0000850670-95-000013.txt : 19950815 0000850670-95-000013.hdr.sgml : 19950815 ACCESSION NUMBER: 0000850670-95-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTCOTT COMMUNICATIONS INC CENTRAL INDEX KEY: 0000850670 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 752110878 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18194 FILM NUMBER: 95563481 BUSINESS ADDRESS: STREET 1: 1303 MARSH LANE CITY: CARROLLTON STATE: TX ZIP: 75006 BUSINESS PHONE: 2144174100 MAIL ADDRESS: STREET 1: 1303 MARSH LANE CITY: CARROLLTON STATE: TX ZIP: 75006 10-Q 1 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 period ended June 30, 1995 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 0-18194 WESTCOTT COMMUNICATIONS, INC. (Exact name of Registrant as specified in its charter) Texas 75-2110878 (State of Incorporation) (I.R.S. Employer Identification No.) 1303 Marsh Lane Carrollton, TX 75006 (Address of principal executive offices) (214) 417-4100 (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 As of August 8, 1995 there were 19,740,229 shares of common stock outstanding. WESTCOTT COMMUNICATIONS, INC. INDEX PART I: FINANCIAL INFORMATION Page No. Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1994 and June 30, 1995. . . . . . . . . . . . . . . .3 Condensed Consolidated Statements of Income - Three Months and Six Months Ended June 30, 1994 and 1995 . . . . .5 Condensed Consolidated Statement of Shareholders' Equity - Six Months Ended June 30, 1995 . . . . . . . . . . . . . . . . . .6 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 1994 and 1995. . . . . . . . . . . . . .7 Notes to Condensed Consolidated Financial Statements . . . . . . .9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. . . . . . . . . . . . . . . . . . . . . 12 PART II: OTHER INFORMATION Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Part I - Financial Information Item 1 - Financial Statements WESTCOTT COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
December 31, June 30, 1994 1995 ____________ ____________ (Unaudited) Current assets: Cash and cash equivalents . . . . . . . $ 5,815,118 $ 9,369,211 Accounts receivable (net of allowance for doubtful accounts of $776,000 and $657,000 at December 31, 1994 and June 30, 1995, respectively). . . 20,939,216 19,561,087 Program inventory . . . . . . . . . . . 5,843,078 6,088,689 Prepaid commissions . . . . . . . . . . 2,038,547 1,884,714 Short-term investments. . . . . . . . . 718,437 - Other current assets. . . . . . . . . . 3,834,796 4,512,110 ____________ ____________ Total current assets. . . . . . . . . 39,189,192 41,415,811 Property and equipment, at cost: Downlink equipment. . . . . . . . . . . 32,267,208 32,825,663 Studio equipment. . . . . . . . . . . . 10,990,730 11,291,660 Office furniture and equipment. . . . . 12,096,651 13,148,009 Leasehold improvements. . . . . . . . . 2,499,308 2,525,348 ____________ ____________ 57,853,897 59,790,680 Accumulated depreciation and amortization . . . . . . . . . . . . . (22,298,155) (26,118,944) ____________ ____________ 35,555,742 33,671,736 Other assets: Equipment inventory . . . . . . . . . . 2,648,086 2,265,316 Program inventory . . . . . . . . . . . 9,802,493 11,494,197 Goodwill (net of accumulated amortization of $3,197,000 and $3,925,000 December 31, 1994 and June 30, 1995, respectively). . . . . 16,491,866 19,795,165 Other intangibles, (net of accumulated amortization of $3,144,000 and $3,308,000 at December 31, 1994 and June 30, 1995, respectively). . . 2,997,859 3,783,288 Other assets. . . . . . . . . . . . . . 2,302,066 2,172,837 ____________ ____________ $ 108,987,304 $ 114,598,350 ____________ ____________ ____________ ____________
WESTCOTT COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS - (Continued) LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30, 1994 1995 ____________ ____________ (Unaudited) Current liabilities: Accounts payable. . . . . . . . . . . . $ 2,430,582 $ 1,984,725 Income taxes payable. . . . . . . . . . 213,436 1,048,415 Accrued liabilities . . . . . . . . . . 4,557,849 5,068,506 Deferred income taxes . . . . . . . . . 1,154,962 - Unearned revenue. . . . . . . . . . . . 14,994,796 11,522,857 Current portion of long-term obligations . . . . . . . . . . . . . 10,000 10,000 ____________ ____________ Total current liabilities . . . . . 23,361,625 19,634,503 Long-term obligations . . . . . . . . . . 32,254 26,508 Deferred income taxes . . . . . . . . . . 1,162,672 1,295,548 Minority interest liability . . . . . . . 132,940 196,188 Shareholders' equity: Common stock, $.01 par value; 29,000,000 shares authorized; 19,561,123 and 19,733,991 shares issued at December 31, 1994 and June 30, 1995, respectively . . . . . 195,611 197,339 Additional paid-in capital. . . . . . . 71,398,368 73,295,253 Retained earnings . . . . . . . . . . . 12,859,978 20,109,155 Less treasury shares at cost; 45,920 shares. . . . . . . . . . . . . . . . (156,144) (156,144) ____________ ____________ Total shareholders' equity. . . . . 84,297,813 93,445,603 ____________ ____________ $ 108,987,304 $ 114,598,350 ____________ ____________ ____________ ____________
See accompanying notes. WESTCOTT COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months ended June 30, ____________________________ 1994 1995 ____________ ____________ Revenues. . . . . . . . . . . . . . . . . $ 22,364,256 $ 23,483,949 Cost of revenues: Programming and production . . . . . . 5,048,168 4,608,480 Delivery and transmission. . . . . . . 2,396,876 2,959,619 Sales and marketing. . . . . . . . . . 5,655,723 4,995,570 General and administrative . . . . . . 2,722,789 2,404,376 Depreciation and amortization. . . . . 2,489,404 2,943,955 ____________ ____________ Total . . . . . . . . . . . . . . . 18,312,960 17,912,000 Income from operations. . . . . . . . . . 4,051,296 5,571,949 Interest expense. . . . . . . . . . . . . (40,716) (25,391) Interest income . . . . . . . . . . . . . 24,411 129,799 Other income (expense). . . . . . . . . . (36,577) 56,867 ____________ ____________ Income before income taxes. . . . . . . . 3,998,414 5,733,224 Provision for income taxes. . . . . . . . 1,518,665 2,293,290 ____________ ____________ Net income available to common shareholders. . . . . . . . . . . . . . $ 2,479,749 $ 3,439,934 ____________ ____________ ____________ ____________ Earnings per common share (Note 2). . . . $ .13 $ .18 ____________ ____________ ____________ ____________ Weighted average common and common equivalent shares outstanding . . . . . . . . . . 19,387,415 19,631,546 ____________ ____________ ____________ ____________
See accompanying notes. WESTCOTT COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED) (Unaudited)
Six Months ended June 30, __________________________ 1994 1995 ____________ ____________ Revenues. . . . . . . . . . . . . . . . . $ 43,001,440 $ 48,118,102 Cost of revenues: Programming and production . . . . . . 8,858,899 9,523,355 Delivery and transmission. . . . . . . 4,696,017 6,293,636 Sales and marketing. . . . . . . . . . 10,536,705 9,840,969 General and administrative . . . . . . 5,215,358 4,846,756 Depreciation and amortization. . . . . 4,994,540 5,848,409 ____________ ____________ Total. . . . . . . . . . . . . . . . 34,301,519 36,353,125 Income from operations. . . . . . . . . . 8,699,921 11,764,977 Interest expense. . . . . . . . . . . . . (90,297) (56,800) Interest income . . . . . . . . . . . . . 58,672 232,146 Other income (expense). . . . . . . . . . (54,927) 37,562 ____________ ____________ Income before income taxes. . . . . . . . 8,613,369 11,977,885 Provision for income taxes. . . . . . . . 3,244,681 4,728,708 ____________ ____________ Net income available to common shareholders . . . . . . . . . . . . . $ 5,368,688 $ 7,249,177 ____________ ____________ ____________ ____________ Earnings per common share (Note 2). . . . $ .27 $ .37 ____________ ____________ ____________ ____________ Weighted average common and common equivalent shares outstanding. . . . . 19,621,683 19,581,297 ____________ ____________ ____________ ____________
See accompanying notes. WESTCOTT COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the six months ended June 30, 1995 (Unaudited)
Common Stock Additional ________________________ paid-in Shares Amount capital __________ __________ ____________ Balance at December 31, 1994 . . . 19,561,123 $ 195,611 $ 71,398,368 Issuance of Common Stock under Employee Stock Purchase Plan . . 7,169 72 86,763 Issuance of Common Stock under Employee Stock Option Plan and Non-Employee Stock Option Plan, including federal income tax benefit (Note 1) . . . . . . . . 31,000 310 240,377 Net Income . . . . . . . . . . . . - - - __________ __________ ____________ Balance at March 31, 1995. . . . . 19,599,292 195,993 71,725,508 Issuance of Common Stock under ETC Purchase Agreement (Note 3). 45,045 450 624,550 Issuance of Common Stock under Employee Stock Purchase Plan . . 6,204 62 80,690 Issuance of Common Stock under Employee Stock Option Plan and Non-Employee Stock Option Plan, including federal income tax benefit (Note 1) . . . . . . . . 83,450 834 864,505 Net Income . . . . . . . . . . . . - - - __________ __________ ____________ Balance at June 30, 1995 . . . . . 19,733,991 $ 197,339 $ 73,295,253 __________ __________ ____________ __________ __________ ____________
See accompanying notes. WESTCOTT COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the six months ended June 30, 1995 (CONTINUED) (Unaudited)
Retained Treasury earnings shares ____________ ___________ Balance at December 31, 1994 . . . $ 12,859,978 $ (156,144) Issuance of Common Stock under Employee Stock Purchase Plan . . - - Issuance of Common Stock under Employee Stock Option Plan and Non-Employee Stock Option Plan, including federal income tax benefit (Note 1) . . . . . . . . - - Net Income . . . . . . . . . . . . 3,809,243 - ____________ ____________ Balance at March 31, 1995. . . . . 16,669,221 (156,144) Issuance of Common Stock under ETC Purchase Agreement (Note 3). - - Issuance of Common Stock under Employee Stock Purchase Plan . . - - Issuance of Common Stock under Employee Stock Option Plan and Non-Employee Stock Option Plan, including federal income tax benefit (Note 1) . . . . . . . . - - Net Income . . . . . . . . . . . . 3,439,934 - ____________ _____________ Balance at June 30, 1995 . . . . $ 20,109,155 $ (156,144) ____________ _____________ ____________ _____________
See accompanying notes. WESTCOTT COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months ended June 30, _____________ ____________ 1994 1995 ____________ ____________ Operating activities: Net income . . . . . . . . . . . . . . . . $ 5,368,688 $ 7,249,177 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization. . . . . . 4,994,538 5,848,409 Deferred income taxes. . . . . . . . . . (1,433,400) - (Gain) Loss on sale of property and equipment. . . . . . . . . . . . . (1,524) 27,041 Changes in operating assets and liabilities: Accounts receivable. . . . . . . . . 490,742 1,405,667 Other current assets and prepaid commissions. . . . . . . . (1,515,712) (453,373) Accounts payable and accrued liabilities. . . . . . . . (1,075,415) (2,176,943) Income taxes payable . . . . . . . . 2,673,429 834,979 Unearned revenue . . . . . . . . . . (4,266,275) (4,432,334) ____________ ____________ Net cash provided by operating activities . . . . . . 5,235,071 8,302,623 Investing activities: Net (increase) decrease in investments . . (379,504) 718,437 Additions to property and equipment. . . (4,940,723) (2,180,716) Net increase in other assets . . . . . . (4,040,175) (922,514) Net additions to program inventory . . . (2,477,175) (1,793,409) Net additions to interest in partnership 53,892 63,248 Proceeds from sale of assets . . . . . . - 17,612 Purchase business combinations, net of cash acquired (Note 3) . . . . . 10,662 (1,478,548) ____________ ____________ Net cash used in investing activities (11,773,023) (5,575,890) Financing activities: Payments on short-term debt and long-term debt. . . . . . . . . . . . . . (339,041) (446,253) Proceeds from short-term and long-term debt 1,422,975 - Proceeds from issuance of stock, net. . . . 1,776,179 1,273,613 ____________ ____________ Net cash provided by (used in) financing activities. . . . . . . . . . 2,860,113 827,360 Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . (3,677,839) 3,554,093 Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . 5,545,539 5,815,118 ____________ ____________ Cash and cash equivalents at end of period . $ 1,867,700 $ 9,369,211 ____________ ____________ ____________ ____________ Supplemental disclosures of cash flow information Cash paid during the period: Interest. . . . . . . . . . . . . . . . $ 12,328 $ 56,800 Income taxes. . . . . . . . . . . . . . $ 726,458 $ 3,677,587
See accompanying notes. WESTCOTT COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued) (Unaudited) Noncash investing activity: In March 1994, the Company issued 100,000 shares of its Common Stock valued at approximately $2,100,000 and assumed liabilities of approximately $979,000 in connection with the acquisition of Excellence in Training Corporation. In April 1995, the Company issued an additional 45,045 shares of its Common Stock valued at approximately $625,000 in connection with the acquisition of Excellence in Training Corporation. WESTCOTT COMMUNICATIONS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Management believes all adjustments necessary for a fair presentation of the results of the interim period have been made and are of a normal recurring nature. In presenting the accompanying unaudited condensed consolidated financial statements, certain amounts have been reclassified. These reclassifications do not have a material impact on the Company's financial statements. During the first six months of 1995, the Company recognized a federal income tax benefit of approximately $216,000 resulting from the exercise of employee stock options. Under generally accepted accounting principles, this federal income tax benefit is recognized as a deferred tax asset and added to additional paid-in-capital in the period of the tax deduction. These unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with the Company's most recent audited financial statements included in its Annual Report on Form 10-K. 2. Earnings per share. Earnings per share are computed based on the weighted average number of common and common equivalent shares outstanding. 3. Acquisitions. Effective March 1, 1994, the Company acquired all of the outstanding stock of Excellence in Training Corporation ("ETC") in exchange for 100,000 shares of the Company's Common Stock valued at approximately $2,100,000 and the assumption of approximately $979,000 of liabilities. In addition, the Company entered into an obligation for additional purchase price and noncompete agreements which are payable through 1996. In April, 1995, in accordance with the terms of the obligation for additional purchase price, the Company issued 45,045 additional shares of its Common Stock valued at approximately $625,000. Effective March 1, 1995, the Company acquired all of the outstanding stock of Lockert Jackson & Associates, Inc. ("Lockert Jackson") in exchange for $1,500,000 and the assumption of approximately $2,075,000 of liabilities. In addition, the Company made a one-time payment of $500,000 in return for five-year non-competition agreements, and will pay approximately $318,000 of additional purchase price over the next three years. Lockert Jackson is nationally recognized as a producer and distributor of "Emergency Medical Update" and "Safety Watch," subscription based emergency medical and safety video training products. This acquisition was accounted for as a purchase, and accordingly, the net assets and results of operations of Lockert Jackson are included in the Company's consolidated financial statements commencing March 1, 1995. Pro forma income statement data for the Lockert Jackson acquisition is not presented as the pro forma impact on the Company's financial statements is not material. WESTCOTT COMMUNICATIONS, INC. Notes to Condensed Consolidated Financial Statements - (Continued) (Unaudited) 4. Long-term Obligations. Effective June 28, 1993, the Company entered into a two-year revolving credit facility with its bank pursuant to which it may borrow up to $18,000,000. After the revolver term expires, outstanding amounts under this facility would be convertible into a four-year term loan. Effective June 28, 1995, this credit facility has been extended for one year to June 28, 1996. The facility provides a sublimit of $1,000,000 for standby letters of credit. A commitment fee of one-half of 1% of the unused credit line and an interest rate of prime, or if lower, an alternate CD rate plus 1 1/2% will be charged. The credit facility contains various restrictive covenants which, among other things, prohibit the payment of dividends and require the Company to maintain certain financial and tangible net worth ratios. The facility is secured by studio equipment, downlink equipment, other equipment and fixtures, subsidiary stock and accounts receivable. At June 30, 1995, there were no amounts borrowed under this facility. 5. Subsequent Events. In March 1995, the Company delivered an acquisition proposal to the Board of Directors of Sandy Corporation. Subsequently, the Company and Sandy Corporation began negotiations regarding a possible acquisition. In June 1995, Sandy Corporation announced that it had received a proposal from Automatic Data Processing, Inc. There are no ongoing discussions regarding the Company's acquisition proposal at this time. The following table contains information about products and services offered by the Company.
Current Markets Offerings Description Medium _______ _________ ___________ ______ Government & LETN Law Enforcement Television Network S/V/W Public Services FETN Fire & Emergency Television Network S/V American Heat American Heat V Pulse Pulse V EMU Emergency Medical Update V GSTN Government Services Television Network V Automotive ASTN Automotive Satellite Television Network S Detroit (WCMI) Custom Programming N/A Health Care HSTN Health & Sciences Television Network S AHA American Hospital Association T WHTG Executive Communications T PSYCHNET Sponsored Programming S LTCN Long Term Care Network S IMN Custom Programming N/A FMTN Family Medical Television Network S Corporate & The CPA Professional Report The CPA Report V PSTN Professional Security Television Network V AFTN Accounting & Financial Television Network V ITS Industrial Training Systems V/C Tel-A-Train Tel-A-Train V/C ETC Excellence in Training V Safety Watch Safety Watch V ATSN Accountants Television Satellite Network S IDTN Electronic Classroom I EXEN Executive Education Network I Financial Services BTCC Bankers Training & Consulting Company V/C Educational TI-IN K-12 Education S
Legend: S = Private Satellite V = Videotape T = Teleconferencing C = Computer-Based Training W = Workstation I = Interactive Multi-Media N/A = Not Applicable Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations: Comparison of Six Months Ended June 30, 1995 to the Six Months Ended June 30, 1994: Revenues. The increase in revenues of $5,116,662 or 12% over the corresponding period last year is primarily attributable to revenue growth in networks internally-developed or acquired during the first quarter of 1994, such as IDTN and ETC. Revenues from the Company's six principal markets for the periods indicated were as follows:
Markets Revenues _____________________________ __________________________ Six Months Ended June 30, June 30, 1994 1995 ____________ ____________ Government and Public Services . . . . . $ 9,084,858 $ 10,063,961 Automotive . . . . . . . . . . . . . . . 5,274,477 5,428,164 Health Care. . . . . . . . . . . . . . . 9,469,819 10,323,731 Corporate and Professional . . . . . . . 11,097,176 13,824,173 Financial Services . . . . . . . . . . . 2,842,786 2,948,843 Education. . . . . . . . . . . . . . . . 4,478,794 4,931,154 Other. . . . . . . . . . . . . . . . . . 753,530 598,076 ____________ ____________ Total. . . . . . . . . . . . . . . . $ 43,001,440 $ 48,118,102 ____________ ____________ ____________ ____________
Revenues in the Government and Public Services market increased $979,103 or 11% primarily as a result of an increase in LETN workstation sales, a product introduced during the first quarter of 1995. Also contributing to this increase was EMU, a product acquired in the acquisition of Lockert Jackson in the first quarter of 1995; and GSTN, which continued to experience a growth in revenues as a result of an increase in subscribers over the same period last year. Revenues in the Automotive market increased $153,687 or 3% due primarily to an increase in revenues for WCMI resulting from several custom programming projects completed during the first six months of 1995. This increase was partially offset by a decrease in revenues for ASTN as a result of a decrease in subscribers over the same period last year. Revenues in the Health Care market increased $853,912 or 9% primarily due to LTCN which experienced an increase in revenues as a result of an increase in subscribers over the same period last year. In addition, WHTG experienced an increase in teleconference revenues in connection with its alliance with the Joint Commission on Accreditation of Healthcare Organizations. Revenues in the Corporate and Professional market increased $2,726,997 or 25% primarily as a result of IDTN's electronic classroom which began operations in the first quarter of 1994; and ETC, which was acquired in the first quarter of 1994. Partially offsetting these increases were decreases in one-time sales revenues for Tel-A-Train and ITS which management believes result from an industry-wide decline in safety training sales, and a decline in international sales as a result of the decline in economic conditions in Mexico. Revenues in the Financial Services market increased $106,057 or 4% due to an increase in subscription-based revenue as a result of an increase in subscribers for BTCC over the same period last year. Revenues in the Education market increased $452,360 or 10% over the same period last year primarily due to revenues generated from a government grant received in the first quarter of 1995. Programming and Production. Programming and production costs increased $664,456 or 8% primarily as a result of production costs associated with IDTN which began operations in early 1994, and royalties paid for ETC which was acquired in the first quarter of 1994. In addition, programming and production expenses for WCMI increased over the same period last year, as several custom programming projects were completed during the first six months of 1995 as compared with the same period last year. Offsetting these increases were decreases in programming and production costs for many of the Company's more mature satellite networks such as ASTN, LETN, TI-IN, FETN, IMN and HSTN, as a result of the more efficient use of production facilities and utilization of existing program inventory. Delivery and Transmission. An increase of $1,597,619 or 34% over the corresponding period last year is primarily due to an increase in transponder expense, resulting from an amendment in 1994 to the Company's long-term transponderlease which increased its satellite transponder capacity. Delivery and transmission costs also increased over the same period last year for IDTN, which began operations in early 1994. In addition, Tel-A-Train experienced a small increase in the cost of collateral materials and hardware from the first six months of 1994 to the first six months of 1995. Sales and Marketing. A decrease of $695,736 or 7% over the corresponding period last year is due primarily to a reduction in commission expense for ITS resulting from the decrease in revenues for the same period last year, and as a result of the implementation of a new sales commission plan in late 1994. LETN also experienced a reduction in commission expense resulting from the decrease in revenues over the same period last year. Partially offsetting these decreases were an increase in sales and marketing expenses attributable to the increase in LETN workstation sales; and an increase in marketing expense for ETC, which was acquired in the first quarter of 1994. Sales personnel are compensated through commissions on new sales and renewals, supplemented by a small base salary. Therefore, commission expense for the satellite networks in any reporting period will vary with the number of subscriptions and renewals sold during such reporting period. Commissions relating to videotape and teleconference networks, however, are deferred and amortized over the life of the respective contract, which is generally a period of one to three years. General and Administrative. General and administrative expenses decreased $368,602 or 7%. This category includes operating costs for the Company's travel agency, bad debt expense, executive compensation, facilities and other expenses not directly attributed to the operation of the programming, production and sales and marketing departments. The decrease in general and administrative expense over the same period last year is primarily attributable to the sale of the travel agency in the first quarter of 1995; the reduction of overhead expenses at Tel-A-Train; and the reduction in outside consulting expense for BTCC. These decreases were partially offset by an increase in general and administrative expense for ETC, which was acquired in the first quarter of 1994. Depreciation and Amortization. The $853,869 or 17% increase in depreciation and amortization expense over the same period last year is primarily attributable to depreciation increases for the installation of downlink equipment at customer receive sites for the Company's satellite networks, as well as One-Touch equipment installed at TI-IN sites during 1994. Equipment installed for IDTN electronic classrooms, computer equipment and software, leasehold improvements and production equipment purchases necessary to accommodate the Company's overall growth also contributed to this increase in depreciation expense. Amortization decreased slightly over the same period last year as certain intangible assets became fully-amortized. Interest. Interest expense decreased by $33,497 or 37% primarily as a result of the payment of $1,100,000 of long-term debt in December, 1994. Interest income increased $173,474 or 296% over the same period last year primarily as a result of the increase in temporary interest-bearing investments. Income Taxes. The provision for income taxes as a percentage of income before income taxes increased from 38% for the six-month period ended June 30, 1994 to 39.5% for the six-month period ended June 30, 1995 primarily as a result of an increase in non-deductible goodwill amortization, an increase in state income taxes and the application of graduated tax rates. Comparison of Three Months Ended June 30, 1995 to the Three Months Ended June 30, 1994: Revenues. The increase in revenues of $1,119,693 or 5% over the corresponding period last year is primarily attributable to revenue growth in IDTN, a network internally-developed during the first quarter of 1994; and due to the introduction of LETN workstations during the first quarter of 1995. Revenues from the Company's six principal markets for the periods indicated were as follows:
Markets Revenues ___________________________________ _________________________ Three Months Ended June 30, June 30, 1994 1995 ____________ ____________ Government and Public Services . . . . . $ 4,602,840 $ 5,211,991 Automotive . . . . . . . . . . . . . . . 2,682,188 2,655,077 Health Care. . . . . . . . . . . . . . . 5,030,676 4,705,710 Corporate and Professional . . . . . . . 6,270,508 7,189,770 Financial Services . . . . . . . . . . . 1,354,831 1,524,138 Education. . . . . . . . . . . . . . . . 1,985,599 1,912,828 Other. . . . . . . . . . . . . . . . . . 437,614 284,435 ____________ ____________ Total. . . . . . . . . . . . . . . . . $ 22,364,256 $ 23,483,949
Revenues in the Government and Public Services market increased $609,151 or 13% primarily as a result of an increase in LETN workstation sales, a product introduced during the first quarter of 1995. Also contributing to this increase were revenues generated from EMU, a product acquired in the acquisition of Lockert Jackson in the first quarter of 1995; and GSTN, which continued to experience a growth in revenues as a result of an increase in subscribers over the same period last year. Revenues in the Automotive market decreased $27,111 or 1% due primarily to a decrease in subscribers for ASTN. This decrease was partially offset by an increase in revenues for WCMI attributable to several custom programming projects completed during the second quarter of 1995. Revenues in the Health Care market decreased $324,966 or 6% primarily as a result of a decrease in revenues for IMN and WHTG resulting from a reduction in teleconference series offered by these networks during the second quarter of 1995 over the same period last year. Partially offsetting this decrease was an increase in revenues for LTCN as a result of an increase in subscribers over the same period last year. Revenues in the Corporate and Professional market increased $919,262 or 15% primarily as a result of IDTN's electronic classroom which began operations in the first quarter of 1994. Partially offsetting these increases were decreases in one-time sales revenues for Tel-A-Train and ITS which management believes result from an industry-wide decline in safety training sales, and a decline in international sales as a result of a decline in economic conditions in Mexico. Revenues in the Financial Services market increased $169,307 or 12% due to an increase in subscription-based revenue as a result of an increase in subscribers for BTCC over the same period last year. Revenues in the Education market decreased $72,771 or 4% due to a decrease in production revenue generated from the summer migrant program during the same period last year. This decrease was partially offset by an increase in revenues generated from the introduction of elementary and middle school products and services, as well as the addition of new high school subscribers. Programming and Production. Programming and production costs decreased $439,688 or 9% primarily as a result of more efficient use of production facilities and utilization of existing programming inventory on the Company's more mature networks such as ASTN, LETN, HSTN and FETN. In addition, both IMN and TI-IN experienced a decrease in production expenses resulting from a decrease in production revenues for the second quarter of 1995 over the same period last year. Delivery and Transmission. An increase of $562,743 or 23% over the corresponding period last year is primarily due to an increase in transponder expense, resulting from an amendment in 1994 to the Company's long-term transponder lease which increased its satellite transponder capacity. Delivery and transmission costs also increased over the same period last year for IDTN, which began operations in early 1994. In addition, Tel-A-Train experienced a small increase in the cost of collateral material and hardware from the second quarter of 1994 to the second quarter of 1995. Sales and Marketing. A decrease of $660,153 or 12% over the corresponding period last year is due primarily to a reduction in commission expense for ITS and Tel-A-Train resulting from the decrease in revenues for the same period, and as a result of the implementation of a new sales commission plan in late 1994. Partially offsetting this decrease was an increase in sales and marketing expense attributable to LETN workstation sales, a product introduced in the first quarter of 1995. Sales personnel are compensated through commissions on new sales and renewals, supplemented by a small base salary. Therefore, commission expense for the satellite networks in any reporting period will vary with the number of subscriptions and renewals sold during such reporting period. Commissions relating to videotape and teleconference networks, however, are deferred and amortized over the life of the respective contract, which is generally a period of one to three years. General and Administrative. General and administrative expenses decreased $318,413 or 12%. This category includes operating costs for the Company's travel agency, bad debt expense, executive compensation, facilities and other expenses not directly attributed to the operation of the programming, production and sales and marketing departments. The decrease in general and administrative expense over the same period last year is primarily attributable to BTCC which experienced a decrease in outside consulting expense over the same period last year, and as a result of the sale of the travel agency in the first quarter of 1995. Depreciation and Amortization. The $454,551 or 18% increase in depreciation and amortization expense over the same period last year is primarily attributable to depreciation increases for the installation of downlink and CDV equipment at LETN, FETN, HSTN, LTCN and TI-IN sites, as well as One-Touch equipment installed at TI-IN sites during 1994. Equipment installed for IDTN electronic classrooms, computer equipment and software, leasehold improvements and production equipment purchases necessary to accommodate the Company's overall growth also contributed to this increase in depreciation expense. Amortization remained relatively stable with a slight decrease as certain intangible assets became fully-amortized. Interest. Interest expense decreased by $15,325 or 38% primarily as a result of the payment of $1,100,000 of long-term debt in December, 1994. Interest income increased $105,388 or 432% over the same period last year primarily as a result of the increase in temporary interest-bearing investments. Income Taxes. The provision for income taxes as a percentage of income before income taxes increased from 38% for the three-month period ended June 30, 1994 to 40% for the three-month period ended June 30, 1995 primarily as a result of an increase in non-deductible goodwill amortization, an increase in state income taxes and the application of graduated tax rates. Liquidity and Capital Resources. During the quarter ended June 30, 1995, the Company satisfied its liquidity needs principally from cash flow from operations. In addition, the Company has a credit facility under which the Company may borrow up to $18,000,000. No amounts had been drawn against this facility as of June 30, 1995. The facility, which has been extended through June 28, 1996, provides a sublimit of $1,000,000 for standby letters of credit. A commitment fee of one half of 1% of the unused credit line and an interest rate of prime, or if lower, an alternate CD rate plus 1 1/2% will be charged. As of June 30, 1995, the Company had $9,369,211 in cash, cash equivalents and temporary investments. During the six months ended June 30, 1995, the Company generated approximately $8 million in cash from operations. Approximately $6 million in cash was used in investment activities, primarily in connection with the purchase of equipment, investment in program inventory and the acquisition of Lockert Jackson in the first quarter of 1995. The Company's financing activities during this period provided approximately $827,000 in cash, primarily resulting from the issuance of common stock. The Company has identified capital needs of approximately $6 million through mid-1996 primarily to fund additional purchases and installations of downlink equipment, computer hardware and software for the A/S 400, purchases and installation of equipment for EXEN classroom sites, and investments in program inventory. The Company believes that cash generated from operations, cash on hand, and funds available under the revolving line of credit will be sufficient to meet its budgeted capital and liquidity requirements through the foreseeable future. Part II - Other Information Item 1 - Legal Proceedings None Item 2 - Changes in Securities None Item 3 - Defaults None Item 4 - Submission of Matters to a Vote (a) The annual shareholders' meeting was held on May 25, 1995. (b) Directors elected at the annual shareholders meeting were Carl Westcott, Jack T. Smith, Jeffrey M. Heller, Gary J. Fernandes, Stansfield Turner and Kern Wildenthal. All of the above have previously served as directors. The directors elected at the annual shareholders' meeting each received the following votes:
Broker For Withheld Non-Votes __________ ________ _________ Carl Westcott 14,175,722 67,110 - Jack T. Smith 14,174,002 68,830 - Jeffrey M. Heller 14,175,522 67,110 - Gary J. Fernandes 13,339,522 903,310 - Stansfield Turner 14,210,122 32,710 - Kern Wildenthal 13,303,322 939,510 -
Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K 11. Computation of Earnings Per Share 27. Financial Data Schedule SIGNATURES Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WESTCOTT COMMUNICATIONS, INC. Date: August 14, 1995 By: /s/ JACK T. SMITH (Jack T. Smith) President and Chief Operating Officer Date: August 14, 1995 By: /s/ PHYLLIS FARRAGUT (Phyllis Farragut) Executive Vice President and Chief Financial Officer (Chief Accounting Officer) INDEX TO EXHIBITS Sequentially Numbered Exhibit Page 11 Computation of Earnings Per Share 27 Financial Data Schedule EX-11 2 EXHIBIT 11 WESTCOTT COMMUNICATIONS, INC. COMPUTATION OF EARNINGS PER SHARE
Three Months ended June 30, ___________________________ 1994 1995 ____________ ____________ Earnings per share: Net income available to common shareholders. . . . . . . . . . . $ 2,479,749 $ 3,439,934 ____________ ____________ ____________ ____________ Weighted average Common and Common equivalent shares(1) . . . 19,387,415 19,631,546 ____________ ____________ ____________ ____________ Earnings per share. . . . . . . . . $ .13 $ .18 ____________ ____________ ____________ ____________ Earnings per Common and Common Equivalent Share: Weighted average shares outstanding . . . . . . . . . . . 19,387,415 19,631,546 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method. . 242,588 246,983 ____________ ____________ Weighted average Common and Common equivalent shares . . . . 19,630,003 19,878,529 ____________ ____________ ____________ ____________ Earnings per Common and Common equivalent shares. . . . . $ .13 $ .17 ____________ ____________ ____________ ____________ Earnings per Common Share Assuming Full Dilution: Weighted average shares outstanding . . . . . . . . . . . 19,387,415 19,631,546 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method. . 239,700 352,322 ____________ ____________ Weighted average Common and Common equivalent shares. . . . . 19,627,115 19,983,868 ____________ ____________ ____________ ____________ Earnings per Common Share assuming assuming full dilution. . . . . . $ .13 $ .17 ____________ ____________ ____________ ____________
Six Months ended June 30, ____________________________ 1994 1995 ____________ ____________ Earnings per share: Net income available to common shareholders. . . . . . . . . . . $ 5,368,688 $ 7,249,177 ____________ ____________ ____________ ____________ Weighted average Common and Common equivalent shares(1) . . . 19,621,683 19,581,297 ____________ ____________ ____________ ____________ Earnings per share. . . . . . . . . $ .27 $ .37 ____________ ____________ ____________ ____________ Earnings per Common and Common Equivalent Share: Weighted average shares outstanding. . . . . . . . . . . . 19,292,486 19,581,297 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method . . 329,197 248,600 ____________ ____________ Weighted average Common and Common equivalent shares . . . . . 19,621,683 19,829,897 ____________ ____________ ____________ ____________ Earnings per Common and Common equivalent shares . . . . . $ .27 $ .37 ____________ ____________ ____________ ____________ Earnings per Common Share Assuming Full Dilution: Weighted average shares outstanding. . . . . . . . . . . . 19,292,486 19,581,297 Net shares to be issued upon exercise of dilutive stock options after applying treasury stock method . . 329,754 301,299 ____________ ____________ Weighted average Common and Common equivalent shares . . . . . 19,622,240 19,882,596 ____________ ____________ ____________ ____________ Earnings per Common Share assuming assuming full dilution . . . . . . $ .27 $ .36 ____________ ____________ ____________ ____________
(1) For the three-month and six-month periods ended June 30, 1995, the calculation of earnings per share was based upon weighted average common shares outstanding, due to the fact that both primary and fully-diluted earnings per share were more than 97% of earnings per common share outstanding. For the three-month and six-month periods ended June 30, 1994, the calculation of earnings per share was based upon weighted average common and common equivalent shares outstanding. EX-27 3
5 This schedule contains summary financial information extracted from the Company's Condensed Consolidated Balance Sheets, Statements of Income, Statement of Shareholders' Equity and Statements of Cash Flows at and for the six months ended June 30, 1995, and is qualified in its entirety by reference to such financial statements. 6-MOS DEC-31-1995 JUN-30-1995 0 0 20,487,797 656,710 21,576,203 41,415,811 59,790,680 26,118,944 114,598,350 19,634,503 36,508 197,339 0 0 93,248,264 114,598,350 0 48,118,102 0 36,353,125 0 651,548 56,800 11,977,885 4,728,708 7,249,177 0 0 0 7,249,177 .37 .36