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 OCTOBER 31, 1998
-------------------------------------------
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
-------------
VAUGHN COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(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
- ------------------------------------------------- --------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
612/832-3200
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
(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
---- ----
/ / COMMON STOCK, $.10 PAR VALUE 4,082,226 OUTSTANDING SHARES AS OF
NOVEMBER 30, 1998.
VAUGHN COMMUNICATIONS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - October 31, 1998 and
January 31, 1998
Condensed consolidated statements of income - Three months ended
October 31, 1998 and 1997; Nine months ended October 31, 1998 and
1997
Condensed consolidated statements of cash flow - Nine months
ended October 31, 1998 and 1997
Notes to condensed consolidated financial statements - October
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 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
PART 1-FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
October 31 January 31
---------- ----------
ASSETS 1998 1998
---- ----
Current Assets
Trade accounts receivable less allowance of
$1,449,000 at October 31, 1998 and $1,126,000
at January 31, 1998 $15,809,929 $13,822,621
Inventories 5,488,901 8,887,898
Net realizable value of business discontinued 1,253,179
Other 1,117,589 1,301,287
----------- -----------
Total Current Assets 23,669,598 24,011,806
Property, plant and equipment 35,013,923 31,185,406
Less accumulated depreciation 22,329,893 19,899,664
----------- -----------
12,684,030 11,285,742
Intangible and Other Assets 9,521,559 9,014,076
----------- -----------
$45,875,187 $44,311,624
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 5,939,977 $ 3,216,356
Notes payable to bank 6,372,011 5,760,436
Salaries, wages and payroll taxes 15,480 818,300
Current portion of long-term debt and capital lease obligations 3,839,074 3,867,986
Other 1,517,214 1,255,415
----------- -----------
Total Current Liabilities 17,683,756 14,918,493
Long-term debt (less current portion) 5,053,688 6,517,724
Capital lease obligations (less current portion) 3,114,427 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
October 31, 1998 - 4,082,226 shares; January 31, 1998 -
4,088,582 shares 408,222 408,858
Additional paid-in capital 8,985,912 9,074,004
Retained earnings 10,574,856 10,835,679
----------- -----------
Total Shareholders' Equity 19,968,990 20,318,541
$45,875,187 $44,311,624
----------- -----------
----------- -----------
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.
1
VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
October 31 October 31
----------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
NET SALES $ 20,864,752 $ 17,762,785 $ 60,234,011 $ 45,593,091
COST AND EXPENSES:
Costs of goods sold 14,003,723 11,776,726 40,318,867 30,031,764
Selling and administrative 5,068,423 4,273,883 15,170,213 11,975,542
Interest 413,008 356,803 1,268,357 871,359
Other expense (income) (15,622) (25,377) (69,878) (62,955)
------------ ------------ ------------ ------------
19,469,532 16,382,035 56,687,559 42,815,710
INCOME BEFORE INCOME TAXES 1,395,220 1,380,750 3,546,452 2,777,381
Income taxes 585,000 578,000 1,488,000 1,168,000
------------ ------------ ------------ ------------
Income from continuing operations 810,220 802,750 2,058,452 1,609,381
Income (loss) from discontinued
operations net of taxes (380,391) (403,969) 71,877 134,618
Loss on sale of Products Division (2,391,162) 0 (2,391,162) 0
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($ 1,961,333) $ 398,781 ($ 260,833) $ 1,743,999
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME PER SHARE
Basic
Continuing operations $ 0.20 $ 0.20 $ 0.50 $ 0.42
Discontinued operations (0.67) (0.10) (0.57) 0.03
------------ ------------ ------------ ------------
($ 0.47) $ 0.10 ($ 0.07) $ 0.45
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted
Continuing operations $ 0.20 $ 0.20 $ 0.50 $ 0.40
Discontinued operations (0.67) (0.10) (0.56) 0.03
------------ ------------ ------------ ------------
($ 0.47) $ 0.10 ($ 0.06) $ 0.43
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to condensed consolidated financial statements
2
VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Nine Months Ended October 31
----------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES
Net Income ($ 260,833) $ 1,743,999
Adjustments to reconcile net income to cash provided by operations
Add loss on discontinued business 2,391,162
Depreciation and Amortization 3,776,559 2,874,746
Receivables (2,332,926) (2,699,890)
Inventories (194,039) 145,230
Other Assets (497,564) 1,023,500
Accounts Payable 2,464,191 1,545,576
Other Liabilities 1,780,197 268,155
----------- -----------
Net cash provided by (used in) operating activities 7,126,747 4,901,316
INVESTING ACTIVITIES
Additions to property, plant, and equipment (4,870,171) (3,393,075)
Purchase of business less cash acquired (1,580,528) (5,811,009)
Other 82,185 234,118
----------- -----------
Net cash used in investing activities (6,368,514) (8,969,966)
FINANCING ACTIVITIES
Repayments of long-term debt and capital leases (4,209,039) (2,829,506)
Borrowings under revolver 611,575 (598,202)
Lease financing of equipment 2,577,978 1,888,655
Increase in long term debt 350,000 4,300,000
Common stock issued in purchase of business 1,200,000
Other (88,747) 107,703
----------- -----------
Net cash provided by financing activities (758,233) 4,068,650
Change in cash -- --
Cash and cash equivalents at beginning of year -- --
----------- -----------
Cash and Cash Equivalents at end of period $ -- $ --
----------- -----------
----------- -----------
See notes to condensed consolidated financial statements
3
VAUGHN COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
October 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 nine-month period ended October 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 October 31
-----------------------------
1998 1997
---- ----
Basic net income (loss) per share:
Net income from continuing operations $810,220 $802,750
Net income (loss) from discontinued operations ($2,741,553) ($403,969)
Weighted average shares outstanding 4,082,110 4,045,378
Net income per share from continuing operations $0.20 $0.20
Net income (loss) per share from discontinued operations ($0.67) ($0.10)
Diluted net income (loss) per share:
Net income from continuing operations $810,220 $802,750
Net income (loss) from discontinued operations ($2,741,553) ($403,969)
Shares used in calculation:
Weighted average shares outstanding 4,082,110 4,045,378
Common shares issuable under stock option plans 62,205 123,010
----------- -----------
4,082,110 4,045,378
----------- -----------
----------- -----------
Net income per share from continuing operations $0.20 $0.20
Net income (loss) per share from discontinued operations ($0.67) ($0.10)
4
Nine Months Ended October 31
----------------------------
1998 1997
---- ----
Basic net income (loss) per share:
Net income from continuing operations $2,058,452 $1,609,381
Net income (loss) from discontinued operations ($2,319,285) $134,618
Weighted average shares outstanding 4,085,660 3,852,068
Net income per share from continuing operations $0.50 $0.42
Net income (loss) per share from discontinued operations ($0.57) $0.03
Diluted net income per share:
Net income from continuing operations $2,058,452 $1,609,381
Net income (loss) from discontinued operations ($2,319,285) $134,618
Shares used in calculation:
Weighted average shares outstanding 4,085,660 3,852,068
Common shares issuable under stock option plans 71,208 139,000
----------- -----------
4,156,868 3,991,068
----------- -----------
----------- -----------
Net income per share from continuing operations $0.50 $0.40
Net income (loss) per share from discontinued operations ($0.56) $0.03
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.
5
The following unaudited pro forma information presents the consolidated results
of continuing operations of the Company as if the acquisitions had been
completed as of February 1, 1997.
Three Months Ended Nine Months Ended
------------------ -----------------
October 31, 1997 October 31, 1997
---------------- ----------------
Net Sales $19,848,000 $54,864,000
Net Income 997,000 1,567,000
Net Income per Common Share
Basic $.24 $.38
Diluted $.24 $.38
NOTE D - DISCONTINUED EARNINGS
During the third quarter of 1998, the Company developed a plan to dispose of the
assets and operations of the Products Division, the operating unit of the
Company involved in the manufacture and sale of gift and souvenir products. The
financial statements have been restated to reflect the Products Division's
results of operations as discontinued operations, and the assets of the division
were restated to reflect their estimated realizable value, which resulted in a
pretax loss of approximately $4,123,000. The estimated realizable value was
based upon an offer the Company received to purchase the business. On November
16, 1998, the Company reached an agreement with a buyer for the sale of the
assets and operations of the Products Division. The selling price of $1,432,775
included $300,000 of cash, a short-term note of $932,775, and the assumption of
$200,000 of liabilities by the buyer.
Summarized results of operations and financial position data of discontinued
operations were as follows (in thousands):
Nine Months Ended October 31
----------------------------
1998 1997
---- ----
Net Sales 9,160 10,708
Net Income from discontinued operations 72 134
Three Months Ended October 31
----------------------------
1998 1997
---- ----
Net Sales 1,115 1,092
Net Loss from discontinued operations (380) (403)
January 31, 1998
----------------
Working Capital $4,541
Total Assets 6,195
Long-Term Debt 498
Total Liabilities 1,179
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
During the third quarter of 1998, the Company announced its intention to sell
the Products Division. Subsequent to quarter end, the Company reached an
agreement for the sale of the assets and operations of the division, and,
accordingly, the financial statements have been restated to reflect the results
of the division as discontinued operations. (See Discontinued Operations below.)
Net sales from continuing operations for the first nine months of 1998 increased
32% to approximately $60,234,000 from approximately $45,593,000 in the first
nine months of 1997. The increase was due in part to a 12% increase in sales
from pre-existing operations, and from additional revenue from the acquisitions
of Certified Media on July 31, 1997, and Copywise, Inc. on February 1, 1998.
Copywise, Inc., a floppy disk replicator located in Fremont, California, was
purchased for a noncontingent 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. For the quarter ended October
31, 1998, sales increased 17%, from approximately $17,763,000 in the quarter
ended October 31, 1997 to $20,865,000 in 1998.
Gross margins have decreased slightly from the previous year. For the quarter
ended October 31, 1998, gross margins were 32.9% compared to 33.7% the previous
year, while year-to-date gross margins have declined from 34.1% to 33.1%. The
decrease is due to lower margins being realized on the sale of CD replication.
Operating expenses as a percentage of sales for the first nine months of 1998
have declined to 25.3% from 26.5% for the first nine months of 1997. The
decrease is a result of the sales growth which increased the leveraging of fixed
costs and continued efforts to control expenses. Interest expense for the first
nine months of 1998 has increased 45% from the previous year, from $871,000 in
the first nine months of 1997 to $1,268,000 in the first nine months of 1998.
The increase was due primarily to additional borrowings associated with the
acquisition, and increased working capital borrowing required to support the
sales growth.
Pretax income in the third quarter of 1998 of approximately $1,395,000 was .1%
greater than the third quarter of the previous year. For the first nine months
of 1998, pretax income was approximately $3,546,000, a 28% increase over the
comparable period in the prior year. The effective tax rate has remained at
approximately 42% for the first nine months of 1998 and 1997, and net income
from continuing operations increased 28% in the first nine months of 1998, from
$1,609,000 in the first nine months of 1997 to $2,058,000 in the first nine
months of 1998. For the third quarter, net income from continuing operations
increased slightly in the third quarter of 1998 to $810,000 compared to $803,000
in the third quarter of 1997.
DISCONTINUED OPERATIONS
The discontinued operations are the result of the Company's sale of the assets
and operations of the Products Division. The Products Division's operations
consisted of the manufacture and sale of gift and souvenir products. This
Division was sold because it no longer met the Company's long-term strategic
focus. The sale was completed November 16, 1998. The assets sold included
approximately $758,000 of accounts receivable, $3,880,000 of inventory, $380,000
of fixed assets, and $406,000 of other assets. The net selling price was
approximately $1,232,000, and resulted in a pretax loss of approximately
$4,123,000. The tax benefit from this loss is expected to be fully utilized by
operating profits the Company has generated.
The Products Division had revenues of $9,160,000 in the first nine months of
1998 compared to $10,708,000 in the comparable period of 1997, and pretax income
of $72,000 and $134,000 in the first nine months of 1998 and 1997, respectively.
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 nine months of 1998, cash flow from
operations of $7,126,000, along with borrowings from third parties, was used to
fund capital expenditures of approximately $4,870,000 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
$3,138,000 is available at October 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 November 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.
8
PART II - OTHER INFORMATION
VAUGHN COMMUNICATION, 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
--- -----------
(27) Financial data schedule.
(b) Reports on Form 8-K
During the quarter ended October 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 December 9, 1998
---------------------------------- ---------------------------------
E. David Willette
Chief Executive Officer
Date December 9, 1998
---------------------------------- ---------------------------------
M. Charles Reinhart
Chief Financial Officer
9