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FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 1995
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-16566
VARITRONIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1442400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Interchange North
300 Highway 169 South
Minneapolis, Minnesota 55426
(Address of principal executive offices) (Zip Code)
612-542-1500
(Registrant's telephone number, including area code)
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 period 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 ___
On December 8, 1995, there were 2,318,828 shares of the registrant's $.01 par
value common stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1: Financial statements
VARITRONIC SYSTEMS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(UNAUDITED)
OCTOBER 31, 1995 JULY 31, 1995
Current assets:
Cash $ 1,735,854 $ 1,347,139
Accounts receivable, net 8,617,140 9,058,870
Inventories:
Finished goods 4,377,276 5,237,054
Raw materials and component parts 5,930,278 6,090,076
Total inventories 10,307,554 11,327,130
Other current assets 1,208,012 1,317,892
Total current assets 21,868,560 23,051,031
Property and equipment, net 4,338,765 4,513,837
Total assets $26,207,325 $27,564,868
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,127,554 $ 3,918,169
Accrued liabilities 1,079,349 1,066,511
Current maturities on long-term debt 800,000 700,000
Total current liabilities 4,006,903 5,684,680
Long-term debt, less current maturities 3,050,000 3,300,000
Stockholders' equity:
Common stock, $.01 par value,
10,000,000 shares authorized;
2,323,828 and 2,328,153 shares
issued and outstanding 23,238 23,281
Additional paid-in capital 163,830 228,376
Retained earnings 18,963,354 18,328,531
Total stockholders' equity 19,150,422 18,580,188
Total liabilities and
stockholders' equity $26,207,325 $27,564,868
See accompanying notes to unaudited consolidated condensed financial statements
VARITRONIC SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
OCTOBER 31,
1995 1994
Net sales $ 13,256,013 $ 11,858,219
Cost of sales 8,738,341 7,438,295
Gross margin 4,517,672 4,419,924
Operating expenses:
Marketing and sales 1,611,762 1,563,992
General and administrative 1,359,888 1,333,845
Product development 544,767 602,707
Total operating expenses 3,516,417 3,500,544
Income from operations 1,001,255 919,380
Interest income 11,815 7,616
Interest expense (88,247) (73,233)
Income before income taxes 924,823 853,763
Provision for income taxes 290,000 280,000
Net income $ 634,823 $ 573,763
Net income per share $ .27 $ .25
Weighted average common shares
outstanding 2,330,000 2,310,000
See accompanying notes to unaudited consolidated condensed financial statements
VARITRONIC SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 634,823 $ 573,763
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 515,924 455,175
Provision for uncollectible accounts receivable -- 28,883
Provision for inventory valuation allowance -- 125,000
Changes in operating assets and liabilities:
Accounts receivable 441,730 917,472
Inventories 1,019,576 (1,561,720)
Other current assets 109,880 (261,297)
Accounts payable (1,790,615) (11,605)
Accrued liabilities 12,838 (221,293)
Net cash provided by operating activities 944,156 44,378
INVESTING ACTIVITIES:
Additions to property and equipment (340,852) (185,402)
Net cash used by investing activities (340,852) (185,402)
FINANCING ACTIVITIES:
Borrowings under line of credit -- 2,100,000
Repayments under line of credit -- (1,100,000)
Payment on current maturities on long-term debt (150,000) --
Repurchases of common stock (203,750) (921,969)
Proceeds from sale of common stock under
incentive stock option plan and employee
stock purchase plan 139,161 133,125
Net cash provided (used) by financing activities (214,589) 211,156
Net increase in cash 388,715 70,132
Cash at beginning of period 1,347,139 209,844
Cash at end of period $ 1,735,854 $ 279,976
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements
VARITRONIC SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Consolidated Financial Statements:
The consolidated financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securuties and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed, or omitted, pursuant to these rules and
regulations. The year-end balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's report on Form 10-K for the year ended July 31, 1995.
The consolidated financial statements as of October 31, 1995, and for the three
months then ended, reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position and results of operations for the interim periods. The
results of operations for any interim period are not necessarily indicative of
results for the full year.
2. Common Stock Repurchase:
The Company repurchased 22,500 of its shares during the quarter ended October
31, 1995, at a total cost of $203,750. At October 31, 1995, there were 277,500
shares remaining for share repurchase under Board of Director authorizations.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 1996 were $13,256,000 compared with
net sales of $11,858,000 in the prior year first quarter, an increase of
$1,398,000, or 11.8%. Sales of the PosterPrinter(R) product line increased by
10.0% from the first quarter of fiscal 1995 and represented 35.7% of current
quarter net sales. EasyStep(R) 4000 product line sales increased by 6.4% from
the comparative period and represented 31.2% of current quarter net sales. Sales
of the EasyStep(R) 2500/ProPartner(TM) product line were $849,000 for the
current quarter. These systems were not offered in the comparable period of one
year-ago. The VintageColor(TM) graphics printing system was introduced late in
the fourth quarter in fiscal 1995. The VintageColor is a wide-format, full-color
printing system which produces output in 24 or 36 inch widths up to 100 feet
long. Sales of the VintageColor product line were $347,000 for the current
quarter. Overall, machine sales increased by 21.1% from the comparable period in
fiscal 1995, and represented 30.7% of total net sales in the first quarter of
fiscal 1996 compared to 28.3% in the same period last year. Sales of consumable
supplies increased by 7.6% from the first quarter of fiscal 1995 and represented
64.1% of current quarter net sales compared to 66.6% last year. International
sales increased by 8.2% from the first quarter of fiscal 1995 due primarily to
an increase in EasyStep 4000 product line sales. Sales of mature lettering and
labeling products decreased by 11.5% between the comparable periods. This
decrease was less than recent quarters as domestic dealers and international
distributors purchased greater quantities of mature supply products in the
current first quarter in advance of the effective date of a price increase on
these supply products.
Gross margin decreased to 34.1% in the first quarter of fiscal 1996 compared to
37.3% in the first quarter of fiscal 1995. Machine margins decreased from the
year-ago period due to an increase in lower margin sales of the ES4000 machine
to a private label customer. In addition, machine margins decreased on the
PosterPrinter due to the increased cost of these machines which are imported
from Japan. PosterPrinter machines and supplies, and supplies used in certain
lettering machines are imported from Japan and are purchased with Japanese yen.
The cost of these imported products sold in the current year first quarter was
higher than the cost of these same products in the first quarter last year. The
Company's current hedge contracts extend to March 1996, and are at more
favorable rates than those of the prior five months, which will result in
decreased costs of imported inventory in future periods. Supply margins
decreased from the first quarter of fiscal 1995 due to the increased cost of the
imported products noted above, and a shift in product mix to increased sales of
relatively lower margin supplies used with the current products, and decreased
sales of the higher margin supplies used with the mature labeling and lettering
systems.
Total operating expenses for the first quarter of fiscal 1996 increased by
$15,000 to $3,516,000 compared to $3,501,000 in the corresponding period in
fiscal 1995. Marketing and sales, and general and administrative expenses were
comparable to the year-ago levels. Current quarter product development expenses
decreased by $58,000, or 9.6% from the same period last year. In the first
quarter of last year, the Company incurred costs related to the development of
the EasyStep 2500/ProPartner product line. These two labeling systems were
launched in the second quarter of fiscal 1995. The Company had a 15% reduction
in force in August 1995. The liability for severance expense was recorded in the
fourth quarter of fiscal 1995.
The Company provided for income taxes in the current year first quarter at its
estimated effective annual income tax rate of 31.4%, which compares to the
effective income tax rate of 12.1% for fiscal 1995. The low effective rate in
fiscal 1995 resulted from greater benefits realized from the Company's foreign
sales corporation and from research and experimentation tax credits applied
against a relatively lower level of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1995, cash totaled $1,736,000, an increase of $389,000 from
July 31, 1995. Cash provided by operations was $944,000 in the quarter ended
October 31, 1995, compared to cash provided by operations of $44,000 in the same
period last year. The increase in cash provided by operating activities in the
current quarter was due to a reduction in the level of inventory. Inventory
decreased by $1,020,000 in the current year first quarter compared to a
$1,562,000 increase in the year-ago period. Accounts payable decreased by
$1,791,000 from July 31, 1995 primarily due to a significant inventory payable
recorded at that date which was paid during the quarter. Current quarter
financing activities include a payment of $150,000 as the first installment on
the four-year term loan. The Company repurchased 22,500 of its shares at a total
cost of $204,000 in the current year first quarter compared to $922,000 of
repurchases in the prior year first quarter.
As of October 31, 1995, working capital improved to $17,862,000 from $17,366,000
at July 31, 1995, while the current ratio increased to 5.5 to 1 from 4.1 to 1 as
of these same dates.
The Company has available an unsecured $6,000,000 bank line of credit through
December 31, 1996. There were no borrowings under this line during the quarter
ended October 31, 1995.
The Company believes cash from operations as well as its line of credit facility
will be adequate to meet its operational expenses, capital expenditures and
share repurchase needs for at least the next 12 months.
DISTRIBUTION RIGHTS
The Company has exclusive distribution rights in the United States, Canada,
Mexico and certain South American countries for the ProImage PosterPrinter
product line under a distribution agreement with Itochu Corporation (a Japanese
trading company). The Company has met the minimum order requirements under the
agreement and continues to maintain exclusive distribution rights in the noted
countries. The distribution agreement expires December 31, 1995. The Company has
signed a new contract with Itochu for exclusive distribution rights in the
countries noted above for the next generation PosterPrinter machine. The new
contract has a term of 27 months beginning January 1996. The Company has
non-exclusive distribution rights for the 220 volt ProImage in certain European
countries under a letter agreement with Itochu. This letter agreement
incorporates by reference substantially all of the terms and conditions of the
distribution agreement referred to above. To date, international sales of the
PosterPrinter product line have not been material.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit Index
Exhibit 27 Financial Data Schedules
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended October 31, 1995
SIGNATURE
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.
Date: December 11,1995
VARITRONIC SYSTEMS, INC.
/s/ Norbert F. Nicpon
Norbert F. Nicpon
Vice President of Finance and
Administration and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
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