UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
Commission file number 33-42633
ViaGrafix Corporation
---------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1354168
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One American Way, Pryor, Oklahoma 74361
---------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code:
(918) 825-6700
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's $.01 par value
common stock as of August 7, 1998 was 6,144,466.
<PAGE 2>
ViaGrafix Corporation
FORM 10-Q
For the Quarter Ended June 30, 1998
INDEX
Part 1. Financial Information
Item 1. Financial Statements Page
----
(a) Statements of Income
for the Three and Six Months
Ended June 30, 1998 and 1997 3
(b) Balance Sheets
as of June 30, 1998 and December 31, 1997 4
(c) Statements of Cash Flows
for the Six Months Ended
June 30, 1998 and 1997 5
(d) Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part 2. Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
<PAGE 3>
Part 1. Financial Information
Item 1. Financial Statements
ViaGrafix Corporation
<TABLE>
Statements of Income Three Months Ended Six Ended Months
(Unaudited)(In thousands, except per share) June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
Net sales $ 4,187 $ 3,280 $ 8,264 $ 6,146
Cost of sales 1,718 1,348 3,460 2,459
-------- -------- -------- --------
Gross profit 2,469 1,932 4,804 3,687
Selling, general and administrative 1,397 845 2,568 1,576
Research & development 385 282 757 525
Depreciation & amortization 119 84 205 149
-------- -------- -------- --------
Operating profit 568 721 1,274 1,437
Net interest income (expense) 161 (75) 163 (149)
-------- -------- -------- --------
Income before income taxes 729 646 1,437 1,288
Provision for income taxes 227 248 398 495
-------- -------- -------- --------
Net income $ 502 $ 398 $ 1,039 $ 793
Computation of net income applicable
to common shares:
Net income $ 502 $ 398 $ 1,039 $ 793
Preferred stock dividends - - - (57)
-------- -------- -------- --------
Net income applicable to common stock $ 502 $ 398 $ 1,039 $ 736
Basic earnings per share $0.08 $0.10 $0.20 $0.19
Weighted average common shares used in
computing basic earnings per share 6,144 3,862 5,272 3,857
Diluted earnings per share $0.08 $0.09 $0.19 $0.18
Weighted average common shares used in
computing diluted earnings per share 6,248 4,500 5,586 4,495
Dividends per common share - - - $ 0.12
Total common stock dividends declared - - - $ 449
</TABLE>
<PAGE 4>
ViaGrafix Corporation
<TABLE>
Balance Sheets
(In thousands) (Unaudited)
June 30, December 31,
1998 1997
<CAPTION>
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 16,615 $ 217
Accounts receivable 3,338 2,456
Income taxes receivable 169 -
Inventories 1,510 1,411
Prepaid & deferred income tax expenses 200 319
------------- -------------
Total current assets 21,832 4,403
Property, plant and equipment 4,085 3,263
Accumulated depreciation 1,140 959
------------- -------------
2,945 2,304
Goodwill net of amortization 94 101
Deferred income taxes 474 611
------------- -------------
Total assets $ 25,345 $ 7,419
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 966 $ 848
Accrued liabilities 266 233
Income taxes payable - 209
Current portion of long-term debt - 789
------------- -------------
Total current liabilities 1,232 2,079
Long-term debt - 2,827
Stockholders' equity:
Common stock, $.01 par value, authorized
40,000,000 shares; issued and outstanding
6,144,466 and 3,861,881 shares in
1998 and 1997, respectively 61 39
Convertible preferred stock, $.01 par
value; authorized 10,000,000 shares;
issued and outstanding 855,000
shares in 1997 - 9
Additional paid-in capital 22,009 1,487
Unearned compensation (124) (149)
Retained earnings 2,167 1,127
------------- -------------
Total stockholders' equity 24,113 2,513
------------- -------------
Total liabilities and stockholders' equity $ 25,345 $ 7,419
</TABLE>
<PAGE 5>
ViaGrafix Corporation
<TABLE>
Statements of Cash Flows Six Months Ended
(Unaudited) (In Thousands) June 30,
1998 1997
---- ----
<CAPTION>
<S> <C> <C>
Operating Activities
Net Income $ 1,039 $ 793
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 205 149
Deferred income tax provision 141 131
Non-cash interest expense 45 -
Loss on disposal of assets 2 5
Bad debt expense 66 -
Amortization of unearned compensation 17 21
Changes in operating assets and liabilities:
Increase in accounts receivable (948) (738)
Increase in inventories (99) (46)
Decrease (increase) in prepaid expenses 115 (25)
Increase in accounts payable 118 152
Increase/(decrease) in accrued liabilities 33 (103)
Increase in income taxes receivable (169) -
Increase/(decrease) in income taxes payable (209) 82
-------- --------
Net cash provided by operating activities 356 421
Investing Activities
Purchase of property, plant & equipment (841) (200)
Financing Activities
Initial public offering of common stock 20,491 -
Repayments of debt (3,661) (249)
Dividends paid to common and preferred shareholders - (506)
Exercise of stock options 53 29
-------- --------
Net cash provided by (used in) financing activities 16,883 (726)
-------- --------
Net increase (decrease) in cash and cash equivalents 16,398 (505)
Cash and cash equivalents at beginning of year 217 1,009
-------- --------
Cash and cash equivalents at end of period $ 16,615 $ 504
</TABLE>
<PAGE 6>
ViaGrafix Corporation
Notes to Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management of ViaGrafix Corporation
("ViaGrafix" or the "Company"), the accompanying balance sheets
and related interim statements of income and cash flows reflect
all adjustments (consisting only of normal recurring items)
necessary for their fair presentation in conformity with
generally accepted accounting principles. Preparing financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities,
revenues, and expenses. Actual results may differ from these
estimates. Interim results are not necessarily indicative of
results for a full year. The information included in this Form 10-
Q should be read in conjunction with Management's Discussion and
Analysis and financial statements and notes thereto included in
the Company's March 4, 1998 Prospectus ("Prospectus") which is
included as a part of Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission.
2. Inventories
Inventories consist of the following:
(Unaudited)
June 30, December 31,
1998 1997
---- ----
Finished goods................ $ 823,348 $ 721,370
Raw materials................. 686,616 689,887
----------- -----------
$ 1,509,964 $ 1,411,257
3. Earnings Per Share
Basic and diluted earnings per share are computed in conformity
with rules and standards established in Statement of Financial
Accounting Standards No. 128 "Earnings Per Share." Basic earnings
per share are based on the average number of common shares
outstanding. Diluted earnings per share assumes conversion of
preferred stock to common stock and exercise of stock options
outstanding using the treasury stock method.
4. Legal Contingencies
The Company is involved in various claims and legal actions
arising in the ordinary course of business. Management does not
believe that the ultimate resolution of these matters will have a
material effect on the Company's financial position, results of
operations or cash flows.
On May 22, 1998 a lawsuit was filed in the United States District
Court for the Northern District of Texas by Jonathan L. Gordon,
brought as a putative class action against the Company and
certain of its officers and directors claiming violations of the
Securities Act of 1933 for alleged misrepresentations and
omissions in the company's prospectus issued in connection with
its initial public offering made in March 1998. Mr. Gordon and
certain others have sought designation as lead plaintiffs in the
action. The Company believes the lawsuit is without merit. The
Company's response is not yet due.
<PAGE 7>
5. Acquisition
On July 31, 1998 the Company acquired certain assets of Make It
So, Inc., a privately held company based in San Mateo,
California, that provides e-mail list management services and
Internet marketing services, for $675,000. The transaction was
financed with existing cash and was accounted for as a purchase.
The purchase price and related direct expenses associated with
the acquisition will be allocated based on the fair value of the
assets purchased.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This commentary should be read in conjunction with the Company's
Prospectus for a more complete understanding of the Company's
financial condition and results of operations. The following
discussion contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those contemplated by
the forward looking statements as a result of certain factors,
including but not limited to those disclosed under "Risk Factors"
in the Company's Prospectus.
Results of Operations
ViaGrafix develops, produces and markets technology-based
information technology ("IT") training products and graphics
software products. The Company's IT training courses include
video tutorials and interactive multimedia training courses
delivered on CD-ROM, LANs, intranets and the Internet for a
variety of computer software. ViaGrafix has developed and markets
more than 800 training courses for most major personal computer
software packages. These products provide an audio-visual
environment that is designed to allow users to learn faster and
increase retention and productivity. The Company's principal
graphics software product, DesignCAD, is a computer-aided design
("CAD") package sold worldwide. ViaGrafix also produces several
other CAD-related software packages. The current primary
platforms for both the training and software products are Windows
3.1, Windows 95,Windows 98 and Windows NT. The Company believes
its training and graphics software products enable users to
increase productivity with their computers and thereby reduce
costs.
Net Sales. Net sales increased 28% to $4.2 million in the three
months ended June 30, 1998 from $3.3 million in the three months
ended June 30, 1997. On a year-to-date basis, net sales were $8.3
million, 34% greater than net sales of $6.1 million in the
comparable period for 1997. This increase, for the quarter and
year-to-date, reflects an increase in sales from existing and new
Information Technology (IT) training titles, and was primarily
attributable to increases in the volume of products sold rather
than increases in prices.
Cost of Sales. Cost of sales increased 27% to $1.7 million in the
three months ended June 30, 1998 from $1.3 million for the three
months ended June 30, 1997. Cost of sales as a percentage of
total sales decreased slightly to 41.0% for the quarter ended
June 30, 1998, from 41.1% for the same period in 1997. For the
six month period ended June 30, 1998 cost of sales increased 41%
to $3.5 million from $2.5 million for the six months ended June
30, 1997. Year-to-date, cost of sales as a percentage of total
sales increased to 41.9% as compared to 40.0% in the comparable
period for 1997. Year-to-date in 1998, the increase in cost of
sales as a percent of sales was a result of increased advertising
allowances to retailers.
<PAGE 8>
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased 65% to $1.4 million in the
three months ended June 30, 1998 from approximately $845,000 for
the same period in 1997. Selling, general and administrative
expenses as a percentage of total sales increased to 33.4% for
the quarter ended June 30, 1998, from 25.8% during the same
period in 1997. Advertising and commissions paid to manufacturer
sales reps increased 179% to approximately $401,000 and 261% to
approximately $131,000 respectively during the second quarter of
1998, compared to approximately $144,000 and $36,000 respectively
for the same period in 1997. Wage expense increased 27% in the
second quarter of 1998 to approximately $810,000 from
approximately $638,000 during the second quarter of 1997. The
increase in advertising was due to increased advertising
expenditures through the distribution channel and increased
direct advertising. The increase in commissions paid to
manufacturer sales reps was a result of significantly increased
sales to retailers through manufacturer sales reps in the second
quarter of 1998 compared to the same period in 1997. Increased
wage expenditures during 1998's second quarter are primarily due
to additional personnel for sales, marketing, technical support
and customer service.
For the first two quarters of 1998, selling, general and
administrative expenses increased 63% to $2.6 million from $1.6
million during the same period in 1997. Selling, general and
administrative expenses as a percentage of total sales increased
to 31.1% for the first half of 1998, from 25.6% during the first
six months of 1997. Advertising and commissions paid to
manufacturer sales reps increased 167% to approximately $819,000
and 382% to $281,000 respectively in the first half of 1998,
compared to approximately $307,000 and $58,000 respectively
during the first half of 1997. These expenditures reflect the
same emphasis by the Company in the first and second quarter as
discussed in the paragraph above.
Research and Development Expenses. Research and development
expenses increased 37% to approximately $385,000 in the three
months ended June 30, 1998 compared to approximately $282,000
during the second quarter of 1997. Research and development
expenses as a percentage of sales increased to 9.2% during the
quarter ended June 30, 1998, from 8.6% during the same period in
1997. On a year-to-date basis, research and development expenses
increased 44% to approximately $757,000 or 9.2% of sales from
approximately $525,000 or 8.5% of sales during the same period in
1997. This increase in dollars and percentage for the second
quarter and year-to-date reflects the Company's commitment to
expand its number of IT training courses offered. The Company
increased its development staff during the fourth quarter of 1997
and the first six months of 1998.
Net Interest Income (Expense). Net interest income was
approximately $161,000 or 3.8% of sales in the three months ended
June 30, 1998 compared to net interest expense of approximately
$75,000, or 2.3% of sales, during the second quarter of 1997. For
the first six months of 1998 net interest income was
approximately $163,000 or 2.0% of sales compared to net interest
expense of approximately $149,000 or 2.4% of sales, during the
first half of 1997. A portion of the net proceeds from the
initial public offering on March 4, 1998 was used to retire all
outstanding long-term debt, which lowered interest expense to
approximately $54,000 in the six months ended June 30, 1998
compared to approximately $158,000 in the same period of 1997. A
significant portion of the net proceeds from the initial public
offering was invested in highly liquid investments with
maturities of three months or less, which generated interest
income of approximately $217,000 in the first half of 1998
compared to interest income of approximately $9,000 in the first
six months of 1997.
<PAGE 9>
Provision for Income Taxes. During the three months ended June
30, 1998 the effective tax rate improved to 31.1% compared to
38.4% for the same period in 1997. Approximately $138,000 of the
$161,000 in net interest income during the second quarter of 1998
was derived from federal tax exempt investments. In addition, tax
credits discussed below favorably impacted the effective tax rate
for the second quarter of 1998.
For the first half of 1998 the effective tax rate improved to
27.7% compared to 38.4% for the first six months of 1997. The
reduction in the effective tax rate was due to the realization of
tax credits for 1995 through 1998 resulting from credits for
increasing research activities. The amount of available credits
for 1995 through 1997 was quantified and the benefit recorded in
the first quarter of 1998. In addition, the effective tax rate
was impacted favorably by increased tax credits during the first
half of 1998, and from employing enrolled members of Indian
Tribes within specified portions of the State of Oklahoma. These
two tax credits were not realized during the first half of
1997, as noted above. The employment tax credit was not available
until August, 1997 as a result of the passage of the Taxpayer
Relief Act of 1997.
Liquidity and Financial Condition
The Company's cash and cash equivalents totaled $16.6 million at
June 30, 1998. Following the Company's initial public offering on
March 4, 1998, the Company realized net proceeds from the
offering of $20.5 million. Long-term debt of $3.7 million was
retired after the Company received the offering proceeds. The
Company does not have any long-term debt as of June 30, 1998.
The Company believes that its cash balance at June 30, 1998 and
cash generated from future operations will satisfy its
anticipated working capital requirements for at least the next
two years. The Company, however, may need substantial additional
funds for potential acquisitions. In the normal course of
business, the Company evaluates acquisitions of businesses,
product lines and technologies that complement the Company's
business. On July 31, 1998 the Company acquired certain assets of
Make It So, Inc., a privately held company based in San Mateo,
California, that provides e-mail list management services and
Internet marketing services, for $675,000.
During the period ending June 30, 1998 operating activities
provided the Company with net cash of approximately $356,000.
Operating activities generated cash flows through approximately
$1,039,000 in net income, increases in accounts payable and
accrued liabilities of approximately $151,000 and a decrease in
prepaid expenses of approximately $115,000. Depreciation and
amortization and non-cash items of interest expense, bad debt
expense and deferred income tax provision generated cash flows of
approximately $457,000. During the period, cash flow used in
operating activities included an increase of approximately
$948,000 in accounts receivable, decreased income taxes payable
of approximately $209,000, increased income taxes receivable of
approximately $169,000, and increased inventories of
approximately $99,000.
The Company's capital expenditures during the first six months of
1998 were approximately $841,000. Capital expenditures were
primarily for expansion of facilities, production and duplication
equipment and computer hardware. With the exception of the
acquisition discussed above, the Company does not have any
significant commitments for capital expenditures, and anticipates
that it will continue to expand its facilities and purchase
equipment as needed to support its product research and
development, production of its products, sales and marketing,
product support, and administrative staff.
<PAGE 10>
Year 2000 Readiness
Until recently, many software systems were not programmed to
correctly recognize dates beyond December 31, 1999 (the "Y2K
Problem"). Many public and private entities are now, and will be,
expending material amounts of human and financial resources to
identify and address the Y2K Problems. The Company believes that
Y2K Problems will not have a material adverse effect on its
results of operations or financial position.
The Company believes, but has no assurance, that the software
applications it uses internally do not suffer Y2K Problems. The
Company uses up-to-date, PC-based software for its internal
accounting and other applications, and believes it has no Y2K
Problem defects. To confirm this, the Company intends to perform
testing of its internal accounting and other applications to
ensure that they correctly handle the Y2K Problem. The Company
intends to correct any anomalies discovered before December 31,
1999.
The Company could experience difficulty in attracting and
retaining qualified technical personnel as the national
population of qualified technical people is absorbed by others in
addressing their Y2K Problems, but to date the Company has been
able to meet its personnel requirements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable in 1998.
<PAGE 11>
Part II. Other Information
Item 1. Legal Proceedings
See Note 4 to Financial Statements.
Item 2. Changes in Securities and Use of Proceeds
(a) Modifications in Instruments Defining the Rights of
Stockholders. As a consequence of the closing of the Company's
initial public offering on March 9, 1998, all outstanding shares
of Series A Convertible Preferred Stock were converted into an
aggregate of 488,571 shares of Common Stock.
(b) Limitations of Qualifications of Other Securities. None.
(c) Sales of Unregistered Securities. None.
(d) Use of Proceeds. On July 31, 1998 the Company acquired
certain assets of Make It So, Inc., a privately held company
based in San Mateo, California, that provides e-mail list
management services and Internet marketing services, for
$675,000. The Company utilized a portion of the proceeds from its
recent initial public offering to fund this acquisition.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Statement regarding computation of per share earnings
27. Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by ViaGrafix during the quarter
ended June 30, 1998
Items 3, 4 and 5 are not applicable and have been omitted.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ViaGrafix Corporation
Date: August 7, 1998 By: /s/ Robert C. Moore, Jr.
-------------------------
Robert C. Moore, Jr.,
Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
<PAGE 12>
Exhibit 11.
ViaGrafix Corporation
<TABLE>
Computation of Earnings Per Share
(Unaudited) (In thousands, except per share)
The following sets forth the computation of basic and diluted
earnings per share for the:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
Numerator:
Net income $ 502 $ 398 $1,039 $ 793
Preferred stock dividend - - 57
------ ------ ------ ------
Numerator for basic earnings per share income -
available to common shareholders 502 398 1,039 736
Effect of dilutive securities - preferred
stock dividend - - - 57
------ ------ ------ ------
Numerator for diluted earnings per share -
income available to common shareholders
after assumed Conversions $ 502 $ 398 $1,039 $ 793
====== ====== ====== ======
Denominator:
Denominator for basic earnings per share
- weighted average shares 6,144 3,862 5,272 3,857
Effect of dilutive securities:
Employee stock options 104 149 125 149
Series A convertible preferred stock - 489 189 489
------ ------ ------ ------
Dilutive potential common shares 104 638 314 638
------ ------ ------ ------
Denominator for diluted earnings per share -
adjusted weighted-average conversions 6,248 4,500 5,586 4,495
====== ====== ====== ======
1998 1997 1998 1997
---- ---- ---- ----
Basic earnings per share $ 0.08 $ 0.10 $ 0.20 $ 0.19
Diluted earnings per share $ 0.08 $ 0.09 $ 0.19 $ 0.18
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,615
<SECURITIES> 0
<RECEIVABLES> 3,466
<ALLOWANCES> 128
<INVENTORY> 1,510
<CURRENT-ASSETS> 21,832
<PP&E> 4,085
<DEPRECIATION> 1,140
<TOTAL-ASSETS> 25,345
<CURRENT-LIABILITIES> 1,232
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 24,113
<TOTAL-LIABILITY-AND-EQUITY> 25,345
<SALES> 8,264
<TOTAL-REVENUES> 8,481
<CGS> 3,460
<TOTAL-COSTS> 3,530
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> 1,437
<INCOME-TAX> 398
<INCOME-CONTINUING> 1,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,039
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
</TABLE>
