UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-15424
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VAUGHN COMMUNICATIONS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-0626191
- -------------------------------------- ---------------------------------------
(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
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 3,692,496 OUTSTANDING SHARES AS OF AUGUST 31,
1996.
VAUGHN COMMUNICATIONS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - July 31, 1996 and January
31, 1996
Condensed consolidated statements of income - Three months ended
July 31, 1996 and 1995; Six months ended July 31, 1996 and 1995
Condensed consolidated statements of cash flow - Six months ended
July 31, 1996 and 1995
Notes to condensed consolidated financial statements - July 31,
1996
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
- 1 -
PART 1-FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
July 31 January 31
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ASSETS 1996 1996
---- ----
Current Assets
Trade accounts receivable less allowance of $873,000
July 31, 1996 and $626,000 at January 31, 1996 $11,928,664 $10,118,138
Inventories 7,636,387 7,778,267
Other 969,508 1,182,731
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Total Current Assets 20,534,559 19,079,136
Property, plant and equipment 23,121,270 21,796,605
Less accumulated depreciation (14,552,133) (13,045,330)
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8,569,137 8,751,275
Intangible and Other Assets 4,595,994 4,985,407
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$33,699,690 $32,815,818
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----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,737,545 $ 2,937,357
Notes payable to banks 4,030,563 4,014,405
Salaries, wages and payroll taxes 217,275 583,396
Current portion of long-term debt and capital lease obligations 4,297,075 2,855,724
Other 2,163,782 1,110,234
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Total Current Liabilities 13,446,240 11,501,116
Long-term debt (less current portion) 3,497,344 6,478,306
Capital lease obligations (less current portion) 1,583,909 1,293,545
Deferred taxes 25,326 25,326
Shareholders' Equity
Common stock, par value $.10 per share:
Authorized 20,000,000 shares; issued and outstanding July 31, 1996 -
3,690,007 shares; January 31, 1996 - 3,457,714 shares 369,000 345,774
Additional paid-in capital 6,589,216 6,289,874
Retained earnings 8,188,655 8,881,877
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Total Shareholders' Equity 15,146,871 15,517,525
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$33,699,690 $32,815,818
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----------- -----------
See Notes to Consolidated Financial Statements
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VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
July 31 July 31
------------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
NET SALES $ 18,300,366 $ 15,001,571 $ 37,616,131 $ 28,334,355
COST AND EXPENSES:
Costs of goods sold 12,244,977 10,025,677 25,331,748 19,147,763
Selling and administrative 4,538,061 3,664,960 9,310,901 7,000,257
Interest 372,236 385,076 712,428 665,551
Other expense (income) (15,104) 659 (20,265) (8,339)
------------ ------------ ------------ ------------
17,140,170 14,076,372 35,334,812 26,805,232
INCOME BEFORE INCOME TAXES 1,160,196 925,199 2,281,319 1,529,123
Income taxes 489,086 404,960 974,086 649,960
------------ ------------ ------------ ------------
NET INCOME $ 671,110 $ 520,239 $ 1,307,233 $ 879,163
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME PER
COMMON SHARE $ 0.17 $ 0.14 $ 0.33 $ 0.24
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements
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VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended July 31
------------------------
1996 1995
---- ----
OPERATING ACTIVITIES
Net Income $ 1,307,233 $ 879,163
Adjustments to reconcile net income to cash
provided by operations
Depreciation and Amortization 1,686,266 1,533,454
Receivables (2,053,271) 126,318
Inventories 141,880 (794,915)
Other Assets 428,230 (54,293)
Accounts Payable (199,814) (1,558,463)
Other Liabilities 733,283 138,186
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Net cash provided by operating activities 2,043,807 267,450
INVESTING ACTIVITIES
Additions to property, plant, and equipment (1,324,665) (1,292,500)
Purchase of business less cash acquired - (5,327,601)
Other 191,379 36,928
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Net cash used in investing activities (1,133,286) (6,583,173)
FINANCING ACTIVITIES
Repayments of long-term debt and capital leases (1,342,359) (1,124,152)
Borrowings under revolver 16,158 513,848
Lease financing of equipment 93,112 683,671
Increase in bank debt - 5,000,000
Stock issued in purchase of business - 1,170,000
Other 322,568 76,024
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Net cash provided by (used in) financing activities (910,521) 6,319,391
Change in cash - 3,668
Cash and cash equivalents at beginning of year - 3,239
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Cash and Cash Equivalents at end of period $ - $ 6,907
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See notes to condensed consolidated financial statements
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VAUGHN COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
July 31, 1996
NOTE A - BASIS OF PRESENTATIONS
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 July 31, 1996
are not necessarily indicative of the results that may be expected for the year
ending January 31, 1997. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended January 31, 1996. Prior
period financial statements have been restated to reflect the acquisition on
June 28, 1996 of Satastar Corporate Services, Inc. which was accounted for as a
pooling of interests. (See Note B)
NOTE B - ACQUISITION OF SATASTAR CORPORATE SERVICES, INC.
Satastar Corporate Services, Inc. (dba PVS Corporate Services), a videotape
duplicator located in Chicago, Illinois, was acquired by the Company on June 28,
1996 by the issuance of 165,357 shares of common stock, $.10 par value, in
exchange for all of the outstanding capital stock of Satastar Corporate
Services, Inc. The business combination has been accounted for as a pooling of
interest, and, accordingly, the financial statements have been restated to
include the combined results of operations from the date Satastar commenced
operations.
Included in results of operations for the period ended July 31, 1996 are the
following results of the previously separate companies for the period of
February 1, 1996 to June 28, 1996:
Three Months Ended July 31, 1996
--------------------------------
Company Satastar Combined
------- -------- --------
Net Sales $17,771,900 $528,466 $18,300,366
Net Income (Loss) 719,396 (48,286) 671,110
Six Months Ended July 31, 1996
-------------------------------
Company Satastar Combined
------- -------- --------
Net Sales $36,254,414 $1,361,717 $37,616,131
Net Income (Loss) 1,390,964 (83,731) 1,307,233
-5-
The following is a reconciliation of revenue and earnings previously reported by
the Company for the period ended July 31, 1995 with the combined amounts
currently presented in the financial statement for that period.
Three Months Ended July 31, 1995
--------------------------------
Company Satastar Combined
------- -------- --------
Net Sales $14,041,547 $960,024 $15,001,571
Net Income 517,166 3,073 520,239
Six Months Ended July 31, 1995
------------------------------
Company Satastar Combined
------- -------- --------
Net Sales $26,414,962 $1,919,393 $28,334,355
Net Income 866,467 12,696 879,163
NOTE C - ACQUISITIONS
On April 4, 1995, the Company completed the acquisition of all 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 effective date of acquisition was April 1, 1995, and
was accounted for by the purchase method of the accounting and, accordingly,
results from operations have been included in the consolidated financial
statements from April 1, 1995.
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.
Goodwill recorded in this transaction will be amortized over 15 years using the
straight-line method.
On January 1, 1996, the Company completed the acquisition of substantially all
of the assets of Advanced Audio/Video Productions, Inc., a video tape duplicator
located in Denver, Colorado. The acquisition has been accounted for by the
purchase method of accounting and the consolidated statement of income for the
year ended January 31, 1996 includes the results of Advanced Audio/Video from
January 1, 1996.
The purchase price was approximately $282,000 including a cash payment by the
Company of approximately $182,000 and long-term debt to the seller of $100,000.
Goodwill recorded in this transaction will be amortized over 15 years using the
straight-line method.
On January 31, 1996, the Company acquired the assets and assumed certain
liabilities of Indian Arts and Crafts, Inc., a gift product business located in
Seattle, Washington. The acquisition has been accounted for by the purchase
method of accounting, and the consolidated financial statements for the year
ended January 31, 1996 reflect the purchase of the business, but do not include
any results from operations since the transaction was completed on the last day
of the fiscal year.
The purchase price was approximately $2,332,000 including approximately $82,000
of cash, 145,138 shares of Vaughn Communications, Inc. common stock valued at
$1,250,000, and long-term debt to the seller of $1,000,000. Goodwill recorded
in this transaction will be amortized over 10 years using the straight-line
method.
- 6 -
The pro forma unaudited results of operations, assuming consummation of all
acquisitions as of February 1, 1995, are as follows:
Three Months Ended July 31 Six Months Ended July 31
-------------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
Net Sales $18,300,000 $19,403,000 $37,616,000 $36,454,000
Net Income 671,000 1,001,000 1,307,000 1,431,000
Net Income per Common Share $.17 $.25 $.33 $.36
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS
On June 28, 1996, the Company acquired Satastar Corporate Services, Inc. by the
issuance of 165,357 shares of common stock in exchange for all the outstanding
capital stock of Satastar. The business combination has been accounted for as a
pooling of interest, and, accordingly, the financial statements include the
combined results of operations from the date Satastar commenced operations. The
historical results of Satastar are not deemed to be material to the Company's
performance, hence, the following relates to the results of operations on a pro
forma basis only.
Net sales increased 22% in the second quarter of 1996 to $18,300,000, an
increase of $3,299,000 from the second quarter of 1995. For the first six
months of 1996, sales of $37,616,000 were $9,282,000, or 33% greater than the
same period last year. Gross margins in the second quarter remained at 33% for
both years. Year to date, gross margins have also remained approximately the
same as the prior year. Operating expenses as a percentage of sales for the
first six months have remained at 25%, while interest expense has also remained
constant. Net income increased 29% in the second quarter of 1996 to $671,000,
while for the first six months net income increased 49% to $1,307,000 in 1996.
The contribution each division made to these results is discussed below.
COMMUNICATIONS DIVISION
The Communications Division's net sales of $12,900,000 in the second quarter of
1996 were a slight increase over last year's second quarter sales of
$12,700,000. For the first six months of 1996, sales were approximately
$27,000,000, a 13% increase over the previous year's sales of $24,000,000. The
relatively flat sales level in the second quarter occurred in the early summer
months, and management believes that this slowdown in sales occurred throughout
the duplication industry and that sales volume will return to more historical
growth levels of 15%-18% in the second half of the year. Gross margins as a
percentage of sales decreased slightly in the second quarter of 1996 to 33%
compared to 34% in the second quarter of 1995. For the first six months of
1996, the gross margin was 33%, the same percentage as the comparable period
last year.
Selling and administrative expenses as a percentage of sales increased in the
first six months of 1996 to 27% from 25% in the first six months of 1995. The
increase was due in part to additional costs associated with the acquisition of
Satastar and costs associated with sales growth.
The flat sales level, combined with an increase in operating expenses, resulted
in a decrease in pretax income from $787,000 in the second quarter of 1995 to
$410,000 in the second quarter of 1996. For the first six months pretax income
decreased from $1,266,000 in 1995 to $988,000 in 1996.
PRODUCTS DIVISION
The Products Division's net sales increased 135% in the second quarter of 1996
to $5,411,000. For the first six months of 1996 sales were $10,683,000, a 132%
increase over the previous year. The increase was due to the acquisition of
Indian Arts and Crafts ("IAAC") on January 31, 1996. Sales from the IAAC
product line were $6,334,000 for the first six months of 1996 and offset a
slight decrease in sales (5%) from the preexisting operations. The operations
of the Products Division are seasonal, with approximately 80% of the sales
occurring in the first half of the year to serve the summer tourist industry.
Gross margins as a percentage of sales increased from 30% in the first six
months of 1995 to 33% in 1996. The improvement can be attributed to a slight
decrease in raw material costs and improved leveraging of fixed costs due to the
increase in sales.
- 8 -
The increased sales and the acquisition resulted in an 87% increase in operating
expenses in the second quarter of 1996, from $524,000 in 1995 to $979,000. For
the first six months, operating expenses as a percentage of sales have decreased
from 23% in 1995 to 19% in 1996.
As a result of the increase in sales and the improvement in gross margins,
pretax income for the first six months of 1996 increased from $267,000 in 1995
to $1,293,000. In the second quarter, pretax income increased $605,000, from
$143,000 in 1995 to $748,000 in 1996.
LIQUIDITY AND SOURCES OF CAPITAL
The Company generated approximately $2,044,000 of cash from operating activities
in the first six months of 1996 compared to $267,000 in the same period of 1995.
The increase was due to improved profits and improved working capital
management.
The Company's principal sources of liquidity continue to be operating income,
long-term debt secured by specific equipment, and its revolving credit facility.
At July 31, 1996, approximately $4,300,000 of this facility was available, and
the Company believes that the liquidity provided by the sources described above
will be adequate to meet its normal operating requirements over the near term.
The Company continues to investigate potential acquisitions, and depending on
the size and structure of the transaction, additional funding may be required.
As of August 31, 1996, no definitive agreements have been reached regarding any
such acquisitions.
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PART II - OTHER INFORMATION
VAUGHN COMMUNICATION, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Vaughn Communications, Inc. (the
"Company") was held June 19, 1996. The Company's Board of Directors solicited
proxies for the Meeting pursuant to its Proxy Statement dated May 20, 1996 (the
"Proxy Statement") and in accordance with Regulation 14A under the Securities
Exchange Act.
The following proposals, described in the Proxy Statement, were presented to the
Shareholders and approved as follows:
1) Board nominees Robert Harmon, Roger Heegaard, William Smith and Donald
Drapeau were reelected by plurality vote (as set forth below) to serve
as members of the Company's Board of Directors for three-year terms
expiring at the 1999 Annual Meeting of Shareholders, and until their
successors are elected and have qualified. There was no solicitation
in opposition.
Votes Votes Votes Broker
For Withheld Against Non-Votes
----- -------- ------- ---------
Robert Harmon 2,853,963 1,491 - 218,875
Roger Heegaard 2,853,963 1,491 - 218,875
William Smith 2,853,963 1,491 - 218,875
Donald Drapeau 2,853,320 1,491 643 218,875
The remaining members of the Board of Directors were not elected at the 1996
Annual Meeting. Messrs. Rodney P. Burwell, Michael R. Sill and E. David
Willette continue to serve terms expiring at the 1997 Annual Meeting of
Shareholders; and until their successors are elected and have qualified.
Messrs. Jeffrey Johnson, Laurence LeJeune, and Harold Wahlquist continue to
serve terms expiring at the 1998 Annual Meeting of Shareholders; and until their
successors are elected and have qualified.
2) By the affirmative vote of 1,741,807 in favor and the negative vote of
183,640 against, with 39,183 abstentions, the Shareholders approved
adoption by the Company of its 1995 Non-Employee Directors Stock
Option Plan which was previously adopted by the Board of Directors.
The Plan provides for the issuance to non-employee Directors of up to
100,000 shares of authorized but unissued Common Stock pursuant to
nonstatutory stock options.
The shareholder actions summarized above are described in further detail in the
Proxy Statement which is filed as Exhibit 22 to this 10-Q Report.
- 10 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list and Exhibit Index of the Exhibits filed
herewith.
NO. DESCRIPTION
(11) Computation of earnings per share
(22) Proxy Statement dated May 20, 1996 for the
Company's Annual Meeting of Shareholders held
June 19, 1996 incorporated by reference to
filing thereof on May 20, 1996
(27) Financial data schedule
(b) Reports on Form 8-K
During the quarter ended July 31, 1996 for which this Form
10-Q is filed, the Company did not file with the Securities
and Exchange Commission any current reports on Form 8-K.
- 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.
__________________________________
Date ________________ __________________________________
E. David Willette
Chief Executive Officer and Treasurer
Date ________________ _________________________________
M. Charles Reinhart, Controller
(Principal Accounting Officer)
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