<PAGE>
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, 1996
------------------------------------------------
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
incorporation or organization) Identification No.)
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 3,702,336 outstanding shares as of
November 30, 1996.
<PAGE>
VAUGHN COMMUNICATIONS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - October 31, 1996 and
January 31, 1996
Condensed consolidated statements of income - Three months ended
October 31, 1996 and 1995; Nine months ended October 31, 1996 and
1995
Condensed consolidated statements of cash flow - Nine months
ended October 31, 1996 and 1995
Notes to condensed consolidated financial statements - October
31, 1996
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
- 1 -
<PAGE>
PART 1-FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
October 31 January 31
1996 1996
---- ----
<S> <C> <C>
ASSETS
Current Assets
Trade accounts receivable less allowance of $813,000 at
October 31, 1996 and $626,000 at January 31, 1996 $11,114,147 $10,118,138
Inventories 8,333,282 7,778,267
Other 1,372,998 1,182,731
----------- -----------
Total Current Assets 20,820,427 19,079,136
Property, plant and equipment 24,404,426 21,796,605
Less accumulated depreciation 15,396,692 13,045,330
----------- -----------
9,007,734 8,751,275
Intangible and Other Assets 4,486,080 4,985,407
----------- -----------
$34,314,241 $32,815,818
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,863,956 $ 2,937,357
Notes payable to bank 2,412,921 4,014,405
Salaries, wages and payroll taxes 201,441 583,396
Current portion of long-term debt and capital
lease obligations 4,523,396 2,855,724
Other 2,564,978 1,110,234
----------- -----------
Total Current Liabilities 13,566,692 11,501,116
Long-term debt (less current portion) 3,409,965 6,478,306
Capital lease obligations (less current portion) 1,805,494 1,293,545
Deferred taxes 25,326 25,326
Shareholders' Equity
Common stock, par value $.10 per share:
Authorized 20,000,000 shares; issued and outstanding
October 31, 1996 - 3,699,574 shares; January 31, 1996 -
3,457,714 shares 370,957 346,774
Additional paid-in capital 6,602,365 6,288,874
Retained earnings 8,533,442 6,881,877
----------- -----------
Total Shareholders' Equity 15,506,764 13,517,525
$34,314,241 $32,815,818
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements
- 2 -
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VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31 October 31
------------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $16,369,329 $ 15,928,182 $53,985,460 $ 44,262,537
COST AND EXPENSES:
Costs of goods sold 11,099,914 10,726,798 36,431,662 29,874,561
Selling and administrative 4,388,304 3,698,322 13,699,205 10,698,579
Interest 294,618 359,844 1,007,046 1,025,395
Other expense (income) (12,838) 8,469 (33,103) 130
----------- ------------ ----------- -----------
15,769,998 14,793,433 51,104,810 41,598,665
INCOME BEFORE INCOME TAXES 599,331 1,134,749 2,880,650 2,663,872
Income taxes 255,000 486,540 1,229,086 1,136,500
----------- ------------ ----------- ------------
NET INCOME $ 344,331 $ 648,209 $ 1,651,564 $ 1,527,372
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
NET INCOME PER
COMMON SHARE $ 0.09 $ 0.18 $ 0.42 $ 0.42
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
See notes to condensed consolidated financial statements
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<PAGE>
VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31
------------------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,651,564 $ 1,527,372
Adjustments to reconcile net income to cash
provided by operations
Depreciation and Amortization 2,635,593 2,351,429
Receivables (1,645,686) (31,405)
Inventories (555,015) (1,452,956)
Other Assets 431,672 (235,293)
Accounts Payable 926,597 36,412
Other Liabilities 1,119,101 687,107
------------ -------------
Net cash provided by operating activities 4,563,826 2,882,666
INVESTING ACTIVITIES
Additions to property, plant, and equipment (2,607,821) (2,094,201)
Purchase of business less cash acquired 0 (5,327,601)
Other 196,525 49,973
------------ -------------
Net cash used in investing activities (2,411,296) (7,371,829)
FINANCING ACTIVITIES
Repayments of long-term debt and capital leases (2,037,835) (1,638,109)
Repayments under revolver (1,601,484) (1,154,011)
Lease financing of equipment 749,115 995,175
Increase in bank debt 400,000 5,000,000
Stock issued in purchase of business - 1,170,000
Other 337,674 112,869
------------ -------------
Net cash provided by (used in) financing activities (2,152,530) 4,485,924
Change in cash 0 (3,239)
Cash and cash equivalents at beginning of year 0 3,239
------------ -------------
Cash and cash equivalents at end of period $ 0 $ 0
------------ -------------
------------ -------------
</TABLE>
See notes to condensed consolidated financial statements
- 4 -
<PAGE>
VAUGHN COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
October 31, 1996
NOTE A - BASIS OF PRESENTATIONS
The accompanying unaudited condensed consolidated 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 October
31, 1996 are not necessarily indicative of the results that may be expected for
the year ending January 31, 1997. 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, 1996. Prior
period financial statements have been restated to reflect the acquisition on
June 28, 1996 of Satastar Corporate Services, Inc. which was accounted for as a
pooling of interests. (See Note B)
NOTE B - ACQUISITION OF SATASTAR CORPORATE SERVICES, INC.
Satastar Corporate Services, Inc. (dba PVS Corporate Services), a videotape
duplicator located in Chicago, Illinois, was acquired by the Company on June 28,
1996 by the issuance of 165,357 shares of common stock, $.10 par value, in
exchange for all of the outstanding capital stock of Satastar Corporate
Services, Inc. The business combination has been accounted for as a pooling of
interest, and, accordingly, the financial statements have been restated to
include the combined results of operations from the date Satastar commenced
operations.
Included in results of operations for the period ended October 31, 1996 are the
following results of the previously separate companies for the period of
February 1, 1996 to June 28, 1996:
Nine Months Ended October 31, 1996
----------------------------------
Company Satastar Combined
------- -------- --------
Net Sales $52,623,743 $1,361,717 $53,985,460
Net Income (Loss) $ 1,735,295 $ (83,731) $ 1,651,564
The following is a reconciliation of revenue and earnings previously reported by
the Company for the period ended October 31, 1995 with the combined amounts
currently presented in the financial statement for that period.
Three Months Ended October 31, 1995
-----------------------------------
Company Satastar Combined
------- -------- --------
Net Sales $14,879,000 $1,049,000 $15,928,000
Net Income $ 589,000 $ 59,000 $ 648,000
Nine Months Ended October 31, 1995
----------------------------------
Company Satastar Combined
------- -------- --------
Net Sales $41,295,000 $2,968,000 $44,263,000
Net Income $ 1,460,000 $ 67,000 $ 1,527,000
- 5 -
<PAGE>
NOTE C - ACQUISITIONS
On April 4, 1995, the Company completed the acquisition of all the capital stock
of Centercom, Inc. and Centercom South, Inc. (collectively "Centercom"), a
videotape duplicator with facilities in Milwaukee, Wisconsin; Chicago, Illinois;
and Tampa, Florida. The effective date of acquisition was April 1, 1995, and
was accounted for by the purchase method of the accounting and, accordingly,
results from operations have been included in the consolidated financial
statements from April 1, 1995.
The purchase price was $6,420,000 including $5,250,000 of cash and 180,000
shares of Vaughn Communications, Inc. common stock valued at $1,170,000. In
addition, the selling shareholders of Centercom collectively will be paid
$200,000 a year for seven years under non-compete and consulting agreements.
Goodwill recorded in this transaction will be amortized over 15 years using the
straight-line method.
On January 1, 1996, the Company completed the acquisition of substantially all
of the assets of Advanced Audio/Video Productions, Inc., a video tape duplicator
located in Denver, Colorado. The acquisition has been accounted for by the
purchase method of accounting and the consolidated statement of income for the
year ended January 31, 1996 includes the results of Advanced Audio/Video from
January 1, 1996.
The purchase price was approximately $282,000 including a cash payment by the
Company of approximately $182,000 and long-term debt to the seller of $100,000.
Goodwill recorded in this transaction will be amortized over 15 years using the
straight-line method.
On January 31, 1996, the Company acquired the assets and assumed certain
liabilities of Indian Arts and Crafts, Inc., a gift product business located in
Seattle, Washington. The acquisition has been accounted for by the purchase
method of accounting, and the consolidated financial statements for the year
ended January 31, 1996 reflect the purchase of the business, but do not include
any results from operations since the transaction was completed on the last day
of the fiscal year.
The purchase price was approximately $2,332,000 including approximately $82,000
of cash, 145,138 shares of Vaughn Communications, Inc. common stock valued at
$1,250,000, and long-term debt to the seller of $1,000,000. Goodwill recorded
in this transaction will be amortized over 10 years using the straight-line
method.
The pro forma unaudited results of operations, assuming consummation of all
acquisitions as of February 1, 1995, are as follows:
<TABLE>
<CAPTION>
Three Months Ended October 31 Nine Months Ended October 31
----------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $16,369,000 $17,796,000 $53,985,000 $54,250,000
Net Income $344,000 $555,000 $1,652,000 $1,986,000
Net Income per Common Share $.09 $.14 $.42 $.51
</TABLE>
- 6 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
On June 28, 1996, the Company acquired Satastar Corporate Services, Inc. by the
issuance of 165,357 shares of common stock in exchange for all of the
outstanding capital stock of Satastar. The business combination has been
accounted for as a pooling of interest, and, accordingly, the financial
statements include the combined results of operations from the date Satastar
commenced operations. The historical results of Satastar are not deemed to be
material to the Company's performance, therefore, the following relates to the
results of operations on a proforma basis only.
Net sales increased 3% in the third quarter of 1996 to $16,400,000, an increase
of $400,000 from the third quarter of 1995. For the first nine months of 1996,
sales of $54,000,000 were $9,700,000, or 22% greater than the same period last
year. Gross margins in the third quarter decreased slightly in 1996 to 32.2%
from 32.6% in 1995. Year to date, gross margins have remained the same as the
prior year. Operating expenses as a percentage of sales have increased to 25%
in the first nine months of 1996, from 19% in the same period of 1995, while
interest expense has decreased slightly in the first nine months of 1996 due to
lower borrowing levels. Net income decreased 47% in the third quarter of 1996
to $344,000, while for the first nine months net income in 1996 increased 8% to
$1,652,000. The contribution each division made to these results is discussed
below.
COMMUNICATIONS DIVISION
The Communications Division's net sales of $14,791,000 in the third quarter of
1996 were a slight increase over last year's third quarter sales of $14,779,000.
For the first nine months of 1996, sales were approximately $41,700,000, an 8%
increase over the previous year's sales of $38,500,000. The majority of the
increase in sales over the previous year occurred in the first quarter, as sales
have been flat for the last six months. Management believes that the slowdown
in sales occurred throughout the videotape duplication industry and that an
increase in sales growth will occur in the fourth quarter of 1996. Gross
margins as a percentage of sales increased slightly in the third quarter of 1996
to 35% compared to 34% in the third quarter of 1995. For the first nine months
of 1996, the gross margin was 33%, the same percentage as the comparable period
last year.
Selling and administrative expenses as a percentage of sales increased in the
first nine months of 1996 to 26% compared to 24% in the first nine months of
1995. The increase was due in part to additional costs associated with the
acquisition of Satastar, costs incurred in the opening of a new branch office in
Seattle, Washington, and costs associated with anticipated sales growth
The flat sales level, combined with an increase in operating expenses, resulted
in an 11% decrease in pretax income, from $1,364,000 in the third quarter of
1995 to $1,210,000 in the third quarter of 1996. For the first nine months
pretax income decreased from $2,643,000 in 1995 to $2,198,000 in 1996.
PRODUCTS DIVISION
The Products Division's net sales increased 37% in the third quarter of 1996 to
$1,579,000. Sales in the first nine months of 1996 were $12,262,000, a 114%
increase over the previous year. The increase was due to the acquisition of
Indian Arts and Crafts (IAAC) on January 31, 1996. Sales from the IAAC product
line were $6,977,000 for the first nine months of 1996 and offset an 8% decrease
in sales from the preexisting operations. The operations of the Products
Division are seasonal, with approximately 80% of the sales occurring in the
first half of the year to serve the summer tourist industry.
Gross margins as a percentage of sales increased from 27% in the first nine
months of 1995 to 29% in 1996. The improvement can be attributed to a slight
decrease in raw material costs and improved leveraging of fixed costs due to the
increase in sales.
- 7 -
<PAGE>
The increased costs associated with the consolidation of operations in Seattle,
Washington resulted in a 79% increase in selling and administrative expenses in
the third quarter, from $387,000 in 1995 to $693,000 in 1996. For the first
nine months operating expenses as a percentage of sales have decreased from 25%
in 1995 to 23% in 1996.
The pretax loss in the third quarter of 1996 was $611,000 compared to last
year's third quarter loss of $207,000. The increase in the amount of loss was
due primarily to the additional costs incurred in consolidating operations.
Pretax income for the first nine months of 1996 was $682,000 compared to $61,000
for the same period last year, due to the increase in sales and the improvement
in gross margins.
LIQUIDITY AND SOURCES OF CAPITAL
The Company generated approximately $4,560,000 of cash from operating activities
in the first nine months of 1996 compared to $2,880,000 in the same period of
1995. The increase was due primarily to improved working capital management.
The Company's principal sources of liquidity continue to be operating income,
long-term debt secured by specific equipment, and its revolving credit facility.
At October 31, 1996, approximately $10,000,000 of this facility was available.
The Company believes that the liquidity provided by the sources described above
will be adequate to meet its normal operating requirements over the near term.
The Company continues to investigate potential acquisitions, and depending on
the size and structure of the transaction, additional funding may be required.
As of November 30, 1996, no definitive agreements have been reached regarding
any such acquisitions.
- 8 -
<PAGE>
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
(11) Computation of earnings per share
(27) Financial data schedule
(b) Reports on Form 8-K
During the quarter ended October 31, 1996 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 ----------------------------------
---------------- E. David Willette
Chief Executive Officer
(Principal Executive Officer)
Date ----------------------------------
---------------- M. Charles Reinhart
Chief Financial Officer
(Principal Accounting Officer)
- 9 -
<PAGE>
VAUGHN COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
October 31 October 31
------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 3,616,424 3,216,219 3,698,725 3,287,308
Net effect of dilutive stock options
based on the treasury stock method
using average market price 311,197 390,017 238,031 411,082
----------- ----------- ----------- ------------
TOTAL 3,927,621 3,606,236 3,936,756 3,698,390
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Net Income $ 1,651,564 $ 1,527,372 $ 344,331 $ 648,209
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Net Income per Share $ 0.42 $ 0.42 $ 0.09 $ 0.18
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
FULLY DILUTED:
Average shares outstanding 3,616,424 3,216,219 3,698,725 3,287,308
Net effect of dilutive stock options
based on the treasury stock method
using the quarter-end market price
if higher than average market price 313,689 419,621 238,082 411,138
----------- ----------- ----------- ------------
TOTAL 3,930,113 3,635,840 3,936,807 3,698,446
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Net Income $ 1,651,564 $1,527,372 $ 344,331 $ 648,209
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Net Income per Share $ 0.42 $ 0.42 $ 0.09 $ 0.18
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
EXHIBIT 11
- 10 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 11,114,147
<ALLOWANCES> 813,000
<INVENTORY> 8,333,282
<CURRENT-ASSETS> 20,820,427
<PP&E> 24,404,426
<DEPRECIATION> 15,396,692
<TOTAL-ASSETS> 34,314,241
<CURRENT-LIABILITIES> 13,566,692
<BONDS> 5,215,459
0
0
<COMMON> 370,957
<OTHER-SE> 15,135,807
<TOTAL-LIABILITY-AND-EQUITY> 34,314,241
<SALES> 53,985,460
<TOTAL-REVENUES> 53,985,460
<CGS> 36,431,662
<TOTAL-COSTS> 36,431,662
<OTHER-EXPENSES> 13,666,102
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,007,046
<INCOME-PRETAX> 2,880,650
<INCOME-TAX> 1,229,086
<INCOME-CONTINUING> 1,651,564
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,651,564
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
