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 APRIL 30, 1998
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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
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYEE
ORGANIZATION) 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 4,088,582 OUTSTANDING SHARES AS OF MAY 31, 1998.
VAUGHN COMMUNICATIONS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Balance Sheets - April 30, 1998 and January 31, 1998
Condensed Statements of Income - Three months ended April 30,
1998 and 1997
Condensed Statements of Cash Flows - Three months ended April 30,
1998 and 1997
Notes to Condensed Financial Statements - April 30, 1998
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(UNAUDITED)
April 30 January 31
ASSETS 1998 1998
---- ----
Current Assets
Trade accounts receivable, less allowance
of $1,450,000 at April 30, 1998 and
$1,126,000 at January 31, 1998 $19,157,951 $13,822,621
Inventories 9,257,861 8,887,898
Other 481,314 1,301,287
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Total Current Assets 28,897,126 24,011,806
Property, plant and equipment 33,106,042 31,185,406
Less accumulated depreciation 21,003,575 19,899,664
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12,102,467 11,285,742
Intangible and other assets 10,243,680 9,014,076
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$51,243,273 $44,311,624
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----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $6,454,438 $3,216,356
Note payable to bank 8,122,010 5,760,436
Salaries, wages and payroll taxes 268,161 818,300
Current portion of long-term debt and
capital lease obligations 4,015,442 3,867,986
Other 1,646,055 1,255,415
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Total Current Liabilities 20,506,106 14,918,493
Long-term debt (less current portion) 6,171,740 6,517,724
Capital lease obligations (less current portion) 3,278,577 2,502,540
Deferred taxes 54,326 54,326
Shareholders' Equity
Common stock, par value $.10 per share:
Authorized 20,000,000 shares; issued
and outstanding April 30, 1998 -
4,088,582 shares; January 31, 1998 -
4,088,582 shares 408,858 408,858
Additional paid-in capital 9,074,004 9,074,004
Retained earnings 11,749,662 10,835,679
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Total Shareholders' Equity 21,232,524 20,318,541
$51,243,273 $44,311,624
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Note: The balance sheet at January 31, 1998 has been derived from the
audited financial statements at that date.
See Notes to Condensed Financial Statements
2
VAUGHN COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended April 30
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1998 1997
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Net Sales $23,695,224 $18,265,539
Cost and Expenses:
Costs of goods sold 15,756,558 12,084,036
Selling and administrative 5,923,802 4,661,048
Interest 458,146 307,498
Other (Income) (32,267) (21,576)
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22,106,239 17,031,006
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Income before income tax 1,588,985 1,234,533
Income taxes 675,000 515,000
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Net Income $ 913,985 $ 719,533
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NET INCOME PER COMMON SHARE:
Basic $.22 $.19
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Diluted $.22 $.19
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See Notes to Condensed Financial Statements
3
VAUGHN COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30
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1998 1997
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OPERATING ACTIVITIES
Net income $913,985 $719,533
Adjustments to reconcile net income to cash used in operations:
Depreciation and Amortization 1,298,828 918,563
Receivables (4,842,721) (3,170,631)
Inventories (228,899) (837,104)
Other Assets 629,327 1,008,993
Accounts Payable 2,978,652 759,517
Other Liabilities (51,966) (81,192)
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Net cash provided by (used in) operating activities 697,206 (682,321)
INVESTING ACTIVITIES
Additions to property, plant, and equipment (1,772,436) (480,968)
Purchase of business less cash acquired (1,580,528) -
Other 116,701 102,159
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Net cash used in investing activities (3,236,263) (378,809)
FINANCING ACTIVITIES
Repayments of long-term debt and capital leases (1,119,116) (672,393)
Borrowings under revolver 2,361,574 1,732,101
Lease financing of equipment 1,296,625 -
Other (26) 1,422
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Net cash provided in financing activities 2,539,057 1,061,130
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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See Notes to Condensed Financial Statements
4
NOTES TO FINANCIAL STATEMENTS (Unaudited)
April 30,1998
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,
1998 are not necessarily indicative of the results that may be expected for the
year ending January 31, 1999. 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, 1998.
NOTE B - EARNINGS PER SHARE
Three Months Ended April 30
1998 1997
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Basic net income per share:
Net income $ 913,985 $ 719,533
Weighted average shares outstanding 4,088,582 3,726,832
Net income per share $.22 $.19
Diluted net income per share:
Net income $ 913,985 $ 719,533
Shares used in calculation:
Weighted average shares outstanding 4,088,582 3,726,832
Common shares issuable under stock option plans 50,430 140,465
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4,139,012 3,867,297
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Net income per share $.22 $.19
NOTE C - ACQUISITIONS
On February 1, 1998, the Company completed the acquisition of the assets of
Copywise, Inc. ("Copywise"), a floppy disk replicator located in Fremont,
California. The acquisition will be accounted for by the purchase method of
accounting. Goodwill associated with the purchase will be amortized over 15
years. The noncontingent purchase was approximately $1,670,000 of cash and the
assumption of approximately $667,000 of liabilities. The purchase price may be
increased by an additional $1,560,000 depending upon the attainment of certain
financial objectives by the acquired business through January 31, 2000.
5
In July 1997, the Company acquired certain assets and assumed certain
liabilities of Certified Media Corporation ("CMC"), a compact disc replicator
located in Fremont, 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 $7,500,000
depending upon CMS's attainment of specific financial objectives through January
31, 1999. Goodwill recorded in this transaction is being amortized over 15
years using the straight-line method.
In July 1997, the Company also 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.
All the acquisitions have been accounted for by the purchase method of
accounting, and the consolidated financial statements for the period ended April
30, 1998, reflect the purchase of the businesses and include any results from
operations subsequent to the closing date of the respective transactions.
The following unaudited pro forma information presents the consolidated results
of operations of the Company as if the acquisitions had been completed as of
February 1, 1997.
Three Months Ended
April 30, 1997
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Net Sales $ 21,019,000
Net Income 745,000
Net Income per Share
Basic $.19
Diluted $.18
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Net sales increased 30% in the first quarter from $18,266,000 in 1997 to
$23,695,000 in 1998. The increase was due to additional sales resulting from
acquisitions and growth from pre-existing operations. Gross margins as a
percentage of sales were 33.5% in the first quarter of 1998, compared to 33.8%
in the first quarter of the prior year. Operating expenses of $5,924,000 in the
first three months of 1998 were approximately 25% greater than the same period
last year. Interest expense also increased from approximately $307,000 in the
first quarter of 1997 to $458,000 in 1998. The increase in interest was due to
higher levels of borrowings associated with growth and acquisitions (see
footnote). The increase in sales resulted in a 27% increase in net income, from
$720,000 in the first quarter of 1997 to $914,000 in the first quarter of 1998.
The contribution each division made to these results is discussed below.
COMMUNICATIONS DIVISION
On February 1, 1998, the Company acquired the assets of Copywise, Inc.
("Copywise"), a floppy disk replicator located in Fremont, California, for a
non-contingent purchase price of approximately $1,670,000 and the assumption of
approximately $667,000 of liabilities. The acquisition has been accounted for
as a purchase and the operating results are included in the Company's results as
of the date of acquisition. The operations of Copywise have been merged into
the Company's preexisting facility in Fremont.
The Communications Division's net sales increased 41% in the first quarter of
1998 from $13,972,000 in 1997 to $19,729,000. The net sales generated from the
Company's acquisitions, including Copywise and Certified Media (which was
acquired on July 31, 1997) and a 16% increase in sales from preexisting
facilities contributed to the sales growth.
Gross margins as a percentage of sales declined slightly from 34.9% in the first
quarter of 1997 to 34.2% in 1998. The decrease was due to the lower margins
being realized in the CD replication portion of the business. The gross margins
from videotape duplication remain strong and have increased from last year's 35%
to 37% in 1998.
Selling and administrative expenses have increased 35% from the previous year
due primarily to the additional expenses associated with the previously
discussed acquisitions, including goodwill amortization and noncompete payments.
The increase in net sales, and the maintaining of gross margins resulted in a
41% increase in pretax income, from $844,000 in the first quarter of 1997 to
$1,190,000 in the first quarter of 1998.
PRODUCTS DIVISION
The Products Division's net sales decreased 8% in the first quarter of 1998,
from $4,293,000 to $3,966,000. The decrease can be attributed in part to a
shortfall in sales in the Alaska market due to a change in sales personnel in
this market.
Gross margins have remained at 30% for the first three months, while operating
expenses have decreased by 12% from the pervious year, from $862,000 in 1997 to
$756,000 in 1998. The reduction in operating expenses reflects the Company's
efforts at cost control and helped offset the decrease in sales. As a result of
the cost control efforts, pretax income increased 2% from the prior year, from
$390,000 in the first quarter of 1997 to $399,000 in the first quarter of 1998.
7
LIQUIDITY AND SOURCES OF CAPITAL
Cash provided by operations and financing provided by banks and third parties
continue to be the Company's primary sources of funds to finance operating needs
and capital expenditures. In the first quarter of 1998, cash flow from
operations of $697,000, along with borrowings from third parties, was used to
fund capital expenditures of approximately $1,772,000 and to fund the $1,580,000
purchase of Copywise.
Based on past performance and current expectations, the Company believes that
working capital levels, coupled with its ability to borrow additional funds
under its $17,000,000 credit facility with a bank (of which approximately
$3,700,000 is available at April 30, 1998), are adequate to meet the operating
requirements of the Company for the next nine months. The Company continues to
explore strategic acquisitions and alternative funding proposals. As of May 31,
1998, no definitive agreements have been reached regarding any such
acquisitions.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure requirements of Item 305 of Regulation S-K are not applicable to
the Company.
8
PART II - OTHER INFORMATION
VAUGHN COMMUNICATIONS, INC.
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 PAGE
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(27) Financial data schedule 10
(b) Reports on Form 8-K
During the quarter ended April 30, 1998, for which this Form
10-Qis filed, the Company did not file with the Securities and
Exchange Commission any current reports on Form 8-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Vaughn Communications, Inc.
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Date June 9, 1998 /s/ E. David Willette
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E. David Willette, CEO
(Principal Executive Officer)
Date June 9, 1998 /s/ M. Charles Reinhart
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M. Charles Reinhart, Chief Financial Officer
(Principal Accounting Officer)
9