FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For quarter ended April 30, 1995
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Commission file number 0-15424
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Vaughn Communications, Inc.
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Exact Name of Registration as Specified in its Charter)
Minnesota 41-0626191
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(State or other jurisdiction of . (I.R.S. Employee Identification No.)
incorporation or organization)
5050 West 78th Street
Minneapolis, Minnesota 55435
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(Address of principal executive offices) (Zip Code)
612/832-3200
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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 and Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
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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Common Stock, $.10 Par Value - 3,111,560 outstanding shares as of May 31, 1994
VAUGHN COMMUNICATIONS, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets - April 30, 1995 and January 31, 1995
Condensed Statements of Operations - Three months ended April
30, 1995 and 1994
Condensed Statements of Cash Flow - Three months ended April
30, 1995 and 1994
Notes to Condensed Financial Statements - April 30, 1995
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
Page 2
VAUGHN COMMUNICATIONS, INC.
PART 1 - FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
APRIL 30 JANUARY 31
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1995 1995
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ASSETS
Current Assets
Trade accounts receivable less allowance of
$580,000 April 30, 1995 and $500,000 at
January 31, 1995 $10,725,787 $ 7,287,924
Inventories 6,362,621 5,762,279
Other 1,140,700 489,418
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Total Current Assets 18,229,108 13,539,621
Property, Plant and Equipment 18,590,162 16,117,463
Less accumulated depreciation 10,208,168 9,650,652
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8,381,994 6,466,811
Intangible and Other Assets 4,666,306 1,249,939
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$31,277,408 $21,256,371
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,559,989 $ 2,440,566
Note payable to bank 5,281,332 4,691,699
Salaries, wages and payroll taxes 255,540 302,123
Current portion of long-term debt and capital
lease obligations 2,606,714 1,361,486
Other 1,764,998 736,084
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Total Current Liabilities 13,468,573 9,531,958
Long-term Debt (less current portion) 6,438,824 2,173,662
Capital Lease Obligations (less current portion) 1,257,398 1,109,130
Deferred Taxes 38,870 21,178
Shareholders' Equity
Common stock par value $.10 per share:
Authorized 20,000,000 shares; issued and
outstanding April 30, 1995 - 3,102,895
shares; January 31, 1995 - 2,832,298
shares 310,289 283,230
Additional paid-in capital 4,754,904 3,576,020
Retained earnings 5,008,550 4,561,193
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Total Shareholders' Equity 10,073,743 8,420,443
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$31,277,408 $21,256,371
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Note: The balance sheet at January 31, 1995 has been derived from the audited
financial statements at that date.
See Notes to Financial Statements.
Page 3
VAUGHN COMMUNICATIONS, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED APRIL 30
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1995 1994
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NET SALES $12,373,415 $9,646,023
COSTS AND EXPENSES:
Costs of Goods Sold 8,533,146 6,440,704
Selling and Administrative 2,984,748 2,338,677
Interest 269,797 146,859
Other (Income) (8,577) 28,558
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11,779,114 8,954,798
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Income from continuing operations before
income tax 594,301 691,225
Income taxes 245,000 270,000
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Income from continuing operations $ 349,301 $ 421,225
Income from discontinued operations net of
taxes -- 500,161
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Net Income 349,301 921,386
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INCOME PER COMMON SHARE:
Continuing Operations $.10 $.13
Discontinued Operations -- .16
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Net Income $.10 $.29
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VAUGHN COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30
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1995 1994
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OPERATING ACTIVITIES
Net Income $349,301 $921,386
Adjustments to reconcile net income to cash provided by operations:
Gain on sale of discontinued operations -- (554,266)
Depreciation and Amortization 705,352 519,089
Receiveables (2,038,869) (1,052,836)
Inventories (34,457) 108,164
Other Assets 36,659 (129,237)
Accounts Payable 486,952 (551,144)
Salaries, Wages and Payroll Taxes (369,119) (128,226)
Other Liabilities 242,937 (172,024)
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Net cash used in Operating Activities (621,244) (1,039,094)
INVESTING ACTIVITIES
Additions to Porperty, Plant and Equiment (683,340) (240,320)
Cash proceeds from sale of business unit -- 800,000
Purchase of Business less cash acquired (5,327,601)
Other 27,768 4,574
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Net cash provided (used) in Investing Activities (5,983,173) 564,254
FINANCING ACTIVITIES
Repayments of Long-Term Debt and Capital Leases (354,648) (266,669)
Borrowings under Revolver 589,633 190,523
Lease Financing of Equipment 163,488 519,015
Increase in Bank Debt 5,000,000
Stock Issued in purchase of business 1,170,000
Other 35,944 31,971
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Net cash provided by Financing Activities 6,604,417 474,840
Change in cash -0- -0-
Cash and cash equivalents at beginning of year -0- -0-
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Cash and cash equivalents at end of period $ -0- $ -0-
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VAUGHN COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1995
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three month
period ended April 30, 1995 are not necessarily indicative of the results
that may be expected for the year ending January 31, 1996. For further
information, refer to the financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended January 31,
1995.
Note B - Discontinued Operations
On March 1, 1994, the Company sold the assets and operations of the operating
unit of the Company involved in the manufacture and sale of flag, float and
display products. The non-contingent selling price of $1,500,000 included
$800,000 of cash and a note receivable of $700,000. The net book value of the
assets sold included approximately $450,000 of inventory, $280,000 of fixed
assets, and $150,000 of accounts receivable. The gain on the sale after
settlement costs was approximately $554,000. The tax liability on the gain
was offset by capital loss carryforwards the Company has available.
Summarized results of operations data of the discontinued operations are as
follows:
YEAR ENDED
JANUARY 31, 1994
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Net Sales $2,904
Cost of Sales 2,037
Selling and Administrative 722
Other 29
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Operating Income before taxes 116
Income taxes 43
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Net Earnings from discontinued operations $ 73
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Note C - Acquisition of Centercom
On April 4, 1995, the Company completed the acquisition of all the capital
stock of Centercom, Inc. and Centercom South, inc. (collectively
"Centercom"). The effective date of acquisition was April 1, 1995, and will
be accounted for as a purchase.
The purchase price was $6,420,000 including $5,250,000 of cash and 180,000
shares of Vaughn Communications, Inc. common stock valued at $1,170,000. In
addition, the selling shareholders of Centercom collectively will be paid
$200,000 a year for seven years under non-compete and consulting agreements.
To fund the transaction, the Company entered into a new $13,000,000 credit
facility with its bank. The new agreement provides for $5,000,000 of
long-term financing to be used for the Centercom acquisition. This long-term
debt has quarterly principal repayments and an interest rate of 1/4% over
the prime rate. The remaining $8,000,000 (at the prime interest rate)
revolving credit facility is to be used to finance working capital.
$3,000,000 of the revolving credit facility is available for long-term
financing to replace existing debt or finance new equipment purchases, of
which $850,000 has been applied to repay a like amount of Centercom long-term
debt.
Centercom is a videotape duplicator with facilities in Milwaukee, Wisconsin,
Chicago, Illinois, and Tampa, Florida. Its sales for the fiscal years ended
June 30, 1994 and 1993 were $8,700,000 and $7,700,000 respectively, while net
income for the same period were $645,000 and $412,000. The pro forma
unaudited results of operations for the three months ended April 30, 1994,
assuming consummation of the purchase as of February 1, 1994 are as follows:
THREE MONTHS ENDED APRIL 30
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1995 1994
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Net Sales $14,183,185 $11,898,737
Net Income 426,949 431,586
Net Income per Common Share .12 .13
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Net sales increased 28% in the first quarter of 1995 to $12,337,000, up
$2,700,000 over the first quarter of 1994. This growth, however, did not
result in increased operating profit, as a decrease in gross margins from 33%
to 31%, additional expenses associated with the acquisition of Centercom,
Inc., and an increase in interest expense resulted in a 14% decrease in
pretax profit from $691,000 to $594,000 in 1995. The Company's tax rate
increased from 39% in 1994 to 41% in 1995, due to the nondeductability of
certain expenses resulting from the Centercom acquisition. The contribution
each division made to these results is discussed below.
Communications Division
The Communications division's net revenues of $10,080,000 in the first
quarter of 1995 were $2,350,000 or 30% higher than the previous year's first
quarter. Included in this increase was approximately $950,000 of revenue from
Centercom, which was acquired April 1, 1995 (See Note C). Excluding the
additional sales from the acquisition, revenues increased by 18% for the
quarter.
Gross margins as a percentage of sales decreased from 34% last year to 31%
for the current year due to higher material costs. Management has selectively
increased prices to pass on some of the material cost increase to its
customers. In addition to price increases, management is also putting in place
methods of cost containment including the direct importing of raw materials
from overseas suppliers.
As a percentage of net sales, operating expenses increased from 24% to 25%
for the first quarter of 1995. The increase was due in part to additional
costs associated with the Centercom acquisition, including $43,000 of
goodwill amortization and non-compete payments.
Interest expense increased from approximately $82,000 in 1994 to $194,000 for
1995. The increase was due to higher bank interest rates which directly
affect the Company's borrowing cost, and increased levels of borrowings on
the Company's line of credit, which is used for operating purposes. Also,
there was an increase in bank term debt of $5,000,000 to finance the
Centercom acquisition which resulted in approximately $38,000 of additional
interest expense.
Pre-tax income for the first quarter of 1995 decreased by 30% to $470,000.
The decrease is due to increases in operating expenses and interest expenses,
and the decline in the gross margin.
Page 8
Products Division
Sales from the Products Division increased 20% in the first quarter of 1995,
from $1,916,000 in 1994 to $2,293,000. The increase was attributable to
improved sales efforts and an increase in the products offerings.
Gross margins as a percentage of sales decreased slightly from 29.9% in the
first quarter of 1994 to 29.3% in 1995 due to increases in the cost of raw
materials.
The increase in sales and the resultant leveraging of fixed operating
expenses contributed to a decrease in operating expenses compared to net
sales from 26% in 1994 to 23% in 1995.
The increase in sales, the relative stability in gross margins and the
leveraging of fixed expenses resulted in a 161% increase in pretax profit from
$48,000 in the first quarter of 1994 to $124,000 in 1995.
Discontinued Operations
The discontinued operations resulted from the Company's sale of the operating
unit involved in the manufacture and sale of flag, float and display
products. The sale was completed on March 1, 1994 and the net gain on the
sale was approximately $554,000.
Acquisition of Centercom
On April 4, 1995 the Company acquired the capital stock of Centercom, Inc.
and Centercom South, Inc. (collectively "Centercom"), a videotape
duplicator with facilities in Milwaukee, Wisconsin, Chicago, Illinois, and
Tampa, Florida. The purchase price was $6,420,000 including $5,250,000 of
cash and 180,000 shares of Vaughn Common Stock valued at $1,170,000. In
addition, the selling shareholders of Centercom will be paid $200,000 a year
for seven years under non-compete and consulting agreements.
For the fiscal years ended June 30, 1994 and 1993, Centercom had annual sales
of $8,700,000 and $7,500,000, respectively, and net income of $649,000 and
$415,000.
The cash consideration was made available under a new credit agreement with
the Company's bank. The new agreement provides for $5,000,000 of long term
financing to be used for the Centercom acquisition. The note has quarterly
principal payments of $250,000 commencing July 1, 1995 and an interest rate
of 1/4% over the prime rate. In addition, the agreement provides for a
revolving credit facility of up to $8,000,000 (at the prime interest rate) to
be used to finance working capital. $3,000,000 of the revolving facility is
available for long-term financing to replace existing debt and to finance new
equipment purchases. Of this amount, $850,000 was applied to repay a like
amount of Centercom long-term debt. The interest rate on the long-term
financing is 1/2% over the prime rate.
Page 9
Liquidity and Sources of Capital
The Company used approximately $621,000 of cash in operating activities in
the first quarter of 1995 compared to $1,039,000 used in the same period in
1994. The improvement in cash flow was largely affected by the $487,000
increase in accounts payable, and a $242,000 increase in other liabilities.
Management closely monitors accounts payable to ensure that early payment
discounts are utilized, but also preserves cash by ensuring that accounts are
not paid before the negotiated due date. The cash flow generated from
management of accounts payable was offset by an increase in accounts
receivable due primarily to the increase in sales.
Approximately $6,000,000 was used in investing activities for the three
months ended April 30, 1995. The largest portion of cash used was the
acquisition of Centercom (see discussion above). The Company used its bank
line of credit to provide $5,000,000 for the acquisition and approximately
$590,000 for working capital needs.
The Company's principal sources of liquidity continue to be operating income,
long-term borrowings secured by specific equipment, and its revolving credit
facility. At April 30, 1995, approximately $1,145,000 of this facility was
available and the Company believes that the liquidity provided by the sources
described above will be adequate for its immediate foreseeable needs.
Page 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed herewith.
NO. DESCRIPTION
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11 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
On April 19, 1995, the Company filed with the Commission a report on Form
8-K dated April 17, 1995, reporting at Item 2 its acquisition of Centercom.
Pursuant to Item 7 of this report on Form 8-K, the Company deferred filing
Centercom's financial statements and combined pro forma financial information
of the Company and Centercom until a date on or before June 18, 1995 when the
same were expected to be available. On or about June 14, 1995, the Company
filed Amendment No. 1 to this report on Form 8-K, filing at Item 7(a) the
report of Richard A. Podraza, S.C., independent certified public accountant,
dated September 9, 1994, with respect to the accompanying Combined Balance
Sheets of Centercom, Inc. and its Affiliate, Centercom South, Inc.,
collectively "Centercom," as of June 30, 1994 and 1993, and the related
Combined Statements of Income, Retained Earnings and Cash Flows of Centercom
for each of the three years in the period ended June 30, 1994, together with
the related Notes to Financial Statements. Amendment No. 1 also included at
Item 7(b) the following Pro Forma Combined Financial Statements (Unaudited)
of the Company and Centercom: the Balance Sheet of the Company as of January
31, 1995, combined with that of Centercom as of March 31, 1995; and the
respective Statements of Operations for the twelve months then ended, using
the purchase method of accounting to reflect the acquisition of all the
common stock of Centercom by the Company which occurred on April 4, 1995, as
if, in the case of the Balance Sheet, the acquisition had occurred at January
31, 1995 and, in the case of the Statement of Operations, the acquisition had
occurred on February 1, 1994.
Page 11
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto authorized.
Vaughn Communications, Inc.
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Date June 10, 1995 /s/ M. Charles Reinhart
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M. Charles Reinhart
Secretary
Date June 10, 1995 /s/ M. Charles Reinhart
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M. Charles Reinhart, Controller
(Principal Accounting Officer)
Page 12