<PAGE> 1
Filed pursuant to Rule 424(b)(1)
RS No. 333-42633
PROSPECTUS
2,200,000 SHARES
VIAGRAFIX LOGO
COMMON STOCK
---------------------
Of the 2,200,000 shares of Common Stock, $.01 par value per share (the
"Common Stock"), offered hereby, 1,750,000 shares are being sold by ViaGrafix
Corporation (the "Company") and 450,000 shares are being sold by certain
existing shareholders of the Company (the "Selling Shareholders"). See
"Principal and Selling Shareholders." The Company will not receive any proceeds
from the sale of the Common Stock being sold by the Selling Shareholders. Prior
to this offering, there has been no public market for the Common Stock. The
initial public offering price is $13.00 per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "VIAX", subject to official notice of issuance.
---------------------
FOR A DISCUSSION OF MATERIAL RISKS IN CONNECTION WITH THE PURCHASE OF THE
COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 6-11 OF THIS
PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================================
PROCEEDS TO
UNDERWRITING PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS(3)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $13.00 $0.91 $12.09 $12.09
- -------------------------------------------------------------------------------------------------------------------------
Total(4)..................... $28,600,000 $2,002,000 $21,157,500 $5,440,500
=========================================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other related matters.
(2) Before deducting expenses estimated at $690,000 payable by the Company. See
"Underwriting."
(3) Before deducting expenses estimated at $110,000 payable by the Selling
Shareholders. See "Underwriting."
(4) The Selling Shareholders have granted the Underwriters a 30-day option to
purchase up to 330,000 additional shares of Common Stock at the Price to
Public, less the Underwriting Discount, for the purpose of covering
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Shareholders will be $32,890,000, $2,302,300, $21,157,500 and
$9,430,200, respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of certificates representing the shares
of Common Stock will be made against payment on or about March 9, 1998 at the
offices of Southwest Securities, Inc., 1201 Elm Street, Dallas, Texas 75270.
SOUTHWEST SECURITIES
The date of the Prospectus is March 4, 1998.
<PAGE> 2
[PICTURE OF USER, WITH COMPANY PRODUCTS IN BACKGROUND]
[CAPTION: New Networkable CD-ROM Training! ViaGrafix
Computer Training Products
800/842-4723
"Training Makes a Difference"
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON STOCK PRIOR TO THE PRICING OF
THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, THE
PURCHASE OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A
SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING
THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS
OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "UNDERWRITING."
ViaGrafix Technology-Based IT Training Product Development Process
[PICTURE OF WORKGROUP]
[CAPTION: The Company studies industry trends and makes conceptual
decisions on new training products.]
[PICTURE OF FINISHED PRODUCT PACKAGE AND SCREEN SHOT]
[CAPTION: Thorough product testing, quality assurance and package design
complete the process.]
[PICTURE OF TWO PEOPLE]
[CAPTION: A complete course script is developed through various stages of
outlining, writing, testing and review.]
[PICTURE OF STUDIO AND EDITING BAY]
[CAPTION: Audio, graphics, video, talent and screen shots are combined and
edited to create a finished course.]
2
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FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact in this Prospectus,
including without limitation statements under "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" regarding the Company's financial position, business strategy and
plans and objectives of management of the Company for future operations, are
forward-looking statements. When used in this Prospectus, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company or its management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of certain
factors, such as those disclosed under "Risk Factors," including but not limited
to technological change, product development risks, competitive factors, pricing
pressures and general economic conditions. Such statements reflect the current
views of the Company with respect to future events and are subject to these and
other risks, uncertainties and assumptions relating to the operations, results
of operations, growth strategy and liquidity of the Company. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by this
paragraph.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. As used in this Prospectus, the "Company" or
"ViaGrafix" means ViaGrafix Corporation and its subsidiaries, unless the context
requires otherwise. Unless otherwise indicated, all financial information and
share data in this Prospectus reflect a 1 for 1.75 reverse stock split on
December 12, 1997 and assume (i) no exercise of the over-allotment option
granted to the Underwriters in connection with this offering and (ii) the
conversion of all outstanding shares of Series A Convertible Preferred Stock of
the Company ("Preferred Stock") into Common Stock prior to the closing of this
offering.
THE COMPANY
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. The Company has developed and markets more than
650 training courses for most major personal computer ("PC") software packages.
These products provide an audio-visual environment that is designed to allow
users to learn faster and increase retention and productivity. Organizations
that purchase the Company's multimedia training products can offer them across a
network to all employees. The Company's principal graphics software product,
DesignCAD, is a computer-aided design ("CAD") package sold worldwide. The
Company 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.
The Company was founded in 1990 to create training products for the PC
user, and it developed a library of computer training videos for computer
software, such as word processors, spreadsheets and operating systems. The
business was expanded to include both business and home computer software
training products and, with the acquisition of American Small Business
Computers, Inc. ("ASBC") in August 1995, now includes the development and
marketing of PC graphics software.
The market for IT training products and services is growing rapidly. The
U.S. market for computer education and training grew to $7.1 billion in 1996 and
is expected to reach $12.9 billion by the year 2001, according to International
Data Corporation ("IDC"). The market for application software in the United
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States and Canada has grown from $5 billion in 1991 to $10.6 billion in 1996
according to Software Publisher's Association ("SPA"). The Company expects this
growth in IT training and software to continue.
The Company's potential training customers include anyone who has a need to
learn to use computer software, including individuals, small businesses,
corporations and government agencies. The Company's graphics software customers
include architects, engineers, designers and hobbyists.
The Company sells its products through distributors and resellers and
directly to end-users. The Company uses its own catalog, promotion of its 800
number and its Internet web site to sell training and software products directly
to end-users. Various Internet web sites of major software companies, such as
Microsoft Corporation, Corel Corporation and Symantec Corporation, contain links
to the Company's Internet web site. Direct sales are also achieved by
direct-mail advertising to the Company's database of existing customers and by
exhibition at more than 80 trade shows, such as COMDEX, throughout the United
States annually.
The Company has experienced growth in revenues and operating earnings since
its inception primarily as a result of internal product development. The
Company's sales have grown from $3.8 million in 1993 to $13.7 million in 1997.
The Company's strategy is to continue to increase its spectrum of easy-to-use
training and software products, increase sales to major retailers, increase
direct corporate sales by expanding its internal sales force, expand software
product development, expand international sales by translating its current
products into other languages and increase its use of strategic alliances.
The Company's offices are located at One American Way, Pryor, Oklahoma
74361, and its telephone number is (918) 825-6700.
THE OFFERING
Common Stock offered by the
Company............................. 1,750,000 shares
Common Stock offered by the Selling
Shareholders...................... 450,000 shares(1)
Total..................... 2,200,000 shares(1)
Common Stock to be outstanding after
the offering........................ 6,100,452 shares(2)(3)
Use of Proceeds to the Company...... For repayment of indebtedness and
general corporate purposes, including
market development, product development
and possible acquisitions. See "Use of
Proceeds." The Company will not receive
any of the proceeds to the Selling
Shareholders.
NASDAQ National Market Symbol....... VIAX
- ---------------
(1) Excludes up to 330,000 additional shares of Common Stock which may be sold
by the Selling Shareholders upon exercise of the Underwriters'
over-allotment option. See "Underwriting."
(2) Based on the number of shares of Common Stock outstanding on December 31,
1997. Excludes 611,977 shares of Common Stock issuable upon exercise of
stock options outstanding as of December 31, 1997, at a weighted average
exercise price of $9.75 per share. Also excludes 323,285 shares reserved for
issuance under the 1995 ViaGrafix Stock Option Plan with respect to options
available for grant. See "Capitalization," "Management -- Director
Compensation," and "Management -- 1995 ViaGrafix Stock Option Plan."
(3) Gives effect to the conversion of all shares of the Company's Preferred
Stock into an aggregate of 488,571 shares of Common Stock prior to the
closing of this offering. See Notes 1 and 7 of Notes to Financial
Statements.
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SUMMARY FINANCIAL INFORMATION AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1993(1) 1994 1995 1996 1997
------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $3,795 $4,884 $7,230 $10,077 $13,695
Gross profit..................................... 2,424 2,997 4,507 6,075 8,328
Research and development(2)...................... -- 207 320 467 1,162
Purchased research and development(3)............ -- -- 1,397 -- --
Operating profit (loss).......................... 1,448 1,273 (1,056) 1,400 3,090
Net income (loss)................................ 1,450 1,039 (707) 675 2,023
Net income (loss) per diluted share(4)........... .34 .24 (.21) .15 .45
Pro forma net income (loss)(5)................... 899 791 (707) 675 2,023
Pro forma net income (loss) per diluted
share(4)(5).................................... .21 .18 (.21) .15 .45
Weighted average common and common equivalent
shares used in computing diluted earnings per
share(4)....................................... 4,286 4,286 3,503 4,405 4,498
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
AS
ACTUAL ADJUSTED(6)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 218 $17,006
Working capital............................................. 2,324 19,901
Total assets................................................ 7,419 24,207
Long-term debt, excluding current portion................... 2,827 --
Total shareholders' equity(4)(6)............................ 2,513 22,981
</TABLE>
- ---------------
(1) Statement of Operations Data for the year ended December 31, 1993 is
unaudited information.
(2) Research and development expenses for the year ended December 31, 1993 are
included in selling, general and administrative expenses, and thus are not
included in this table.
(3) The Company incurred a one-time charge in 1995 to write off the acquired
in-process research and development in connection with the acquisition of
ASBC.
(4) Shares have first been adjusted in 1993 for a 1,000 for 1 stock split in
1994, and then again in 1993-1997 for a 1 for 1.75 reverse stock split on
December 12, 1997.
(5) Includes a pro forma tax provision, as the Company was an S corporation in
1993 and the period from January 1 to August 16, 1994.
(6) Adjusted to reflect the sale of 1,750,000 shares of Common Stock offered by
the Company at an assumed public offering price of $13.00 per share after
deducting the underwriting discount and the estimated offering expenses
payable by the Company.
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RISK FACTORS
The following factors, which may affect the Company's current position and
future prospects, should be considered carefully in addition to the other
information contained in this Prospectus before purchasing the Common Stock
offered hereby.
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT RISK
The market for the Company's products is characterized by rapid
technological advances and evolving industry standards and can be significantly
affected by new product introductions, changing customer requirements and market
activities of industry participants. The life cycles of the Company's products
are difficult to estimate, and the Company's position in the current market
could be undermined by rapid product advances which could tax the Company's
ability to keep pace. The Company's future success will depend upon its ability
to continue to improve existing product lines and to develop and introduce
products with new or enhanced capabilities that address the increasingly
sophisticated needs of its customers. Among other things, the emergence of the
Internet as an alternative computing platform and distribution medium may
adversely affect the demand for single-user products and alter current software
utilization, distribution and pricing patterns. There can be no assurance that
the Company will be able to successfully develop and market new or enhanced
products or respond effectively to technological changes or new product
announcements by others. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness and revenue. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000 Readiness".
Delays in the release of new and upgraded versions of the Company's IT
training products and graphics software products could have a significantly
negative impact on the Company's sales and results of operations. Because of the
complexities inherent in developing software products as sophisticated as those
sold by the Company and the testing periods associated with such products, no
assurance can be given that future product introductions by the Company will not
be delayed. In addition, complex software programs may contain undetected errors
or "bugs" when they are first introduced or as new versions are released. There
can be no assurance that errors will not be found in the Company's existing or
future products, with the possible result of delays in or loss of market
acceptance of these products, diversion of the Company's resources, injury to
the Company's reputation and increased service and warranty expenses.
RELIANCE ON A MAJOR DISTRIBUTOR
The Company relies heavily upon sales to Ingram Micro, Inc. ("Ingram"), a
distributor that supplies resellers, including some major retailers. Sales to
Ingram accounted for approximately 17% of the Company's revenues in 1997, and
was less than 10% of the Company's sales for each of the fiscal years ended 1996
and 1995. The Company's unwritten agreement with Ingram does not require minimum
purchases, is not exclusive and may be terminated by either party without cause.
There can be no assurance that Ingram will actively market the Company's
products or will maintain its relationship with the Company. Any loss of, or
material decrease in, the business from Ingram could have a material adverse
effect on the Company's business, financial condition and results of operations.
See Note 10 of Notes to Financial Statements.
RELIANCE ON MAJOR RETAILERS
The Company relies heavily upon sales to certain retail customers,
including Computer City, Inc., CompUSA Inc., Sears Roebuck & Co. and Best Buy
Company, Inc. Direct and indirect sales to the Company's eight top retail
customers accounted for approximately 26% of the Company's revenues in 1997
(indirect sales result when the Company's products are supplied to these
retailers through Ingram). The Company's ability to achieve significant revenue
growth in the future will depend in part on adding new retail accounts and
leveraging its relationships with existing retailer customers. The Company is
currently investing, and intends to continue to invest, significant resources to
develop these channels. There can be no assurance that the Company will be able
to leverage relationships with existing retail accounts and add new retailers to
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market the Company's products effectively. The inability to do so could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Growth Strategy" and Note 10 of Notes to
Financial Statements.
DEPENDENCE ON RESELLERS
The Company distributes approximately 59% of its products (based on 1997
revenues) through a network of dealers, retailers and other resellers.
Accordingly, the Company is dependent upon these resellers to assist in
promoting market acceptance of its products. There can be no assurance that
these dealers, retailers and other resellers will devote the resources necessary
to provide effective sales and marketing support to the Company. The Company's
dealers, retailers and other resellers are not generally contractually committed
to make future purchases of the Company's products and, therefore, could
discontinue carrying the Company's products in favor of a competitor's product
or for any other reason. In addition, the Company is dependent upon the
continued viability and financial stability of these dealers, retailers and
other resellers, some of which are small organizations with limited capital. The
Company believes that its future growth and success will depend in large part
upon its dealer, retail and other reseller channels. Accordingly, if a
significant number of its dealers, retailers and other resellers were to
experience financial difficulties, or otherwise become unable or unwilling to
promote, sell or pay for the Company's products, the Company's results of
operations could be adversely affected. The Company plans to expand its internal
sales force with a portion of the offering proceeds in order to increase its
direct sales to end-users (41% of 1997 revenues); however, there can be no
assurance that this effort will be successful. See Note 10 of Notes to Financial
Statements.
COMPETITION
The markets for technology-based IT training products and graphics software
products are highly competitive and characterized by rapid changes in
technology. In the technology-based IT training products market, the Company
competes primarily with a number of small private companies and a few large
companies, both private and public, such as CBT Group, P.L.C. In the market for
graphics software products, the Company competes primarily with several large
public companies, including Autodesk, Inc., International Microcomputer
Software, Inc. and Visio Corporation.
Certain of the Company's competitors have substantially greater financial,
marketing and technical resources than the Company. There can be no assurance
that other companies have not developed or marketed, or will not develop or
market, products that are superior to those of the Company, that are offered at
substantially lower prices than those of the Company or that have or will
achieve greater market acceptance than those of the Company. See
"Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend to a significant extent on the
efforts and abilities of Michael A. Webster, Chairman of the Board, President
and Chief Executive Officer; Robert E. Webster, Executive Vice President and
Secretary; Robert C. Moore, Jr., Treasurer and Chief Financial Officer; and
certain other managerial, technical, sales and marketing personnel. The loss of
the services of any of these individuals or group of individuals could have a
material adverse effect on the Company's business, financial condition and
results of operations. None of the Company's executive officers has entered into
an employment contract with the Company. The Company maintains a key-man life
insurance policy on Michael A. Webster, but not on any other person. The future
success of the Company will depend in large part on its ability to attract and
retain qualified management and technical employees, and there can be no
assurance that the Company will be able to do so.
RELIANCE ON MICROSOFT TECHNOLOGY
The Company's technology-based IT training products and graphics software
products are designed for Microsoft technologies, including Windows NT, Windows
95, Windows 3.1 and MS-DOS. Although the Company believes that Microsoft
technologies are and will be widely utilized by its customers, no assurance
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<PAGE> 8
can be given that these individuals or businesses will actually adopt such
technologies as anticipated or will not in the future migrate to other computing
technologies that the Company does not support. Moreover, the Company's strategy
will require that the Company's products and technology be compatible with new
developments in Microsoft's technology.
MANAGEMENT OF GROWTH
The Company has grown rapidly since its formation and may grow rapidly in
the future. This growth has resulted in an increase in responsibilities placed
upon the Company's management and has placed added pressures on the Company's
operating and other systems. To manage its growth effectively, the Company will
be required to continue to upgrade and add systems and controls and to expand,
train and manage its employee base. There can be no assurance that the
management skills and systems currently in place will be adequate if the Company
continues to grow, or that the Company will be able to implement additional
systems successfully and in a timely manner. In addition, the Company from time
to time may seek acquisitions of businesses, product lines and technologies that
are complementary to those of the Company or that allow it to enter new markets.
Any such acquisition may place additional strains upon the Company's management
resources. See "Business -- Employees" and "Management."
MANAGEMENT DISCRETION OVER PROCEEDS OF THE OFFERING
The Company currently has no specific plan for a substantial amount of the
proceeds of the offering. Outside of the repayment of indebtedness as specified
in this Prospectus, no specific amounts have been allocated for such items as
market development, product development and possible acquisitions. Accordingly,
the Company's management will have discretion to allocate a major portion of the
proceeds to uses which shareholders may not deem desirable, and there can be no
assurance that the proceeds can or will be invested to yield a significant
return. See "Use of Proceeds."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND CASH FLOW
The Company's quarterly revenue and operating results have varied in the
past and are likely to vary in the future. See Note 15 of Notes to Financial
Statements. Because the Company's products are standard and off-the-shelf, it
operates with little backlog, and most of its revenues in each quarter result
from orders booked in that quarter. The Company establishes its expenditure
levels based on its expectations as to future revenue and, if revenue levels are
below expectations, expenses could be disproportionately high. As a result, a
drop in near-term demand could significantly affect both revenue and profits in
any quarter. In the future, the Company's operating results may fluctuate for
this reason or as a result of a number of other factors, including increased
expenses, timing of product releases, increased competition, variations in the
mix of sales, announcements of new products by the Company or its competitors
and capital spending patterns of the Company's customers. As a result, there can
be no assurance the Company will be able to maintain profitability on an annual
or quarterly basis.
The Company has also experienced fluctuations in its cash flows as a result
of its operation with little backlog. In 1995 and 1996, the Company did not make
some payments of interest on its long-term debt incurred in connection with the
ASBC acquisition due to limited cash flow and an unwritten waiver by the
noteholders which was subsequently confirmed in writing. See "Certain
Transactions -- ASBC Acquisition." The amounts not paid were reclassified as
additional principal in those years. See Note 6 of Notes to Financial
Statements. Although the Company intends to retire this debt in its entirety
with proceeds from this offering, there is no assurance that future fluctuations
in its cash flows will not limit the Company's ability to service any future
debts or otherwise have a materially adverse effect.
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations should not be relied upon as
indications of future performance. Furthermore, it is possible that in some
future quarters the Company's operating results will fall below the expectations
of the Company, market analysts and investors. In such event, the price of the
Company's Common Stock would likely be materially adversely affected. See Note
15 of Notes to Financial Statements.
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DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT
The Company relies on a combination of trade secret, copyright and
trademark laws, nondisclosure agreements and other contractual provisions and
technical measures to protect its intellectual property rights. The Company
currently has a policy of requiring confidentiality and nondisclosure agreements
with executive officers and employees involved in product development. There can
be no assurance that these protections will be adequate to prevent the Company's
competitors from copying or reverse-engineering the Company's products, or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. The Company
has no patents, and existing copyright laws afford only limited protection for
the Company's intellectual property rights and will not protect such rights in
the event competitors independently develop products similar to those of the
Company. The Company licenses its software products primarily under
"shrink-wrap" licenses that are not signed by its licensees. These shrink-wrap
licenses may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of certain countries in which the Company's products are or
may be licensed do not protect the Company's products and intellectual property
rights to the same extent as the laws of the United States.
There has been substantial litigation regarding patent, trademark and other
intellectual property rights involving software and other technology companies.
Although the Company has never been the subject of a material intellectual
property dispute, and is unaware of any claim that its software, trademarks or
other proprietary rights infringe upon the proprietary rights of third parties,
there can be no assurance that a third party will not assert that the Company's
technology violates its intellectual property rights in the future. As the
number of products in the Company's target markets increases and the
functionality of these products further overlap, developers may become
increasingly subject to infringement claims. Any such claims, with or without
merit, can be time consuming and expensive to defend. There can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to its current or future products or that any such
assertion will not require the Company to enter into royalty arrangements or
litigation that could be costly to the Company.
INTERNATIONAL SALES AND OPERATIONS
The Company sells its products in certain international markets and intends
to expand its sales in these markets. Sales to countries other than the United
States and Canada accounted for 7% of the Company's 1997 revenues. The Company
has entered into distribution arrangements in Japan, the United Kingdom, France,
Australia and Turkey. The largest of these, Japan and the United Kingdom,
accounted for 2% and 1.3%, respectively, of the Company's 1997 revenues. The
Company's international business may be affected by such factors as local
economic and market conditions, political and economic instability, difficulties
in enforcing intellectual property and contractual rights, fluctuations in
currency exchange rates and the need for compliance with a wide variety of
foreign and United States export regulations. There can be no assurance that one
or more of these factors will not have a material adverse effect on the
Company's international operations and, consequently, the Company's business,
results of operations and financial condition.
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain state and foreign jurisdictions. The sale and support
of products by the Company and its retailers and other resellers may entail the
risk of such claims, and there can be no assurance that the Company will not be
subject to such claims in the future. A product liability claim brought against
the Company could have a material adverse effect upon the Company's business,
results of operations and financial condition.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active public market will develop for
the Common Stock or be sustained upon completion of this
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offering or that the market price of the Common Stock will not decline below the
initial public offering price. If an active trading market for the Common Stock
does not develop, the trading price and liquidity of the Common Stock will be
materially adversely affected. The initial public offering price of the Common
Stock has been determined by negotiations between the Company and the
Representative of the Underwriters and may not be indicative of the prices that
will prevail in the public market. See "Underwriting."
The trading prices of the Company's Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, changes in earnings estimates by analysts, developments or
disputes concerning intellectual property rights, technological innovations or
new products, governmental regulatory action, general conditions in the software
industry, increased price competition or other events or factors, many of which
are beyond the Company's control. In addition, the stock market has experienced
extreme price and volume fluctuations, which have particularly affected the
market prices of many computer software companies and which have often been
unrelated to the operating performance of such companies.
DILUTION
Purchasers of shares of the Common Stock in this offering will experience
immediate and substantial dilution in the net tangible book value of their
shares. Prior to this offering, assuming the conversion of all of the
outstanding 855,000 shares of Preferred Stock into 488,571 shares of Common
Stock, each share of Common Stock had a net tangible book value of $.55 as of
December 31, 1997. Assuming an initial public offering price of $13.00 per share
and payment of the estimated underwriting discount and offering expenses, (i)
after this offering each share of Common Stock will have a tangible book value
of $3.75, and (ii) the net tangible book value dilution to purchasers of Common
Stock in this offering will be $9.25 per share. See "Dilution,"
"Management -- 1995 ViaGrafix Stock Option Plan," and "Underwriting."
OWNERSHIP CONCENTRATION
Upon completion of this offering, the Company's directors and executive
officers (primarily Michael A. Webster and Robert E. Webster) will beneficially
own in the aggregate approximately 54% of the Company's outstanding Common
Stock. See "Principal and Selling Shareholders." If these shareholders vote
together, they will be able to elect all of the Company's directors, control the
management and policies of the Company and determine the outcome of any matter
submitted to a vote of the Company's shareholders. This would allow them to
effect any amendment of the Company's certificate of incorporation and certain
mergers and other business combinations in which the Company is either the
acquired or the acquiring entity. See "Description of Capital Stock." This
presents the potential for a conflict of interest between the Company and these
shareholders, and may act to reduce the likelihood of a successful attempt to
take over the Company or any acquisition of a substantial amount of Common Stock
without the consent of these shareholders. See "Description of Capital Stock."
ANTI-TAKEOVER CONSIDERATIONS
Upon completion of this offering, the Company will have an authorized class
of 10,000,000 shares of undesignated Preferred Stock, $.01 par value, which may
be issued on such terms, and with such rights, preferences and designations, as
the Company's Board of Directors may determine. The Company is subject to the
Oklahoma General Corporation Act, which contains provisions that restrict
certain business combinations. Some or all of the foregoing factors could have
the effect of discouraging certain attempts to acquire the Company and, as a
result, could deprive the Company's shareholders of opportunities to sell their
shares of Common Stock at prices higher than prevailing market prices. See
"Description of Capital Stock -- Preferred Stock" and "Description of Capital
Stock -- Anti-Takeover Provisions."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of significant amounts of Common Stock in the public market or the
perception that such sales will occur could adversely affect the market price of
the Common Stock. Of the 6,100,452 shares of Common
10
<PAGE> 11
Stock to be outstanding upon completion of this offering, the 2,200,000 shares
offered hereby will be eligible for immediate sale in the public market without
restriction unless the shares are purchased by "affiliates" of the Company
within the meaning of Rule 144 of the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 3,900,452 shares of Common Stock held by
existing shareholders upon completion of this offering will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under the Securities Act. The
Selling Shareholders have agreed that they will not sell, directly or
indirectly, any Common Stock without the prior consent of Southwest Securities,
Inc., Representative of the Underwriters, for a period of 180 days from the date
of this Prospectus. Subject to the provisions of Rules 144 and 701 and the
rights of the Selling Shareholders to exercise certain registration rights,
additional shares will be available for sale in the public market as follows:
(i) 228,571 shares will be available for immediate sale in the public market on
the date of this Prospectus, (ii) 64,738 shares will be eligible for sale upon
the expiration of lock-up agreements 90 days after the date of this Prospectus
and (iii) 3,607,143 shares will be eligible for sale upon the expiration of
lock-up agreements 180 days after the date of this Prospectus. See "Shares
Eligible for Future Sale," "Underwriting" and "Principal and Selling
Shareholders."
ABSENCE OF DIVIDENDS
Although the Company paid dividends on its capital stock in 1995 and 1997,
the Company does not intend to pay any cash dividends on its Common Stock for
the foreseeable future.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 shares of
Common Stock offered by the Company pursuant to this offering will be
approximately $20,467,500, after deducting the underwriting discount and
estimated offering expenses payable by the Company. The Company intends to use
approximately $3.7 million of such net proceeds to retire its 7.5% notes due
August 15, 2000, payable to Geocapital III, L.P. and Robert E. Webster, incurred
for the acquisition of ASBC in 1995. See "Certain Transactions -- ASBC
Acquisition" and Note 6 of Notes to Financial Statements. The Company expects to
use the remainder of the net proceeds from this offering for general corporate
purposes, including the expansion of sales and marketing activities, increased
product development and funding of working capital. The Company may seek
acquisitions of businesses, products and technologies that are complementary to
those of the Company, and a portion of the net proceeds may be used for such
acquisitions. While the Company may engage from time to time in discussions with
respect to potential acquisitions, the Company has no plans, commitments or
agreements with respect to any material acquisitions as of the date of this
Prospectus, and there can be no assurance that any such acquisitions will be
made. Pending such uses, the Company intends to invest the net proceeds from
this offering in short-term, investment-grade, interest-bearing securities. See
"Risk Factors -- Management Discretion over Proceeds of the Offering."
The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Shareholders. The net proceeds to be
received by the Selling Shareholders from the sale of their 450,000 shares at an
assumed public offering price of $13.00 per share are expected to be
approximately $5,330,500 ($9,320,200 if the Underwriters' over-allotment option
is fully exercised) after deducting the estimated underwriting discount and
offering expenses payable by the Selling Shareholders. See "Principal and
Selling Shareholders."
DIVIDEND POLICY
Although the Company paid dividends on its capital stock of $31,291 in 1995
and $505,800 in 1997, the Company does not intend to pay any future cash
dividends on its Common Stock and anticipates that, for the foreseeable future,
it will use earnings for the operation and expansion of the business. Payment of
cash dividends in the future will depend upon the Company's earnings, its
capital requirements, financial condition and other relevant factors and will be
determined by the Board of Directors.
11
<PAGE> 12
DILUTION
The net tangible book value of the Company at December 31, 1997 was
$2,412,256 or $.55 per share of Common Stock, after giving effect to the
conversion of all outstanding shares of Preferred Stock into Common Stock prior
to the closing of this offering. Net tangible book value per share is equal to
the Company's total tangible assets (total assets less goodwill and trademarks)
less total liabilities, divided by the total number of shares of Common Stock
outstanding, including shares of Common Stock issued upon the conversion of the
Preferred Stock in connection with this offering. Pro forma net tangible book
value dilution per share represents the difference between the amount per share
paid by purchasers of shares of Common Stock in this offering and the pro forma
net tangible book value per share of Common Stock immediately after completion
of this offering. After giving effect to the sale by the Company of the
1,750,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13.00 per share, and after deducting the estimated
underwriting discount and offering expenses, the pro forma net tangible book
value of the Company as of December 31, 1997 would have been $22,880,206 or
$3.75 per share of Common Stock. This represents an immediate increase in such
pro forma net tangible book value of $3.20 per share to existing shareholders
and an immediate dilution of $9.25 per share to new investors purchasing shares
in this offering. If the initial public offer price is higher or lower, the
dilution to new investors will be, respectively, greater or less. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $13.00
Net tangible book value as of December 31, 1997........... .55
Pro forma increase attributable to new investors.......... 3.20
----
Pro forma net tangible book value as of December 31, 1997
after offering............................................ 3.75
------
Pro forma net tangible book value dilution per share to new
investors................................................. $ 9.25
======
</TABLE>
The following table summarizes on a pro forma basis as of December 31,
1997, after giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock in connection with this offering, the number
of shares of Common Stock purchased from the Company, the total consideration
paid to the Company and the average price paid per share by existing
shareholders and by new investors (assuming an initial public offering price of
$13.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
SHARES PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 4,350,452 71% $ 2,412,256 10% $ .55
New investors....................... 1,750,000 29% 22,750,000 90% $13.00
--------- --- ----------- ---
Total..................... 6,100,452 100% $25,162,256 100%
========= === =========== ===
</TABLE>
The computations in the above table are determined without deducting the
estimated underwriting discount and offering expenses payable by the Company.
Both tables set forth in this section assume no exercise of existing stock
options. As of December 31, 1997, options to purchase 611,977 shares of Common
Stock were outstanding, with a weighted average exercise price of $9.75 per
share. To the extent outstanding options are exercised, there will be further
dilution to holders of Common Stock. See "Management -- 1995 ViaGrafix Stock
Option Plan."
12
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on an actual basis assuming the conversion of all shares
of Preferred Stock into an aggregate of 488,571 shares of Common Stock prior to
the closing of this offering and (ii) as adjusted to give effect to the sale of
1,750,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $13.00 per share and the receipt and
application of the proceeds therefrom, after deducting the estimated
underwriting discount and offering expenses payable by the Company. See "Use of
Proceeds." This information should be read in conjunction with the Company's
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt including current portion.................... $3,616 $ --
Shareholders' equity
Common Stock, $.01 par value, 40,000,000 shares authorized
and 3,861,881 shares issued and 6,100,452 issued and
outstanding on an as adjusted basis.................... 39 61
Preferred Stock @ $.01 par value 10,000,000 shares
authorized and 855,000 shares issued and outstanding
and no shares issued and outstanding on an as adjusted
basis.................................................. 9 --
Additional paid-in capital.................................. 1,487 21,942
Unearned compensation....................................... (149) (149)
Retained earnings........................................... 1,127 1,127
------ -------
Total shareholders' equity........................ 2,513 22,981
------ -------
Total capitalization.............................. $6,129 $22,981
====== =======
</TABLE>
13
<PAGE> 14
SELECTED FINANCIAL DATA
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The selected statement of operations data set
forth below for the years ended December 31, 1995, 1996 and 1997 and the balance
sheet data at December 31, 1996 and 1997, are derived from, and are qualified by
reference to, the audited financial statements included elsewhere in this
Prospectus and should be read in conjunction with those financial statements and
notes thereto audited by Ernst & Young LLP. The selected balance sheet data as
of December 31, 1994 and 1995 and the selected statement of operations data for
the year ended December 31, 1994 have been derived from audited financial
statements that are not included elsewhere in this Prospectus. The selected
financial data as of and for the year ended December 31, 1993, has been derived
from unaudited financial statements of the Company which, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial information set forth
therein. The results for the year ended December 31, 1997, are not necessarily
indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1993(1) 1994 1995(2) 1996 1997
------- ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
IT training products........................... $3,795 $4,884 $ 5,856 $ 6,953 $11,093
Graphics software products..................... -- -- 1,374 3,124 2,602
------ ------ ------- ------- -------
Net sales........................................ 3,795 4,884 7,230 10,077 13,695
Cost of sales.................................... 1,371 1,887 2,723 4,002 5,367
------ ------ ------- ------- -------
Gross profit..................................... 2,424 2,997 4,507 6,075 8,328
Operating expenses:
Selling, general and administrative............ 931 1,463 3,413 3,523 3,757
Research and development(3).................... -- 207 320 467 1,162
Purchased research and development(4).......... -- -- 1,397 -- --
Depreciation and amortization.................. 45 54 433 685 319
------ ------ ------- ------- -------
Operating profit (loss).......................... 1,448 1,273 (1,056) 1,400 3,090
Net interest income (expense).................... 2 3 (109) (262) (251)
------ ------ ------- ------- -------
Income (loss) before income taxes................ 1,450 1,276 (1,165) 1,138 2,839
Net income (loss)................................ $1,450 $1,039 $ (707) $ 675 $ 2,023
====== ====== ======= ======= =======
Net income (loss) per diluted common share(5).... $ .34 $ .24 $ (.21) $ .15 $ .45
====== ====== ======= ======= =======
Diluted weighted average shares(5)............... 4,286 4,286 3,503 4,405 4,498
PRO FORMA DATA:
Pro forma net income (loss)(6)................... $ 899 $ 791 $ (707) $ 675 $ 2,023
====== ====== ======= ======= =======
Pro forma net income (loss) per diluted common
share(5)(6).................................... $ .21 $ .18 $ (.21) $ .15 $ .45
====== ====== ======= ======= =======
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 33 $ 389 $ 35 $ 1,009 $ 218
Working capital.................................. 1,049 872 676 1,637 2,324
Total assets..................................... 1,332 1,302 5,283 6,112 7,419
Long-term debt................................... -- -- 3,478 3,482 2,827
Total shareholders' equity....................... 1,155 979 243 937 2,513
Dividends per common share equivalent(7)......... -- -- $ 0.05 -- $ 0.12
SUPPLEMENTAL DATA:
Number of training courses offered............... 155 230 335 460 670
</TABLE>
14
<PAGE> 15
- ---------------
(1) Statement of Operations and Balance Sheet Data for the year ended December
31, 1993 is unaudited information.
(2) The operating results of ASBC are included in the statements of operations
from the August 15, 1995 acquisition date forward.
(3) Research and development expenses for the year ended December 31, 1993 are
included in selling, general and administrative expenses.
(4) The Company incurred a one-time charge in 1995 to write off the acquired
in-process research and development related to the acquisition of ASBC.
(5) Shares have first been adjusted in 1993 for a 1,000 for 1 stock split in
1994, and then again in 1993-1997 for a 1 for 1.75 reverse stock split on
December 12, 1997.
(6) Includes a pro forma tax provision, as the Company was an S corporation in
1993 and the period from January 1 to August 16, 1994.
(7) The Company made S corporation distributions of $1,215,000 in the period
from January 1 through August 15, 1994.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and Notes thereto, and the other financial information
included elsewhere in this Prospectus.
OVERVIEW
ViaGrafix was founded in 1990 to develop, produce and market
technology-based IT training products. The Company's training videos were first
released in 1990, followed by interactive multimedia training on CD-ROM in 1994.
The Company entered the graphics software market in 1995 with the acquisition of
ASBC. In 1996 the Company began providing interactive multimedia training
delivered over LANs, intranets and the Internet.
The Company's sales have grown from $3.8 million in 1993 to $13.7 million
in 1997. This revenue growth has resulted from the expansion of the market for
technology-based IT training products, growing market acceptance of the
Company's products, the Company's increased product line, and entry into the
graphics software market with the acquisition of ASBC in 1995.
Of the Company's sales in 1995, 1996 and 1997, 81%, 69% and 81%,
respectively, were of the Company's training products and 19%, 31% and 19%,
respectively, were of the Company's software products. Prior to the acquisition
of ASBC in 1995, the Company had no sales of software products. See Notes 1 and
10 of Notes to Financial Statements.
The Company has been profitable every year since inception with the
exception of 1995, when $1.4 million was charged to acquired in-process research
and development expenses in connection with the acquisition of ASBC, resulting
in an operating loss of $1.1 million. See Note 2 of Notes to Financial
Statements. Subsequently, the Company has had operating income of $1.4 million
in 1996 and $3.1 million in 1997.
ViaGrafix training and software products are developed and produced
primarily in-house. The Company uses its own studio and editing stations to
produce broadcast quality video training products. The Company's video training
products are normally duplicated and packaged in-house. The Company's software
and multimedia training products are produced and packaged in-house, with the
exception of CD-ROM duplication. The Company's order processing and fulfillment
are also done in-house. The Company believes that this vertical integration
enables it to keep minimal inventories of finished products, provide timely
product updates, and provide a quick order-to-delivery time. Accordingly, the
Company has not had a material order backlog at the end of any quarter.
The Company recognizes revenues upon shipment of products, upon receipt of
royalty revenues and upon receipt of licensing fees from its alliance partners.
The Company nets sales against estimated allowances for returned products. Cost
of sales consists primarily of direct materials and labor associated with the
duplication and packaging of the Company's training software and graphics
software products.
The Company charges all costs of developing IT training products to
research and development expense as incurred. The Company also charges all costs
of establishing technological feasibility of its graphics software products to
research and development expense as incurred.
Sales and marketing expenses are typically realized as incurred. However,
the Company prepays registration fees for participation in trade shows scheduled
for the next twelve months. These expenses are capitalized and then expensed
upon conclusion of trade show events.
In November 1997 the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition," which
the Company will adopt for fiscal years beginning after December 15, 1997. If
the Company had elected to adopt SOP 97-2 for prior periods, the impact on its
financial position, results of operations or cash flows would not have been
significant. See Note 1 of Notes to Financial Statements.
16
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data expressed in percentages:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 37.7 39.7 39.2
Gross profit................................................ 62.3 60.3 60.8
Selling, general and administrative......................... 47.2 35.0 27.4
Research and development.................................... 4.4 4.6 8.5
Purchased research and development(1)....................... 19.3 -- --
Depreciation and amortization............................... 6.0 6.8 2.3
Operating profit (loss)..................................... (14.6) 13.9 22.6
Net interest income (expense)............................... (1.5) (2.6) (1.8)
Income (loss) before income taxes........................... (16.1) 11.3 20.7
Net income (loss)........................................... (9.8) 6.7 14.8
</TABLE>
- ---------------
(1) The Company incurred a one-time charge in 1995 to write off the acquired
in-process research and development related to the acquisition of ASBC.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales increased 35.9% to $13.7 million for the year ended
December 31, 1997, compared to $10.1 million for the year ended December 31,
1996. This increase reflects an increase in sales primarily from existing and
additional training products. IT training product sales for the year ended
December 31, 1997 increased 59.5% to approximately $11.1 million, or 81% of
total sales, compared to approximately $7.0 million, or 69% of total sales, in
1996. This increase was primarily attributable to increases in the volume of
products sold rather than increases in prices. Graphics software sales for the
year ended December 31, 1997, decreased 16.7% to approximately $2.6 million, or
19% of total sales, compared to approximately $3.1 million, or 31% of total
sales, in 1996. This decrease was primarily due to stronger sales of DesignCAD
upgrades for Windows 95 in 1996.
Cost of Sales. Cost of sales increased 34.1% to $5.4 million for the year
ended December 31, 1997, compared to $4.0 million in 1996. Cost of sales as a
percentage of total sales decreased to 39.2% for the year ended December 31,
1997, from 39.7% for 1996. The decline in cost of sales as a percent of sales
was a result of productivity improvements due to economies of scale as sales
increases were covered with minimal increase in duplicating and packaging
expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 6.6% to $3.8 million during the year ended
December 31, 1997, compared to $3.5 million in 1996. Selling, general and
administrative expenses as a percentage of total sales decreased to 27.4% for
the year ended December 31, 1997, from 35.0% in 1996, due largely to the
Company's ability to control its growth in payroll and trade show expenses.
Research and Development Expenses. Research and development expenses
increased 149% to $1.2 million during the year ended December 31, 1997, compared
to approximately $467,000 in 1996. Research and development expenses as a
percentage of total sales increased to 8.5% for the year ended December 31,
1997, from 4.6% in 1996. This higher level of research and development expense
reflects an overall increase in personnel for product development. The Company
believes that significant investment in research and development is required to
remain competitive in its markets and, therefore, expects research and
development expenses to continue to increase in absolute terms in future
periods.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses decreased from approximately $685,000 during the year ended December
31, 1996, to approximately $319,000 in 1997. Depreciation and amortization
expenses as a percentage of total sales decreased from 6.8% for the year ended
17
<PAGE> 18
December 31, 1996, to 2.3% in 1997. This reduction was due mostly to the
conclusion of the amortization period for purchased ASBC software, which was
only $5,500 in the year ended December 31, 1997, versus approximately $322,000
during 1996.
Income Taxes. In the year ended December 31, 1997, the effective tax rate
improved to 29% compared to 41% in 1996. The reduction in the effective tax rate
was due to the realization of tax credits from 1994 through 1997 resulting from
the passage of the Taxpayer Relief Act of 1997 in August, 1997, which clarified
that companies employing enrolled members of Indian Tribes within specified
portions of the State of Oklahoma are eligible to receive a tax credit. The
credits are based upon a percentage of the increase in qualified wages paid to
qualified members of Indian Tribes. The amount of available credits was
quantified and the benefit recorded in the fourth quarter of 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales increased 39.4% to $10.1 million for the year ended
December 31, 1996, compared to $7.2 million in 1995. Training product sales for
the year ended December 31, 1996 increased 18.7% to approximately $7.0 million,
or 69% of total sales, compared to approximately $5.9 million, or 81% of total
sales, in 1995. This increase reflects an increase in sales of existing training
products and additional video and CD-ROM based training products. Graphics
software sales for the year ended December 31, 1996 increased 127% to
approximately $3.1 million, or 31% of total sales, compared to approximately
$1.4 million, or 19% of total sales, in 1995. The increase in graphics software
sales in 1996 is reflective of the inclusion in 1996 of a full twelve months of
sales of products of ASBC, which was acquired in August 1995. As a result, 1996
was the first full year of graphics software sales for the Company.
Cost of Sales. Cost of sales increased 46.9% to $4.0 million for the year
ended December 31, 1996, compared to $2.7 million in 1995. Cost of sales as a
percentage of total sales increased to 39.7% for the year ended December 31,
1996, from 37.7% in 1995. The increase in cost of sales as a percent of sales
was largely the result of a reduction in efficiencies due to the introduction of
many new products during the period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 3.2% to $3.5 million for the year ended
December 31, 1996, compared to $3.4 million in 1995. Selling, general and
administrative expenses as a percentage of total sales decreased to 35.0% for
the year ended December 31, 1996, from 47.2% in 1995. The decrease in selling,
general and administrative expenses as a percentage of total sales during 1996
was due to the Company's ability to reduce its advertising expenditures and
control other operating costs, combined with improved economies of scale
realized after the acquisition of ASBC in August 1995.
Research and Development Expenses. Research and development expenses
increased 45.9% during the year ended December 31, 1996, to approximately
$467,000 compared to approximately $320,000 in 1995. Research and development as
a percentage of total sales increased from 4.4% for the year ended December 31,
1995 to 4.6% in 1996. This higher level of development expense primarily
reflected an overall increase in personnel to develop new products.
Write-off of Acquired In-Process Research and Development. The Company
incurred a one-time charge of $1.4 million in 1995 to write off in-process
research and development acquired in connection with the acquisition of ASBC in
August 1995. The write-off was 19.3% of total sales for the year ended December
31, 1995.
Depreciation and Amortization Expenses. In the year ended December 31,
1996, depreciation and amortization expenses increased 58.3% to approximately
$685,000 from approximately $433,000 in 1995. Depreciation and amortization as a
percentage of total sales increased to 6.8% for the year ended December 31,
1996, from 6.0% in 1995. This increase was mostly due to the depreciable assets
added in 1995 from the acquisition of ASBC incurring a full year of depreciation
in 1996, compared with four and one-half months in 1995.
Net Interest Income (Expense). Net interest expense increased 140% to
approximately $262,000 in the year ended December 31, 1996, from approximately
$109,000 in 1995. In 1996, which was the first full year of
18
<PAGE> 19
financing the August 1995 purchase of ASBC, interest expense was 2.6% of total
sales compared to 1.5% in 1995.
LIQUIDITY AND FINANCIAL CONDITION
The Company believes that cash generated from operations and its net
proceeds from this offering will satisfy the Company's 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 or understandings with respect to any such transaction.
During 1997, operating activities provided the Company with net cash of
approximately $1.1 million. During that year, cash flow used in operating
activities included increases of approximately $1.4 million and $581,000 in
accounts receivable and inventory, respectively, along with a decrease of
approximately $250,000 in income taxes payable. Operating activities generated
cash flows through approximately $2.0 million in net income, while increases in
accounts payable and accrued liabilities generated cash flow of approximately
$603,000, and non-cash items of depreciation and amortization expense, deferred
income tax provision, and bad debt expenses provided approximately $613,000.
During 1996, operating activities provided the Company with net cash of
approximately $1.4 million. During that year, cash flow was generated by net
income of approximately $675,000. Cash flow of approximately $1.4 million was
provided through depreciation and amortization expense, non-cash interest
expense, and increases in income taxes payable and accrued liabilities. Cash
flow used in operating activities included an increase in prepaid expenses, an
increase in deferred income taxes and a decrease in accounts payable totaling
approximately $652,000.
In 1995, operating activities provided the Company with net cash of
approximately $125,000. While the net loss for the year of approximately
$707,000 generated negative cash flow, the non-cash write-off of acquired
in-process research and development provided approximately $1.4 million in cash
flow. Cash flow of approximately $1.2 million was generated by depreciation and
amortization expense, non-cash interest expense, decreased inventory and
increases in accounts payable and accrued liabilities. Cash flow used in
operating activities included an increase in accounts receivable and prepaid
expenses, a decrease in income taxes payable, and an increase in deferred income
taxes totaling approximately $1.7 million.
The Company's capital expenditures during 1995, 1996 and 1997 were
approximately $31,000, $285,000, and $744,000, respectively. These 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
growth.
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 their Y2K Problems. Some software
companies may incur material product liabilities related to their 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's technology-based IT training products and graphics software
products are not believed to suffer Y2K Problem defects simply because the
nature of training products and PC based graphics software is not reliant on the
calendar. However, it is conceivable that the Company's technology-based IT
training products may have to be modified if the third party software packages
to which they relate are modified because of Y2K Problems. The Company believes
that its costs of issuing new versions of its products to
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address the changes in third party software, and any resulting obsolescence of
Company inventory, would more than be offset by revenues generated from the sale
of new versions of the Company's products.
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.
The Company's customers often have budgets for IT expenditures and, to the
extent they expend funds in remedying Y2K Problems, the amounts customers may
otherwise have available to purchase the Company's products could be reduced.
The Y2K Problem is worldwide, and its impact on third parties and the economy in
general could affect the Company to an extent that is not currently estimable.
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BUSINESS
GENERAL
ViaGrafix develops, produces and markets technology-based 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.
The Company has developed and markets more than 650 training courses for most
major PC software packages. Such products provide an audio-visual environment
designed to allow users to learn faster and increase retention and productivity.
Organizations that purchase the Company's multimedia training products can offer
them across a network to all employees. The Company's principal graphics
software product, DesignCAD, is a CAD package sold worldwide. The Company 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 improve productivity with their computers and thereby reduce costs.
The Company was founded in 1990 to create training products for the PC
user, and it developed a library of computer training videos for computer
software, such as word processors, spreadsheets and operating systems. The
business was expanded to include both business and home computer software
training products and, with the acquisition of ASBC in August 1995, now includes
the development and marketing of PC graphics software.
The Company's potential training customers include anyone who has a need to
learn to use computer software, including individuals, small businesses,
corporations and government agencies. The Company's graphics software customers
include architects, engineers, designers and hobbyists.
The Company sells its products through distributors and resellers and
directly to end-users. The Company uses its own catalog, promotion of its 800
number and its Internet web site to sell training and software products directly
to end-users. Various Internet web sites of major software companies, such as
Microsoft Corporation, Corel Corporation and Symantec Corporation, contain links
to the Company's Internet web site. Direct sales are also achieved by direct
mail advertising to the Company's database of existing customers and by
exhibition at more than 80 trade shows, such as COMDEX, throughout the United
States annually.
The Company has experienced growth in revenues and operating earnings since
its inception primarily as a result of internal product development. The
Company's sales grew from $3.8 million in 1993 to $13.7 million in 1997. The
Company's strategy is to continue to increase its spectrum of easy-to-use
training and software products, increase sales to major retailers, increase
direct corporate sales by expanding its internal sales force, expand software
product development, expand international sales by translating its current
products into other languages and increase its use of strategic alliances.
INDUSTRY BACKGROUND
Training Market. With the proliferation of computers, there has been a
continually increasing need for training and educational products for computers
and software, and for better, easier-to-use software products. Businesses and
organizations are becoming increasingly dependent upon computer systems in order
to remain competitive in their marketplace. This has resulted in significant
growth in the IT training market. According to IDC, the U.S. market for computer
education and training grew to $7.1 billion in 1996 and is expected to reach
$12.9 billion by the year 2001.
The IT training market is diverse, consisting of a variety of product and
service providers. Technology-based training products for IT include CD-ROM
based training, video-based training and Internet-delivered training.
Non-technology-based training products for IT include books and other written
materials. Service providers include technology manufacturers, commercial
trainers, consulting firms, value-added resellers, computer dealers, systems
integrators, network integrators, colleges, universities, and independent
service organizations.
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The majority of IT training is still delivered by instructor-led training,
which accounted for $5.7 billion, or 80% of the total U.S. market, in 1996.
However, for several years instructor-led training has grown at a slower rate
and is expected to continue at a slower rate than IT training as a whole.
Technology-based IT training is gaining acceptance as a proficient as well as
efficient method for software education. IDC estimates that CD-ROM based
training, video-based training and Internet delivered training for IT combined
will grow from $528 million in 1996 to $3.3 billion in 2001, representing an
annual growth rate of 44%.
Several factors account for the rapid and sustained growth of CD-ROM
training, video-based training and Internet delivered training:
- Recognized Need. The continued growth of the personal computer has
created millions of end-users that need training on software. As
companies continue to increase their use of computers, they also must
continue to increase the ability of their personnel to be competent
computer users.
- Technology and Quality Improvements. The quality of CD-ROM, video-based
and Internet training products has improved significantly with
technological improvements in the computer industry and the development
of more creative content.
- More Economical. Instructor-led training, while effective, is more
expensive and requires specified time periods. Technology-based IT
training provides an audio-visual environment designed to allow users to
learn faster and increase retention and productivity.
- Ease of Use. Technology-based IT training products allow users to learn
at a self-directed pace and can be used repeatedly. Multimedia training
also allows users to receive instantaneous feedback on their progress.
Additionally, multimedia training can be accessed over a network
simultaneously by multiple users.
- Growth of the Internet. The emergence of the Internet as an important
communication and advertising vehicle has placed new pressure on millions
of people to become computer literate.
- Technological Demands. IT products are constantly adding new features and
functionality, thus necessitating new versions to be released. It is a
constant challenge for users to keep pace with these changes, thereby
increasing their need for training.
Technology-based training developed as a market niche in the mid-1980s with
the emergence of video and computer-based training. As the need for training
became more evident and IT training became more prevalent, video-based training
and computer-based training were accepted as effective and efficient options in
many situations, and popularity increased in the early 1990s. Also in the early
1990s, CD-ROM based training was introduced utilizing multimedia as a
high-quality instructional method more capable of being enhanced by creative
production techniques. In the mid-1990s, with the proliferation of CD-ROM
capable computers, CD-ROM based multimedia training began to grow swiftly.
Internet delivered training was also introduced in the mid-1990s.
Graphics Software Market. The market for software in the United States and
Canada has grown from $5 billion in 1991 to $10.6 billion in 1996, the market
for Windows software has grown from less than $1 billion in 1991 to more than
$8.5 billion in 1996, and the market for graphics software for Windows has grown
from $205 million in 1991 to $1.1 billion in 1996, according to the SPA.
Graphics software for Windows includes CAD software, three-dimensional modeling
software, general drawing and design software.
With the increase in the use of Windows, computers are increasingly being
used for design and other graphics intensive tasks. New users of Windows
graphics software will be looking for easy-to-learn, easy-to-use software that
is affordable.
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THE VIAGRAFIX SOLUTION
The Company designs, develops, markets, sells and supports its
technology-based IT training products and graphics software products based on
the following principles:
Optimize Training Products for Productivity. The Company develops and
markets training courses that teach people how to use popular software
packages such as Microsoft Excel, Microsoft Word, Microsoft Windows, Lotus
1-2-3 and WordPerfect. These educational courses offer many advantages over
traditional instructor-led training. They allow users to fit training to
their work schedules, begin training at a level which is appropriate for
them, train only on the topics that are relevant to their needs and
practice and test their skills as they learn.
Offer a Broad Range of Training Products. The Company develops and
markets training courses that teach people how to use a diverse selection
of software applications, such as PageMaker, DesignCAD, CorelDraw, ACT! and
FrontPage. The Company also develops and markets training courses that
teach the use of more technical software, such as C++, Visual Basic and
HTML programming.
Design User Friendly Graphics Software Products. The Company designs
its graphics software products with focus on ease of use and full
functionality. These products are designed to be used by both professional
and casual users.
Offer Products with Superior Value. The Company attempts to develop
products that can be marketed at a lower price than similar competing
products.
Release Products to the Market Quickly. The Company attempts to
develop its products and maintain a relatively short time to market.
Leverage Internet Technologies. The Company's products employ Internet
technologies for delivery and communication. Some of the Company's more
popular multimedia IT training products are available on the Company's web
site, and more are to be added. The Company's software products utilize
Internet technologies by offering Internet file compatibility and direct
e-mail support.
GROWTH STRATEGY
The Company's objective is to become a leading provider of technology-based
IT training products and graphics software products. The following are the key
elements of the Company's strategy to achieve that objective:
Expand Training Product Offerings. The Company has created a
development system that utilizes technologies and a streamlined development
process to reduce development time and cost. The Company plans to increase
its development staff to increase the size of its product line and
introduce new training products earlier in the software product sales
cycle. The Company also plans to add courses on more technical material
which are frequently requested by the Company's customers.
Increase Sales through Major Retailers. The Company's sales to major
retailers have more than doubled in the past year, and the Company expects
to be able to continue growth of such sales. The Company still sells to a
relatively small number of major retailers, which leaves the Company with a
natural path for growth by adding more retail accounts. See "Risk
Factors -- Reliance on Major Retailers."
Increase Direct Corporate Sales. Heretofore the Company has focused on
a consumer marketing approach to its business. The Company is now in the
process of creating an internal corporate sales force to increase
penetration of the corporate market. Corporate sales currently account for
a nominal portion of the Company's business and represent an area targeted
by the Company for growth. The Company believes that since its multimedia
training courses are deliverable on CD-ROM, LANs, intranets and the
Internet, it has a competitive advantage. The Company's multimedia courses
also offer testing, which make them suited to the needs of the corporate
market. The Company plans to develop a method to
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compare test results to worldwide results via the Internet. The Company
will attempt to establish a testing standard for software training that
will enhance its competitive advantage in the future.
Expand Software Product Development. The Company expects to
successfully market new "easy-to-use" graphics software utilizing its
established customer base and sales channels. The Company has the ability
to use its core DesignCAD technology to produce these new products at a
lower incremental cost. The Company has three new graphics software
products under current development. These products will expand the
Company's software line into the broader, less technical areas of
illustration, web page design and three-dimensional modeling. The Company
also plans to create industry specific applications using the DesignCAD
engine that will specialize in topics such as automated building design and
applications for surveying and plumbing design.
Increase International Sales. The Company intends to boost
international sales and plans to begin a five-year effort to translate its
products into other languages, beginning with Spanish, German and French.
International sales account for more than 50% of many major software
companies' sales, but accounted for 7% of the Company's sales in 1997.
Develop Strategic Alliances. The Company intends to enter into
developmental and marketing alliances with key IT vendors to create and
market IT training products. To date, the Company has entered into a
diverse array of alliances with Street Technologies, Inc. ("Street"),
RealNetworks, Inc. (formerly Progressive Networks, Inc.), Symantec
Corporation and McAfee Associates, Inc. The Company's agreement with Street
enables it to deliver multimedia training courses on CD-ROM, LANs,
intranets and the Internet in a more effective manner. See "Certain
Transactions -- Street Technologies." Stephen P. Gott, Chief Executive
Officer of Street, will become a director of the Company on the day
following the date of this Prospectus and plans to purchase 10,000 shares
of stock in this offering. The Company believes that these alliances will
provide a number of competitive advantages, including access to the
partners' distribution channels and development plans.
The Company intends to remain opportunistic with respect to the acquisition
of product lines and companies which would complement its growth strategy.
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PRODUCTS
Technology-based IT Training Products. The Company has developed and
markets more than 550 video courses and more than 120 multimedia courses. The
Company's principal educational products are training videos and multimedia
courses teaching today's most popular software. The following is a list of some
applications, programming languages and operating systems for which the Company
has developed training products:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
SUITES INTERNET DATABASE
- --------------------------------------------------------------------------------------
<S> <C> <C>
Microsoft Office Internet Access
Lotus SmartSuite World Wide Web FoxPro
Corel WordPerfect Suite MS Internet Explorer Paradox
Netscape Navigator ACT!
Goldmine
- --------------------------------------------------------------------------------------
OPERATING SYSTEMS COMMUNICATIONS DESKTOP PUBLISHING
- --------------------------------------------------------------------------------------
Windows Microsoft Outlook PageMaker
Windows NT Lotus Notes CorelDraw!
NetWare WinFax Pro Publisher
DOS Adobe Illustrator
OS/2 PhotoShop
- --------------------------------------------------------------------------------------
WORD PROCESSING PRESENTATION GRAPHICS CAD
- --------------------------------------------------------------------------------------
Microsoft Word PowerPoint DesignCAD
WordPerfect Harvard Graphics AutoCAD
WordPro Corel Presentations
AmiPro
- --------------------------------------------------------------------------------------
SPREADSHEETS AND ACCOUNTING TECHNICAL MISCELLANEOUS
- --------------------------------------------------------------------------------------
Excel C, C++ Lotus Organizer
Lotus 1-2-3 Visual Basic Microsoft Project
Quicken HTML
Quickbooks Delphi
UNIX
BASIC
- --------------------------------------------------------------------------------------
</TABLE>
Each application above may have from one to thirteen courses associated
with it. For example, the DesignCAD 97 training series consists of "Learning
DesignCAD 97, Introduction," "Learning DesignCAD 97, Advanced," and "Learning
DesignCAD 97, Solid Modeling." There are six courses for Microsoft Excel 97, 12
courses for Novell NetWare 4, and four courses for C and C++ programming.
Additionally, the Company has training courses for several different versions of
many of the software programs listed above.
Corporate training departments and training companies commonly incorporate
training videos or multimedia courses into their existing training programs as a
supplemental way to meet varying learning preferences of individuals. Training
videos and multimedia courses can also reduce training time and costs otherwise
incurred through seminars and personal or classroom instruction and allow
training to take place anytime or anywhere. The Company believes these tutorials
are an excellent way to increase employee productivity at minimal cost.
Since 1996, ViaGrafix has developed its multimedia-based interactive
software tutorials to be "networkable," which allow them to be accessible
simultaneously by multiple users through LANs, intranets and the Internet.
Beginning with Microsoft Office 97 tutorials, an optional "Skill Development
Quiz" concludes each chapter and a comprehensive test is offered optionally at
the end of each tutorial.
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ViaGrafix training products are offered in three configurations. Video
tutorials usually run from 60 to 90 minutes in length and are packaged in a
black plastic binder with printed graphics. Most have a suggested retail price
of $49.95. This line includes tutorials for beginners, intermediate, and
advanced users. A second configuration, "Teach Yourself" video tutorials, are 60
minutes or shorter in length, have less instructional detail, are packaged in a
printed cardboard case, and have a suggested retail price of $19.95. Multimedia
courses are sold on CD-ROM in a durable clear plastic case with printed
graphics, include the full range of instructional titles from beginners to
advanced users, and typically have a suggested retail price of $49.95.
Multimedia courses generally contain two to four hours of training. Multimedia
courses are also offered on LANs, intranets, and the Internet. Pricing for these
delivery methods is based on the number of titles and length of license period.
Graphics Software Products. The Company develops and markets several
graphics software packages. DesignCAD 97 and DesignCAD LT are the latest CAD
products offered by the Company. DesignCAD 97, with a retail price of $499,
offers true solid modeling, extensive dimensioning, animation, Internet
capability, file compatibility with all the major file types, and object linking
and embedding. DesignCAD 97 is packaged in a printed cardboard carton. Included
is the software on either a CD-ROM or a three and one-half inch diskette, a
reference manual set up in a format similar to an encyclopedia, and a user's
guide tutorial manual. DesignCAD LT is a version of DesignCAD 97 with reduced
three-dimensional capability and a retail price of $349.
Although sales of DesignCAD products generate most of the Company's
software revenue, the Company develops and markets several other
graphics-related software products. These include VinylCAD, used for sign
making, ModelCAD, used for model airplane and railroad design, Estimator Pro,
used for cost estimation and DesignSYM, a collection of symbol libraries used
with CAD software. The Company also develops and markets EconoCAD, Instant
Architect and Instant Engineer, lower cost CAD software products based on
DesignCAD. The Company's software products are targeted primarily for Windows
platforms.
Retail prices suggested by the Company are not binding upon resellers of
the Company's IT training and software products. Customers may find the
Company's products at varying discounted prices.
Product Life Cycle. ViaGrafix training courses have varying lives. Most
application software versions have a life of 18-24 months with operating systems
having a longer life. The life cycle for software training products can be
broken into three segments. The first segment, during the first six to twelve
months of the software version, has the strongest sales. The second segment,
through the remaining time that the software version is current, normally
continues at a somewhat reduced level. The third segment begins after a newer
version of the software has been released. This segment is marked by reduced
sales that continue for a varied period, from months to years. The Company's
graphics software usually has an active product life of 18-24 months. Upgrades
to new versions of the Company's software allow very high upgrade sales
initially, followed by steady sales to new users, which continue until the next
version announcement. Residual sales of older versions continue for a few years
after the release of newer versions.
PRODUCT DEVELOPMENT
Since inception, the Company has made substantial investments in product
research and development. During 1995, 1996 and 1997, development expenses were
approximately $320,000, $467,000 and $1,162,000, respectively. As of December
31, 1997, the Company had 44 employees engaged in research and development.
Substantially all of the Company's product research and development activities
take place in its Pryor, Oklahoma facility. The product development, including
product design, script writing, programming, video editing and multimedia
editing, take place on-site. The Company primarily uses in-house talent for
video and multimedia presentations, although from time to time it supplements
its in-house resources with outside specialists. The Company's facility includes
a video studio, three video-editing bays, 10 multimedia editing stations and
other office space necessary to accomplish these tasks. The Company utilizes
approximately 8,000 square feet for product development.
The Company has created a product development system that utilizes
specialized technologies and a streamlined development process. The development
technologies consist of the Company's proprietary
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software, off-the-shelf software and licensed tools, which have been optimized
to create technology-based training products. The development process controls
the course development, incorporating feedback mechanisms that monitor quality
assurance from script writing to finished product. The Company believes that its
product development system is a competitive strength that enables it to (i)
create courses that are deliverable via CD-ROM, videotape, LANs, intranets or
the Internet, (ii) change or enhance portions of a course without recreating the
entire course, (iii) create courses that support a common product architecture
and interface and (iv) shorten time to market at a relatively low cost.
The Company's software research and development involves a formal process
to guide software development through stages of product concept, market
requirements, analysis, product definition, design specification, coding,
testing and release. These efforts are also focused on identifying, developing
and integrating leading technologies into the Company's products.
CHART
SALES AND MARKETING
The Company sells and markets its technology-based IT training products and
graphics software products directly to end-users and through resellers and
distributors. During 1997, the Company achieved approximately 41% of its
revenues through direct sales to end-users and approximately 59% of its revenues
through resellers and distributors.
Direct Sales. The Company's direct marketing methods include national
advertising in periodicals such as Windows Magazine, PC Magazine and Windows
Sources, in addition to direct mail advertising and exhibition at more than 80
trade shows, such as COMDEX, throughout the United States annually. The
importance of trade shows to the Company is considerable in that a total of 86
employees attended, and represented the Company, at least one trade show during
1997. The Company is also involved in various marketing activities on the
Internet. Orders are received by telephone, fax, mail, e-mail and Internet web
site. The Company staffs telephones for inbound sales calls 24 hours per day,
seven days per week.
Distribution. More than 900 active dealers and resellers purchase directly
from the Company. The Company also sells to distributors, such as Ingram, who
supply dealers and resellers with the Company's products. The Company supports
advertising through the distribution channel using advertising allowances for
approved ads, payments for retail endcaps and allowances and payments for
display space in distributor catalogs.
The Company relies heavily upon sales to Ingram, a major distributor that
supplies computer-related products to other resellers, including some major
retailers. Sales to Ingram accounted for approximately 17% of the Company's
revenues for 1997. The Company also relies heavily upon sales to certain
retailers, including Computer City, Inc., CompUSA Inc., Sears Roebuck & Co, and
Best Buy Company, Inc. Sales to the Company's eight top retailers accounted for
approximately 26% of the Company's revenues for 1997. The Company is currently
investing, and intends to continue to invest, significant resources to develop
these channels.
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Of the Company's sales in 1995, 1996 and 1997, 81%, 69% and 81%,
respectively, were of the Company's training products and 19%, 31% and 19%,
respectively, were of the Company's software products. Prior to the acquisition
of ASBC in 1995, the Company had no sales of software products. See Note 10 of
Notes to Financial Statements.
Sales to countries other than the United States and Canada accounted for 7%
of the Company's 1997 revenues. Japan and the United Kingdom accounted for 2%
and 1.3%, respectively, of the Company's 1997 revenues.
CUSTOMERS (END-USERS)
The Company's training products are used to educate people in the use of
software. The Company estimates that about two-thirds of its training customers
use the products for work-related activities, and one-third use the products for
personal improvement. The Company estimates that about one-third of DesignCAD
users are professional engineers and about one-third use DesignCAD for
architectural and building applications. The remaining customers use DesignCAD
for a wide variety of purposes, such as facilities management, technical
illustration and casual drawing.
The Company has an extensive and diverse list of end-users, including
thousands of users from various industries including telecommunications,
technology, oil and gas, healthcare, insurance, government, finance and
education.
CUSTOMER SUPPORT
The Company believes that its ability to provide quality customer service
and support to its distributors and end-user customers is essential to continued
product acceptance. The Company has a 30-day return policy on all products and
offers extended terms and return policies to some major retailers and
distributors. The Company's customer support services are as follows:
Technical Support. The Company's technical staff provides telephone, fax,
mail and e-mail support to the entire customer base. In addition, qualified
developers and partners who work closely with the Company's products have
extended access to the Company's Internet support site, which contains technical
updates and technical maintenance files.
Customer Service. The Company's customer service staff provides processing
and shipping information on current and future orders. These personnel also deal
with any customer inquiries involving delivery, availability, priority handling
and replacement products.
PRODUCTION AND SUPPLIERS
Most of the production of the Company's products takes place on-site. The
Company's facility includes 200 duplicating VCRs, diskette duplicators, CD-ROM
duplicators, numerous shrink-wrap machines and other equipment necessary to
complete the production of the products. The Company outsources the actual
"stamping" of CD-ROMs to high volume producers. The Company utilizes
approximately 12,000 square feet of its facility and 33 employees in production
of the products.
Inventories of finished goods are generally kept at levels equal to one to
six weeks of orders. The principal physical components of the Company's products
are diskettes, CD-ROMs, videotapes, printed material and manuals. The Company
keeps significant inventories of these raw materials in order to meet rapid
delivery requirements of its customers. The materials that make up these
principal physical components of the Company's software products are available
from a number of suppliers. The Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products due to
product availability or material returns due to product defects.
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INTELLECTUAL PROPERTY RIGHTS
The Company regards certain features of its internal operations, software
and documentation as its intellectual property. The Company believes that,
because of the rapid pace of technological change in the computer software
industry, trade secret and copyright protection are less significant than
certain other factors. These factors include the knowledge, ability and
experience of the Company's employees, frequent product enhancements and the
timeliness and quality of support services. The Company relies on a combination
of contract, copyright, trademark and trade secret laws and other measures to
protect its intellectual property. The Company has no patents. The Company
licenses its software products primarily under "shrink-wrap" licenses that are
not signed by its licensees. These shrink-wrap licenses may be unenforceable
under the laws of certain jurisdictions. See "Risk Factors -- Dependence on
Intellectual Property Rights; Risk of Infringement."
The Company provides its products to customers on a "right-to-use" basis
under non-exclusive licenses, which generally are non-transferable and have a
perpetual term. The Company typically licenses its products solely for the
customer's internal operations.
COMPETITION
The market for technology-based IT training products and graphics software
products is highly competitive and is characterized by rapid changes in
technology and frequent introductions of new platforms and features. The Company
expects competition to increase as other companies introduce additional and more
competitive products in these markets. In its video training business, the
Company competes primarily with a number of small private companies. In its
multimedia training business, the Company competes directly against a number of
small private companies and indirectly with a number of large computer-based
training vendors, most of whom are expected to enter the multimedia training
business. Some of these computer-based training vendors, such as CBT Group,
P.L.C., Gartner Group, Inc., and National Educational Training Group, Inc., have
larger technical staffs, greater brand recognition and market presence, more
established and larger marketing and sales organizations and substantially
greater financial resources than the Company. CBT Group, P.L.C., an industry
leader, has developed a strong position in IT training with products focused on
more technical applications oriented to corporate customers.
Some of the Company's competitors in the graphics software business such as
Autodesk, Inc., International Microcomputer Software, Inc. and Visio Corporation
have larger technical staffs, greater brand recognition and market presence,
more established and larger marketing and sales organizations and substantially
greater financial resources than the Company. See "Risk Factors -- Competition."
The Company believes that the competitive factors affecting the market for
the Company's products include product performance, price and quality; product
functionality and features; the availability of products for existing and future
platforms; the ease of use and ease of integration of the products with other
hardware and software components; and the quality of customer support services.
The Company's present or future competitors may be able to deliver products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to remain successful in the software products market, the Company must respond
to technological change, customer requirements and competitors' current
products, product enhancements and innovations. In particular, the Company
recently introduced its multimedia training product line that is deliverable via
CD-ROM, LANs, intranets or the Internet. The Company is currently developing
additional products and enhancements for this product line in an effort to
respond to customer feedback and new technological advances. See "Risk
Factors -- Competition."
BACKLOG; SEASONALITY
The Company typically ships its products within a short period after
acceptance of orders from distributors and other customers. Accordingly, the
Company typically does not have a material backlog of unfilled orders and net
sales in any quarter are substantially dependent on orders booked in that
quarter.
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The Company has not experienced material seasonality, and does not
anticipate material seasonality in the future.
FACILITIES
The Company's administrative, marketing, production and product development
facilities consist of approximately 68,000 square feet at a single location in
Pryor, Oklahoma. The Company owns and occupies this facility and the five acres
of land on which it is located, the latter offering room for possible expansion.
See "Certain Transactions -- ASBC Acquisition."
The Company believes that its facilities are suitable and adequate for its
operations as now conducted and as currently foreseen.
EMPLOYEES
As of December 31, 1997, the Company had a total of 145 employees including
93 employees in sales, marketing, technical support and customer service, 44
employees in research and development and eight employees in administration. A
number of the Company's employees or their spouses are enrolled members of
Indian Tribes employed within specified portions of the State of Oklahoma, for
which the Company receives certain tax benefits. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Year Ended December 31, 1997 Compared to Year Ended December 31,
1996." The Company has allocated approximately 8,000 square feet of its
facilities to recreational, physical fitness and child-care facilities for its
employees and offers flexible work schedules to many of its employees. None of
the Company's employees are represented by a labor union. Management believes
that the Company's relations with its employees are good.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation arising out of
operations in the normal course of business, none of which is expected to have a
material adverse effect on its results of operations or financial position.
30
<PAGE> 31
MANAGEMENT
The directors, executive officers and key managers of the Company and their
ages as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael A. Webster..................... 39 Chairman of the Board, President and
Chief Executive Officer
Robert E. Webster...................... 42 Executive Vice President, Secretary
and Director
Robert C. Moore, Jr.................... 50 Treasurer and Chief Financial Officer
Chao-Chyuan Shih....................... 45 Director of Software Development
Austin E. Acuff........................ 51 Retail Sales Manager
Roy L. Bliss........................... 55 Director nominee
Stephen P. Gott........................ 48 Director nominee
Gerald R. Harris....................... 66 Director nominee
</TABLE>
Michael A. Webster has served as Chairman of the Board, President and Chief
Executive Officer since the Company's inception in 1990. Mr. Webster served as
General Manager of Champion Electronics, Inc., a company operating Radio Shack
dealership outlets involved in computer retailing, from October 1984 to December
1989. He holds a Bachelors Degree in Music from Oklahoma State University. In
1997, Mr. Webster completed the Owners/Presidents Management program offered at
Harvard Business School. Michael A. Webster is the brother of Robert E. Webster.
Robert E. Webster has served as Director, Vice President and Secretary
since the Company's inception in 1990. Mr. Webster served as Director and Vice
President of ASBC from July 1981 to August 1995. He has served as Executive Vice
President on the Company's management team since 1995, after the Company
acquired ASBC. He holds a Bachelors Degree in Computer Science and a Masters
Degree in Computer Science, both from Oklahoma State University. Robert E.
Webster is the brother of Michael A. Webster.
Robert C. Moore, Jr. has served as Chief Financial Officer since July 1997
and Treasurer since October 1997. Mr. Moore served as Vice President and Chief
Financial Officer of Hughes Lumber Company in Tulsa, Oklahoma from June 1978 to
June 1997, and as Assistant Controller of a division of Evans Products Company
from October 1972 to May 1978. He holds a Bachelors Degree in Economics from
North Carolina State University and a Masters Degree in Business Administration
from the Darden Graduate School of Business Administration, University of
Virginia.
Chao-Chyuan Shih has served as Director of Software Development since
ViaGrafix acquired ASBC in August 1995. Mr. Shih served as Senior Programmer of
ASBC from August 1988 to August 1995. He holds a Bachelors Degree in Physics
from National Central University in Taiwan and a Masters Degree in Computer
Science from the University of Arkansas.
Austin E. Acuff has served as Retail Sales Manager since July 1994. Mr.
Acuff served as an instructor of business classes for Northeast Vo-Tech Center
from August 1988 to July 1994 and was employed by Wal-Mart as Store Manager from
July 1971 to August 1988. He attended Southwest Missouri State University,
majoring in Accounting and Business Administration.
Roy L. Bliss, of Tulsa, Oklahoma, will become a director of the Company on
the date of this Prospectus. Mr. Bliss is the founder of United Video Satellite
Group, Inc., a diversified satellite communications company serving cable and
satellite television systems, radio and data communications networks and client
software and network management requirements on a global basis. Mr. Bliss was
employed there from 1969 through 1996, at which time it was acquired by
Tele-Communications, Inc. He served as Chief Operating Officer from 1970 to
1996, as President from 1991 to 1996, and as a Director from 1984 to 1996. Mr.
Bliss is currently engaged in the management of his investments. He holds a
Bachelors Degree in Business Administration from Arizona State University.
31
<PAGE> 32
Stephen P. Gott, of Katonah, New York, will become a director of the
Company on the date of this Prospectus. Mr. Gott has been President and Chief
Executive Officer of Street Technologies, Inc. since its formation in 1995.
Street Technologies provides web-based streaming technology that enables users
to view synchronized audio, video, graphic animation and text over LANs,
intranets and the Internet. Mr. Gott was Partner and Chief Technology and
Operations Officer at Lehman Brothers, Inc., from 1986 to 1995. Mr. Gott was
General Manager and Senior Vice President at First Boston Corporation from 1982
to 1986. He holds a Bachelor of Science Degree from Northeastern University and
an Advanced Management Degree from Cornell University. Street Technologies, Inc.
has a development and licensing agreement with the Company. See "Certain
Transactions -- Street Technologies."
Gerald R. Harris, of Pryor, Oklahoma, will become a director of the Company
on the date of this Prospectus. Mr. Harris is the founder and President of Hem,
Inc., an industrial saw manufacturer established in 1966. Prior to founding Hem,
Inc., Mr. Harris worked as an engineer at Lawrence Radiation Laboratory in
Livermore, California. He holds a degree in Mechanical Design from Healds
College of Engineering.
Officers of the Company serve at the pleasure of the Board of Directors.
The term of office of each director of the Company ends at the next annual
meeting of the Company's shareholders or when his successor is elected and
qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and Compensation
Committee, both of which will be composed solely of independent directors.
Messrs. Bliss, Gott and Harris will comprise both the Audit Committee and the
Compensation Committee upon becoming directors of the Company on the date of
this Prospectus. The function of the Audit Committee is to make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plans for and results of the Company's annual
audit, approve professional services provided by and the independence of the
independent public accountants, consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls. The
function of the Compensation Committee is to establish a general compensation
policy for the Company, approve increases in directors' fees and salaries paid
to officers and senior employees of the Company, administer the 1995 ViaGrafix
Stock Option Plan and determine, subject to the provisions of the Company's
employee benefit plans, the extent of such participation and terms and
conditions under which benefits thereunder may be vested, received or exercised.
DIRECTOR COMPENSATION
Each member of the Board will be paid a fee of $500 for each Board of
Directors meeting attended. All directors will receive reimbursement of
reasonable expenses incurred in attending Board and committee meetings and
otherwise carrying out their duties. Upon completion of this offering, each
director and each director nominee will receive an option to purchase 10,000
shares of Common Stock under the 1995 ViaGrafix Stock Option Plan with a per
share exercise price equal to the initial public offering price. Each option
will be non-transferable except upon death (unless otherwise approved by the
Board), and will become exercisable with respect to one-fifth of the shares of
Common Stock issuable thereunder on each of the first five anniversaries of the
date of the grant if the individual is a director at such time.
32
<PAGE> 33
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation for
the year ended December 31, 1997 of the Company's Chief Executive Officer and
each executive officer of the Company who was compensated in excess of $100,000
in 1997 by the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION OTHER ALL
NAME AND ---------------- ANNUAL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
------------------ ---- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Michael A. Webster....................... 1997 $175,000 -- $2,506(1) --
President
Robert E. Webster........................ 1997 $125,000 -- $1,284(2) --
Executive Vice President
</TABLE>
- ---------------
(1) Consists of $1,900 in 401(k) matching contributions by the Company and $606
reflecting personal use of Company automobile.
(2) Consists of $577 in 401(k) matching contributions by the Company and $707
reflecting personal use of Company automobile.
The Company did not issue any restricted stock awards or other long term
compensation to such executive officers. Neither of the named executive officers
is party to an employment agreement with the Company.
The following table provides information regarding options granted to each
of the named executive officers during 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
# OF SHARES % OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS OPTION TERM(1)
OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION -----------------------
NAME DATE OF GRANT GRANTED EMPLOYEES ($/SHARE) DATE 5% 10%
---- ------------- ----------- ----------- -------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael A. Webster..... December 12 140,000 31.8% $13.00 December, $502,832 $1,111,128
2002
Robert E. Webster...... December 12 100,000 22.7% $13.00 December, $359,166 $ 793,663
2002
<CAPTION>
POTENTIAL
REALIZED VALUE
ASSUMING MARKET
PRICE EQUAL TO
NAME $13.00/SHARE(1)
---- ---------------
<S> <C>
Michael A. Webster..... --
Robert E. Webster...... --
</TABLE>
- ---------------
(1) The amounts under the columns labeled "5%" and "10%" are included by the
Company pursuant to certain rules promulgated by the Securities and Exchange
Commission and are not intended to forecast future appreciation, if any, in
the price of the Common Stock. Such amounts assume annual compound rates of
stock appreciation and are based on the assumption that the named persons
hold the options for the full term of the options. The actual value of the
options will vary in accordance with the market price of the Common Stock.
The column headed "Potential Realized Value Assuming Market Price equal to
$13.00/share" is included to demonstrate that the options were issued with
an exercise price equal to the Price to Public so that the holders of the
options will not realize any gain without an increase in the stock price
which would benefit all stockholders commensurately.
33
<PAGE> 34
1995 VIAGRAFIX STOCK OPTION PLAN
The 1995 ViaGrafix Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors and the shareholders in January 1995. The purpose of the
Option Plan is to attract and retain qualified personnel, to provide additional
incentives to employees, including officers, directors and consultants of the
Company and to promote the success of the Company's business. Pursuant to the
Option Plan, the Company may grant incentive stock options to employees and
officers and nonstatutory stock options to consultants, employees and directors.
A total of 1,000,000 shares of Common Stock has been reserved for issuance under
the Option Plan. As of December 31, 1997, options to purchase 70,766 shares of
Common Stock had been exercised under the Option Plan (of which 6,028 shares
were subsequently repurchased by the Company) and there were 611,977 shares of
Common Stock issuable upon exercise of outstanding stock options at a weighted
average per share exercise price of $9.75, including options granted in 1997 to
purchase 440,286 shares at the public offering price of which options to
purchase 140,000 shares and 100,000 shares were granted to Michael A. Webster
and Robert E. Webster, respectively. Options to purchase 323,285 shares remain
available for grant under the Option Plan. Although no vesting schedule is
required under the Option Plan, options previously granted under the Option Plan
generally can be exercised in staggered amounts over a five-year period
beginning one year after the date of grant. The exercise price of incentive
stock options granted under the Option Plan must be at least equal to the fair
market value of the stock subject to the option on the date of grant. The Option
Plan may be amended at any time by the Board, although certain amendments
require shareholder approval.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation provides
that the Company's directors shall not be personally liable to the Company or
its shareholders for monetary damages for breach of the director's fiduciary
duty as a director, provided that this provision does not limit the liability of
a director for any (a) breach of the director's duty of loyalty to the Company
or its shareholders, (b) act or omission not in good faith or which involves
intentional misconduct or a knowing violation of law, (c) liability for the
unlawful payment of dividends or redemption of stock, or (d) transaction from
which the director derived an improper personal benefit. This provision in the
Amended and Restated Certificate of Incorporation does not eliminate the duty of
care and, in appropriate circumstances, equitable remedies such as an injunction
or other forms of non-monetary relief would remain available under Oklahoma law.
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
The Company's Amended and Restated Certificate of Incorporation provides
for indemnification of directors and officers of the Company and persons who
serve at the request of the Company as a director or officer of another
corporation in which the Company owns stock for all liabilities, expenses,
(including attorneys' fees) and costs incurred in a legal proceeding in which he
is a party by reason of his having been an officer or director. The Amended and
Restated Certificate of Incorporation, however, excludes indemnification for
matters in which the officer or director is adjudged to have been guilty of
gross negligence or willful misconduct.
These indemnification provisions may be sufficiently broad to permit
indemnification of the Company's officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the Securities Act.
In the opinion of the Securities and Exchange Commission, indemnification for
liabilities arising under the Securities Act is against public policy and,
therefore, unenforceable. Accordingly, these indemnification provisions may not
limit the liability of directors and executive officers under the Securities
Act.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
pending or threatened litigation or proceeding which may result in a claim for
such indemnification by any director, officer, employee or other agent.
34
<PAGE> 35
CERTAIN TRANSACTIONS
ASBC ACQUISITION
On August 15, 1995, the Company acquired land, a building and all of the
2,500 outstanding shares of ASBC for $300,002 in cash and two 7.5% promissory
notes due August 15, 2000 (the "7.5% Notes") in the aggregate principal amount
of $4,300,000. See Notes 2 and 6 of Notes to Financial Statements. Prior to the
acquisition, the Company engaged in various business transactions with ASBC. See
Note 11 of Notes to Financial Statements.
The Company purchased 1,078 shares of ASBC common stock from Geocapital
III, L.P., holder of the Company's outstanding Preferred Stock which will be
converted into 488,571 shares of Common Stock prior to the closing of this
offering, for $1,500,000, which was paid with (i) $97,826 in cash, and (ii) an
unsecured $1,402,174 7.5% Note. Shortly prior to the transaction, Geocapital
III, L.P. had acquired its ASBC Common Stock from Robert E. Webster in exchange
for 488,571 shares of Common Stock.
The Company purchased from Robert E. Webster, a director and officer of the
Company, (i) the remaining 1,422 shares of ASBC common stock for $1,978,670 and
(ii) the property now owned and operated by the Company at One American Way,
Pryor, Oklahoma, for $1,121,332. Of the total purchase price of $3,100,002 due
to Robert E. Webster, the Company paid (i) $202,175 in cash, and (ii) $2,897,826
by delivery of a 7.5% Note secured by a mortgage on the property at One American
Way. Mr. Webster purchased 50% of the ASBC stock and the American Way real
estate from a party not affiliated with ViaGrafix approximately six months prior
to the acquisition. The purchase price for the acquisition of the ASBC stock and
real estate by ViaGrafix was determined based upon Mr. Webster's prior purchase
price and without any third party valuation or fairness opinion.
The Company intends to repay the outstanding principal and accrued interest
on the 7.5% Notes from the proceeds of the offering, of which $1,179,730
principal amount will be paid to Geocapital III, L.P. and $2,436,510 principal
amount will be paid to Robert E. Webster. See "Use of Proceeds" and Notes 2 and
6 of Notes to Financial Statements.
The Company effected the acquisition of ASBC to obtain (i) direct access to
ASBC's well-developed distribution channel for its training products, (ii)
ASBC's technical expertise and manpower for increased product development, (iii)
a revenue stream from ASBC's existing graphics software product line and
products in development and (iv) ASBC's facility that met the Company's current
needs and anticipated expansion.
STREET TECHNOLOGIES, INC.
On January 22, 1997, the Company entered into a Development and Licensing
Agreement with Street Technologies, Inc. ("Street") pursuant to which Street
agreed to pay royalties for sales of ViaGrafix multimedia products sold for use
over LANs, intranets and the Internet, and ViaGrafix agreed to pay royalties to
Street on licenses sold for multimedia training products developed using Street
products sold for use over LANs, intranets and the Internet. For the year ended
December 31, 1997, Street paid royalties of $315,000 to ViaGrafix and ViaGrafix
did not pay any royalties to Street. See Note 11 of Notes to Financial
Statements. Stephen P. Gott, who will become a director of the Company on the
day following the date of this Prospectus, is President and Chief Executive
Officer of Street.
35
<PAGE> 36
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1997 (after giving
effect to the conversion of the outstanding shares of Preferred Stock into
Common Stock prior to the closing of this offering and as adjusted for the sale
of the shares of Common Stock offered hereby) by (i) each person who is known by
the Company to own beneficially more than 5% of the Common Stock, (ii) each
director and executive officer of the Company and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COMMON STOCK SHARES TO OF COMMON STOCK
PRIOR TO THIS OFFERING(1) BE SOLD IN AFTER THIS OFFERING(1)
------------------------- THIS -----------------------
NUMBER PERCENT OFFERING(2) NUMBER PERCENT
----------- --------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
Michael A. Webster..................... 2,258,929(3) 51.9% 237,874 2,021,055(3) 33.1%
Robert E. Webster...................... 1,423,928 32.7 157,936 1,265,992 20.8
Geocapital III, L.P.(4)................ 488,571 11.2 54,190 434,381 7.1
One Bridge Plaza
Fifth Floor
Fort Lee, NJ 07024
Robert C. Moore, Jr.................... 3,429(5) * -- 3,429(5) *
All directors and executive officers as
a group (3 persons).................. 3,686,286 84.7 395,810 3,290,476(6) 53.9
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally provide that a person is
deemed to be the beneficial owner of securities as to which the person has
or shares the voting or investment power. Shares of Common Stock subject to
options currently exercisable, or exercisable within 60 days hereof, are
deemed outstanding for computing the percentage of the person holding such
options but not deemed outstanding for the computing of any other person.
The persons named in the group above have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them.
(2) Assumes no exercise of the Underwriters' over-allotment option granted by
the Selling Shareholders. See "Underwriting." If the over-allotment option
is exercised in full, Michael A. Webster, Robert E. Webster and Geocapital
III, L.P., will sell 174,441, 115,820 and 39,739 additional shares, and will
beneficially own 30.3%, 18.9% and 6.5% of the outstanding shares,
respectively.
(3) Includes 114,286 shares held by Michael A. Webster as Trustee for trusts for
the benefit of his minor children.
(4) Geocapital III, L.P. is an investment partnership of which Stephen Clearman
is the managing partner and Richard Vines and Lawrence Lepard are the
general partners.
(5) On January 19, 1998 Mr. Moore acquired these shares for $1.72 per share
pursuant to the exercise of a stock option granted on July 21, 1997.
(6) Excludes any shares of Common Stock that may be purchased in this offering
by the director nominees. The Underwriters have agreed to offer the
following shares of Common Stock to the following director nominees at the
Price to Public: (i) 10,000 shares of Common Stock to Roy L. Bliss, (ii)
10,000 shares of Common Stock to Stephen P. Gott and (iii) 1,000 shares of
Common Stock to Gerald R. Harris.
The Company and the Selling Shareholders are parties to a Registration
Rights Agreement dated August 16, 1994 (the "Registration Rights Agreement"),
which was entered into contemporaneously with Geocapital III, L.P.'s acquisition
of its Preferred Stock and provides that if shares of stock of the Company and
Geocapital III, L.P., Michael A. Webster or Robert E. Webster are registered for
sales under the Securities Act of 1933, the Company will pay the first $50,000
of all the aggregate registration expenses and the balance of such expenses will
be borne proportionately by the Company and the Selling Shareholders according
to the number of shares sold by each.
36
<PAGE> 37
The Registration Rights Agreement grants to the Selling Shareholders
piggyback registration rights for (i) the shares of Common Stock owned by
Geocapital III, L.P. and (ii) up to 2,982,857 shares of Common Stock in the
aggregate held by Michael A. Webster and Robert E. Webster (together, the
"Registrable Common"). In addition, under the Registration Rights Agreement, the
holders of 20% of the shares of Common Stock held by Geocapital III, L.P. or its
permitted assigns may require the Company to register such shares on Form S-3;
provided, however, that (i) such registration may be required no more than once
per year and (ii) the shares to be registered must have an aggregate proposed
offering price of not less than $500,000. The foregoing registration rights
extend with respect to each share of Registrable Common until such time (with
certain exceptions) as such share of Registrable Common has been sold.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred
Stock, $.01 par value per share, which may be issued in one or more series.
COMMON STOCK
As of December 31, 1997, there were 4,350,452 shares of Common Stock
outstanding and held of record by 53 shareholders, assuming the conversion of
all shares of the Preferred Stock into an aggregate of 488,571 shares of Common
Stock prior to the closing of this offering. Based upon the number of shares
outstanding as of that date and after giving effect to the issuance of the
1,750,000 shares of Common Stock offered by the Company hereby, there will be
6,100,452 shares of Common Stock outstanding upon the closing of this offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and the affirmative vote of the
holders of a majority of the outstanding shares is required for the approval of
most major corporate actions, including amendment of the Certificate of
Incorporation and certain mergers and other business combinations and except as
set forth below under "Anti-Takeover Provisions" and for the election of
directors. Directors are elected by a plurality of the shares voting, provided
that a quorum is present, and shareholders do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for, fully
paid and non-assessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
Upon the closing of this offering, there will be no shares of Preferred
Stock outstanding. The Board of Directors is authorized, subject to certain
limitations prescribed by law, without further shareholder approval, to issue
from time to time up to an aggregate of 10,000,000 shares of Preferred Stock in
one or more series and to fix or alter the designations, preferences, rights and
any qualifications, limitations or restrictions of the shares of each such
series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company.
37
<PAGE> 38
The Company has no present plans to issue any shares of Preferred Stock. See
"Risk Factors -- Ownership Concentration" and "Risk Factors -- Anti-Takeover
Considerations."
ANTI-TAKEOVER PROVISIONS
The Company is subject to the provisions of the Oklahoma Takeover
Disclosure Act of 1985 (the "Disclosure Act") regulating corporate takeovers.
The Disclosure Act requires certain notices to be given prior to making a
takeover offer. Such notices include filing a registration statement with the
Securities Administrator of Oklahoma and delivering a copy of such notice to the
Company. The Disclosure Act applies to offers to take over an issuer of publicly
traded securities of which at least 20% are held by Oklahoma residents. A
"takeover" offer includes offers in which the offeror discloses its intention
that, as a result of the offer: (i) the offeror will own more than 10% of any
class of equity securities or (ii) ownership of any class of equity securities
will be increased by more than 5%.
The Company is subject to the provisions of Section 1090.3 of the Oklahoma
General Corporation Act. That section provides, with certain exceptions, that an
Oklahoma public corporation may not engage in any of a broad range of business
combinations with a person or an affiliate or associate of such person who is an
"Interested Shareholder" for a period of three years from the date that such
person became an Interested Shareholder unless: (a) the business combination or
the transaction resulting in the person becoming an Interested Shareholder is
approved by the Board of Directors of the corporation before the person becomes
an Interested Shareholder, (b) upon consummation of the transaction which
resulted in the person becoming an Interested Shareholder, the Interested
Shareholder owned 85% or more of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding shares owned by persons who are
both officers and directors of the corporation and shares held by certain
employee stock ownership plans) or (c) on or after the date the person became an
Interested Shareholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock, excluding shares owned by the Interested
Shareholder, at an annual or special meeting. An "Interested Shareholder" is
defined as any person that is (a) the owner of 15% or more of the outstanding
voting stock of the corporation or (b) an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
Interested Shareholder.
The Oklahoma Shares Control Act ("OSCA") (Section 1145 et seq. of the
Oklahoma General Corporation Act) prohibits the voting of "control shares" of an
Oklahoma public corporation without the approval of a majority of shares held by
non-interested shareholders. Under the OSCA, "control shares" are shares
acquired by a person which causes his percentage ownership to exceed certain
statutorily prescribed ranges of ownership beginning at 20%. The OSCA was ruled
unconstitutional shortly after its adoption in 1987; however, it is believed
that certain amendments to the OSCA in 1990 and 1991 may have cured its
constitutional infirmities. The provisions of OSCA, which only apply to
acquisitions of control shares of a public corporation, do not apply with
respect to shares held by Michael A. Webster and Robert E. Webster to the extent
they owned the shares prior to the date of this Prospectus.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is UMB Bank, n.a.,
928 Grand Avenue, Kansas City, Missouri 64106.
LISTING
The Company has been approved for listing of the Common Stock on the Nasdaq
National Market under the symbol "VIAX", subject to official notice of issuance.
38
<PAGE> 39
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have an aggregate of
6,100,452 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options to
purchase Common Stock. Of these shares, the 2,200,000 shares sold in this
offering are freely tradable without restriction or further registration under
the Securities Act.
The remaining 3,900,452 shares of Common Stock are deemed "restricted
securities" as defined in Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered under the
Securities Act or if they qualify for an exemption from registration under the
Securities Act, including Rules 144, 144(k) and 701, summarized below.
Subject to the provisions of Rules 144, 144(k) and 701 and to the rights of
the Selling Shareholders to exercise certain registration rights, additional
shares will be available for sale in the public market as follows: (i) 228,571
shares will be available for immediate sale in the public market pursuant to
Rule 701 under the Securities Act on the date of this Prospectus, (ii) 64,738
shares will be eligible for sale pursuant to Rule 144 under the Securities Act
upon the expiration of lock-up agreements 90 days after the date of this
Prospectus and (iii) 3,607,143 shares will be eligible for sale pursuant to Rule
144 under the Securities Act upon the expiration of lock-up agreements 180 days
after the date of this Prospectus. See "Principal and Selling Shareholders."
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of Common Stock (approximately 61,005 shares immediately after this offering) or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the date on which notice of such sale is filed, subject
to certain restrictions. In addition, a person who is not an affiliate of the
Company, and has not been an affiliate of the Company at any time during the
three months preceding the sale, would be entitled to sell such shares under
Rule 144(k) without regard to the requirements described above if not less than
two years have elapsed since the shares were acquired from the Company or an
affiliate.
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired pursuant to written plans such as the 1995 ViaGrafix Stock
Option Plan may be resold by persons other than affiliates, beginning 90 days
after the date of this Prospectus, subject only to the manner of sale provisions
of Rule 144, and by affiliates, beginning 90 days after the date of this
Prospectus, subject to all provisions of Rule 144 except its one-year minimum
holding period.
Shortly after the date of this Prospectus, the Company intends to file a
Form S-8 registration statement under the Securities Act to register all shares
of Common Stock issuable under the 1995 ViaGrafix Stock Option Plan. See
"Management -- Director Compensation" and "-- 1995 ViaGrafix Stock Option Plan."
Such registration statement is expected to become effective immediately upon
filing, and shares covered by that registration statement will thereupon be
eligible for sale in the public markets, subject to Rule 144 limitations
applicable to affiliates.
Prior to this offering, there has not been any public market for the Common
Stock of the Company, and no prediction can be made as to the effect, if any,
that market sales of shares of Common Stock or the availability of shares for
sale will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through the sale of its
equity securities.
The Selling Shareholders (holding an aggregate of 3,607,143 shares of
Common Stock) have agreed that they will not, without the prior written consent
of the Representative of the Underwriters, sell or otherwise dispose of any
shares of Common Stock during the 180-day period following the date of this
Prospectus. See "Underwriting."
39
<PAGE> 40
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, the Underwriters named below have agreed, severally
and not jointly, through Southwest Securities, Inc., the Representative of the
Underwriters, to purchase from the Company and the Selling Shareholders and the
Company and the Selling Shareholders have agreed to sell to the Underwriters,
the number of shares of Common Stock set forth opposite the name of the
respective Underwriter at the Price to Public less the Underwriting Discount set
forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Southwest Securities........................................ 900,000
Raymond James & Associates, Inc. ........................... 140,000
Morgan, Keegan & Company, Inc. ............................. 140,000
D.A. Davidson & Co. ........................................ 90,000
Hoak Breedlove Wesneski & Co. .............................. 90,000
Janney Montgomery Scott Inc. ............................... 90,000
Needham & Company, Inc. .................................... 90,000
Pennsylvania Merchant Group Ltd. ........................... 90,000
Sanders Morris Mundy Inc. .................................. 90,000
Stephens Inc. .............................................. 90,000
C.E. Unterberg Towbin ...................................... 90,000
Van Kasper & Company........................................ 90,000
Wedbush Morgan Securities Inc. ............................. 90,000
Sovereign Securities, Inc. ................................. 40,000
WIT Capital Corporation..................................... 40,000
Equity Securities Investments, Inc. ........................ 40,000
---------
Total............................................. 2,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares offered hereby if any of the shares
are purchased.
The Underwriters have advised the Company that they propose to offer all or
a part of the shares offered hereby directly to the public at the Price to
Public set forth on the cover page of this Prospectus, that they may offer
shares to certain dealers at a price which represents a concession of $0.50 per
share and they may allow, and such dealers may reallow, a concession of not more
than $0.10 per share to certain other dealers. After the commencement of this
offering, the Price to Public and the concessions may be changed.
The Selling Shareholders have granted the Underwriters a 30-day option to
purchase up to 330,000 additional shares of Common Stock at the Price to Public
less the Underwriting Discount set forth on the cover page of this Prospectus.
The Underwriters may exercise the option only to cover over-allotments, if any,
in connection with the offering of the shares made hereby. To the extent the
Underwriters exercise the option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of additional shares of Common Stock as the number of shares set
forth opposite that Underwriter's name in the preceding table bears to the total
number of shares listed in such table.
The Company has additionally agreed to pay to Southwest Securities, Inc.,
solely by deduction from the proceeds of this offering, a financial advisory fee
equal to 0.75% of the total Price to Public of the shares sold by the Company
and the Selling Shareholders pursuant to the Underwriting Agreement. The fee is
for financial advisory services provided by Southwest Securities, Inc. to the
Company in connection with this offering and related matters.
The Selling Shareholders and certain other shareholders have agreed with
the Representative of the Underwriters not to sell or otherwise dispose of any
shares of Common Stock (other than the 330,000 shares
40
<PAGE> 41
subject to the over-allotment option), or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, for a period of 180 days
after the date of this Prospectus without the written consent of the
Representative. See "Shares Eligible for Future Sale."
The Representative of the Underwriters has advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock was determined by
negotiations between the Company and Representative of the Underwriters. Among
the factors considered in such negotiations were prevailing market conditions,
the results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies which the Company
and the Representative of the Underwriters believes to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant. The anticipated
initial public offering price set forth on the cover of this Prospectus is
subject to change as a result of market conditions and other factors.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Representative
to bid for and purchase the Common Stock. As an exception to these rules, the
Representative is permitted to engage in certain transactions that stabilize the
price of the Common Stock. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Representative creates a short position in the Common Stock in
connection with this offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representative may
reduce that short position by purchasing shares of Common Stock in the open
market. The Representative may also elect to reduce any short position by
exercising all or part of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. Neither the Company nor the
Representative makes any representation or prediction as to the direction or
magnitude of any effect that the transaction described above might have on the
price of the Common Stock. In addition, neither the Company nor the
Representative makes any representation that the Representative will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Company, Michael A. Webster and Robert E. Webster agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriter may be required to
make in respect thereof.
The Representative plans to offer shares at the Price to Public to Company
director nominees as follows: (i) 10,000 shares of Common Stock to Roy L. Bliss,
(ii) 10,000 shares of Common Stock to Stephen P. Gott and (iii) 1,000 shares of
Common Stock to Gerald R. Harris.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Johnson, Allen, Jones & Dornblaser, Inc., Tulsa,
Oklahoma. Members of such firm have indicated their intent to acquire
approximately 4,000 shares of Common Stock at the Price to Public. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Jackson Walker L.L.P., Dallas, Texas.
41
<PAGE> 42
EXPERTS
The financial statements and schedule of ViaGrafix Corporation as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 included in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities and Exchange Act of 1934, as amended (the "Exchange Act").
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (as amended, the
"Registration Statement") under the Securities Act with respect to the shares of
Common Stock offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information contained in the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus as to the contents of any agreement or other
document filed as an exhibit to the Registration Statement are not necessarily
complete, and in each instance reference is made to the copy of such agreement
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement, including exhibits and schedules thereto, may be inspected by anyone
without charge at the Commission's principal office in Washington, D.C. and
copies of all or any part thereof may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices located at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade
Center, New York, New York 10048, upon payment of certain fees prescribed by the
Commission. The Commission also maintains a World Wide Web site, which provides
online access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at the
address "http://www.sec.gov."
The Company intends to distribute to its shareholders annual reports
containing financial statements audited by its independent accountants and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial statements.
42
<PAGE> 43
VIAGRAFIX CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets as of December 31, 1996 and 1997............. F-3
Statements of Operations for the years ended December 31,
1995, 1996 and 1997....................................... F-4
Statements of Changes in Shareholders' Equity for the years
ended December 31, 1995, 1996 and 1997.................... F-5
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997....................................... F-6
Notes to Financial Statements............................... F-7
Schedule II -- Valuation and Qualifying Accounts for the
years ended December 31, 1995, 1996 and 1997.............. F-17
</TABLE>
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in respective
financial statements or notes thereto.
F-1
<PAGE> 44
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ViaGrafix Corporation
We have audited the accompanying balance sheets of ViaGrafix Corporation as
of December 31, 1996 and 1997, and the related statements of operations, changes
in shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. Our audits also included the financial statement
schedule included in the Index to Financial Statements. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ViaGrafix Corporation at
December 31, 1996 and 1997 and the results of operations and cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Tulsa, Oklahoma
January 30, 1998
F-2
<PAGE> 45
VIAGRAFIX CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $1,009,347 $ 217,654
Trade accounts receivable (net of allowance for doubtful
accounts of $60,254 in 1997)........................... 1,203,905 2,455,752
Inventories............................................... 830,572 1,411,257
Prepaid expenses.......................................... 281,886 314,668
Deferred income taxes..................................... 3,670 4,150
---------- ----------
Total current assets.............................. 3,329,380 4,403,481
Property, plant and equipment............................... 2,528,043 3,262,637
Accumulated depreciation.................................... (666,307) (959,025)
---------- ----------
1,861,736 2,303,612
Capitalized software (net of accumulated amortization of
$644,500 and $650,000 in 1996 and 1997, respectively)..... 5,500 --
Goodwill (net of accumulated amortization of $18,176 and
$31,395 in 1996 and 1997, respectively)................... 114,013 100,794
Deferred income taxes....................................... 801,269 611,022
---------- ----------
Total assets...................................... $6,111,898 $7,418,909
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 328,422 $ 847,890
Accrued liabilities....................................... 149,189 232,961
Income taxes payable...................................... 458,987 208,768
Current portion of long-term debt......................... 755,958 789,513
---------- ----------
Total current liabilities......................... 1,692,556 2,079,132
Long-term debt.............................................. 3,482,241 2,826,727
Shareholders' equity:
Common stock, $.01 par value, authorized 40,000,000
shares; issued 5,714,286 and 3,861,881 shares in 1996
and 1997, respectively................................. 57,143 38,619
Series A convertible preferred stock, $.01 par value;
authorized 10,000,000 shares; issued and outstanding
855,000 shares (liquidation value of $1,742,278 and
$1,797,619 at December 31, 1996 and 1997,
respectively).......................................... 8,550 8,550
Additional paid-in capital................................ 1,505,895 1,487,420
Unearned compensation..................................... -- (148,798)
Retained earnings......................................... 1,356,131 1,127,259
---------- ----------
2,927,719 2,513,050
Less 1,880,514 common shares in treasury, at cost in
1996................................................... 1,990,618 --
---------- ----------
Total shareholders' equity........................ 937,101 2,513,050
---------- ----------
Total liabilities and shareholders' equity........ $6,111,898 $7,418,909
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 46
VIAGRAFIX CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................. $7,230,214 $10,076,742 $13,694,696
Cost of sales......................................... 2,723,194 4,001,358 5,366,531
---------- ----------- -----------
Gross profit.......................................... 4,507,020 6,075,384 8,328,165
Selling, general and administrative expenses.......... 3,413,031 3,523,839 3,756,498
Research and development expenses..................... 320,000 467,000 1,162,000
Write-off of acquired in-process research and
development......................................... 1,397,000 -- --
Depreciation and amortization expense................. 432,563 684,882 319,281
---------- ----------- -----------
Operating profit (loss)............................... (1,055,574) 1,399,663 3,090,386
Other income (expense):
Interest income and other........................... 10,685 62,459 20,535
Interest expense.................................... (119,882) (324,547) (272,349)
---------- ----------- -----------
Income (loss) before income taxes..................... (1,164,771) 1,137,575 2,838,572
Provision (benefit) for income taxes:
Current............................................. 209,040 600,943 629,493
Deferred............................................ (667,054) (137,885) 186,437
---------- ----------- -----------
(458,014) 463,058 815,930
---------- ----------- -----------
Net income (loss)..................................... $ (706,757) $ 674,517 $ 2,022,642
========== =========== ===========
Computation of net income (loss) applicable to common
shares:
Net income (loss)..................................... $ (706,757) $ 674,517 $ 2,022,642
Preferred stock dividends............................. (24,917) -- (57,162)
---------- ----------- -----------
Net income (loss) applicable to common stock.......... $ (731,674) $ 674,517 $ 1,965,480
========== =========== ===========
Basic earnings (loss) per common share................ $ (.21) $ .18 $ .51
Weighted average common shares used in computing basic
earnings per share.................................. 3,503,309 3,831,360 3,859,443
Diluted earnings (loss) per common and common
equivalent share.................................... $ (.21) $ .15 $ .45
Weighted average common and common equivalent shares
used in computing diluted earnings per share........ 3,503,309 4,404,739 4,497,589
</TABLE>
See accompanying notes.
F-4
<PAGE> 47
VIAGRAFIX CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON PREFERRED ADDITIONAL UNEARNED RETAINED COMMON SHARES
STOCK STOCK PAID-IN CAPITAL COMPENSATION EARNINGS IN TREASURY TOTAL
---------- ---------- --------------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... $ 57,143 $ 17,100 $ 2,982,900 $ -- $1,421,598 $(3,500,000) $ 978,741
Conversion of 855,000
shares of Series A
convertible preferred
stock to 488,571 shares
of common stock........ -- (8,550) (1,491,450) -- -- 1,500,000 --
Declared and paid $.051
dividend per common
share equivalent on
616,571 common stock
equivalent shares
outstanding............ -- -- -- -- (31,291) -- (31,291)
Exercise of 12,571 stock
options................ -- -- -- -- (1,936) 4,400 2,464
Net loss................. -- -- -- -- (706,757) -- (706,757)
---------- ---------- ----------- ---------- ---------- ----------- ----------
Balance at December 31,
1995................... 57,143 8,550 1,491,450 -- 681,614 (1,995,600) 243,157
Purchase of 4,886
treasury common shares,
at cost................ -- -- -- -- -- (5,148) (5,148)
Exercise of 28,943 stock
options................ -- -- 14,445 -- -- 10,130 24,575
Net income............... -- -- -- -- 674,517 -- 674,517
---------- ---------- ----------- ---------- ---------- ----------- ----------
Balance at December 31,
1996................... 57,143 8,550 1,505,895 -- 1,356,131 (1,990,618) 937,101
Purchase of 1,143
treasury common shares,
at cost................ -- -- -- -- -- (2,200) (2,200)
Exercise of 29,252 stock
options................ -- -- 18,777 -- -- 10,493 29,270
Granted stock options at
price less than
estimated fair market
value.................. -- -- 180,835 (180,835) -- -- --
Amortization of unearned
compensation........... -- -- -- 32,037 -- -- 32,037
Declared and paid
approximately $.117
dividend per common
share equivalent on
common and preferred
shares outstanding..... -- -- -- -- (505,800) -- (505,800)
Cancellation of 1,852,405
treasury common shares,
at cost................ (18,524) -- (218,087) -- (1,745,714) 1,982,325 --
Net income............... -- -- -- -- 2,022,642 -- 2,022,642
---------- ---------- ----------- ---------- ---------- ----------- ----------
Balance at December 31,
1997................... $ 38,619 $ 8,550 $ 1,487,420 $ (148,798) $1,127,259 $ -- $2,513,050
========== ========== =========== ========== ========== =========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 48
VIAGRAFIX CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $ (706,757) $ 674,517 $ 2,022,642
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization expense................ 432,563 684,882 319,281
Deferred income tax provision (benefit).............. (667,054) (137,885) 186,437
Noncash interest expense............................. 49,439 142,342 --
Loss on disposal of assets........................... -- -- 9,419
Bad debt expense..................................... -- -- 107,497
Write-off of purchased research and development...... 1,397,000 -- --
Amortization of unearned compensation................ -- -- 32,037
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable...................................... (724,451) 2,987 (1,363,859)
Decrease (increase) in inventories................ 38,963 (5,585) (580,685)
Decrease (increase) in prepaid expenses........... (149,918) (113,418) (32,782)
Increase (decrease) in trade accounts payable..... 615,415 (401,036) 519,468
Increase in accrued liabilities................... 46,627 102,562 83,772
Increase (decrease) in income taxes payable....... (207,129) 428,447 (250,219)
---------- ----------- -----------
Net cash provided by operating activities.............. 124,698 1,377,813 1,053,008
INVESTING ACTIVITIES
Purchases of property, plant and equipment............. (30,776) (285,282) (744,013)
American Small Business Computers, Inc. acquisition.... (300,002) -- --
---------- ----------- -----------
Net cash used in investing activities.................. (330,778) (285,282) (744,013)
FINANCING ACTIVITIES
Repayments of debt..................................... (118,947) (137,623) (621,958)
Dividends paid to common and preferred shareholders.... (31,291) -- (505,800)
Purchase of treasury common stock...................... -- (5,148) (2,200)
Exercise of stock options.............................. 2,464 24,575 29,270
---------- ----------- -----------
Net cash used in financing activities.................. (147,774) (118,196) (1,100,688)
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents... (353,854) 974,335 (791,693)
Cash and cash equivalents at beginning of year......... 388,866 35,012 1,009,347
---------- ----------- -----------
Cash and cash equivalents at end of year............... $ 35,012 $ 1,009,347 217,654
========== =========== ===========
Supplemental cash flow information:
Interest paid........................................ $ 54,575 $ 168,794 300,626
========== =========== ===========
Income taxes paid.................................... $ 416,169 $ 173,000 $ 479,000
========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 49
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
General
The Company is engaged primarily in the business of producing and selling,
directly to end-users and through resellers and distributors, a wide range of
computer software training videos and interactive CD-ROM software training
products ("training products"). Beginning on August 15, 1995, the Company
entered into the business of developing and selling, directly to end-users and
through resellers and distributors, Computer-Aided Design ("CAD") software,
which is primarily used in the engineering and architectural fields.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents. Cash
equivalents consist of money market and investor accounts of $841,314 and
$166,394 at December 31, 1996 and 1997, respectively.
Revenue Recognition
The Company sells its CAD software with substantially no obligations beyond
the delivery date of the software. The Company's price for its products is fixed
at the date of sale, and the retailer's obligation to the Company is not
contingent on resale of the products or affected by damage or theft of the
products. Revenue is recognized on all products at the time of delivery. The
computer software training videos and interactive CD-ROM software training
products can be returned within 30 days or, for certain retailers, under a stock
return policy. The Company records an estimate of the amount, when significant,
of returns expected in the next 30 days or under each stock return policy at the
time of the initial delivery of the products.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the average cost method.
Prepaid Expenses
Throughout the year the Company participates in numerous trade shows. The
Company is required to prepay registration and booth fees for the trade shows.
These prepayments are included in prepaid expenses.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated using
accelerated methods over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and building improvements.......................... 10-39
Production equipment........................................ 5-7
Automobiles................................................. 5-7
Furniture and fixtures...................................... 5-7
</TABLE>
Interest is capitalized on borrowed funds used to finance building and
building improvement projects during construction. Approximately $28,400 of
interest was capitalized for the year ended December 31, 1997.
F-7
<PAGE> 50
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SOFTWARE RESEARCH AND DEVELOPMENT COSTS
The Company's policy is to capitalize any significant software development
costs subsequent to the establishment of technological feasibility until such
time as the product is available for general release. All costs incurred prior
to technological feasibility are expensed as research and development costs when
incurred. Due to the method employed by the Company to develop software, an
insignificant amount of costs are incurred between the date technological
feasibility is established, and when the products are ready for general release.
As described in Note 2, the Company allocates a portion of the cost of
acquired enterprises to intangible assets based upon the estimated fair value of
the intangibles, including software in various stages of development. The fair
value of software development projects which have not yet reached technological
feasibility and which have no alternative use are expensed as research and
development in the period acquired. The fair values of all other developed
software products are included in intangible assets and amortized over the
expected remaining life of the specific software products.
Income Taxes
Deferred income taxes are computed using the liability method and are
provided on all temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities.
Treasury Stock
Treasury stock purchases were accounted for under the cost method whereby
the entire cost of the acquired stock was recorded as treasury stock. Gains and
losses on the subsequent reissuance of shares were credited or charged to
additional paid-in capital or retained earnings, respectively, using the
specific identification method.
Incentive Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB No. 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Advertising Costs
Costs incurred for advertising are expensed when incurred. Advertising
expenses amounted to $904,580, $712,812 and $833,242 for the years ended
December 31, 1995, 1996 and 1997, respectively.
Earnings Per Share
Basic earnings (loss) per share are based on the average number of common
shares outstanding. Diluted earnings (loss) per share for 1995, 1996 and 1997
assumes conversion of the Company's Series A convertible preferred stock and
exercise of stock options outstanding using the treasury stock method. The
number of shares used in the earnings (loss) per share calculations for 1995 and
1996 have been restated to reflect the adoption of SFAS No. 128, "Earnings Per
Share."
F-8
<PAGE> 51
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock Split
Effective December 12, 1997, the Company executed a 1 for 1.75 reverse
stock split and also changed the par value of the common and preferred shares
from $.001 to $.01. All prior share and per share amounts have been restated to
reflect the reverse stock split and change in par value.
Fair Value Disclosure
The carrying value of the long-term debt approximates fair value due to the
current market rates. The financial assets and other liabilities approximate
their fair values because of the short maturity of those instruments.
New Accounting Standards
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," which requires that a company report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for a company's operating segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these statements
will not impact the Company's financial position, results of operations or cash
flows, and any effect will be limited to the form and content of the Company's
disclosures. Both statements are effective for fiscal years beginning after
December 15, 1997, with earlier application permitted. However, the Company will
not adopt these statements until 1998.
In November 1997, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition," which
supersedes SOP No. 91-1, "Software Revenue Recognition." The Company is required
to adopt SOP No. 97-2 for transactions entered into in fiscal years beginning
after December 15, 1997. Earlier application is permitted as of the beginning of
fiscal years or interim periods for which financial statements or information
have not been issued. Retroactive application is prohibited. The Company does
not plan to early adopt SOP No. 97-2 and it is not expected to significantly
impact the Company's financial position, results of operations or cash flows.
2. ACQUISITIONS
On August 15, 1995, the Company acquired land, a building and the
outstanding stock of American Small Business Computers, Inc. ("ASBC") for
$300,002 in cash and two 7.5% promissory notes due August 15, 2000, in the
aggregate principal amount of $4,300,000. Immediately prior to the acquisition,
ASBC was owned 43% by the holder of the Company's Series A convertible preferred
stock and 57% by an individual who is a minority shareholder in the Company and
a brother of the Company's majority shareholder. The majority shareholder of the
Company had no ownership interest in ASBC and was not an employee, officer or
director of ASBC prior to the purchase of ASBC by the Company. Before the
transaction, ASBC and the Company were not under common control. As a result,
the transaction was accounted for under Accounting Principles Board Opinion No.
16 ("APB No. 16"), "Accounting for Business Combinations," as a purchase.
In accordance with APB No. 16, the purchase price was allocated to the
tangible and specifically identified intangible assets acquired and liabilities
assumed based upon the estimated fair value of such assets and liabilities. The
excess of the purchase price and liabilities assumed over the fair value of
tangible and specifically identified intangible assets was recorded as goodwill
and is being amortized over 10 years. The fair value of software development
projects was computed based upon the discounted future cash flows expected to be
generated by such projects. The costs assigned to software development projects
related to products that had not yet reached technological feasibility and for
which the technology had no future alternative uses were expensed immediately as
in-process research and development. The costs assigned to projects for which
F-9
<PAGE> 52
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
technological feasibility had been achieved was amortized over the remaining
life of the respective product, which ranged from four to 24 months.
The following table presents the allocation of the purchase price between
assets acquired and liabilities assumed:
<TABLE>
<CAPTION>
BOOK VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Inventory................................................... $ 558,401 $ 558,401
Property, plant and equipment............................... 1,215,156 1,890,555
In-process research and development......................... -- 1,397,000
Software development........................................ -- 650,000
Less liabilities assumed.................................... (28,143) (28,143)
---------- ----------
$1,745,414 $4,467,813
==========
Purchase price.............................................. 4,600,002
----------
Goodwill.................................................... $ 132,189
==========
</TABLE>
The operating results of ASBC are included in the statements of operations
from the acquisition date forward. The capitalized software amortization expense
was $322,409, $322,091 and $5,500 for the years ended December 31, 1995, 1996
and 1997, respectively.
3. INVENTORIES
Inventories as of December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Finished goods.............................................. $113,133 $ 721,370
Raw materials............................................... 717,439 689,887
-------- ----------
$830,572 $1,411,257
======== ==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Land........................................................ $ 100,000 $ 100,000
Building and building improvements.......................... 1,215,118 1,614,696
Production equipment........................................ 1,094,890 1,309,148
Automobiles................................................. 78,840 183,016
Furniture and fixtures...................................... 39,195 55,777
---------- ----------
$2,528,043 $3,262,637
========== ==========
</TABLE>
F-10
<PAGE> 53
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The components of the provision (benefit) for income taxes for the year
ended December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 186,046 $ 534,839 $491,989
State.......................................... 22,994 66,104 137,504
--------- --------- --------
209,040 600,943 629,493
Deferred:
Federal........................................ (593,678) (122,718) 165,929
State.......................................... (73,376) (15,167) 20,508
--------- --------- --------
(667,054) (137,885) 186,437
--------- --------- --------
$(458,014) $ 463,058 $815,930
========= ========= ========
</TABLE>
A reconciliation of the statutory federal income tax rate to the provision
(benefit) for income taxes for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- ---------
<S> <C> <C> <C>
Expected provision (benefit) for federal income
taxes at the statutory rate....................... $(396,022) $386,776 $ 965,114
State income taxes -- net of federal benefit........ (46,125) 45,048 112,407
Income tax credits.................................. -- -- (282,602)
Other............................................... (15,867) 31,234 21,011
--------- -------- ---------
Provision (benefit) for income taxes................ $(458,014) $463,058 $ 815,930
========= ======== =========
</TABLE>
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred income tax assets:
Accrued vacation.......................................... $ 3,670 $ 4,150
Capitalized software...................................... 669,352 632,144
Related party interest accrual............................ 78,891 78,147
Goodwill.................................................. 53,026 26,531
-------- --------
Total deferred income tax assets.................. 804,939 740,972
Deferred income tax liabilities:
Tax over book depreciation................................ -- (125,800)
-------- --------
Net deferred income tax assets.............................. $804,939 $615,172
======== ========
</TABLE>
No valuation allowance of deferred income tax assets is considered
necessary as the realization of these assets is not dependent on future taxable
income or tax planning strategies.
6. LONG-TERM DEBT
The Company delivered two 7.5% promissory notes in the aggregate principal
amount of $4,300,000 for payment of part of the $4,600,002 purchase price of
ASBC (see note 11). The notes are payable in equal monthly installments over the
term of the notes with all unpaid principal and interest due August 15, 2000.
All
F-11
<PAGE> 54
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
interest not paid when due is considered additional principal. The notes are
equal in priority and no discrimination in favor of either holder as to payments
or any other actions can occur under the promissory notes.
The Company had $4,238,199 and $3,616,240 in outstanding principal under
the notes at December 31, 1996 and 1997, respectively. These amounts include
$49,439 and $142,342 of interest that has been reclassified as additional
principal in 1995 and 1996, respectively, and are due with the final scheduled
payment under the promissory notes.
The annual maturities of long-term debt at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998..................................................... $ 789,513
1999..................................................... 850,805
2000..................................................... 1,975,922
----------
Total.......................................... $3,616,240
==========
</TABLE>
One of the notes payable is secured by a first mortgage on the building and
land of the Company. The other note payable is unsecured. The notes also contain
restrictions which, among other things, requires the maintenance of acceptable
insurance for the benefit of the mortgagee on the property mortgaged.
7. SERIES A CONVERTIBLE PREFERRED STOCK
Prior to August 15, 1995, the Company had 1,710,000 shares of Series A
Convertible Preferred Stock, $.01 par value issued and outstanding. The shares
of preferred stock are convertible at any time into one common share for each
1.75 share of preferred stock held, unless an adjustment of such conversion
ratio is required in accordance with the Series A Convertible Preferred Stock
Purchase Agreement ("Agreement"). The Agreement states the conversion ratio will
change if and when the Company issues and sells any shares of common stock for a
price per share less than $3.0702 except for shares issued and sold under the
incentive stock option plan described in Note 8. On August 15, 1995, the holder
of 855,000 issued and outstanding shares of Series A Convertible Preferred Stock
exercised the right to convert those shares to common shares. After this
conversion, there are 855,000 remaining shares of Series A Convertible Preferred
Stock outstanding. The holders of preferred stock are entitled to receive a
preferred dividend at the discretion of the Board of Directors, and are also
entitled to a dividend equal to that of a common stock equivalent dividend, if
and when declared by the Board of Directors. The holders of each share of
preferred stock is entitled to the number of votes per share equal to the number
of shares of common stock into which each share is convertible.
Upon liquidation of the Company, whether voluntary or involuntary, the
holders of the Series A Convertible Preferred Stock are entitled to be paid,
before any distribution is made to any common stockholders, an amount equal to
the greater of: 1) $1.7544 per share plus an amount equal to an annual dividend
of $.13158 per share less all dividends previously declared and paid thereon, or
2) such amount per share as would have been payable had each such share been
converted to common stock prior to the liquidation of the Company.
8. STOCK OPTION PLAN
On January 26, 1995, the Company adopted an incentive stock option plan
(the "Plan") under Section 422(b) of the Internal Revenue Code, which received
shareholder approval. The Plan provides for the issuance of qualified and
nonqualified options to purchase shares of common stock of the Company at "fair
market value," as determined by the Board of Directors, to selected qualified
employees and contractors, respectively, of the Company. Options may be granted
under the Plan at any time after January 1, 1995 and prior to January 1, 2005.
Options vest and are exercisable as determined by the Board of Directors on a
grant-
F-12
<PAGE> 55
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
by-grant basis. Such options granted in excess of $100,000 will be considered
nonqualified. In 1995, the Board of Directors increased the number of shares of
common stock which is reserved under the Plan from 107,143 shares to 285,714
shares and in 1997 from 285,714 shares to 1,000,000 shares. The exercise price
per share is specified separately in the Plan agreement relating to each option
granted but can not be less than the fair market value per share of common stock
on the date of the grant.
Options transactions are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------- --------------
A3STOCK OPTIONS OUTSTANDING AND EXERCISABLE
<S> <C> <C>
Shares under option:
Granted................................................... 199,000 $ 1.00
Canceled.................................................. (6,857) .20
Exercised................................................. (12,571) .20
-------
Balance at December 31, 1995................................ 179,572 1.10
Canceled.................................................. (30,114) 1.05
Exercised................................................. (28,943) 1.05
-------
Balance at December 31, 1996................................ 120,515 1.12
Granted................................................... 527,857 11.13
Canceled.................................................. (7,143) 1.33
Exercised................................................. (29,252) 1.12
-------
Balance at December 31, 1997................................ 611,977 9.75
=======
</TABLE>
The exercise price for options outstanding as of December 31, 1997 ranged
from $0.19 to approximately $13.00. The weighted average remaining life of those
options is eight years. At December 31, 1997, 15,605 options are exercisable. On
December 12, 1997, the Company granted 440,286 additional common stock options
at the planned stock offering price. At December 31, 1997, 323,285 common shares
were reserved by the Company for future option grants under the Plan.
Each stock option exercise price was set by management based on its best
estimate of market value as of the date of grant. As a result of negotiations
with underwriters in connection with a planned stock offering, management, for
financial statement purposes, reassessed the fair value of its common stock as
of each grant date for the purpose of determining the amount of unearned
compensation expenses, if any, under APB No. 25. Based upon management's revised
estimates, unearned compensation of $180,835 related to the January 1997 stock
option grants was accrued and is being amortized over the five-year vesting
period of the stock options granted in 1997. The weighted average estimated fair
market value of the common stock at the grant date for the January 1997 stock
options was $3.78.
SFAS No. 123 requires pro forma information regarding net income and
earnings per share to be determined as if the Company has accounted for its
employee stock options granted subsequent to December 31, 1995 under the fair
value method of SFAS No. 123. The fair value for these options was estimated at
the date of grant using a "minimum value" option pricing model. The following
weighted-average assumptions for 1995, 1996 and 1997 were used: risk-free
interest rate of 6%; a dividend yield of zero; and a weighted-average expected
life of each option of five years.
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
F-13
<PAGE> 56
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- ----------
<S> <C> <C> <C>
Pro forma net income (loss)....................... $(733,078) $659,673 $1,960,612
========= ======== ==========
Pro forma basic earnings (loss) per common
share........................................... $ (.22) $ .17 $ .49
========= ======== ==========
Pro forma diluted earnings (loss) per common and
common equivalent share......................... $ (.22) $ .15 $ .44
========= ======== ==========
</TABLE>
9. EARNINGS PER SHARE
The following sets forth the computation of basic and diluted earnings per
share for the year ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Numerator:
Net income (loss)............................... $(706,757) $ 674,517 $2,022,642
Preferred stock dividend........................ (24,917) -- (57,162)
--------- --------- ----------
Numerator for basic earnings per share income --
available to common shareholders................ (731,674) 674,517 1,965,480
Effect of dilutive securities -- preferred stock
dividend........................................ -- -- 57,162
--------- --------- ----------
Numerator for diluted earnings per share -- income
available to common shareholders after assumed
conversions..................................... $(731,674) $ 674,517 $2,022,642
========= ========= ==========
Denominator:
Denominator for basic earnings per
share -- weighted average shares*............ 3,503,309 3,831,360 3,859,443
Effect of dilutive securities:
Employee stock options.......................... -- 84,808 149,575
Series A convertible preferred stock............ -- 488,571 488,571
--------- --------- ----------
Dilutive potential common shares.................. -- 573,379 638,146
--------- --------- ----------
Denominator for diluted earnings per
share -- adjusted weighted-average
conversions..................................... 3,503,309 4,404,739 4,497,589
========= ========= ==========
</TABLE>
- ---------------
* Adjusted for the 1 for 1.75 reverse stock split. See Note 1.
<TABLE>
<CAPTION>
1995 1996 1997
----- ---- ----
<S> <C> <C> <C>
Basic earnings per share.................................... $(.21) $.18 $.51
Diluted earnings per share.................................. $(.21) $.15 $.45
===== ==== ====
</TABLE>
10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company sells and markets, primarily in the United States and Canada,
its training products and software directly and through resellers and
distributors. Training product sales for the years ended December 31, 1995, 1996
and 1997 were 81% ($5,856,000), 69% ($6,953,000) and 81% ($11,093,000),
F-14
<PAGE> 57
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively, of total net sales. During the year ended December 31, 1997,
approximately 41% of the Company's net sales were through direct sales and 59%
through resellers and distributors. Approximately 17% and 26% of total net sales
were with one customer and eight retailers, respectively, for the year ended
December 31, 1997. The Company did not have any customers which individually
accounted for more than 10% of total sales for the years ended December 31, 1995
and 1996.
The Company does not require collateral from its customers. Its credit
policy is in accordance with normal industry trade and credit terms. Credit
losses relating to the Company's customers have not been significant.
11. RELATED PARTY TRANSACTIONS
The Company engaged in the following business activities with ASBC during
the year ended December 31, 1995 before it was purchased by the Company on
August 15, 1995:
<TABLE>
<S> <C>
Purchase of parts and raw materials......................... $10,453
Sales of training videos and supplies....................... $21,797
</TABLE>
The promissory notes described in Note 6 are payable to two shareholders of
the Company. The Company incurred $119,882, $324,547 and $300,748 of interest
expense during the years ended December 31, 1995, 1996 and 1997, respectively,
related to these promissory notes.
In January 1997, the Company entered into a developing and licensing
agreement with Street Technologies, Inc. ("Street") pursuant to which Street
agreed to pay royalties for networkable sales of the Company's multimedia
products and the Company agreed to pay royalties to Street on networkable
licenses sold for multimedia training products developed using Street products.
For the year ended December 31, 1997, Street paid royalties of $315,000 to the
Company. The president and chief executive officer of Street is expected to
become a director of the Company prior to completion of a planned stock
offering.
12. LEASE COMMITMENTS
The Company has lease commitments relating to real property it has vacated.
The Company has accrued the remaining lease obligation of $20,325 as of December
31, 1997 as a charge to rent expense during the year ended December 31, 1997.
The Company incurred $53,419, $30,919 and $55,032 of rental expense during
the years ended December 31, 1995, 1996 and 1997, respectively.
13. EMPLOYEE BENEFIT PLAN
In November 1997, the Company adopted a 401(k) plan into which
participating employees can defer up to 15% of their annual compensation up to a
specified limit. The Company matches 50% of each participating employee's
deferrals, not to exceed 6% of each participating employee's annual
compensation. The Company contributions to the Plan for the year ended December
31, 1997 were $10,983. The Company does not provide any post-retirement benefits
other than the 401(k) plan.
14. 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.
F-15
<PAGE> 58
VIAGRAFIX CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial information is in thousands, except for
earnings (loss) per share data:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Sales........................................... $1,198 $1,508 $ 2,325 $2,200
Gross profit.................................... 783 965 1,578 1,181
Income before taxes............................. 205 341 (1,050)* (661)*
Net income...................................... 124 207 (637) (401)
Basic earnings per share.......................... $ .04 $ .06 $ (.17) $ (.11)
Dilutive earnings per share....................... $ .03 $ .05 $ (.17) $ (.11)
Year ended December 31, 1996:
Sales........................................... $2,062 $3,145 $ 2,419 $2,451
Gross profit.................................... 1,181 1,954 1,429 1,511
Income before taxes............................. 79 576 359 124
Net income...................................... 45 340 209 81
Basic earnings per share.......................... $ .01 $ .09 $ .05 $ .02
Dilutive earnings per share....................... $ .01 $ .08 $ .05 $ .02
Year ended December 31, 1997:
Sales........................................... $2,866 $3,280 $ 3,656 $3,893
Gross profit.................................... 1,755 1,932 2,457 2,184
Income before taxes............................. 642 646 1,132 419
Net income...................................... 395 398 689 541**
Basic earnings per share.......................... $ .09 $ .10 $ .18 $ .14
Dilutive earnings per share....................... $ .09 $ .09 $ .15 $ .12
</TABLE>
- ---------------
* Losses before income taxes in the third and fourth quarters of 1995 are due
to the write-off of acquired in-process research and development and
amortization of capitalized software resulting from the acquisition of ASBC
on August 15, 1995.
** Net income is higher than income before taxes in the fourth quarter of 1997
due to the realization of tax credits for 1994-1997 as a result of the
passage of the Taxpayer Relief Act of 1997 in August 1997. The amount of the
credit was quantified and recorded in the fourth quarter of 1997.
F-16
<PAGE> 59
VIAGRAFIX CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT AMOUNTS BALANCE AT
BEGINNING CHARGED END OF
DESCRIPTION OF PERIOD TO EXPENSES DEDUCTIONS PERIOD
----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts.............. -- -- -- --
Year ended December 31, 1996:
Allowance for doubtful accounts.............. -- -- -- --
Year ended December 31, 1997:
Allowance for doubtful accounts.............. -- $107,497 $(47,243) $60,254
</TABLE>
F-17
<PAGE> 60
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS PROSPECTUS RELATES, OR AN
OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED,
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 11
Dividend Policy........................ 11
Dilution............................... 12
Capitalization......................... 13
Selected Financial Data................ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 21
Management............................. 31
Certain Transactions................... 35
Principal and Selling Shareholders..... 36
Description of Capital Stock........... 37
Shares Eligible for Future Sale........ 39
Underwriting........................... 40
Legal Matters.......................... 41
Experts................................ 42
Additional Information................. 42
Index to Financial Statements.......... F-1
</TABLE>
UNTIL MARCH 29, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
Viagrafix Logo
2,200,000 SHARES
VIAGRAFIX
COMMON STOCK
-----------------
PROSPECTUS
-----------------
SOUTHWEST SECURITIES
MARCH 4, 1998
======================================================
