<PAGE> 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 (No Fee Required) For the quarter ended April 30,
1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) For the transition period from
________________________ to _______________________
Commission File No. 0-29396
AUTOLOGIC INFORMATION INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3855697
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1050 Rancho Conejo Boulevard, Thousand Oaks, CA 91320
- ------------------------------------------------ -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 498-9611
Not Applicable
---------------------------------------------------------------
(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 period that the Registrant
was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No [ ]
The number of shares of common stock outstanding as of June 3, 1999 was
5,787,970.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1--FINANCIAL STATEMENTS
AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, October 30,
1999 1998
--------- ---------
(Unaudited)
ASSETS (Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $10, 001 $ 11,871
Accounts receivable less allowance for doubtful
accounts of $1,605 (1999) and $1,844 (1998) 15,618 17,928
Inventories-See Note C 12,125 11,310
Deferred income tax benefit-See Note D 3,809 3,829
Prepaid expenses and other assets 2,472 1,354
--------- ---------
Total current assets 44,025 46,292
PROPERTY AND EQUIPMENT, at cost net of
accumulated depreciation and amortization
of $7,449 (1999) and $6,086 (1998) 5,657 5,827
DEFERRED INCOME TAX BENEFIT-See Note D 2,823 2,823
EXCESS OF PURCHASE PRICE OVER NET ASSETS
ACQUIRED, net of amortization of $1,792 (1999)
and $1,516 (1998)-See Note B 961 1,237
OTHER ASSETS 241 75
--------- ---------
$ 53,707 $ 56,254
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,386 $ 4,877
Payable to Volt-See Notes E and F -- 202
Accrued payroll and related liabilities 3,330 3,914
Accrued expenses 1,984 1,458
Accrued restructuring costs 256 1,014
Customer advances 4,783 4,501
Income taxes payable 137 356
--------- ---------
Total current liabilities 13,876 16,322
STOCKHOLDERS' EQUITY-See Notes B and G
Preferred stock, par value $0.01
Authorized-1,000,000 shares; issued - none -- --
Common stock, par value $0.01
Authorized - 12,000,000 shares; issued and
outstanding 5,787,970 shares in 1999 and 1998 58 58
Paid-in capital 112,620 112,620
Accumulated deficit (72,847) (72,746)
--------- ---------
39,831 39,932
--------- ---------
$ 53,707 $ 56,254
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 3
AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- --------------------------
April 30, May 1, April 30, May 1,
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES
Systems and equipment $ 12,993 $ 15,906 $ 25,739 $ 27,988
Customer service and support 6,575 6,642 12,625 12,602
-------- -------- -------- --------
19,568 22,548 38,364 40,590
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Cost of systems and equipment 6,948 8,793 13,860 14,574
Cost of customer service and support 5,206 5,109 9,723 9,700
-------- -------- -------- --------
Gross margin 7,414 8,646 14,781 16,316
Operating expenses 7,484 7,283 14,663 14,377
Charges from Volt-See Note E and F
Rent 194 194 388 395
General and administrative 9 9 18 18
-------- -------- -------- --------
OPERATING (LOSS) INCOME (273) 1,160 (288) 1,526
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest income 111 121 238 228
Foreign exchange loss (30) (124) (79) (570)
Other, net (48) 14 (60) 10
-------- -------- -------- --------
33 11 99 (332)
-------- -------- -------- --------
(LOSS) INCOME FROM OPERATIONS
BEFORE INCOME TAXES (240) 1,171 (189) 1,194
INCOME TAX BENEFIT (PROVISION)-See Note D 109 (481) 88 (491)
-------- -------- -------- --------
NET (LOSS) INCOME $ (131) $ 690 $ (101) $ 703
======== ======== ======== ========
BASIC AND DILUTED (LOSS) EARNINGS
PER SHARE-See Note G $ (0.02) $ 0.12 $ (0.02) $ 0.12
======== ======== ======== ========
Average number of shares outstanding - Basic 5,788 5,788 5,788 5,788
======== ======== ======== ========
Average number of shares outstanding - Diluted 5,788 5,789 5,788 5,789
======== ======== ======== ========
</TABLE>
See accompanying notes
3
<PAGE> 4
AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
$0.01 Par Value Paid-In Accumulated
Shares Amount Capital Deficit
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at October 30, 1998 5,787,970 $ 58 $ 112,620 $ (72,746)
Net loss for the six months (unaudited) -- -- -- (101)
--------- --------- --------- ---------
Balance at April 30, 1999 (unaudited) 5,787,970 $ 58 $ 112,620 $ (72,847)
========= ========= ========= =========
</TABLE>
See accompanying notes
4
<PAGE> 5
AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------
April 30, May 1,
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (101) $ 703
Adjustments to reconcile net (loss) income to net
cash (applied to) provided by operating activities:
Depreciation 1,149 1,094
Amortization 276 276
Provision for doubtful accounts 208 30
(Gain) loss on foreign currency translation (338) 24
(Gain) loss on dispositions of property and equipment (129) 76
Deferred income taxes 20 (97)
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,716 2,973
Increase in inventories (815) (2,679)
(Increase) decrease in prepaid expenses and other assets (1,284) 80
Decrease in accounts payable (1,379) (680)
Decrease in accrued expenses (884) (616)
Increase in customer advances 382 1,178
(Decrease) increase in income taxes payable (219) 680
Decrease in payable to Volt (202) (174)
-------- --------
NET CASH (APPLIED TO) PROVIDED BY
OPERATING ACTIVITIES (1,600) 2,868
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property and equipment -- 145
Purchases of property and equipment (850) (778)
-------- --------
NET CASH APPLIED TO INVESTING ACTIVITIES (850) (633)
-------- --------
Effect of exchange rate changes on cash 580 172
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,870) 2,407
Cash and cash equivalents, beginning of period 11,871 9,452
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,001 $ 11,859
======== ========
SUPPLEMENTAL CASH TRANSACTIONS Cash paid during the period:
Interest expense $ -- $ 3
Income tax $ 262 $ 258
</TABLE>
See accompanying notes
5
<PAGE> 6
AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X and, therefore, do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, in the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the Company's financial position at April 30, 1999 and results of operations for
the three months and six months ended April 30, 1999 and May 1, 1998, and cash
flows for the six months ended April 30, 1999 and May 1, 1998. Operating results
for interim periods are not necessarily indicative of the results that may be
expected for a full fiscal year.
These statements should be read in conjunction with the financial statements and
footnotes included in the Company's Annual Report on Form 10-K for the year
ended October 30, 1998. Except as described in Notes H and I below, the
accounting policies used in preparing these financial statements are the same as
those described in that Report. The Company's fiscal year ends on the Friday
nearest October 31 and its fiscal quarters end on the Friday nearest the last
day of January, April and July.
NOTE B--FORMATION OF THE COMPANY AND MERGER
The Company was incorporated in Delaware on September 5, 1995 as a wholly-owned
subsidiary of Volt Information Sciences, Inc. ("Volt"). On January 29, 1996,
pursuant to the terms of an Agreement and Plan of Merger dated October 5, 1995,
as subsequently amended (the "Merger Agreement"), among the Company, Volt and
Information International, Inc. ("Triple-I"), Volt contributed to the capital of
Autologic, Incorporated ("Autologic") and certain foreign subsidiaries of Volt
("Volt Subsidiaries") the amounts Autologic or such subsidiaries owed to Volt
and, subsequent thereto, caused Autologic to merge with and into the Company.
Volt also assigned to the Company all of the issued and outstanding shares of
the Volt Subsidiaries. In addition, pursuant to the Merger Agreement, on January
29, 1996, following approval by its stockholders, Triple-I merged with and into
the Company.
As the Company, Autologic and the Volt Subsidiaries were under common control,
the merger of Autologic and the transfer of the stock of the Volt Subsidiaries
to the Company has been accounted for on a pooling of interest basis. The merger
of Triple-I has been accounted for under the purchase method of accounting and,
accordingly, the purchase price, which was based on the quoted market price of
the Triple-I common stock at the time the general terms of the acquisition were
agreed to and announced, plus the value of stock options issued in exchange for
outstanding stock options of Triple-I, has been allocated to net assets based
upon their estimated fair values. The $2,753,000 excess of the purchase price
over the estimated fair value of Triple-I's identifiable assets, including the
estimated future tax benefits of Triple-I's net operating loss carryforwards and
deductible temporary differences, was recorded on the effective date of the
merger and is being amortized over a five-year period.
NOTE C--INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
April 30, October 30,
1999 1998
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Service parts $ 1,346 $ 1,818
Materials 5,743 5,671
Work-in-process 2,868 2,713
Finished goods 2,168 1,108
------------ ------------
$ 12,125 $ 11,310
============ ============
</TABLE>
6
<PAGE> 7
AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
NOTE D--INCOME TAXES
Income taxes are provided using the liability method. Significant components of
the income tax provision (benefit) attributable to operations are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
April 30, May 1, April 30, May 1,
1999 1998 1999 1998
--------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current Taxes:
Federal $ 13 $ 446 $ 70 $ 464
State and local 18 70 52 80
Foreign (177) 213 (230) 44
----- ----- ----- -----
Total current (146) 729 (108) 588
----- ----- ----- -----
Deferred Taxes:
Federal 57 (216) 46 (77)
State and local (20) (32) (26) (20)
Foreign -- -- -- --
----- ----- ----- -----
Total deferred 37 (248) 20 (97)
----- ----- ----- -----
Total income tax (benefit) provision $(109) $ 481 $ (88) $ 491
===== ===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of changes in the temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
As described in Note B, as of the date of the mergers, a deferred tax asset was
established representing the estimated future tax benefit anticipated to be
realized from the use of Triple-I's net operating loss carryforward and
deductible temporary differences and the Company's deductible temporary
differences existing at the date of mergers to reduce anticipated taxable income
of the Company to be realized subsequent to the mergers. The Company believes
that it is more likely than not that such tax benefits will be realized based on
the combined companies' past and anticipated future results of operations and
after considering provisions of the tax law, such as the change in ownership
provisions, that restrict the future use of Triple-I's tax benefits.
NOTE E--CHARGES FROM VOLT
Volt incurs certain costs on behalf of the Company which are reflected in the
results of operations. In addition, during the six months ended April 30, 1999
and May 1, 1998, the Company incurred $18,000 in legal fees payable to Volt
under a $3,000 per month retainer arrangement that provides the Company access
to Volt's in-house legal staff.
7
<PAGE> 8
AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
NOTE F--RELATED PARTY TRANSACTIONS
A three-year lease, commencing on the effective date of the mergers, was entered
into between the Company, as lessee, and a wholly-owned subsidiary of Volt, as
lessor, for space previously occupied by Autologic as its headquarters and
manufacturing facility in Thousand Oaks, California. During the six months ended
April 30, 1999 and May 1, 1998, the Company paid rent to Volt of $388,000 and
$395,000 respectively. Pursuant to the terms of the lease, as amended in
December 1996, the Company's Board of Directors established a new rental rate
based on prevailing rates in the general area, which resulted in a slight
decrease in rent. The lease also provides for the Company to pay all real estate
taxes, insurance, utilities and repairs related to the facility. The Company is
currently negotiating a renewal of the lease, and the Company and the Landlord
have continued to operate under the terms of the lease since its expiration on
January 28, 1999.
NOTE G--PER SHARE DATA
The Company calculates per share data in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share." (SFAS No. 128). Under SFAS
No. 128 earnings per share data is calculated for basic and diluted earnings per
share. Basic earnings per share excludes dilutive securities including stock
options, and is calculated using the weighted average common shares outstanding
for the period. Diluted earnings per share reflects the dilution to earnings
that would occur if stock options and other dilutive securities resulted in the
issuance of common stock. Substantially all common stock equivalent shares from
stock options (341,500 and 189,500 in 1999 and 1998, respectively) have been
excluded from the computation of diluted earnings per share because the effect
would be antidilutive, since the option price was greater than the average for
the quarters.
NOTE H--SOFTWARE REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants issued
SOP 97-2, "Software Revenue Recognition," as amended for SOP 98-4 and SOP 98-9,
which provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and has superseded SOP 91-1. The
Company has adopted the provisions of SOP 97-2 to transactions entered into
during fiscal 1999. The adoption of this guidance has not had a material impact
on the Company's financial condition or results of operations because the
Company's revenue recognition policies complied with the provisions of SOP 97-2
prior to adoption.
NOTE I--EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
During 1999, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new
rules for the reporting of comprehensive income and its components. The adoption
of SFAS 130 had no impact on the Company's net income or shareholders' equity
for any of the reported periods.
8
<PAGE> 9
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
In order to keep investors informed of the Company's future plans and
objectives, this Report (and other reports and statements issued by the Company
and its officers from time to time) contains certain statements concerning the
Company's future results, future performance, intentions, objectives, plans and
expectations that are or may be deemed to be "forward-looking statements". The
Company's ability to do this has been fostered by the Private Securities
Litigation Reform Act of 1995 which provides a "safe harbor" for forward-looking
statements to encourage companies to provide prospective information so long as
those statements are accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those discussed in the statement. The Company believes it is in the best
interests of investors to take advantage of the "safe harbor" provisions of that
Act. Although the Company believes that its expectations are based on reasonable
assumptions, these forward-looking statements are subject to a number of known
and unknown risks and uncertainties that could cause the Company's actual
results, performance, and achievements to differ materially from those described
or implied in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, general economic
and business conditions in the United States and in the overseas markets where
the Company distributes products, including the impact of the major economic
problems in Asia; the impact of the strengthening dollars on international
prices; the Company's ability to successfully expand its market base beyond its
traditional newspaper market; potential changes in customer spending and
purchasing policies and practices; the continuing availability of components,
sub-assemblies, parts and end items, and dependence on third parties for some
components; risks inherent in new product introductions, such as start-up delays
and uncertainty of customer acceptance; the Company's ability to maintain
superior technological capability; the Company's ability to foresee changes and
to identify, develop and commercialize innovative and competitive products and
systems in a timely and cost effective manner and achieve customer acceptance,
in markets characterized by rapidly changing technology and frequent new product
introductions; the Company's ability to meet competition in its highly
competitive markets with minimal impact on prices and margins; the Company's
ability to attract and retain certain classifications of technologically
qualified personnel, particularly in the areas of research and development and
customer service; the Company's ability, and the ability of certain of its
customers and suppliers and others, to successfully and timely complete their
Year 2000 compliance programs; and the impact of the introduction of the Euro
currency.
Results of Operations
Three months ended April 30, 1999 compared to three months ended May 1, 1998
Revenues in the three months ended April 30, 1999 decreased by $2,980,000, or
13.2%, consisting of a decrease of $2,914,000, or 18.3%, in sales of systems and
equipment and a decrease of $66,000, or 1.0%, in customer service and support
sales. The decrease in systems and equipment sales was due primarily to the
international operations, mainly Latin America, Europe and the Pacific Rim.
Total international sales (shipments to customers located outside the United
States) were 37.7% of total net sales for the three-month period ended April 30,
1999, compared to 48.2% for the comparable period in the prior year. The lower
sales in Latin America and the Pacific Rim were the result of the economic
problems, which may continue to impair sales in these regions until the Latin
American and Pacific Rim currencies strengthen. Lower sales in Europe were the
result of customers shifting to the Company's Computer-to-Plate (CTP) product
line at a more cautious pace than purchases of the 3850 film imager last year.
Customer service and support sales decreased due primarily to a decline in
Europe, where several old proprietary contracts expired and were replaced with
lower revenue contracts.
Gross margins decreased .4 percentage points (from 38.3% to 37.9%) due to lower
gross margins on systems and equipment and customer service and support. Systems
and equipment gross margins increased by 1.8 percentage points (from 44.7% to
46.5%) due primarily to the sale of a greater proportion of higher margin
products. Customer service and support margins decreased by 2.3 percentage
points (from 23.1% to 20.8%) due primarily to the expiration of several high
margin proprietary contracts in Europe during the quarter.
Operating expenses increased by $201,000 from $7,283,000 in the second quarter
of 1998 to $7,484,000 in the second quarter of 1999 due primarily to development
costs associated with the Company's new Computer-to-Plate (CTP) product.
Operating expense expressed as a percentage of sales increased by 5.9 percentage
points (from 32.3% to 38.2%) due to lower sales and slightly higher costs due to
the CTP development.
The $10,000 decrease in interest income is due to a lower average (over the
three-month period) interest rate in the second quarter of 1999 than in the
comparable period in the prior year.
9
<PAGE> 10
A foreign exchange loss of $30,000 was realized in the second quarter of 1999
compared to a loss in the same period in 1998 of $124,000. The loss in both
periods was due to unfavorable currency movements in the European currency
markets. To reduce the potential impact from foreign currency changes on the
Company's foreign currency receivables and firm commitments, foreign currency
options are purchased.
The Company's effective benefit tax rate is 45.4% for the three months ended
April 30, 1999 compared to a tax provision rate of 41.1% for the comparable
period in the prior year. The benefit rate in fiscal 1999 is higher than the tax
provision rate in fiscal 1998 due to higher foreign income tax rates.
Six months ended April 30, 1999 compared to six months ended May 1, 1998
Revenues in the six months ended April 30, 1999 decreased by $2,226,000, or
5.5%, consisting of a decrease of $2,249,000, or 8.0%, in sales of systems and
equipment partially offset by an increase of $23,000, or .2%, in customer
service and support sales. The decrease in systems and equipment sales was due
primarily to the international operations in Latin America, Europe and the
Pacific Rim. Total international sales (shipments to customers located outside
the United States) were 40.9% of total net sales for the six-month period ended
April 30, 1999, compared to 47.7% for the comparable period in the prior year.
The lower sales in Latin America and the Pacific Rim were the result of the
economic problems which may continue to impair sales in these regions until
Latin American and Pacific Rim currencies strengthen. Lower sales in Europe were
the result of customers shifting to the Company's new Computer-to-Plate (CTP)
product line at a more cautious pace than purchases of the 3850 film imager last
year. Customer service and support sales increased slightly due to an increase
in new domestic customer service contracts offset by a decline in Europe, where
several old proprietary contracts expired and were replaced with lower revenue
contracts.
Gross margins decreased 1.7 percentage points (from 40.2% to 38.5%) due to lower
gross margins on systems and equipment. Systems and equipment gross margins
decreased by 1.7 percentage points (from 47.9% to 46.2%) due primarily to the
sale of a greater proportion of lower margin products and competitive pricing
pressures. Sales in fiscal 1999 of equipment introduced within the last three
years comprised approximately 90% of equipment sales. Customer service and
support margins were 23.0% in both fiscal 1999 and 1998.
Operating expenses increased by $286,000 from $14,377,000 in fiscal 1998 to
$14,663,000 in fiscal 1999 due primarily to development costs associated with
the Company's new Computer-to-Plate (CTP) product. Operating expense expressed
as a percentage of sales increased by 2.8 percentage points (from 35.4% to
38.2%) due to lower sales and slightly higher costs due to the CTP development.
The $10,000 increase in interest income is due to a higher average (over the
six-month period) cash balance in fiscal 1999 than in the comparable period in
the prior year.
A foreign exchange loss of $79,000 was realized in fiscal 1999 compared to a
loss in the same period in 1998 of $570,000. The loss in both years was due to
unfavorable currency movements in the European currency markets. To reduce the
potential impact from foreign currency changes on the Company's foreign currency
receivables and firm commitments, foreign currency options are purchased.
The Company's effective benefit tax rate was 46.6% for the six months ended
April 30, 1999 compared to a tax provision rate of 41.1% for the comparable
period in the prior year. The benefit rate in fiscal 1999 is higher than the tax
provision rate in fiscal 1998 due to higher foreign income tax rates.
10
<PAGE> 11
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Continued
Liquidity and Capital Resources
During the six months of fiscal 1999, operating activities used $1,600,000 of
cash resulting primarily from a net loss of $101,000 and uses of cash from
operating assets and liabilities of $2,685,000 partially offset by non-cash
charges included in the net loss for the period of $1,186,000.
Changes in operating assets and liabilities used $2,685,000 in cash, net. Cash
was provided by a decrease in receivables of $1,716,000 and an increase in
customer advances of $382,000. Cash was used to increase inventories $815,000,
increase prepaid expenses and other assets $1,284,000 and to decrease accounts
payable $1,379,000, accrued expenses $884,000, income taxes payable $219,000 and
payable to Volt $202,000.
The non-cash charges consisted of depreciation of $1,149,000, amortization of
$276,000, provision for doubtful accounts of $208,000 and deferred income tax of
$20,000 partially offset by a loss on foreign currency translation of $338,000
and losses on dispositions of property and equipment of $129,000.
Investing activities used cash of $850,000 for the purchase of property and
equipment.
As a result of the foregoing, during the six months ended April 30, 1999, cash
and cash equivalents decreased by $1,870,000. The Company's working capital as
of April 30, 1999 was $30,149,000, which includes $10,001,000 in cash and cash
equivalents. These resources are anticipated to be sufficient to meet the
Company's liquidity and capital needs in the normal course of business.
The Company has a liability for restructuring costs incurred prior to the
mergers in the amount of $256,000 at April 30, 1999. The accrued amount provides
for the estimated costs related to closing certain facilities of Triple-I. The
liability is being funded through operating cash flows and is expected to be
paid in its entirety in fiscal 1999.
Year 2000 Compliance
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations, causing disruptions in operations.
aii's STATE OF READINESS. The Company is affected in the processing of
data relating to the Year 2000 and beyond by 1) its own internal
computer information systems, 2) by third parties with which it has
business relationships and 3) both its current and discontinued
products, which are in production usage at customer sites. The Company
has undertaken various initiatives intended to ensure that its computer
equipment and software (both internally and throughout its produce line)
will function properly with respect to dates in the Year 2000 and
thereafter. For this purpose, the term "computer equipment and software"
includes systems that are commonly thought of as information technology
("IT") systems. Non-IT systems refers to other miscellaneous systems,
not thought of as IT systems, such as alarm systems, fax machines, etc.
Both IT and non-IT systems may contain embedded technology, which
complicates the Company's Year 2000 identification, assessment,
remediation and testing efforts. The Company currently anticipates that
its Year 2000 efforts, which began in January of 1997, will be completed
by the end of the Company's fourth quarter. The following table sets
forth the percentage of completion of the Company's Year 2000
initiatives, as well as the Company's progress and anticipated
completion dates, as of April 30, 1999:
11
<PAGE> 12
<TABLE>
<CAPTION>
Time Percent
Year 2000 Initiatives Table Complete
- --------------------- ----- --------
<S> <C> <C>
Internal Systems:
Initial IT system identification 1/97 - 10/98 100%
Initial IT system assessment 1/97 - 10/98 100%
Remediation and testing central system 1/97 - 5/98 100%
Conversion of desktop PCs 1/97 - 10/99 80%
Identification regarding non-IT issues 1/97 - 5/98 100%
Assessment regarding non-IT issues 1/97 - 10/99 85%
Product Line:
Initial IT system identification 1/97 - 1/98 100%
Initial IT system assessment 10/97 - 6/98 100%
Remediation and testing 1/97 - 5/99 100%
</TABLE>
INFORMATION TECHNOLOGY (IT). In a corporate-wide Year 2000 readiness
analysis completed in 1997, individual business units were required to
formally develop a plan to achieve Year 2000 compliance. Each plan
consisted of an evaluation of the compliance status of internal IT
systems and an identification of specific hardware and software
compliance issues.
The readiness target date for all business units was December 31, 1998.
All business units have completed their reviews and have replaced or
modified applications found to be non-compliant.
AII has a number of network-connected desktop PCs which are not
compliant. An upgrade program is in place and is expected to be
completed by August 1999 at an estimated cost of $75,000 for testing and
replacement.
NON-IT. With respect to non-IT issues, a project coordinator is working
with the Company's facilities management to ensure premises issues are
addressed in Company owned and leased properties in the United States.
Outside of the U.S., local division managers have been instructed to
address this issue.
The Company has some risk on a location by location basis related to the
possible failure of government agencies, public utilities and providers
of telecommunication and transportation services. Due to the Company's
dispersion of facilities, the largest concentrated risks in this regard
are in Thousand Oaks, California and Boston, Massachusetts.
COMPANY PRODUCTS. In 1997 the Company established a policy that all
current products be Year 2000 compliant and that its quality assurance
personnel test all new releases of software and hardware for Year 2000
compliance.
All current product from the Company has been successfully tested for
Year 2000 compliance. The Company has published and periodically updated
a product compliance list. Users of old, non-compliant equipment have
been notified. Users operating older revision levels of current products
have been notified of the requirement to upgrade, if required.
THIRD PARTIES. Third parties having a material relationship with the
Company have Year 2000 issues to address and resolve. Such third parties
include suppliers, financial institutions, governmental agencies,
telecommunication and insurance carriers. An aspect of the Company's
project is to identify the third parties and contact them to seek
written assurance as to the third parties' anticipation of being Year
2000 compliant. The nature of the Company's follow-up depends upon its
assessment of the reason and the materiality of the effect of
non-compliance by third parties on the Company.
During 1998 and 1999, compliance questionnaires were sent to all major
suppliers and other third parties with whom the Company does business.
As of April 30, 1999, 99% of major domestic suppliers have responded
with 93% responding they are compliant and 6% in the process of becoming
Year 2000 complaint. Those that have not replied have been replaced with
compliant sources. In addition, compliance questionnaires were also sent
to other third parties the Company does business with, such as financial
institutions, telecommunications and insurance companies. Of those third
parties, response rate of close to 80% has been achieved, with
approximately 72% of respondents indicating they are Year 2000 complaint
and the remaining indicating that they are in the process of becoming
compliant with a deadline of no later than mid-1999. Outside of the
United States, local division managers have been instructed to address
major suppliers and other third parties. However, the Company has no
means of ensuring that such third parties will be Year 2000 ready. The
inability of third parties to complete their Year 2000 resolution
process in a timely fashion could materially impact the Company. The
effect of non-compliance by third parties is not determinable.
12
<PAGE> 13
COSTS TO ADDRESS aii's YEAR 2000 ISSUES. The Company's Year 2000
incurred and future remediation costs for all business units are
projected to be approximately $840,700 in the aggregate. At this time,
the Company's actual and estimated future costs for internal systems and
its product lines are as follows:
<TABLE>
<CAPTION>
Costs incurred Estimated Total
through 4/30/99 Future Costs Costs
--------------- ------------ -----
<S> <C> <C> <C>
Internal Systems:
Hardware $ 91,400 $ 74,500 $165,900
Software 403,900 103,500 507,400
-------- -------- --------
Total 495,300 178,000 673,300
Product Line:
Hardware $ 36,500 $ 4,000 $ 40,500
Software 102,900 24,000 126,900
-------- -------- --------
Total 139,400 28,000 167,400
Total Company $634,700 $206,000 $840,700
======== ======== ========
</TABLE>
Included in the actual costs through April 30, 1999 under Internal
Systems - Software is the cost of a new corporate business system of
$345,000 which was installed during fiscal years 1996 and 1997 and which
has been capitalized. In addition to addressing Year 2000 issues, the
business system was installed to streamline the Company's operations and
provide better management information. Except for hardware costs, all
other costs are being expensed as incurred.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The Company's management
believes it has an effective program in place to resolve the Year 2000
issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In addition,
disruption in the economy in general resulting from Year 2000 issues and
the failure of third parties, over whom the Company has no control, to
become timely Year 2000 compliant could also materially adversely affect
the Company. The amount of potential liability and lost revenue cannot
be reasonably estimated at this time. All Company internal systems are
currently Year 2000 compliant except for a number of network-connected
PCs previously mentioned. In addition, the Company has thoroughly
reviewed its product line to assist its customers with the Year 2000
issue. The Company believes that its current products are Year 2000
compliant and no additional costs or expenses are anticipated under
warranties or to service such products except for the development of
certain testing hardware and computer software (which it presently
estimates will cost approximately $167,400 to develop). The Company
believes that a majority of its discontinued products are also Year 2000
compliant. However, certain of its older products, the sale for which
were discontinued several years ago, may not be Year 2000 compliant. The
Company believes such products are not under warranty and the Company
has not been renewing its one-year service contracts as they relate to
these older products or products of others that it services which are
not Year 2000 compliant. In most cases, the Company offers a new, Year
2000 compliant product which can be purchased as a replacement for the
older product that is not Year 2000 compliant, along with annual
maintenance agreements.
THE COMPANY'S CONTINGENCY PLANS. Although the Company believes both its
internal systems and product line are Year 2000 compliant, contingency
plans have been made. Preparations are in process to have a team of
technicians available to assist customers with software and hardware
which may have Year 2000 "bugs" not revealed until after December 31,
1999 despite testing. The Company anticipates handling these situations
with immediate program fixes, swapped backup hardware or process work
around. The Company does not anticipate that problems of this nature
will be significant due to thorough testing of its product line and
advance notification to its customers.
Impact of the Euro
Several European countries have adopted, as of January 1, 1999, and others are
expected to adopt, a Single European Currency (the "Euro") with a transition
period continuing through January 1, 2002. The Company is reviewing the impact
the Euro has had, and may continue to have, on its internal systems and on its
competitive environment. The Company believes, based on testing and experience
to date, that its internal systems are and will continue to be Euro capable
without material modification cost. Further, the Company has not experienced to
date and does not expect the introduction of the Euro currency to have a
material adverse impact on the Company's financial position or results of
operations.
13
<PAGE> 14
ITEM 3--QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and derivative financial instruments. To reduce
the potential impact from foreign currency changes on the Company's foreign
currency receivables and firm commitments, foreign currency options are
purchased.
AII maintains a portfolio of highly liquid cash equivalents maturing in three
months or less from the date of purchase. Given the short-term nature of these
investments, and that the Company has no borrowings outstanding, the Company is
not subject to significant principal risk. However, the Company's yield return
on future short-term investments could be affected at the time of reinvestment
as a result of intervening events. The Company presently has no borrowings and,
accordingly, does not purchase interest rate swaps or other instruments to hedge
against interest rate fluctuations.
A significant portion of AII's operations consists of sales activities in
foreign locations, as the Company sells its products worldwide. The Company's
financial results, therefore, could be significantly impacted by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Since all of AII's sales are denominated in U.S. dollars, the
Company's foreign operations are net payers in currencies other than the U.S.
dollar. As such, the Company's operating results may be adversely affected by
the impacts of weaker foreign currencies relative to the U.S. dollar. To
mitigate the short-term effect of changes in currency exchange rates on its
foreign currency based expenses and receivables, the Company purchases foreign
currency option contracts to hedge the adverse impact of currency fluctuations
on its foreign currency receivables and firm commitments. Management believes
that due to its currency option positions that changes in currency rates would
not have a significant impact on the Company's results of operations.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 1999 Annual Meeting of Shareholders held on April 14, 1999,
stockholders:
(a) Elected the following to serve as directors of the Company to serve until
the 2000 Annual Meeting of the Stockholders, by the following votes:
<TABLE>
<CAPTION>
For Votes Withheld
--- --------------
<S> <C> <C>
Leroy M. Bell 5,434,175 12,183
Dennis D. Doolittle 5,434,233 12,125
Alden L. Edwards 5,431,933 14,425
EuGene L. Falk 5,431,333 15,025
James J. Groberg 5,433,333 13,025
Paul H. McGarrell 5,433,333 13,025
Jerome Shaw 5,433,323 13,035
William Shaw 5,433,333 13,025
</TABLE>
(b) Ratified the action of the Board of Directors in appointing Ernst & Young
LLP as the Company's independent public accountants for the fiscal year ending
October 29, 1999 by the following vote:
For: 5,443,457 Against: 426 Abstain: 2,475
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 5--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C>
15 Independent Accountants' Report on Review of Interim
Financial Information from Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended April 30,
1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AUTOLOGIC INFORMATION INTERNATIONAL, INC.
Dated: Thousand Oaks, California
June 11, 1999
BY: /s/Anthony F. Marrelli
-------------------------------------
Anthony F. Marrelli
Vice President and Chief
Financial Officer
15
<PAGE> 16
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description
<S> <C>
15 Independent Accountants' Report on Review of Interim Financial
Information from Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
16
<PAGE> 1
EXHIBIT 15
INDEPENDENT ACCOUNTANT'S REVIEW REPORT; ERNST & YOUNG LLP
The Board of Directors
Autologic Information International, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Autologic Information International, Inc. and subsidiaries as of April 30, 1999,
and the related condensed consolidated statements of operations for the
three-month and six-month periods ended April 30, 1999 and May 1, 1998, the
condensed consolidated statement of stockholders' equity for the six-month
period ended April 30, 1999, and the condensed consolidated statements of cash
flows for the six-month periods ended April 30, 1999 and May 1, 1998. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Autologic Information
International, Inc. and subsidiaries as of October 30, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended, not presented herein; and in our report dated December 9,
1998, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of October 30, 1998, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
June 1, 1999
Woodland Hills, California
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-29-1999
<PERIOD-START> OCT-31-1998
<PERIOD-END> APR-30-1999
<CASH> 10,001
<SECURITIES> 0
<RECEIVABLES> 15,618
<ALLOWANCES> 0
<INVENTORY> 12,125
<CURRENT-ASSETS> 44,025
<PP&E> 5,657
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,707
<CURRENT-LIABILITIES> 13,876
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 39,773
<TOTAL-LIABILITY-AND-EQUITY> 53,707
<SALES> 38,364
<TOTAL-REVENUES> 38,364
<CGS> 23,583
<TOTAL-COSTS> 38,652
<OTHER-EXPENSES> 99
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (189)
<INCOME-TAX> (88)
<INCOME-CONTINUING> (101)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (101)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
