<PAGE> 1
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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 quarter ended January 29, 1999
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 No. 0-29396
AUTOLOGIC INFORMATION INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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
</TABLE>
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 March 5, 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>
January 29, October 30,
1999 1998
--------- ---------
(Unaudited)
ASSETS (Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 10,497 $ 11,871
Accounts receivable less allowance for doubtful
accounts of $1,925 (1999) and $1,844 (1998) 16,706 17,928
Inventories-See Note C 12,272 11,310
Deferred income tax benefit-See Note D 3,846 3,829
Prepaid expenses and other assets 2,243 1,354
--------- ---------
Total current assets 45,564 46,292
PROPERTY AND EQUIPMENT, at cost net of
accumulated depreciation and amortization
of $6,496 (1999) and $6,086 (1998) 5,695 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 $1,654 (1999)
and $1,516 (1998)-See Note B 1,099 1,237
OTHER ASSETS 104 75
--------- ---------
$ 55,285 $ 56,254
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,420 $ 4,877
Payable to Volt-See Notes E and F 191 202
Accrued payroll and related liabilities 3,016 3,914
Accrued expenses 1,600 1,458
Accrued restructuring costs 886 1,014
Customer advances 4,845 4,501
Income taxes payable 365 356
--------- ---------
Total current liabilities 15,323 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 (72,716) (72,746)
--------- ---------
39,962 39,932
$ 55,285 $ 56,254
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 3
AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------------
January 29, January 30,
1999 1998
----------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C>
REVENUES
Systems and equipment $ 12,746 $ 12,082
Customer service and support 6,050 5,960
--------- ---------
18,796 18,042
--------- ---------
OPERATING COSTS AND EXPENSES
Cost of systems and equipment 6,912 5,781
Cost of customer service and support 4,517 4,591
--------- ---------
Gross margin 7,367 7,670
Operating expenses 7,179 7,094
Charges from Volt-See Notes E and F
Rent 194 201
General and administrative 9 9
--------- ---------
OPERATING INCOME (LOSS) (15) 366
OTHER INCOME (EXPENSE)
Interest income 127 107
Foreign exchange loss (49) (446)
Other, net (12) (4)
--------- ---------
66 (343)
--------- ---------
INCOME FROM OPERATIONS
BEFORE INCOME TAXES 51 23
INCOME TAX PROVISION-See Note D 21 10
--------- ---------
NET INCOME $ 30 $ 13
========= =========
BASIC AND DILUTED EARNINGS
PER SHARE -See Note G $ 0.01 $ --
========= =========
Average number of shares outstanding-Basic 5,788 5,788
===== =====
Average number of shares outstanding-Diluted 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 income for the three months -- -- -- 30
--------- ---------- --------- ---------
Balance at January 29, 1999 5,787,970 $ 58 $ 112,620 $ (72,716)
========= ========== ========= =========
</TABLE>
See accompanying notes
4
<PAGE> 5
AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------
January 29, January 30,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30 $ 13
Adjustments to reconcile net income to net
cash applied to operating activities:
Depreciation 569 536
Amortization 138 138
Provision for doubtful accounts 201 131
Gains on foreign currency translation (139) (8)
Gains on dispositions of property and equipment (14) (11)
Deferred income taxes (17) 152
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 852) (857)
Increase in inventories (962) (1,591)
Increase in prepaid expenses and other assets (919) (76)
Decrease in accounts payable (399) (1,015)
Decrease in accrued expenses (913) (574)
Increase in customer advances 372 2,402
Increase in income taxes payable 9 --
Decrease in payable to Volt (11) (265)
-------- --------
NET CASH APPLIED TO OPERATING ACTIVITIES (1,203) (1,025)
-------- --------
CASH FLOWS APPLIED TO INVESTING ACTIVITIES
Purchases of property and equipment (423) (370)
-------- --------
Effect of exchange rate changes on cash 252 199
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,374) (1,196)
Cash and cash equivalents, beginning of period 11,871 9,452
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,497 $ 8,256
======== ========
SUPPLEMENTAL CASH TRANSACTIONS Cash paid during the period:
Interest expense $ -- $ 3
Income tax $ 136 $ 220
</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 January 29, 1999 and results of operations
and cash flows for the three months ended January 29, 1999 and January 30, 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.
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 and 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. A $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>
January 29, October 30,
1999 1998
------------- --------------
(Dollars in thousands)
<S> <C> <C>
Service parts $ 1,464 $ 1,818
Materials 5,816 5,671
Work-in-process 3,029 2,713
Finished goods 1,963 1,108
------------- --------------
$ 12,272 $ 11,310
============= ==============
</TABLE>
6
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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 attributable to operations are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
January 29, January 30,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Current Taxes:
Federal $ 57 $ 17
State and local 34 10
Foreign (53) (169)
--------- ---------
Total current 38 (142)
--------- ---------
Deferred Taxes:
Federal (11) 140
State and local (6) 12
Foreign -- --
--------- ---------
Total deferred (17) 152
--------- ---------
Total income tax provision $ 21 $ 10
========= =========
</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 quarters ended January 29, 1999
and January 30, 1998, the Company incurred $9,000 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. At January 29, 1999, the Company had a $191,000
payable to Volt as a result of costs paid by Volt on behalf of the Company
including amounts owed under the retainer arrangement.
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 three months
ended January 29, 1999 and January 30, 1998, the Company paid rent to Volt of
$194,000 and $201,000 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 (345,000 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
As of January 29, 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.
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.
Three months ended January 29, 1999 compared to three months ended January 30,
1998
Results of Operations
In the three month period ended January 29, 1999, revenues increased by
$754,000, or 4.2%, due to an increase of $664,000, or 5.5%, in sales of systems
and equipment and a $90,000, or 1.5%, increase in customer service sales. The
increase in systems and equipment sales was due primarily to increased domestic
sales offset in part by lower sales internationally. Total international sales
(shipments to customers located outside the United States) were 44.2% of total
net sales for the three-month period ended January 29, 1999, compared to 47.1%
for the comparable prior year period with the decrease due to lower sales in the
Pacific Rim and Latin America. The increase in customer service sales resulted
primarily from slightly higher sales of spare parts in the domestic operations.
Gross margins decreased 3.3 percentage points (from 42.5% to 39.2%) due to lower
gross margins on systems and equipment offset, in part, by increased margins on
customer service. Systems and equipment gross margins decreased by 6.4
percentage points (from 52.2% to 45.8%) due principally to the sale of a greater
proportion of lower margin products and competitive pricing pressures. Customer
service gross margins improved by 2.3 percentage points (from 23.0% to 25.3%)
due primarily to improved margins on spare part sales.
Operating expenses increased by $85,000 from $7,094,000 in the first quarter of
1998 to $7,179,000 in the first quarter of 1999 due to slightly higher general
and administrative expenses. Operating expense expressed as a percentage of
sales decreased 1.1 percentage points (from 39.3% to 38.2%) due to a
proportionally higher increase in sales.
The $20,000 increase in interest income is due to a higher average (over the
three-month period) cash balance in the first quarter of 1999 than in the
comparable period in the prior year.
A foreign exchange loss of $49,000 was realized in the first quarter of 1999
compared to a loss in the same period in 1998 of $446,000. The loss in both
years was due to unfavorable currency movements in the European currency
markets. To reduce the potential impact
9
<PAGE> 10
from foreign currency changes on the Company's foreign currency receivables and
firm commitments, foreign currency options are purchased.
The Company's effective tax rate was reduced to 41.1% in the first quarter of
1999 from 43.5% in the first quarter of 1998.
Liquidity and Capital Resources
During the three months of fiscal 1999, operating activities used $1,203,000 of
cash. While cash was provided principally by a profit of $30,000, non-cash
charges aggregating $738,000 (consisting principally of depreciation of
$569,000, goodwill amortization of $138,000 and a provision for doubtful
accounts of $201,000 offset, in part, primarily by a $139,000 gain on foreign
currency translation), a decrease in accounts receivable of $852,000 and an
increase in customer advances of $372,000, these factors were offset by uses in
cash principally for inventory of $962,000, prepaid expenses and other assets of
$919,000, reductions of accounts payable by $399,000 and accrued expenses by
$913,000.
Investing activities used cash of $423,000 for the purchase of property and
equipment.
As a result of the foregoing, during the three months ended January 29, 1999,
cash and cash equivalents decreased by $1,374,000. The Company's working capital
as of January 29, 1999 was $30,241,000, which includes $10,497,000 in cash and
cash equivalents. These resources are anticipated to be sufficient to meet the
Company's liquidity and capital needs for the near term in the normal course of
business.
The Company has a liability for restructuring costs incurred prior to the
mergers in the amount of $886,000 at January 29, 1999. The accrued amount
provides for the estimated costs related to the closing of 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 May 1999. 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
January 29, 1999:
<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 - 5/99 80%
Identification regarding non-IT issues 1/97 - 5/98 100%
Assessment regarding non-IT issues 1/97 - 5/99 80%
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 95%
</TABLE>
10
<PAGE> 11
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,
with units expected to be fully compliant by then. All business units have
completed their reviews and have replaced or modified applications found to
be noncompliant.
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 May 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 and Boston.
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, compliance questionnaires were sent to all major suppliers and
other third parties with whom the Company does business. As of January 29,
1999, 90% of major suppliers have responded with 70% responding they are
compliant and 20% in the process of becoming Year 2000 complaint. Further
follow-up efforts are being made for the 10% that have not replied and
alternative Year 2000 compliant suppliers are being identified. In
addition, compliance questionnaires were also sent to other third parties
the Company does business with, such as financial institutions,
telecommunications and insurance companies. A response rate of close to
100% has been achieved, with approximately 80% 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. 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.
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 $837,000 in the aggregate. At this time, the Company's actual
and estimated future costs for internal systems and its product lines are
as follows:
11
<PAGE> 12
<TABLE>
<CAPTION>
Costs Estimated Total
through 1/29/99 Future Costs Costs
--------------- ------------ ---------
<S> <C> <C> <C>
Internal Systems:
Hardware $ 50,000 $ 118,000 $ 168,000
Software 383,200 117,000 500,200
--------- --------- ---------
Total 433,200 235,000 668,200
Product Line:
Hardware $ 36,500 $ 4,000 $ 40,500
Software 102,300 26,000 128,300
--------- --------- ---------
Total 138,800 30,000 168,800
Total Company $ 572,000 $ 265,000 $ 837,000
========= ========= =========
</TABLE>
Included in the actual costs through January 29, 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 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 $169,000 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.
12
<PAGE> 13
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.
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 interest rate risk.
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.
PART II - OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits:
15 Independent Accountants' Report on Review of Interim
Financial Information from Ernst & Young LLP
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended January 29,
1999.
</TABLE>
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
March 12, 1999
BY: /s/ Anthony F. Marrelli
------------------------------------
Anthony F. Marrelli
Vice President and
Chief Financial Officer
13
<PAGE> 14
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>
14
<PAGE> 1
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 January 29,
1999, and the related condensed consolidated statements of operations for the
three-month periods ended January 29, 1999 and January 30, 1998, the condensed
consolidated statement of stockholders' equity for the three-month period ended
January 29, 1999, and the condensed consolidated statements of cash flows for
the three-month periods ended January 29, 1999 and January 30, 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.
March 1, 1999
Woodland Hills, California
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