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 March 31, 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 May 8, 1998 was 6,144,466.
<PAGE 2>
ViaGrafix Corporation
FORM 10-Q
For the Quarter Ended March 31, 1998
INDEX
Part 1. Financial Information
Item 1. Financial Statements Page
(a) Statements of Income for the Three Months
Ended March 31, 1997 and 1998 3
(b) Balance Sheets as of December 31, 1997
and March 31, 1998 4
(c) Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1998 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 10
Item 2. Changes in Securities and Use of Proceeds 10
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
(Unaudited) (In thousands, except per share) Three Months Ended March 31,
1997 1998
---- ----
<CAPTION>
<S> <C> <C>
Net sales $2,866 $4,077
Cost of sales 1,111 1,742
-------- --------
Gross profit 1,755 2,335
Selling, general and administrative 731 1,171
Research & development 243 372
Depreciation & amortization 65 86
-------- --------
Operating profit 716 706
Net interest income (expense) (74) 2
-------- --------
Income before income taxes 642 708
Provision for income taxes 247 171
-------- --------
Net income $ 395 $ 537
Computation of net income applicable to
common shares:
Net income $ 395 $ 537
Preferred stock dividends (57) -
-------- --------
Net income applicable to common stock $ 338 $ 537
Basic earnings per share $ 0.09 $ 0.12
Weighted average common shares used in
computing basic earnings per share 3,852 4,400
Diluted earnings per share $ 0.09 $ 0.11
Weighted average common shares used in
computing diluted earnings per share 4,490 4,923
Dividends per common share $ 0.12 -
Total common stock dividends declared $ 449 -
</TABLE>
<PAGE 4>
ViaGrafix Corporation
<TABLE>
Balance Sheets
(In thousands) (Unaudited)
December 31, March 31,
1997 1998
---- ----
<CAPTION>
<S> <C> <C>
Assets
- ------
Current Assets:
Cash and cash equivalents $ 217 $ 16,755
Accounts receivable 2,456 2,984
Inventories 1,411 1,538
Prepaid & deferred income tax expenses 319 281
----------- -----------
Total current assets 4,403 21,558
Property, plant and equipment 3,263 3,611
Accumulated depreciation 959 1,026
----------- -----------
2,304 2,585
Goodwill net of amortization 101 97
Deferred income taxes 611 508
----------- -----------
Total assets $ 7,419 $ 24,748
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Trade accounts payable $ 848 $ 968
Accrued liabilities 233 164
Income taxes payable 209 13
Current portion of long-term debt 789 -
----------- -----------
Total current liabilities 2,079 1,145
Long-term debt 2,827 -
Stockholders' equity:
Common stock, $.01 par value, authorized
40,000,000 shares; issued and outstanding
3,861,881 and 6,144,466 shares in 1997 and
1998, respectively 39 61
Convertible preferred stock, $.01 par value;
authorized 10,000,000 shares; issued and
outstanding 855,000 shares in 1997 9 -
Additional paid-in capital 1,487 22,017
Unearned Compensation (149) (139)
Retained earnings 1,127 1,664
----------- -----------
Total stockholders' equity 2,513 23,603
----------- -----------
Total liabilities and stockholders' equity $ 7,419 $ 24,748
</TABLE>
<PAGE 5>
ViaGrafix Corporation
<TABLE>
Statements of Cash Flows
(Unaudited) (In Thousands) Three Months Ended
March 31,
1997 1998
---- ----
<CAPTION>
<S> <C> <C>
Operating Activities
Net Income $ 395 $ 537
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 65 86
Deferred income tax provision 30 107
Non-cash interest expense - 45
Bad debt expense - 71
Amortization of unearned compensation 9 10
Changes in operating assets and liabilities:
Increase in accounts receivable (473) (599)
Increase in inventories (89) (127)
Decrease in prepaid expenses 94 34
Increase in accounts payable 92 120
Decrease in accrued liabilities (91) (69)
Decrease in income taxes payable (146) (196)
--------- ---------
Net cash provided by (used in) operating
activities (122) 19
Investing Activities
Purchase of property, plant & equipment (133) (364)
Financing Activities
Initial public offering of common stock - 20,491
Repayments of debt (68) (3,661)
Dividends paid to common and preferred sharholders (506) -
Exercise of stock options 29 53
--------- ---------
Net cash provided by (used in) financing
activities (545) 16,883
--------- ---------
Net increase (decrease) in cash and cash
equivalents (800) 16,538
Cash and cash equivalents at beginning of year 1,009 217
--------- ---------
Cash and cash equivalents at end of period $ 209 $ 16,755
</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)
December 31, March 31,
1997 1998
---- ----
Finished goods ............. $ 721,370 $ 856,931
Raw materials .............. 689,887 681,180
---------- ----------
$ 1,411,257 $ 1,538,111
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.
5. Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income."
Statement 130 establishes new rules for the reporting and display
of comprehensive income and its components; however, the adoption
of this statement had no impact on the Company's net income or
stockholders' equity. Statement 130 requires that the Company's
unearned compensation expense, which prior to adoption was
reported separately as a component in stockholders' equity, also
be included in other comprehensive income.
<PAGE 7>
Comprehensive income for the first quarter of 1998 was $546,000
as compared to net income of $537,000. For the first quarter of
1997, comprehensive income totaled $222,000 compared to net
income of $395,000. The difference between comprehensive income
and net income for both years relates to the Company's unearned
compensation expense which results from the issuance of employee
stock options at below market price in 1997 and the amortization
of this expense in 1998 and 1997.
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 700 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 primary platforms for
both the training and software products are Windows 3.1, Windows
95 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 42% to $4.1 million in the three
months ended March 31, 1998 from $2.9 million in the three months
ended March 31, 1997. This increase reflects an increase in sales
from existing and additional 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 57% to $1.7 million in the
three months ended March 31, 1998 from $1.1 million for the three
months ended March 31, 1997. Cost of sales as a percentage of
total sales increased to 42.7% for the quarter ended March 31,
1998, from 38.8% for the same period in 1997. The increase in
cost of sales as a percent of sales was a result of increased
advertising allowances to retailers in the first quarter of 1998.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased 60% to $1.2 million in the
three months ended March 31, 1998 from approximately $731,000 for
the same period in 1997. Selling, general and administrative
expenses as a percentage of total sales increased to 28.7% for
the quarter ended March 31, 1998, from 25.5% during the same
period in 1997. Advertising and commissions paid to manufacturer
sales reps increased 157% to approximately $419,000 and 577% to
approximately $149,000 respectively during the first three months
of 1998, compared to approximately $163,000 and $22,000
respectively for the same period in 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 first quarter of 1998 compared to
the same period in 1997.
<PAGE 8>
Research and Development Expenses. Research and development
expenses increased 53% to approximately $372,000 in the three
months ended March 31, 1998 compared to approximately $243,000
during the first quarter of 1997. Research and development
expenses as a percentage of total sales increased to 9.1% during
the quarter ended March 31, 1998, from 8.5% during the same
period in 1997. This increase in dollars and percentage 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 three months of
1998.
Net Interest Income (Expense). Net interest income was
approximately $2,000 in the three months ended March 31, 1998
compared to net interest expense of approximately $74,000, or
2.6% of sales, during the first quarter 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 three months
ended March 31, 1998 compared to approximately $80,000 in the
first quarter 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 $56,000 in the first
quarter of 1998 compared to interest income of approximately
$6,000 in the quarter ended March 31, 1997.
Provision for Income Taxes. During the three months ended March
31, 1998 the effective tax rate improved to 24.2% compared to
38.5% for the same period in 1997. The reduction in the effective
tax rate was due to the realization of tax credits for 1995
through 1997 resulting from credits for increasing research
activities. The amount of available credits was quantified and
the benefit recorded in the first quarter of 1998. In addition,
the effective tax rate was impacted favorably by tax credits
during the quarter for increasing research activities, 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 quarter 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 $16.8 million at
March 31, 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 March 31, 1998.
The Company believes that its cash balance at March 31, 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 require 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. The Company has no present commitments with respect to
any such transaction.
<PAGE 9>
During the period ending March 31, 1998 operating activities
provided the Company with net cash of approximately $19,000.
Operating activities generated cash flows through approximately
$537,000 in net income and increases in accounts payable of
approximately $120,000. Depreciation and amortization and non-
cash items of interest expense, bad debt expense and deferred
income tax provision generated cash flows of approximately
$309,000. During the period cash flow used in operating
activities included increases of approximately $599,000 in
accounts receivable along with approximately $392,000 for
decreased income taxes payable, increased inventories and
decreased accrued liabilities.
The Company's capital expenditures during the first quarter of
1998 were approximately $364,000. Capital expenditures were
primarily for expansion of facilities, production and duplication
equipment and computer hardware. While the Company does not have
any significant commitments for capital expenditures, the Company
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.
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 10>
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 March 9, 1998, the Company closed an
initial public offering of 2,200,000 shares of its $.01 par value
common stock. The shares were offered at a price of $13.00 per
share pursuant to a Registration Statement on Form S-1 (No. 333-
42633) which was declared effective March 4, 1998. There were
initially 1,750,000 shares sold by the Company and 450,000 shares
sold by selling shareholders. On March 26 the underwriters
exercised in full the over-allotment option of 330,000 shares at
$13.00 per share. All of the shares sold in the over-allotment
were sold by selling shareholders. The offering was managed by
Southwest Securities, Inc. The aggregate offering price of the
shares (including the over-allotment) was $32,890,000.
The proceeds of the offering were subject to the following
actual expenses incurred through March 31, 1998:
Direct or indirect payments
to directors,
officers, general partners
of the Registrant
or their associates; to
persons owning ten
percent or more of any
class of equity Direct or
securities of the issuer; indirect
and to affiliates of payments to
the Registrant others
---------------------------- ------------
Underwriting discounts
and Commissions $0 $2,302,300
Finders' fees 0 0
Expenses paid to or for
Underwriters 0 246,675
Other expenses 35,737 549,334
------- -------
Total expenses $35,737 $3,098,3098
<PAGE 11>
The net proceeds of the offering after deducting the expenses
described above were approximately $20,490,700. Between the
closing of the offering and March 31, 1998, such proceeds were
used by the Registrant for each of the purposes indicated
below:
Direct or indirect
payments to directors,
officers, general partners
of the Registrant
or their associates; to
persons owning ten
percent or more of any
class of equity Direct or
securities of the issuer; indirect
and to affiliates of payments to
the Registrant others
---------------------------- -----------
Payment of long term debt $2,467,100 $1,194,500
Temporary investments 0 16,718,100
Purchase of equipment 0 111,000
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 March 31, 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: May 8, 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
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 March 31:
<TABLE>
1997 1998
---- ----
<CAPTION>
<S> <C> <C>
Numerator:
Net income $ 395 $ 537
Preferred stock dividend 57 -
------ ------
Numerator for basic earnings per
share income -
available to common shareholders 338 537
Effect of dilutive securities -
preferred stock dividend 57 -
------ ------
Numerator for diluted earnings per
share - income available to common
shareholders after assumed
conversions $ 395 $ 537
====== ======
Denominator:
Denominator for basic earnings per
share - weighted average shares 3,852 4,400
Effect of dilutive securities:
Employee stock options 149 145
Series A convertible preferred stock 489 378
------ ------
Dilutive potential common shares 638 523
------ ------
Denominator for diluted earnings per
share - adjusted
weighted-average conversions 4,490 4,923
====== ======
1997 1998
---- ----
Basic earnings per share $ 0.09 $ 0.12
Diluted earnings per share $ 0.09 $ 0.11
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,755
<SECURITIES> 0
<RECEIVABLES> 3,115
<ALLOWANCES> 131
<INVENTORY> 1,538
<CURRENT-ASSETS> 21,558
<PP&E> 3,611
<DEPRECIATION> 1,026
<TOTAL-ASSETS> 24,748
<CURRENT-LIABILITIES> 1,145
<BONDS> 0
0
0
<COMMON> 61
<OTHER-SE> 23,603
<TOTAL-LIABILITY-AND-EQUITY> 24,748
<SALES> 4,077
<TOTAL-REVENUES> 4,133
<CGS> 1,742
<TOTAL-COSTS> 3,371
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> 708
<INCOME-TAX> 171
<INCOME-CONTINUING> 537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 537
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
