Varitronic Systems, Inc.
300 Highway 169 South
300 Interchange North
Minneapolis, MN 55426
Telephone: 612-542-1500
Fax: 612-541-1503
March 10, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
File 0-16566 - Form 10-Q
The following EDGAR filing is Varitronic Systems, Inc. second quarter fiscal
1995 Form 10-Q pursuant to applicable provisions of the Securities and Exchange
Act of 1934. The report covers the quarter and six months ended January 31,
1995.
I can be reached by phone at 612-542-1500, or by fax at 612-541-1503.
Our filing account number is 0000738633.
Very truly yours,
VARITRONIC SYSTEMS, INC.
John A. Rahja
Director of Accounting
_____________
FORM 10-Q
_____________
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 January 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 March 9, 1995 there were 2,323,987 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
<TABLE>
<CAPTION>
(UNAUDITED)
JANUARY 31, 1995 JULY 31, 1994
<S> <C> <C>
Current assets:
Cash $ 263,158 $ 209,844
Accounts receivable, net 8,215,775 8,902,523
Inventories:
Finished goods 5,047,951 4,935,609
Raw materials and component parts 8,116,171 6,801,194
Total inventories 13,164,122 11,736,803
Other current assets 1,316,260 826,322
Total current assets 22,959,315 21,675,492
Property and equipment, net 3,940,995 4,264,098
Total assets $26,900,310 $25,939,590
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit $ 3,500,000 $ 3,000,000
Accounts payable 3,003,273 2,992,734
Accrued liabilities 1,127,602 1,216,335
Total current liabilities 7,630,875 7,209,069
Stockholders' equity:
Common stock, $.01 par value,
10,000,000 shares authorized;
2,323,987 and 2,408,123 shares
issued and outstanding 23,240 24,081
Additional paid-in capital 185,255 -
Retained earnings 19,060,940 18,706,440
Total stockholders' equity 19,269,435 18,730,521
Total liabilities and
stockholders' equity $26,900,310 $25,939,590
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements
VARITRONIC SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $12,128,225 $11,240,961 $23,986,443 $22,244,292
Cost of sales 7,689,431 6,971,860 15,127,726 13,589,141
Gross margin 4,438,794 4,269,101 8,858,717 8,655,151
Operating expenses:
Marketing and sales 1,429,483 1,680,393 2,993,475 3,337,692
General and administrative 1,340,250 1,504,780 2,674,094 2,914,932
Product development 538,434 656,838 1,141,141 1,169,167
Total operating expenses 3,308,167 3,842,011 6,808,710 7,421,791
Income from operations 1,130,627 427,090 2,050,007 1,233,360
Other income 275 244 7,891 783
Interest expense (79,311) (200) (152,544) (8,767)
Income before income taxes 1,051,591 427,134 1,905,354 1,225,376
Provision for income taxes 350,000 150,000 630,000 425,000
Net income $ 701,591 $ 277,134 $ 1,275,354 $ 800,376
Net income per share $.30 $.10 $.55 $.30
Weighted average common
shares outstanding 2,320,000 2,681,000 2,315,000 2,673,000
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements
VARITRONIC SYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
<S> <C> <C>
1995 1994
OPERATING ACTIVITIES:
Net income $ 1,275,354 $ 800,376
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 769,494 561,240
Provision for uncollectible accounts receivable 33,478 3,247
Provision for inventory valuation allowance 125,000 -
Changes in operating assets and liabilities:
Accounts receivable 653,270 405,099
Inventories (1,552,319) 614,186
Other current assets (489,938) (178,551)
Accounts payable 10,539 1,269,350
Accrued liabilities (88,733) (431,663)
Net cash provided by operating activities 736,145 3,043,284
INVESTING ACTIVITIES:
Additions to property and equipment (446,391) (1,785,759)
Net cash used by investing activities (446,391) (1,785,759)
FINANCING ACTIVITIES:
Borrowings under line of credit 3,000,000 500,000
Repayments under line of credit (2,500,000) (2,000,000)
Proceeds from sale of common stock under
incentive stock option plan and employee
stock purchase plan 185,529 145,280
Repurchase of common stock (921,969) (20,000)
Net cash used by financing activities (236,440) (1,374,720)
Net increase (decrease) in cash 53,314 (117,195)
CASH AT BEGINNING OF PERIOD 209,844 334,728
CASH AT END OF PERIOD $ 263,158 $ 217,533
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements
VARITRONIC SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Consolidated Condensed Financial Statements:
The unaudited consolidated condensed financial statements as of January 31,
1995, and for the three and six 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 unaudited
consolidated condensed interim 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, 1994.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales increased to $12,128,000 for the second quarter of fiscal 1995
compared to net sales of $11,241,000 in the prior year second quarter. This
increase resulted from growth in sales of two product lines. Sales of the
EasyStep(TM) 4000 product line increased by 31.8% from the second quarter of
fiscal 1994, and represented almost 35% of current quarter net sales. The
Company markets the EasyStep 4000 in the industrial labeling and signage
markets. Sales of the PosterPrinter product line increased by 18.5% between the
comparable quarters, and represented 31.7% of current period net sales. This
growth was due in part to the January 1994 introduction of the third generation
PosterPrinter machine, the ProImage(TM). Decreased sales of supplies for the
Company's mature lettering systems, including the Merlin, Express, Elite and XT
product lines, offset some of these increases. The decrease in sales of supplies
used with these machines was expected due to the aging of the installed end user
machine base. Overall, machine sales declined slightly between the comparable
periods, while supply sales increased by 15.6%.
The Company resumed shipments of a new labeling system, the ProPartner (TM), in
December 1994. Total product line sales were $508,000 in the quarter ended
January 31, 1995. This product was initially launched in the fourth quarter of
fiscal 1994, but shipments were suspended in July 1994 to implement improvements
to the manufacturing process. The Company expects to introduce the EasyStep(TM)
2500, the industrial market version of the ProPartner, in the third quarter of
fiscal 1995. The EasyStep 2500 can be powered by battery, and has bar code and
international language capability. Order backlog of these products totaled
approximately $1,500,000 at January 31, 1995. The Company doesn't expect to ship
this entire backlog in the fiscal 1995 third quarter.
Net sales for the six months ended January 31, 1995 were $23,986,000, compared
to net sales of $22,244,000 in the same period in fiscal 1994. Sales of the
EasyStep 4000 product line increased by 54.6% between the periods, and
represented 33.8% of current period six month net sales compared to 23.6% one
year ago. Sales of the PosterPrinter product line increased by 18.8% over the
year-ago period. Sales of mature lettering products decreased by approximately
30% between the periods for the reasons noted above. Current period total
machine sales increased by 4.6% from last year, while supply sales increased by
11.4%.
Gross margin was 36.6% and 36.9% for the second quarter and six months ended
January 31, 1995, compared to 38.0% and 38.9% for the comparable periods in the
prior fiscal year. Machine margins decreased from last year due to increased
sales of the lower margin PosterPrinter machines. PosterPrinter machine sales
comprised 56.7% of the current year six month machine sales compared to 44.9% in
the year-ago six month period. Supply margins decreased slightly due to
increased sales of lower margin supplies used with the Company's EasyStep 4000
machine. Finally, the Company recorded a $125,000 expense provision to the
inventory valuation accounts in fiscal 1995 compared to no provision in the
prior year six-month period. This provision was intended to cover certain
anticipated inventory scrap and rework costs for the EasyStep 2500/ProPartner
product line.
Operating expenses for the second quarter of fiscal 1995 were $3,308,000
compared to $3,842,000 in the second quarter of fiscal 1994, a decrease of
$534,000, or 13.9%. Prior year operating expenses included approximately
$250,000 incurred in connection with acquisition discussions with Kroy, Inc.
which were terminated in December 1993. These costs were included in general and
administrative expenses. Marketing and sales expenses decreased by $251,000 from
the second quarter of last year due to decreased advertising and promotion
expenses. In addition, the fiscal 1994 second quarter included certain costs
incurred in connection with new product introductions. Product development
expenses decreased by $118,000, or 18.0%, between comparable periods. Prior year
expenses included higher costs associated with the development of the EasyStep
2500/ProPartner product line, and the contract development for the ProLynx
computer interface for the ProImage.
Operating expenses for the six months ended January 31, 1995, were $6,809,000
compared to $7,422,000 in the same period in fiscal 1994. Marketing and sales
expenses decreased by $344,000 during the current period compared to the same
period in fiscal 1994, principally due to a significant decrease in promotion
expenses resulting from changes to promotion programs.
Interest expense totaled $79,000 for the current quarter, and $153,000 for the
current six month period. Average daily borrowings under the bank line of credit
were approximately $3,850,000 during the current six month period.
The Company provided for income taxes at a 33.3% and 33.1% rate for the current
quarter and six months compared to an effective tax rate of 32.1% for all of
fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES:
As of January 31, 1995, cash totaled $263,000, an increase of $53,000 from July
31, 1994. Cash provided by operations for the six months ended January 31, 1995,
was $736,000 which compares to cash provided by operations of $3,043,000 for the
comparable period in fiscal 1994. The decrease in cash provided from operating
activities in the current year resulted from a gross increase in inventory of
$1,552,000, comprised mainly of PosterPrinter, EasyStep 4000 and EasyStep
2500/ProPartner inventory. Cash provided by operating activities also included
an increase of $475,000 in net income and $363,000 in non-cash expenses in the
current six month period. The Company expended $446,000 for capital additions
compared to $1,786,000 in the year-ago period under investing activities. Prior
year fixed asset additions were mainly for specialized tooling for the EasyStep
2500/ProPartner product line. Under financing activities, the Company paid its
bank line down by $1,500,000 during the six months ended January 31, 1994,
compared to an increase of $500,000 to the bank line in the current year. In the
current year, the bank line has been used to finance growth in inventory and
repurchase shares of Common Stock. As of January 31, 1995, working capital
increased to $15,328,000 from $14,466,000 at July 31, 1994, while the current
ratio was 3.0 to 1 for both of these dates.
The Company has available an unsecured $10,000,000 bank line of credit through
December 31, 1996. The bank line outstanding at January 31, 1995 was $3,500,000,
compared to $3,000,000 at July 31, 1994.
The Company expects that it will continue to finance its working capital and
capital expenditure needs for the foreseeable future from internally generated
funds and its bank line of credit.
DISTRIBUTION RIGHTS:
The Company has exclusive distribution rights in the United States, Canada,
Mexico and certain South American countries for the ProImage PosterPrinter 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 non-exclusive
distribution for the 220 volt ProImage in certain foreign countries, primarily
in Europe, under a letter agreement with Itochu. This letter agreement
incorporates by reference substantially all of the terms and conditions of the
exclusive distribution agreement referred to above. Under terms of the letter
agreement, the Company is the exclusive distributor of the 220 volt ProImage in
these countries until March 31, 1995. At such time, and at the discretion of
Itochu, the Company will be appointed the exclusive distributor, or the
non-exclusive distribution agreement will continue.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders of the Company held on December
9, 1994, the shareholders approved the adoption of the 1994 Incentive
Stock Option Plan under which 100,000 shares of Common Stock will be
reserved for issuance, and also approved an amendment to the Employee
Stock Purchase Plan to increase the number of shares of Common Stock
reserved for issuance under the Plan by 75,000. These proposals passed
by a vote of 1,420,856 shares in favor and 25,707 shares opposed, and
1,420,508 shares in favor and 26,295 shares opposed, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: No reports on Form 8-K have
been filed during the quarter.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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: March 9, 1995
VARITRONIC SYSTEMS, INC.
/s/ Norbert F. Nicpon
Norbert F. Nicpon
Vice President of Finance and
Administration and Chief
Financial Officer
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-START> AUG-01-1994
<PERIOD-END> JAN-31-1995
<CASH> 263,158
<SECURITIES> 0
<RECEIVABLES> 8,415,775
<ALLOWANCES> 200,000
<INVENTORY> 13,164,122
<CURRENT-ASSETS> 22,959,315
<PP&E> 9,498,328
<DEPRECIATION> 5,557,333
<TOTAL-ASSETS> 26,900,310
<CURRENT-LIABILITIES> 7,630,875
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<COMMON> 23,240
0
0
<OTHER-SE> 19,246,195
<TOTAL-LIABILITY-AND-EQUITY> 26,900,310
<SALES> 23,986,443
<TOTAL-REVENUES> 23,986,443
<CGS> 15,127,726
<TOTAL-COSTS> 15,127,726
<OTHER-EXPENSES> 6,767,341
<LOSS-PROVISION> 33,478
<INTEREST-EXPENSE> 152,544
<INCOME-PRETAX> 1,905,354
<INCOME-TAX> 630,000
<INCOME-CONTINUING> 1,275,354
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