<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, 1997
------------------------------------------------
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 4,072,449 OUTSTANDING SHARES AS OF
NOVEMBER 30, 1997.
<PAGE>
VAUGHN COMMUNICATIONS, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - October 31, 1997 and
January 31, 1997
Condensed consolidated statements of income - Three months ended
October 31, 1997 and 1996; Nine months ended October 31, 1997 and
1996
Condensed consolidated statements of cash flow - Nine months
ended October 31, 1997 and 1996
Notes to condensed consolidated financial statements -
October 31, 1997
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
<PAGE>
PART 1-FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
October 31 January 31
---------- ----------
ASSETS 1997 1997
---- ----
Current Assets
Trade accounts receivable less allowance
of $1,190,000 at October 31, 1997 and
$650,000 at January 31, 1997 $13,211,504 $10,685,149
Inventories 9,242,729 9,256,455
Other 1,322,603 1,626,542
----------- -----------
Total Current Assets 23,776,836 21,568,146
Property, plant and equipment 29,684,643 24,953,876
Less accumulated depreciation 18,876,183 16,237,440
----------- -----------
10,808,460 8,716,436
Intangible and Other Assets 9,237,208 4,466,641
----------- -----------
$43,822,504 $34,751,223
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,528,081 $ 2,982,508
Notes payable to banks 4,183,110 4,781,312
Salaries, wages and payroll taxes 24,332 696,894
Current portion of long-term debt and capital
lease obligations 3,646,726 2,830,033
Other 2,414,016 1,009,306
----------- -----------
Total Current Liabilities 14,796,265 12,300,053
Long-term debt (less current portion) 7,182,178 4,563,880
Capital lease obligations (less current portion) 1,868,590 963,533
Deferred taxes 75,326 75,326
Shareholders' Equity
Common stock, par value $.10 per share:
Authorized 20,000,000 shares; issued and
outstanding October 31, 1997 - 4,067,619
shares; January 31, 1997 - 3,726,513 shares 406,761 372,652
Additional paid-in capital 8,852,000 7,578,406
Retained earnings 10,641,384 8,897,373
----------- -----------
Total Shareholders' Equity 19,900,145 16,848,431
$43,822,504 $34,751,223
----------- -----------
----------- -----------
Note: The balance sheet at January 31, 1997 has been derived from the
audited financial statements at that date. See Notes to Condensed
Financial Statements.
- 1 -
<PAGE>
VAUGHN COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31 October 31
---------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 18,854,657 $ 16,369,329 $56,300,969 $53,985,460
COST AND EXPENSES:
Costs of goods sold 12,887,180 11,099,914 37,895,745 36,431,662
Selling and administrative 4,923,337 4,388,304 14,459,170 13,699,205
Interest 397,712 294,618 1,042,365 1,007,046
Other expense (income) (37,353) (12,838) (105,310) (33,103)
------------ ------------ ----------- -----------
18,170,876 15,769,998 53,291,970 51,104,810
INCOME BEFORE INCOME TAXES 683,781 599,331 3,008,999 2,880,650
Income taxes 285,000 255,000 1,265,000 1,229,086
------------ ------------ ----------- -----------
NET INCOME $ 398,781 $ 344,331 $ 1,743,999 $ 1,651,564
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
NET INCOME PER
COMMON SHARE $ 0.10 $ 0.09 $ 0.44 $ 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)
Nine Months Ended October 31
----------------------------
1997 1996
---- ----
OPERATING ACTIVITIES
Net Income $ 1,743,999 $ 1,651,564
Adjustments to reconcile net income to
cash provided by operations
Depreciation and Amortization 2,874,746 2,635,593
Receivables (2,699,890) (1,645,686)
Inventories 145,230 (555,015)
Other Assets 1,023,500 431,672
Accounts Payable 1,545,576 926,597
Other Liabilities 268,155 1,119,101
------------ ------------
Net cash provided by operating
activities 4,901,316 4,563,826
INVESTING ACTIVITIES
Additions to property, plant, and equipment (3,393,075) (2,607,821)
Purchase of business less cash acquired (5,811,009) -
Other 234,118 196,525
------------ ------------
Net cash used in investing activities (8,969,966) (2,411,296)
FINANCING ACTIVITIES
Repayments of long-term debt and
capital leases (2,829,506) (2,037,835)
Borrowings under revolver (598,202) (1,601,484)
Lease financing of equipment 1,888,655 749,115
Increase in long term debt 1,500,000 -
Increase in bank debt 2,800,000 400,000
Common stock issued in purchase of business 1,200,000 -
Other 107,703 337,674
------------ ------------
Net cash provided by financing
activities 4,068,650 (2,152,530)
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
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<PAGE>
VAUGHN COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
October 31, 1997
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 October 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending January 31, 1998. 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, 1997. 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 - MERGER WITH SATASTAR CORPORATE SERVICES, INC.
Satastar Corporate Services, Inc. (dba PVS Corporate Services), a videotape
duplicator located in Chicago, Illinois, was merged with 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
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<PAGE>
NOTE C - ACQUISITIONS
On July 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Certified Media Corporation, a compact disc ("CD") 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 $8,000,000
depending upon Certified Media's attaining certain financial objectives through
January 31, 1999. Goodwill recorded in this transaction is being amortized over
15 years using the straight-line method.
Also on July 31, 1997, the Company 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.
Both acquisitions have been accounted for by the purchase method of accounting,
and the consolidated financial statements for the period ended October 31, 1997,
reflect the purchase of the businesses, and include any results from operations
since the transactions were completed.
The pro forma unaudited results of operations, assuming consummation of all
acquisitions as of February 1, 1996, are as follows:
Three Months Ended October 31 Nine Months Ended October 31
----------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net Sales $18,855,000 $17,086,000 $59,901,000 $58,925,000
Net Income 399,000 58,000 1,249,000 644,000
Net Income
per Common
Share $ .10 $ .01 $ .30 $ .16
NOTE D - EARNINGS PER SHARE
In February, 1997 the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in no change
in primary earnings per share for the third quarter ended October 31, 1997 and
1996. The impact is expected to result in an increase of $.01 and $.04 per
share for the nine months ended October 31, 1997 and 1996, respectively. The
impact of Statement 128 on the calculation of fully diluted earnings per share
for these quarters is not expected to be material.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
On July 31, 1997, the Company acquired certain assets and assumed certain
liabilities of Certified Media Corporation, a compact disc ("CD") replicator
located in Fremont, California. The initial purchase price of $5,500,000
included $2,800,000 of cash, $1,500,000 of long-term debt to the sellers, and
171,210 shares of Vaughn Communications, Inc. common stock valued at $1,200,000.
The purchase price may be increased to a maximum of $8,000,000 in the event
certain financial objectives are met, or likewise, the price could be reduced if
certain objectives are not met. The Company will now be able to offer our
customers CD replication services, along with its videotape duplication and
other related services such as printing, packaging, graphics design and
fulfillment services.
Also on July 31, 1997, the Company acquired certain assets from Dub South, a
videotape duplicator located in Atlanta, Georgia. The non-contingent purchase
price included $311,000 of cash and the assumption of $439,000 of long-term
debt. The purchase price may be increased by $1,200,000 in the event certain
financial objectives are met.
Both acquisitions have been accounted for by the purchase method of accounting,
and the consolidated financial statements for the period ended October 31, 1997
include the results from operations as of the date of the acquisitions.
Net sales increased 15% in the third quarter of 1997 to $18,855,000, an increase
of approximately $2,485,000 from the third quarter of 1996. For the first nine
months of 1997 sales were approximately $56,301,000, a 4% increase over sales of
$53,985,000 for the same period the previous year. Gross margins in the third
quarter remained at 32% for both years, while year-to-date gross margins were
33% for both years. Operating expenses as a percentage of sales have remained
relatively consistent for the periods being reported, while interest expense has
increased slightly due to additional debt associated with the acquisitions. Net
income increased 16% in the third quarter of 1997 to $399,000, while for the
first nine months of 1997, net income increased 6% to $1,744,000. The
contribution each division made to these results is discussed below.
COMMUNICATIONS DIVISION
The Communications Division's net sales increased 20% to $17,763,000 for the
quarter ended October 31, 1997 from $14,791,000 for the quarter ended October
31, 1996. For the nine months ended October 31, 1997, sales were $45,593,000,
an increase of 9% over sales of $41,724,000 for the same period the previous
year. The increase in sales in the third quarter of 1997 was due in part to the
acquisitions which were completed on July 31, 1997. Excluding these
acquisitions, sales increased approximately $414,000, or 3%, over the previous
year's third quarter. Year-to-date sales also increased 3% over the previous
year, when adjusted for the acquisitions.
Gross margins as a percentage of sales declined slightly in the third quarter of
1997 to 34% compared to 35% in the previous year's third quarter. The decline
was due to lower margins being realized on the sale of CD replication.
Year-to-date gross margins have increased from 33% in 1996 to 34% in 1997.
Operating expenses as a percentage of sales were 24.4% and 26.5% respectively
for the three and nine months ended October 31, 1997, compared to 25.3% and
26.5%, respectively, for the same periods in 1996. Total operating expenses
increased from $3,740,000 in the third quarter of 1996 to $4,338,000 in the
third quarter of 1997 primarily as a result of the acquisitions.
Net interest expense increased from $207,000 in the third quarter of 1996 to
$292,000 in the third quarter of 1997 due to additional debt associated with the
acquisitions. Net interest is approximately the same for the first nine months
of both years.
Pretax income in the third quarter of 1997 was approximately $1,356,000, a 12%
increase over the third quarter of 1996. Year-to-date pretax income of
$2,753,000 in 1997 is 27% greater than the same period last year.
- 6 -
<PAGE>
PRODUCTS DIVISION
The Products Division's net sales decreased by 30% in the third quarter of 1997
from $1,579,000 in 1996 to $1,092,000. The decrease was due in part to the UPS
strike in August which resulted in a loss of approximately $300,000 in sales.
For the nine month period, sales have declined from $12,262,000 in 1996 to
$10,708,000 in 1997, a reduction of 13%. The lower sales volume and a
corresponding reduction in the leveraging of fixed expenses has resulted in a
decline in gross margin percentage from 29% for the nine months ended October
31, 1996 to 27% for the nine months ended October 31, 1997. Operating expenses
for the nine month period have declined from $2,763,000 in 1996 to $2,484,000 in
1997 as a result of cost containment programs that have been implemented. As a
result of the decrease in sales and gross margins, pretax income for the nine
months ended October 31, has declined from $680,000 in 1996 to $231,000 in
1997. For the third quarter, the net loss increased from $612,000 in 1996 to
$673,000 in 1997.
LIQUIDITY AND SOURCES OF CAPITAL
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, 1997, approximately $3,177,000 of this facility was available
compared to $5,300,000 at October 31, 1996. The primary reason for the decrease
was the additional borrowing of $2,800,000 used to fund the acquisition of
Certified Media. 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 divestitures; and, depending on the size and structure of the
transaction, additional funding may be required or generated. As of November
30, 1997, no definitive agreements have been reached regarding any such
transactions.
- 7 -
<PAGE>
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
--- -----------
(11) Computation of earnings per share
(27) Financial data schedule
(b) Reports on Form 8-K
During the quarter ended October 31, 1997 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 10, 1997 \s\ E. DAVID WILLETTE
------------------------- ----------------------------------------
E. David Willette
Chief Executive Officer
Date December 10, 1997 \s\ M. CHARLES REINHART
------------------------- ----------------------------------------
M. Charles Reinhart
Chief Financial Officer
- 8 -
<PAGE>
VAUGHN COMMUNICATIONS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
October 31 October 31
------------------------ ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 3,852,068 3,616,424 4,045,378 3,698,725
Net effect of dilutive stock options
based on the treasury stock method
using average market price 122,643 311,197 108,139 238,031
---------- ------------ ----------- -----------
TOTAL 3,974,711 3,927,621 4,153,517 3,936,756
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
Net Income $1,743,999 $ 1,651,564 $ 398,781 $ 344,331
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
Net Income per Share $ .44 $ .42 $ .10 $ .09
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
FULLY DILUTED:
Average shares outstanding 3,852,068 3,616,424 4,045,378 3,698,725
Net effect of dilutive stock options
based on the treasury stock method
using the quarter-end market price
if higher than average market price 139,000 313,689 123,010 238,082
---------- ------------ ----------- -----------
TOTAL 3,991,068 3,930,113 4,168,388 3,936,807
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
Net Income $1,743,999 $ 1,651,564 $ 398,781 $ 344,331
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
Net Income per Share $ .44 $ .42 $ .10 $ .09
---------- ------------ ----------- -----------
---------- ------------ ----------- -----------
</TABLE>
EXHIBIT 11
- 9 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,211,504
<ALLOWANCES> 1,190,000
<INVENTORY> 9,242,729
<CURRENT-ASSETS> 23,776,836
<PP&E> 29,684,643
<DEPRECIATION> 18,876,183
<TOTAL-ASSETS> 43,822,504
<CURRENT-LIABILITIES> 14,796,265
<BONDS> 0
0
0
<COMMON> 407,761
<OTHER-SE> 19,492,384
<TOTAL-LIABILITY-AND-EQUITY> 43,822,504
<SALES> 56,300,969
<TOTAL-REVENUES> 56,300,969
<CGS> 37,895,745
<TOTAL-COSTS> 37,895,745
<OTHER-EXPENSES> 14,353,860
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,042,365
<INCOME-PRETAX> 3,008,999
<INCOME-TAX> 1,265,000
<INCOME-CONTINUING> 1,743,999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,743,999
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
