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, 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
______________________________
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 4,082,052 OUTSTANDING SHARES AS OF AUGUST 31, 1998.
VAUGHN COMMUNICATIONS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - July 31, 1998 and January
31, 1998
Condensed consolidated statements of income - Three months ended
July 31, 1998 and 1997; Six months ended July 31, 1998 and 1997
Condensed consolidated statements of cash flow - Six months ended
July 31, 1998 and 1997
Notes to condensed consolidated financial statements - July 31,
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 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 1998 1998
---- ----
Current Assets
Trade accounts receivable less allowance of
$1,408,000 at July 31, 1998 and $1,126,000
at January 31, 1998 $17,950,091 $13,822,621
Inventories 8,985,636 8,887,898
Other 982,653 1,301,287
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Total Current Assets 27,918,380 24,011,806
Property, plant and equipment 35,600,183 31,185,406
Less accumulated depreciation 22,020,460 19,899,664
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13,579,723 11,285,742
Intangible and Other Assets 10,084,461 9,014,076
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$51,582,564 $44,311,624
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----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 6,685,881 $ 3,216,356
Notes payable to banks 7,244,435 5,760,436
Salaries, wages and payroll taxes 264,794 818,300
Current portion of long-term debt and capital
lease obligations 4,148,069 3,867,986
Other 2,170,746 1,255,415
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Total Current Liabilities 20,513,925 14,918,493
Long-term debt (less current portion) 5,571,279 6,517,724
Capital lease obligations (less current portion) 3,513,780 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 July 31, 1998 - 4,082,052 shares;
January 31, 1998 - 4,088,582 shares 408,205 408,858
Additional paid-in capital 8,984,859 9,074,004
Retained earnings 12,536,190 10,835,679
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Total Shareholders' Equity 21,929,254 20,318,541
$51,582,564 $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.
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VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
July 31 July 31
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
NET SALES $23,719,426 $19,180,773 $47,414,650 $37,446,312
COST AND EXPENSES:
Costs of goods sold 16,161,903 12,924,529 31,918,461 25,008,565
Selling and administrative 5,737,687 4,874,785 11,661,489 9,535,833
Interest 500,901 337,155 959,047 644,653
Other expense (income) (22,580) (46,381) (54,847) (67,957)
----------- ----------- ----------- -----------
22,377,911 18,090,088 44,484,150 35,121,094
INCOME BEFORE INCOME TAXES 1,341,515 1,090,685 2,930,500 2,325,218
Income taxes 555,000 465,000 1,230,000 980,000
----------- ----------- ----------- -----------
NET INCOME $ 786,515 $ 625,685 $ 1,700,500 $ 1,345,218
----------- ----------- ----------- -----------
NET INCOME PER
COMMON SHARE
Basic $ 0.19 $ 0.16 $ 0.42 $ 0.36
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ 0.19 $ 0.16 $ 0.41 $ 0.35
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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
------------------------
1998 1997
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OPERATING ACTIVITIES
Net Income $ 1,700,500 $ 1,345,218
Adjustments to reconcile net income to cash
provided by operations
Depreciation and Amortization 2,510,630 1,822,725
Receivables (3,574,551) (2,750,353)
Inventories 43,326 595,220
Other Assets 537,678 1,017,252
Accounts Payable 3,210,095 (503,138)
Other Liabilities (642) (499,528)
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Net cash provided by (used in) operating activities 4,427,036 1,027,396
INVESTING ACTIVITIES
Additions to property, plant, and equipment (4,266,577) (1,033,091)
Purchase of business less cash acquired (1,580,528) (5,811,009)
Other 80,990 229,603
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Net cash used in investing activities (5,766,115) (6,614,497)
FINANCING ACTIVITIES
Repayments of long-term debt and capital leases (2,633,100) (1,327,282)
Borrowings under revolver 1,483,999 1,373,512
Lease financing of equipment 2,577,978 -
Increase in bank debt - 4,300,000
Common stock issued in purchase of business - 1,200,000
Other (89,798) 40,871
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Net cash provided by financing activities 1,339,079 5,587,101
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, 1998
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,
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 July 31
1998 1997
---- ----
Basic net income per share:
Net income $ 786,515 $ 625,685
Weighted average shares outstanding 4,086,382 3,807,034
Net income per share $.19 $.16
Diluted net income per share:
Net income $ 786,515 $ 625,685
Shares used in calculation:
Weighted average shares outstanding 4,086,382 3,807,034
Common shares issuable under stock option plans 97,564 132,194
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4,086,382 3,807,034
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Net income per share $.19 $.16
Six Months Ended July 31
1998 1997
---- ----
Basic net income per share:
Net income $1,700,500 $1,345,218
Weighted average shares outstanding 4,087,464 3,746,565
Net income per share $.42 $.36
- 5 -
Diluted net income per share:
Net income $1,700,500 $1,345,218
Shares used in calculation:
Weighted average shares outstanding 4,087,464 3,746,565
Common shares issuable under stock option plans 77,110 142,612
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4,164,574 3,889,177
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Net income per share $.41 $.35
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 price 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.
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 July
31, 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 Six Months Ended
July 31, 1997 July 31, 1997
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Net Sales $23,614,000 $44,632,000
Net Income 362,000 1,107,000
Net Income per Common Share
Basic $.09 $.27
Diluted $.09 $.27
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Net sales increased 24% in the second quarter of 1998 to $23,700,000, an
increase of $4,500,000 from the second quarter of 1997. For the first six
months of 1998 sales of $47,400,000 were $9,968,000, or 27% greater than the
same period in 1997. Gross margins declined slightly to 31.9% in the second
quarter of 1998 from 32.6% for the same quarter in 1997. Year-to-date gross
margin declined from 33.2% in 1997 to 32.7% in 1998. Second quarter operating
expenses as a percentage of sales declined from 25.4% in 1997 to 24.2% in 1998.
For the six-month period operating expenses declined from 25.5% in 1997 to
24.6% in 1998. Interest expense increased by $163,000 in the second quarter of
1998 and by $315,000 for the first six months of 1998. The increase was due to
additional borrowings associated with the acquisitions of Certified Media
Corporation and Copywise, Inc. and increased working capital borrowings needed
to support the sales growth. Net income of $787,000 in the second quarter of
1998 was a 26% increase over the previous year's second quarter. For the first
six months net income also increased 26% from $1,345,000 in 1997 to $1,700,000
in 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 cash 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 42% in the second quarter of
1998 to $19,640,000. This was an increase of $5,782,000 from the prior year's
second quarter. For the first six months sales increased 41% from $27,830,000
in 1997 to $39,369,000 in 1998. The increase is attributable to a 14% increase
in sales from already existing facilities, and the inclusion of sales from the
Company's acquisitions of Copywise and Certified Media (which was acquired on
July 31,1997).
Gross margins have decreased slightly from the previous year. For the second
quarter, gross margins were 32.2% compared to 33.9% the previous year, while
year-to-date gross margins have declined from 34.4% to 31.2%. The decrease is
due to the lower margins being realized on the sale of CD replication.
Operating expenses as a percentage of sales for the first six months have
declined from the prior year's 28% to 26% in the current year. The decrease is
a result of the increase in sales which increased the leveraging of fixed costs
and continued efforts to control expenses.
Pretax income in the second quarter of $711,000 was 23% ahead of last year's
second quarter. For the first six months of 1998 pretax income of $2,151,000
is 54% ahead of last year.
PRODUCTS DIVISION
The Products Division's net sales decreased 23% in the second quarter of 1998
to $4,079,000. For the first six months, sales have declined 16% from
$9,616,000 in 1997 to $8,045,000 in 1998. The decrease can be attributed in
part to "softness" in the markets served by the Company, and, to a lesser
degree, a transition in sales personnel. The business is highly seasonal, with
approximately 80% of the sales occurring in the first six months, and it is
unlikely the Company will be able to make up the shortfall in the second half
of the year. Gross margins have improved slightly in the first six months,
from 29.8% in 1997 to 30.3% in 1998. For the second quarter gross margins were
30.5% in 1998 compared to 29.2% in 1997. Recognizing the declining sales, the
Company instituted cost containment measures
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which resulted in a $274,000 (15%) reduction in operating expenses for the
first six months of 1998 compared to the first six months of 1997. The
decrease in operating expenses partially offset the decline in sales and
resulted in a 16% decrease in pretax income for the first six months, from
$929,000 in 1997 to $779,000 in 1998. In the second quarter, pretax income was
$381,000 compared to $539,000 in 1997.
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 six months of 1998, cash flow
from operations of $4,427,000, along with borrowings from third parties, was
used to fund capital expenditures of approximately $4,267,000 and to fund the
$1,580,000 purchase price 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 July 31, 1998), are adequate to meet the operating
requirements of the Company for the next six months. The Company continues to
explore strategic acquisitions and divestitures as well as alternative funding
proposals. As of August 31, 1998, no definitive agreements have been reached
regarding any such transactions.
OTHER
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date sensitive. Any of the Company's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company utilizes a number of computer
programs across its entire operation. The Company has substantially completed
its assessment of the year 2000 problem, and currently believes that costs of
addressing this issue will not have a material adverse impact on the Company's
financial position. However, if the Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result in
a material financial risk to the Company. In order to assure that this does
not occur, the Company plans to devote all resources required to resolve any
significant year 2000 issues in a timely manner.
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.
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PART II - OTHER INFORMATION
VAUGHN COMMUNICATIONS, 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 23, 1998. The Company's Board of Directors solicited
proxies for the Meeting pursuant to its Proxy Statement dated May 26, 1998 (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 Jeffrey Johnson and Harold Wahlquist 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 2001 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
--- -------- ------- ---------
Jeffrey Johnson 3,355,004 - - 244,740
Harold Wahlquist 3,316,087 38,200 16,349 245,462
The remaining members of the Board of Directors were not elected at the
1998 Annual Meeting. Messrs. 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.
Messrs. Rodney Burwell, Michael Sill and E. David Willette continue to
serve terms expiring at the 2000 Annual Meeting of Shareholders, and until
their successors are elected and have qualified.
2) By the affirmative vote of 1,869,764 in favor and the negative vote of
825,632 with 12,862 abstentions and 891,491 broker non-votes, the
Shareholders approved adoption by the Company of its 1998 Stock Option
Plan. The Plan provides for the grant to select management and other
employees of the Company of stock options to purchase up to 300,000 shares
of authorized but unissued Common Stock pursuant to incentive stock options
under Section 422 of the Internal Revenue Code and/or nonstatutory stock
options not qualifying thereunder.
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) 1998 Stock Option Plan together with form of
nonstatutory stock option agreement and form
of incentive stock option agreement.
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(22) Proxy Statement dated May 26, 1998 for the
Company's Annual Meeting of Shareholders
held June 23, 1998, incorporated by reference
to filing thereof on May 26, 1998.
(27) Financial data schedule
(b) Reports on Form 8-K
During the quarter ended July 31, 1998 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.
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: September 10, 1998 \s\ E. David Willette
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E. David Willette
Chief Executive Officer
Date: September 10, 1998 \s\ M. Charles Reinhart
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M. Charles Reinhart
Chief Financial Officer
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