<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 (No Fee Required) For the quarter ended July 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
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(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 September 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>
July 30, October 30,
1999 1998
--------- -----------
(Unaudited)
ASSETS (Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 11,001 $ 11,871
Accounts receivable less allowance for doubtful
accounts of $1,336 (1999) and $1,844 (1998) 14,610 17,928
Inventories-See Note C 10,718 11,310
Deferred income tax benefit-See Note D 3,835 3,829
Prepaid expenses and other assets 1,612 1,354
--------- ---------
Total current assets 41,776 46,292
PROPERTY AND EQUIPMENT, at cost net of
accumulated depreciation and amortization
of $7,698 (1999) and $6,086 (1998) 5,610 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 $1,930 (1999)
and $1,516 (1998)-See Note B 823 1,237
OTHER ASSETS 485 75
--------- ---------
$ 51,517 $ 56,254
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,458 $ 4,877
Payable to Volt-See Notes E and F 147 202
Accrued payroll and related liabilities 3,078 3,914
Accrued expenses 1,852 1,458
Accrued restructuring costs 129 1,014
Customer advances 5,475 4,501
Income taxes payable -- 356
--------- ---------
Total current liabilities 13,139 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 (74,300) (72,746)
--------- ---------
38,378 39,932
--------- ---------
$ 51,517 $ 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 Nine Months Ended
-------------------------- -------------------------
July 30, July 31, July 30, July 31,
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES
Systems and equipment $ 10,349 $ 15,699 $ 36,088 $ 44,546
Customer service and support 6,231 6,567 18,856 18,310
-------- -------- -------- --------
16,580 22,266 54,944 62,856
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES
Cost of systems and equipment 5,798 8,875 19,658 24,093
Cost of customer service and support 4,571 4,188 14,294 13,244
-------- -------- -------- --------
Gross margin 6,211 9,203 20,992 25,519
Operating expenses 7,807 7,593 22,470 21,970
Charges from Volt-See Note E and F
Rent 194 194 582 589
General and administrative 9 9 27 27
-------- -------- -------- --------
OPERATING (LOSS) INCOME (1,799) 1,407 (2,087) 2,933
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest income 102 140 340 368
Foreign exchange loss (123) (132) (202) (702)
Other, net 15 (32) (45) (22)
-------- -------- -------- --------
(6) (24) 93 (356)
-------- -------- -------- --------
(LOSS) INCOME FROM OPERATIONS
BEFORE INCOME TAXES (1,805) 1,383 (1,994) 2,577
INCOME TAX BENEFIT (PROVISION)-See Note D 352 (673) 440 (1,164)
-------- -------- -------- --------
NET (LOSS) INCOME $ (1,453) $ 710 $ (1,554) $ 1,413
======== ======== ======== ========
BASIC AND DILUTED (LOSS) EARNINGS
PER SHARE-See Note G $ (0.25) $ 0.12 $ (0.27) $ 0.24
======== ======== ======== ========
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 nine months (unaudited) -- -- -- (1,554)
--------- --------- --------- ---------
Balance at July 30, 1999 (unaudited) 5,787,970 $ 58 $ 112,620 $ (74,300)
========= ========= ========= =========
</TABLE>
See accompanying notes
4
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AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------
July 30, July 31,
1999 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (1,554) $ 1,413
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation 1,684 1,649
Amortization 414 414
Provision for doubtful accounts 244 328
(Gain) loss on foreign currency translation (251) 234
(Gain) loss on dispositions of property and equipment (19) 101
Deferred income taxes (6) 17
Changes in operating assets and liabilities:
Decrease in accounts receivable 2,736 95
Decrease (increase) in inventories 592 (2,946)
(Increase) decrease in prepaid expenses and other assets (669) 426
Decrease in accounts payable (2,155) (1,411)
Decrease in accrued expenses (1,555) (211)
Increase in customer advances 1,091 2,084
(Decrease) increase in income taxes payable (356) 872
Decrease in payable to Volt (55) (81)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 141 2,984
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property and equipment -- 145
Purchases of property and equipment (1,448) (1,326)
-------- --------
NET CASH APPLIED TO INVESTING ACTIVITIES (1,448) (1,181)
-------- --------
Effect of exchange rate changes on cash 437 10
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (870) 1,813
Cash and cash equivalents, beginning of period 11,871 9,452
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,001 $ 11,265
======== ========
SUPPLEMENTAL CASH TRANSACTIONS
Cash paid during the period:
Interest expense $ -- $ 11
Income tax $ 482 $ 51
</TABLE>
See accompanying notes
5
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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 July 30, 1999 and results of operations for
the three months and nine months ended July 30, 1999 and July 31, 1998, and cash
flows for the nine months ended July 30, 1999 and July 31, 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.
Certain reclassifications have been made to the condensed consolidated financial
statements for the three-month and nine-month periods ended July 31, 1998 to
conform to the presentation for the similar periods in 1999.
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>
July 30, October 30,
1999 1998
------- -----------
(Dollars in thousands)
<S> <C> <C>
Service parts $ 1,176 $ 1,818
Materials 4,992 5,671
Work-in-process 2,886 2,713
Finished goods 1,664 1,108
------- -------
$10,718 $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 (benefit) attributable to operations are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
July 30, July 31, July 30, July 31,
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Current Taxes:
Federal $ (516) $ 696 $ (446) $ 1,160
State and local (49) 87 3 167
Foreign 239 (224) 9 (180)
------- ------- ------- -------
Total current (326) 559 (434) 1,147
------- ------- ------- -------
Deferred Taxes:
Federal (18) 106 28 29
State and local (8) 8 (34) (12)
Foreign -- -- -- --
------- ------- ------- -------
Total deferred (26) 114 (6) 17
------- ------- ------- -------
Total income tax (benefit) provision $ (352) $ 673 $ (440) $ 1,164
======= ======= ======= =======
</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 nine months ended July 30, 1999
and July 31, 1998, the Company incurred $27,000 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. 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. During the nine months ended
July 30, 1999 and July 31, 1998, the Company paid rent to Volt of $582,000 and
$589,000 respectively.
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 (331,500 and 187,000 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 prices were greater than the average
market prices of the Company's common stock during the quarters and, in the 1999
periods, due to the loss sustained.
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 had no 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 stockholders' 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 and Latin America; the impact of a strengthening dollar 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 July 30, 1999 compared to three months ended July 31, 1998
Revenues in the three months ended July 30, 1999 decreased by $5,686,000 or
25.5%, consisting of decreases of $5,350,000 or 34.1%, in sales of systems and
equipment and $336,000, or 5.1%, in customer service and support sales. The
decrease in systems and equipment sales was due to a decline in domestic and
Latin American sales and lower sales of the Company's Laser Cinema Recorder
(LCR). The decline in domestic sales is due primarily to the Year 2000. In
fiscal year 1998 many customers increased their purchases of new systems in
anticipation of the Year 2000. In fiscal 1999, customers who have replaced and
tested their systems are deferring new purchases until after December 31, 1999.
The lower sales in Latin America was the result of the economic problems which
may continue to impact sales until the foreign currencies strengthen. The
decline in LCR sales is due primarily to competition and a general softness in
the market. Customer service and support sales decreased primarily domestically
as older, proprietary, full service contracts have been replaced with new
systems (due to the Year 2000) that require less maintenance and as a result
generate lower service and support revenue.
Gross margins decreased 3.8 percentage points from 41.3% to 37.5% due primarily
to lower customer service and support margins offset by a slight increase in
margin on systems and equipment. Customer support and service margins decreased
by 9.6 percentage points from 36.2% to 26.6% due primarily to lower sales and a
higher level of warranty costs. Systems and equipment margins increased .5
percentage points from 43.5% to 44.0% due to slightly lower manufacturing costs.
Operating expenses increased by $214,000 from $7,593,000 in the third quarter of
1998 to $7,807,000 in the third 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 13.0
percentage points (from 34.1% to 47.1%) due to lower sales and higher
development costs due to the CTP and wide versions of the CTP and film imager.
9
<PAGE> 10
The decrease in interest income is due to a lower average (over the three-month
period) cash balance in the third quarter of 1999 than in the comparable period
in the prior year.
A foreign exchange loss of $123,000 was realized in the third quarter of 1999
compared to a loss in the same period in 1998 of $132,000. 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 was 19.5% for the three months ended
July 30, 1999 compared to a tax provision rate of 48.7% for the comparable
period. The benefit rate in fiscal 1999 is lower than the tax provision rate in
fiscal 1998 due to foreign tax expenses, which partially offset the domestic tax
benefit.
Nine months ended July 30, 1999 compared to nine months ended July 31, 1998
Revenues in the nine months ended July 30, 1999 decreased by $7,912,000 or
12.6%, consisting of a decrease of $8,458,000, or 19.0%, in sales of systems and
equipment offset by an increase of $546,000, or 3.0% in customer service and
support sales. The decrease in sales of systems and equipment was due to a
decline in demand domestically and internationally and lower sales of the
Company's Laser Cinema Recorder (LCR). The decline domestically was due
principally to the Year 2000, as customers who have replaced their systems are
deferring purchases until after December 31, 1999. International sales
(shipments to customers located outside the United States) were 40.4% of total
net sales for the nine-month period ended July 30, 1999, compared to 43.7% 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
impact sales in these regions until Latin America and Pacific Rim currencies
strengthen. Lower sales in Europe were the result of customers purchasing the
Company's new Computer-to-Plate (CTP) product line at a slower pace than
purchases of the 3850 film imager last year. The decline in LCR sales is due
primarily to competition and a general softness in the market. Customer service
and support sales increased primarily due to an increase in software support
contracts and spare parts sales.
Gross margins decreased 2.4 percentage points (from 40.6% to 38.2%) due lower
gross margins on systems and equipment and service and support revenue. Systems
and equipment gross margins decreased by .4 percentage points (from 45.9% to
45.5%) due primarily to the sale of a greater proportion of lower margins
products and competitive pricing pressures primarily during the first quarter of
fiscal 1999. Customer service and support gross margins decreased by 3.5
percentage points (from 27.7% to 24.2%) due to higher warranty costs.
Operating expenses increased by $500,000 from $21,970,000 in fiscal 1998 to
$22,470,000 in fiscal 1999 due primarily to the development costs associated
with the Company's new CTP product. Operating expenses as a percentage of sales
increased by 5.9 percentage points (from 35.0% to 40.9%) due to lower sales and
the higher costs due to the CTP development.
The $28,000 decrease in interest income is due to a lower average (over the
nine-month period) cash balance in the fiscal 1999 period than in the comparable
period in the prior year.
A foreign exchange loss of $202,000 was realized in the nine months ended July
30, 1999 compared to a loss in the same period in 1998 of $702,000. 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 tax benefit rate was 22.1% for the nine months ended
July 30, 1999 compared to a tax provision rate of 45.2% for the comparable
period in the prior year. The benefit rate in fiscal 1999 is lower than the tax
provision rate in fiscal 1998 due to foreign tax expenses, which partially
offset the domestic tax benefit.
10
<PAGE> 11
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Continued
Liquidity and Capital Resources
During the nine months of fiscal 1999, operating activities provided $141,000 of
cash resulting primarily from non-cash charges of $2,066,000, partially offset
by the net loss for the period of $1,554,000 and changes in operating assets and
liabilities of ($371,000).
The non-cash charges consisted of depreciation of $1,684,000, amortization of
$414,000, and a provision for doubtful accounts of $244,000, partially offset by
a gain on foreign currency translation of $251,000, gains on dispositions of
property and equipment of $19,000 and deferred income taxes of $6,000.
Changes in operating assets and liabilities used $371,000 in cash, net. Cash was
provided by a decrease in receivables of $2,736,000 and inventories of $592,000
and an increase in customer advances of $1,091,000. Cash was used to increase
prepaid expenses and other assets $669,000 and to decrease accounts payable by
$2,155,000, accrued expenses by $1,555,000, income taxes payable by $356,000 and
payable to Volt by $55,000.
Investing activities used cash of $1,448,000 for the purchase of property and
equipment.
As a result of the foregoing, during the nine months ended July 30, 1999, cash
and cash equivalents decreased by $870,000. The Company's working capital as of
July 30, 1999 was $28,637,000, which includes $11,001,000 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 $129,000 at July 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 approximate percentage of completion of the Company's Year
2000 initiatives, as well as the Company's progress and anticipated
completion dates, as of July 30, 1999:
11
<PAGE> 12
<TABLE>
<CAPTION>
Time Approximate 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 90%
Identification regarding non-IT issues 1/97 - 5/98 100%
Assessment regarding non-IT issues 1/97 - 10/99 90%
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 October 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 addressing 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 has been 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.
Virtually all 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 with whom the Company does business, such as
financial institutions, telecommunications and insurance companies. Of
those third parties, a response rate of 100% has been achieved, with
approximately 76% 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 the third quarter of 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 $824,400 in the aggregate. As of July 30,
1999, the Company's actual and estimated future costs for internal
systems and its product lines were as follows:
<TABLE>
<CAPTION>
Costs incurred Estimated Total
through 7/30/99 Future Costs Costs
--------------- ------------ --------
<S> <C> <C> <C>
Internal Systems:
Hardware $113,400 $ 47,000 $160,400
Software 423,500 76,500 500,000
-------- -------- --------
Total 536,900 123,500 660,400
Product Line:
Hardware $ 38,000 $ 4,000 $ 42,000
Software 105,000 17,000 122,000
-------- -------- --------
Total 143,000 21,000 164,000
Total Company $679,900 $144,500 $824,400
======== ======== ========
</TABLE>
Included in the actual costs through July 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 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 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 $164,000
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 compatible
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.
PART II - OTHER INFORMATION
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(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 July 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
September 10, 1999
BY: /s/ Anthony F. Marrelli
-------------------------------------
Anthony F. Marrelli
Vice President and Chief
Financial Officer
14
<PAGE> 15
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>
15
<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 July 30, 1999,
and the related condensed consolidated statements of operations for the
three-month and nine-month periods ended July 30, 1999 and July 31, 1998, the
condensed consolidated statement of stockholders' equity for the nine-month
period ended July 30, 1999, and the condensed consolidated statements of cash
flows for the nine-month periods ended July 30, 1999 and July 31, 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.
August 24, 1999
Woodland Hills, California
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-29-1999
<PERIOD-START> OCT-31-1998
<PERIOD-END> JUL-30-1999
<CASH> 11,001
<SECURITIES> 0
<RECEIVABLES> 14,610
<ALLOWANCES> 0
<INVENTORY> 10,718
<CURRENT-ASSETS> 41,776
<PP&E> 5,610
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,517
<CURRENT-LIABILITIES> 13,139
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 38,320
<TOTAL-LIABILITY-AND-EQUITY> 51,517
<SALES> 54,944
<TOTAL-REVENUES> 54,944
<CGS> 33,952
<TOTAL-COSTS> 57,031
<OTHER-EXPENSES> 93
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,994)
<INCOME-TAX> (440)
<INCOME-CONTINUING> (1,554)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,554)
<EPS-BASIC> (.27)
<EPS-DILUTED> (.27)
</TABLE>
