 2000, are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ---------------
<S> <C> <C>
2001.......................................... $ 5,474
2002.......................................... 6,152
2003.......................................... 6,155
2004.......................................... 6,213
2005.......................................... 5,100
Thereafter.................................... 14,817
---------------
$ 43,911
===============
</TABLE>
The Company leases certain equipment from unaffiliated entities. Further
minimum lease payments under capital leases as of June 30, 2000 are:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ---------------
<S> <C> <C>
2001.......................................... $ 2,739
2002.......................................... 2,781
2003.......................................... 2,515
2004.......................................... 899
---------------
Total minimum lease payments.................. 8,934
Less: Amount representing interest........... 1,290
---------------
Present value of minimum lease payments....... $ 7,644
===============
</TABLE>
Leased property under capital leases are classified in fixed assets as
follows:
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
--------------- ---------------
<S> <C> <C>
Equipment under capital leases................ $ 5,256 $ 10,639
Less: Accumulated amortization............... 1,092 2,536
--------------- --------------
$ 4,164 $ 8,103
=============== ==============
</TABLE>
F-15
<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, 1998,
1999 and 2000 amounted to $270, $272 and $238, 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
year ended June 30, 1998 amounted to $130. At June 30, 1999 and 2000 the Company
also had accounts receivable of $130 and $158 and accounts payable of ($176) and
($120), respectively from (to) other affiliated entities.
At June 30, 2000, 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>
2001............................. $ 231
2002............................. 231
--------------
$ 462
==============
</TABLE>
The Company has receivables from certain officers of the Company which are
non interest bearing and are without specified repayment terms. These
receivables are collateralized by split-dollar-life insurance policies which the
Company funds on behalf of the officers. Included in other current assets are
$303 and $356 due from the officers at June 30, 1999 and 2000, respectively.
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 segment is subject to different marketing, production, and technology
strategies. 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-16
<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 1998, 1999 and
2000 is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net revenues from unaffiliated customers:
Systems and Products...................................... $ 18,631 $ 25,615 $ 30,540
Satellite and Distribution Services....................... 21,384 31,280 34,130
Production Services....................................... 32,980 32,516 31,478
------------------ ------------------ ------------------
Net revenues.............................................. $ 72,995 $ 89,411 $ 96,148
================== ================== ==================
Intersegment revenues:
Systems and Products...................................... $ 1,386 $ 2,067 $ 667
Satellite and Distribution Services....................... 1,160 1,125 1,058
Production Services....................................... 1,010 492 239
------------------ ------------------ ------------------
Total intersegment revenues............................... $ 3,556 $ 3,684 $ 1,964
================== ================== ==================
Operating income:
Systems and Products...................................... $ 2,490 $ 1,372 $ 2,327
Satellite and Distribution Services....................... 5,830 6,075 7,234
Production Services....................................... 3,542 170 (400)
Corporate ................................................ (5,170) (5,479) (5,172)
------------------ ------------------ ------------------
Operating income from continuing operations............... 6,692 2,138 3,989
Interest expense, net..................................... (3,619) (4,149) (4,814)
Other income.............................................. 217 53 557
------------------ ------------------ ------------------
Income (loss) before income taxes and discontinued operations
and extraordinary gain.................................. $ 3,290 $ (1,958) $ (268)
================== ================== ==================
Depreciation and amortization:
Systems and Products...................................... 650 754 685
Satellite and Distribution Services....................... 2,076 2,957 3,293
Production Services....................................... 4,035 4,568 4,702
Corporate ................................................ 1,197 1,557 1,785
------------------ ------------------ ------------------
Total depreciation and amortization ...................... $ 7,958 $ 9,836 $ 10,465
================== ================== ==================
Assets:
Systems and Products...................................... 5,971 6,427 9,270
Satellite and Distribution Services....................... 16,460 20,691 21,062
Production Services....................................... 29,787 25,698 20,654
Corporate ................................................ 29,642 32,502 35,046
------------------ ------------------ ------------------
Total assets.............................................. $ 81,860 $ 85,318 $ 86,032
================== ================== ==================
Additions to fixed assets:
Systems and Products...................................... $ 653 $ 1,349 $ 347
Satellite and Distribution Services....................... 4,591 5,332 3,180
Production Services....................................... 634 4,575 758
Discontinued operations................................... 119 --- ---
Corporate ................................................ 451 628 174
------------------ ------------------ ------------------
Total additions to fixed assets........................... $ 6,448 $ 11,884 $ 4,459
================== ================== ==================
</TABLE>
F-17
<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,
1998 1999 2000
------------------ ------------------ ------------------
<S> <C> <C> <C>
Numerator:
Income (loss) before discontinued operations and
extraordinary gain............................... $ 1,699 $ (1,900) $ (1,111)
------------------ ------------------ ------------------
Numerator for basic earnings per share-
income (loss) available to common stockholders... 1,699 (1,900) (1,111)
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................................ $ 1,699 $ (1,900) $ (1,111)
================== ================== ==================
Denominator:
Denominator for basic earnings per share-
weighted-average shares.......................... 12,276,278 13,264,307 13,291,649
Effect of dilutive securities:
4% convertible subordinated notes and stock
options ......................................... -- -- --
------------------ ------------------ ------------------
Denominator for dilutive earnings per share-
adjusted weighted-average shares and assumed
conversions...................................... 12,276,278 13,264,307 13,291,649
================== ================== ==================
Basic earnings (loss) per share before discontinued
operations and extraordinary gain................. $ 0.14 $ (0.14) $ (0.08)
================== ================== ==================
Diluted earnings (loss) per share before discontinued
operations and extraordinary gain................. $ 0.14 $ (0.14) $ (0.08)
================== =================== ==================
</TABLE>
Earnings (loss) per share from continuing operations have 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, convertible to 272,143
shares of common stock at June 30, 2000, has 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 of the Company's
current year operating loss, therefore, having an antidilutive effect, were
498,900, 549,529 and 604,703 for fiscal 1998, 1999 and 2000, respectively.
F-18
<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 for continuing operations is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Statutory tax rate....................................... 34.0% (34.0)% (34.0)%
Change in valuation allowance............................ (5.2) 45.2 640.8
Non-deductible intangible amortization................... 8.8 16.9 124.5
State and local taxes, net of federal benefit............ 9.6 (34.7) (331.3)
Non-deductible meals and entertainment................... 0.9 2.1 21.7
Other.................................................... 0.3 1.5 (107.2)
--------------- --------------- ---------------
48.4% (3.0)% 314.5%
=============== =============== ===============
</TABLE>
The provision for income taxes from continuing operations for the Company
is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Current
Federal............................................. $ --- $ --- $ ---
State and local..................................... 439 550 270
Deferred
Federal............................................. 1,372 (369) (415)
State and local..................................... 38 (1,580) (1,612)
Adjustment to valuation allowance................... (258) 1,341 2,600
---------------- ---------------- ---------------
$ 1,591 $ (58) $ 843
================ ================ ===============
</TABLE>
The components of net deferred tax assets arising from temporary
differences as of June 30, 1999 and 2000 were as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1999 2000
------------------------ ------------------------
<S> <C> <C>
Receivable allowance............................................ $ 542 $ 469
Inventory reserves.............................................. 379 443
Compensation payable............................................ 353 294
Other........................................................... 26 ---
------------------------ ------------------------
Current deferred tax asset.................................. 1,300 1,206
Federal and state net operating loss and credit carryforwards... 5,602 8,182
Valuation allowance............................................. (2,020) (4,620)
Purchase accounting reserves.................................... 355 230
Straight lined rent............................................. 698 647
Accelerated depreciation........................................ (259) (739)
------------------------ ------------------------
Non-current deferred tax asset.............................. 4,376 3,700
------------------------ ------------------------
Total deferred tax asset.................................... $ 5,676 $ 4,906
======================== ========================
</TABLE>
F-19
<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, 1999 and 2000.
The state net operating loss carryforward valuation allowance increased by
$1,341 and $2,600 in 1999 and 2000, respectively, as a result of additional
operating losses in certain subsidiaries. The Company has a state valuation
allowance of $4,620 as of June 30, 2000. The state valuation allowance is
provided as a result of estimates regarding future operations of certain
subsidiaries in certain states.
At June 30, 2000, the Company has potential tax benefits from net operating
loss carryforwards for federal income tax purposes of $2,739, which expire
between 2007 and 2020. Use of the net operating losses may be restricted due to
the change in ownership provisions of the Internal Revenue Code of 1986, as
amended. The Company also has potential tax benefits from net operating loss
carryforwards for state income tax purposes of $5,025, which expire between 2002
and 2020, 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, 1998, 1999 and 2000, the matching employer
contributions amounted to $191, $275 and $200, 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 1999 and 2000, 115,000 and 187,500 shares of common
stock options were granted, respectively. At June 30, 2000, there are 185,500
shares of common stock available for granting.
F-20
<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
Options did not impact the aggregate intrinsic value, reduce the ratio of
exercise price per option to the market value per share, or alter the vesting
provision of the Stockholder Options. As a result, no expense under APB 25 was
recognized.
The Black-Scholes option pricing model used the following assumptions for
grants in 1998, 1999 and 2000, respectively: expected volatility of 0.4, 0.5 and
0.92, dividend yield of 0% and expected lives of ten years for all years, and
risk free interest rates of 6.38%, 6.09% and 6.21%.
The following table shows the pro forma impact of options on the Company's
net loss for the years ended June 30, 1998, 1999 and 2000 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>
1998 1999 2000
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss: As Reported $ (161) $ (1,900) $ (729)
Pro Forma (265) (2,071) (826)
Net loss per common share - Basic: As Reported (.01) (.14) (.05)
Pro Forma (.02) (.16) (.06)
Net loss per common share - Diluted: As Reported (.01) (.14) (.05)
Pro Forma $ (.02) $ (.16) $ (.06)
</TABLE>
A summary of the status of the Stock Plan at June 30, 1999 and 2000, and
changes during the years then ended is presented in the table below.
<TABLE>
<CAPTION>
1999 2000
------------------------------- ------------------------------
Weighted Weighted
Number Average Number Average
Of Exercise Of Exercise
Shares Price Shares Price
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.................. 857,800 $ 4.16 $ 965,600 $ 4.02
Granted........................................... 115,000 2.95 187,500 2.16
Exercised......................................... --- --- (3,000) 2.94
Forfeited......................................... (7,200) 3.28 (210,100) 4.05
Canceled or Expired............................... --- --- --- ---
------------- ------------- ------------- -------------
Outstanding at end of year........................ 965,600 $ 4.02 940,000 $ 3.65
============= ============= ============= =============
Exercisable at end of year........................ 609,257 $ 4.61 600,148 $ 3.30
============= ============= ============= =============
Weighted average fair value of options granted.... $ 2.10 $ 1.93
============= =============
</TABLE>
F-21
<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, 2000
is $1.625 - $6.00 with a weighted average remaining contractual life of 7.11
years. Approximately, 183,178 options become exercisable in fiscal 2001, 90,834
options become exercisable in fiscal 2002 and 65,840 options become exercisable
in fiscal 2003.
<TABLE>
<CAPTION>
Options Exercise Weighted Options
Outstanding Price Range Average Life Exercisable
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
192,500 $1.625 - 2.625 9.61 1,666
354,000 2.940 - 3.250 7.47 204,982
393,500 4.000 - 6.000 5.55 393,500
----------------- ----------------- ----------------- -----------------
940,000 $1.625 - 6.000 7.11 600,148
================= ================= ================= =================
</TABLE>
Upon the Merger, the Company assumed 508,800 fully vested IPL options,
which had previously been granted to former employees and directors of IPL,
393,500 of these options are outstanding at June 30, 2000.
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.
F-22
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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
operations. 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 and
2000 is a reserve of $249 and $65, respectively, principally for remaining lease
commitments and severance arrangements.
Note 17 - Other Income
Included in 2000 other income is $367 pertaining to the assignment of the
Company's leasehold in its Miami studio and the sale of other assets.
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, 2000,
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>
2001.............................................. $ 4,167
2002.............................................. 3,570
2003.............................................. 3,068
2004.............................................. 2,870
2005.............................................. 2,598
Thereafter........................................ 9,674
---------------
$ 25,947
===============
</TABLE>
Rental expense for the years ended June 30, 1998, 1999 and 2000 amounted to
$3,719, $4,302 and $4,137, respectively. The Company also has non-cancelable
subleases of approximately $837.
Employment Agreements - At June 30, 2000, 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>
2001.............................................. $ 3,641
2002.............................................. 1,050
2003.............................................. 64
2004.............................................. 61
--------------
$ 4,816
==============
</TABLE>
F-23
<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 matters, 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 - Unaudited Quarterly Results
Unaudited quarterly financial information for fiscal year 1999 and 2000 is
set forth below.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1998 1998 1999 1999
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Fiscal 1999
Revenues........................ $ 21,906 $ 21,562 $ 22,700 $ 23,243
Gross profit.................... $ 5,962 $ 6,032 $ 5,917 $ 5,856
Income from continuing
operations................... $ (286) $ (450) $ (821) $ (343)
Income from continuing
operations per share - basic $ (0.02) $ (0.03) $ (0.06) $ (0.03)
Net income (loss)............... $ (286) $ (450) $ (821) $ (343)
Quarter Ended
------------------------------------------------------------------------------
September 30, December 31, March 31, June 30,
1999 1999 2000 2000
----------------- ---------------- ----------------- ----------------
Fiscal 2000
Revenues........................ $ 20,804 $ 22,552 $ 26,981 $ 25,811
Gross profit.................... $ 6,437 $ 6,284 $ 6,749 $ 5,920
Income (loss) from continuing
operations................... $ (215) $ (111) $ 10 $ (795)
Income (loss) from continuing
operations per share - basic. $ (0.02) $ (0.01) $ 0.00 $ (0.05)
Net income (loss)............... $ (215) $ (111) $ 392 $ (795)
</TABLE>
F-24
<PAGE>
VIDEO SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued
Note 21 - Subsequent Events
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 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.
F-25
<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, 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
================= ================ ================ =================
June 30, 2000:
Allowance for doubtful
accounts and volume
discounts................. $ 1,029 $ 371 $ 466 $ 934
================= ================ ================ =================
</TABLE>
(a)The balance at beginning of year gives effect to the Merger with and
into International Post Limited of $1,052.
F-26
