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, 1997
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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 ________________________
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
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYEE IDENTIFICATION NO.)
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 4,011,023 OUTSTANDING SHARES AS OF AUGUST 31,
1997.
VAUGHN COMMUNICATIONS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - July 31, 1997 and January
31, 1997
Condensed consolidated statements of income - Three months ended
July 31, 1997 and 1996; Six months ended July 31, 1997 and 1996
Condensed consolidated statements of cash flow - Six months ended
July 31, 1997 and 1996
Notes to condensed consolidated financial statements - July 31,
1997
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
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PART 1-FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31 JANUARY 31
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ASSETS 1997 1997
---- ----
Current Assets
Trade accounts receivable less allowance of $925,000
July 31, 1997 and $650,000 at January 31, 1997 $13,527,861 $10,685,149
Inventories 8,792,739 9,256,455
Other 866,977 1,626,542
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Total Current Assets 23,187,577 21,568,146
Property, plant and equipment 27,324,659 24,953,876
Less accumulated depreciation 17,902,829 16,237,440
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9,421,830 8,716,436
Intangible and Other Assets 9,320,380 4,466,641
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$41,929,787 $34,751,223
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---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,479,367 $ 2,982,508
Notes payable to banks 6,154,824 4,781,312
Salaries, wages and payroll taxes 228,674 696,894
Current portion of long-term debt and capital lease obligations 3,600,859 2,830,033
Other 1,246,002 1,009,306
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Total Current Liabilities 13,709,726 12,300,053
Long-term debt (less current portion) 7,657,195 4,563,880
Capital lease obligations (less current portion) 1,053,009 963,533
Deferred taxes 75,326 75,326
Shareholders' Equity
Common stock, par value $.10 per share:
Authorized 20,000,000 shares; issued and outstanding July 31, 1997 -
4,010,756 shares; January 31, 1997 - 3,726,513 shares 401,075 372,652
Additional paid-in capital 8,790,854 7,578,406
Retained earnings 10,242,602 8,897,373
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Total Shareholders' Equity 19,434,531 16,848,431
$41,929,787 $34,751,223
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---------- ----------
Note: The balance sheet at January 31, 1997 has been derived from the audited
financial statements at that date. See Notes to Condensed 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
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $19,180,773 $18,300,366 $37,446,312 $37,616,131
COST AND EXPENSES:
Costs of goods sold 12,924,529 12,244,977 25,008,565 25,331,748
Selling and administrative 4,874,785 4,538,061 9,535,833 9,310,901
Interest 337,155 372,236 644,653 712,428
Other expense (income) (46,381) (15,104) (67,957) (20,265)
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18,090,088 17,140,170 35,121,094 35,334,812
INCOME BEFORE INCOME TAXES 1,090,685 1,160,196 2,325,218 2,281,319
Income taxes 465,000 489,086 980,000 974,086
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NET INCOME $ 625,685 $ 671,110 $1,345,218 $1,307,233
---------- ---------- ---------- ----------
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NET INCOME PER
COMMON SHARE $ 0.16 $ 0.17 $ 0.35 $ 0.33
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---------- ---------- ---------- ----------
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
------------------------
1997 1996
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OPERATING ACTIVITIES
Net Income $ 1,345,218 $ 1,307,233
Adjustments to reconcile net income to cash
provided by operations
Depreciation and Amortization 1,822,725 1,686,266
Receivables (2,750,353) (2,053,271)
Inventories 595,220 141,880
Other Assets 1,017,252 428,230
Accounts Payable (503,138) (199,814)
Other Liabilities (499,528) 733,283
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Net cash provided by (used in) operating activities 1,027,396 2,043,807
INVESTING ACTIVITIES
Additions to property, plant, and equipment (1,033,091) (1,324,665)
Purchase of business less cash acquired (5,811,009) -
Other 229,603 191,379
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Net cash used in investing activities (6,614,497) (1,133,286)
FINANCING ACTIVITIES
Repayments of long-term debt and capital leases (1,327,282) (1,342,359)
Borrowings under revolver 1,373,512 16,158
Lease financing of equipment - 93,112
Increase in long term debt 1,500,000 -
Increase in bank debt 2,800,000 -
Common stock issued in purchase of business 1,200,000 -
Other 40,871 322,568
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Net cash provided by financing activities 5,587,101 (910,521)
Change in cash - -
Cash and cash equivalents at beginning of year - -
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Cash and Cash Equivalents at end of period $ $ -
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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, 1997
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, 1997
are not necessarily indicative of the results that may be expected for the year
ending January 31, 1998. 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, 1997. 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 - MERGER WITH SATASTAR CORPORATE SERVICES, INC.
Satastar Corporate Services, Inc. (dba PVS Corporate Services), a videotape
duplicator located in Chicago, Illinois, was merged with 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
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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
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Company Satastar Combined
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Net Sales $36,254,414 $1,361,717 $37,616,131
Net Income (Loss) 1,390,964 (83,731) 1,307,233
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NOTE C - ACQUISITIONS
On July 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Certified Media Corporation, a compact disc ("CD") replicator
located in San Jose, California. The initial purchase price was $5,500,000,
including $2,800,000 of cash, 171,210 shares of Vaughn Communications, Inc.
common stock valued at $1,200,000, and long-term debt to the sellers of
$1,500,000. The purchase price may be increased to a maximum of $8,000,000
depending upon Certified Media's attaining certain financial objectives through
January 31, 1999. Goodwill recorded in this transaction is being amortized over
15 years using the straight-line method.
Also on July 31, 1997, the Company acquired certain assets of Dub South, a
videotape duplicator located in Atlanta, Georgia. The noncontingent purchase
price included $311,000 of cash and the assumption of approximately $439,000 of
liabilities. The purchase price may be increased by an additional $1,200,000,
depending on the profit performance for the next five years. There was no
goodwill recorded on this transaction.
Both acquisitions have been accounted for by the purchase method of accounting,
and the consolidated financial statements for the period ended July 31, 1997,
reflect the purchase of the businesses, but do not include any results from
operations since the transactions were completed on the last day of the period.
The pro forma unaudited results of operations, assuming consummation of all
acquisitions as of February 1, 1996, are as follows:
Three Months Ended July 31 Six Months Ended July 31
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1997 1996 1997 1996
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Net Sales $21,403,000 $20,596,000 $41,047,000 $41,362,000
Net Income 261,000 242,000 850,000 677,000
Net Income per Common Share $.06 $.06 $.21 $.17
NOTE D - EARNINGS PER SHARE
In February, 1997 the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in no change
in primary earnings per share for the second quarter ended July 31, 1997 and an
increase of $.02 per share in primary earnings per share for the second quarter
ended July 31, 1996. The impact is expected to result in an increase of $.01
and $.04 per share for the six months ended July 31, 1997 and 1996,
respectively. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these quarters is not expected to be material.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
On July 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Certified Media Corporation, a compact disc ("CD") replicator
located in San Jose, California. The initial purchase price of $5,500,000
included $2,800,000 of cash, $1,500,000 of long-term debt to the sellers, and
171,210 shares of Vaughn Communications, Inc. common stock valued at $1,200,000.
The purchase price may be increased to a maximum of $8,000,000 in the event
certain financial objectives are met, or likewise, the price could be reduced if
certain objectives are not met.
Also on July 31, 1997, the company acquired certain assets from Dub South, a
videotape duplicator located in Atlanta, Georgia. The non-contingent purchase
price included $311,000 of cash and the assumption of $439,000 of long-term
debt. The purchase price may be increased by $1,200,000 in the event certain
financial objectives are met.
Both acquisitions have been accounted for by the purchase method of accounting,
and the consolidated financial statements for the period ended July 31, 1997
reflect the purchase of the businesses, but do not include any results from
operations since the transactions were completed on the last day of the period.
Net sales increased 5% in the second quarter of 1997 to $19,200,000, an increase
of approximately $900,000 from the second quarter of 1996. For the first six
months of 1997 sales of $37,446,000 were approximately even with the same period
last year. Gross margins in the second quarter remained at 33% for both years,
while year-to-date gross margins have also remained at 33%. Operating expenses
as a percentage of sales for the first six months have remained at 25%, while
interest expense has declined slightly. Net income decreased 7% in the second
quarter of 1997 to $626,000, while for the first six months net income increased
3% to $1,345,000 in 1997. The contribution each division made to these results
is discussed below.
COMMUNICATIONS DIVISION
The Communications Division's net sales of $13,900,000 in the second quarter of
1997 were an 8% increase over last year's second quarter sales of $12,900,000.
For the first six months of 1997, sales were approximately $27,800,000, a 3%
increase over the previous year's sales of $26,900,000. Gross margins as a
percentage of sales increased slightly in the second quarter of 1997 from 33% in
1996 to 34% in 1997. Year-to-date gross margins have also increased from 33% in
1996 to 34% in 1997. Selling and administrative expenses as a percentage of
sales increased in the first six months of 1997 to 28% from 27% in the first six
months of 1996, while interest expense declined slightly.
The increase in sales, combined with the improved gross margins, more than
offset the increase in operating expenses and resulted in a 32% increase in
pretax profit in the second quarter of 1997 to $578,000. Year-to-date pretax
profits have increased 41%, from $988,000 in 1996 to $1,397,000 in 1997.
PRODUCTS DIVISION
The Products Division's net sales decreased 2% in the second quarter of 1997
from $5,410,000 in 1996 to $5,323,000 in 1997. For the first six months sales
declined from $10,683,000 in 1996 to $9,616,000 in 1997, a decrease of 10%. The
operations of the Products Division are seasonal, with approximately 80% of
sales occurring in the first half of the year to serve the summer tourist
industry, hence it is unlikely that the sales shortfall will be made up in the
second half of the year.
Gross margins as a percentage of sales have also declined from 33% in 1996 to
30% in 1997, primarily due to the decrease in sales resulting in less leveraging
of the Company's fixed expenses. Operating expenses have declined by 11% from
the previous year and as a percentage of sales have remained at 19%.
- 7 -
As a result of the decrease in sales and gross margins, pretax profit for the
second quarter declined by 29% from $760,000 in 1996 to $539,000 in 1997.
Year-to-date, pretax profit decreased from $1,292,000 in 1996 to $929,000 in
1997, or 28%.
LIQUIDITY AND SOURCES OF CAPITAL
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, 1997, approximately $1,600,000 of this facility was available
compared to $4,300,000 the previous year. The primary reason for the decrease
was the additional borrowing of $2,800,000 used to fund the acquisition of
Certified Media. 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 divestitures, and depending on the size and structure of the
transaction, additional funding may be required or generated. As of August 31,
1997, no definitive agreements have been reached regarding any such
transactions.
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PART II - OTHER INFORMATION
VAUGHN COMMUNICATION, INC.
ITEM 2. CHANGES IN SECURITIES
a) Not Applicable.
b) Not Applicable.
c) During the quarter ended July 31, 1997, the Company sold unregistered
securities as follows: as of July 31, 1997, the Company issued 171,210
shares of its common stock to the shareholders of Certified Media
Corporation ("CMC") in consideration of the acquisition by the Company of
substantially all of the assets of CMC. There were no underwriters
involved with the acquisition. The shares issued to the shareholders of
CMC were issued in reliance upon the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended (the "Act"). With
respect to the Company's reliance on Section 4(2) of the Act, the
shareholders of CMC represented that they acquired the shares for
investment and the certificates representing the shares issued to the
shareholders of CMC were legended with respect to restrictions on transfer.
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 17, 1997. The Company's Board of Directors solicited
proxies for the Meeting pursuant to its Proxy Statement dated May 20, 1997 (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 Rodney Burwell, Michael Sill and E. David Willette 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 2000
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
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Rodney Burwell 2,861,648 - 12,349 -
Michael Sill 2,857,648 - 16,349 -
E. David Willette 2,873,897 - 100 -
The remaining members of the Board of Directors were not elected at the 1997
Annual Meeting. 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. Messrs. Robert Harmon,
Roger Heegaard, William Smith and Donald Drapeau continue to serve terms
expiring at the 1999 Annual Meeting of Shareholders; and until their successors
are elected and have qualified.
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.
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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
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(10) Agreement with Certified Media Corporation
(11) Computation of earnings per share
(22) Proxy Statement dated May 20, 1997
for the Company's Annual Meeting
of Shareholders held June 17, 1997
incorporated by reference to filing
thereof on May 20, 1997
(27) Financial data schedule
(b) Reports on Form 8-K
During the quarter ended July 31, 1997 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.
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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
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E. David Willette
Chief Executive Officer
Date
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M. Charles Reinhart
Chief Financial Officer
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