UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
Commission file number 33-42633
ViaGrafix Corporation
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(Exact name of registrant as specified in its charter)
Oklahoma 73-1354168
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One American Way, Pryor, Oklahoma 74361
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(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (918) 825-6700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's $.01 par value common stock as
of August 5, 1999 was 5,788,866.
<PAGE 2>
ViaGrafix Corporation
FORM 10-Q
For the Quarter Ended June 30, 1999
INDEX
Part 1. Financial Information
Item 1. Consolidated Financial Statements Page
----
(a) Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 1998 3
(b) Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998 4
(c) Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998 5
(d) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part 2. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
<PAGE 3>
Part 1. Financial Information
Item 1. Consolidated Financial Statements
<TABLE>
ViaGrafix Corporation
Consolidated Statements of Operations Three Months Ended Six Months Ended
(Unaudited) (In thousands, except per share) June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
Net sales $ 5,959 $ 4,187 $ 13,304 $ 8,264
Cost of sales 1,788 990 3,651 1,964
---------- ---------- ---------- ----------
Gross profit 4,171 3,197 9,653 6,300
Selling, general and administrative 2,636 1,338 4,927 2,457
Advertising 1,824 787 5,201 1,607
Research & development 615 385 1,145 757
Depreciation & amortization 373 119 709 205
---------- ---------- ---------- ----------
Total operating expenses 5,448 2,629 11,982 5,026
---------- ---------- ---------- ----------
Operating profit (loss) (1,277) 568 (2,329) 1,274
Net interest income 98 161 212 163
---------- ---------- ---------- ----------
Income (loss) before income taxes (1,179) 729 (2,117) 1,437
Provision (benefit) for income taxes (469) 227 (856) 398
---------- ---------- ---------- ----------
Net income (loss) $ (710) $ 502 $ (1,261) $1,039
Basic earnings (loss) per share ($0.12) $0.08 ($0.22) $0.20
Weighted average common shares used in
computing basic earnings (loss) per share 5,788 6,144 5,814 5,272
Diluted earnings (loss) per share ($0.12) $0.08 ($0.22) $0.19
Weighted average common shares used in
computing diluted earnings (loss) per share 5,788 6,248 5,814 5,586
</TABLE>
<PAGE 4>
<TABLE>
ViaGrafix Corporation (Unaudited)
Consolidated Balance Sheets (In Thousands) June 30, December 31,
1999 1998
---- ----
<CAPTION>
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 7,203 $ 10,046
Short-term investments 3,100 3,000
Accounts receivable 3,332 4,713
Income taxes receivable 690 205
Inventories 2,757 1,909
Prepaid expenses 640 518
Deferred income taxes 523 57
---------- ----------
Total current assets 18,245 20,448
Property, plant and equipment 4,924 4,380
Accumulated depreciation (1,602) (1,316)
---------- ----------
3,322 3,064
Goodwill, net of amortization 81 88
Capitalized customer lists, net of amortization 29 207
Capitalized software, net of amortization 93 169
Prepaid royalties & licenses, net of amortization 388 543
Note receivable-officer 185 188
Deferred income taxes 415 509
---------- ----------
Total assets $ 22,758 $ 25,216
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 1,403 $ 1,767
Accrued liabilities 489 512
Notes payable - 103
---------- ----------
Total current liabilities 1,892 2,382
Minority interest in subsidiary 25 -
Stockholders' equity:
Common stock, $.01 par value, authorized 40,000,000
shares; issued and outstanding 5,788,184 and
5,866,340 shares in 1999 and 1998, respectively 58 59
Additional paid-in capital 19,760 20,506
Unearned Compensation (90) (104)
Retained earnings 1,113 2,373
---------- ----------
Total stockholders' equity 20,841 22,834
---------- ----------
Total liabilities and stockholders' equity $ 22,758 $ 25,216
</TABLE>
<PAGE 5>
<TABLE>
ViaGrafix Corporation Six Months Ended
Consolidated Statements of Cash Flows June 30,
(In Thousands) (Unaudited) 1999 1998
---- ----
<CAPTION>
<S> <C> <C>
Operating Activities
Net Income (loss) $ (1,261) $ 1,039
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 709 205
Deferred income tax provision (benefit) (372) 141
Non-cash compensation expense for sale of minority
interest in subsidiary 34 -
Minority interest in loss of subsidiary (9) -
Non-cash interest expense - 45
Loss on disposal of assets 2 2
Bad debt expense 166 66
Amortization of unearned compensation 15 17
Cash provided by (used in ) changes in
operating assets and liabilities:
Accounts receivable 1,215 (948)
Inventories (848) (99)
Prepaid expenses (122) 115
Accounts payable (364) 118
Accrued liabilities (23) 33
Income taxes receivable (485) (169)
Income taxes payable - (209)
------- -------
Net cash provided (used) by operating activities (1,343) 356
Investing Activities
Purchase of property, plant & equipment (585) (841)
Proceeds from disposal of equipment 32 -
Maturity of short-term investments 3,000
Purchase of short-term investments (3,100) -
Note receivable-officer 3 -
------- -------
Cash used in investing activities (650) (841)
Financing Activities
Initial public offering of common stock - 20,491
Purchase and cancellation of common stock (808) -
Repayments of debt (103) (3,661)
Exercise of stock options 61 53
------- -------
Net cash provided by (used in) financing activities (850) 16,883
------- -------
Net increase (decrease) in cash and cash equivalents (2,843) 16,398
Cash and cash equivalents at beginning of year 10,046 217
------- -------
Cash and cash equivalents at end of period $ 7,203 $16,615
</TABLE>
<PAGE 6>
ViaGrafix Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management of ViaGrafix Corporation, the accompanying balance
sheets and related interim statements of operations and cash flows reflect all
adjustments (consisting only of normal recurring items) necessary for their fair
presentation in conformity with generally accepted accounting principles.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses. Actual results may differ from these estimates. Net income (loss)
and comprehensive income (loss) are the same. Interim results are not
necessarily indicative of results for a full year. The information included in
this Form 10-Q should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and consolidated
financial statements and notes thereto included in the ViaGrafix Form 10-K for
the fiscal year ended December 31, 1998 as filed with the Securities and
Exchange Commission.
2. Inventories
Inventories consist of the following:
(Unaudited)
June 30, December 31,
1999 1998
---- ----
Finished goods................................ $ 1,728,000 $ 996,000
Raw materials................................. 1,029,000 913,000
----------- -----------
$ 2,757,000 $ 1,909,000
3. Effective Tax Rate
During the three months ended June 30, 1999 the effective tax rate was 39.8%
compared to 31.1% for the second quarter of 1998. The higher effective tax rate
in 1999 is due to the effect of tax credits being added to the tax benefit as
compared to tax credits being subtracted from the tax provision in the second
quarter of 1998.
During the six months ended June 30, 1999 the effective tax rate was 40.4%
compared to 27.7% for the first half of 1998. The higher effective tax rate in
1999 is due to the effect of tax credits being added to the tax benefit as
compared to tax credits being subtracted from the tax provision in the second
half of 1998. In addition, in the first half of 1998 the effective tax rate was
reduced due to the realization of tax credits for 1995 through 1997 resulting
from credits for increasing research activities. The amount of available credits
was quantified and the benefit recorded in the first quarter of 1998.
4. Stockholders' Equity
ViaGrafix announced on September 1, 1998 that our board of directors authorized
the repurchase of up to $3 million of our common stock. During the first quarter
of 1999 we repurchased 124,200 shares of our common stock for approximately
$808,000. Since September 1, 1998 ViaGrafix has repurchased 403,100 shares for
approximately $2.3 million. In the first half of 1999 and 1998, our employees
exercised approximately 46,000 and 44,000 options for ViaGrafix common stock for
approximately $61,000 and $53,000 respectively.
<PAGE 7>
5. Earnings Per Share
Basic earnings per share are based on the average number of common shares
outstanding during each period. Diluted earnings per share assumes conversion of
preferred stock to common stock and exercise of stock options outstanding using
the treasury stock method.
6. Legal Contingencies
On May 22, 1998 a lawsuit was filed in the United States District Court for the
Northern District of Texas by Jonathan L. Gordon, brought as a putative class
action against ViaGrafix and certain of its officers and directors claiming
violations of the Securities Act of 1933 for alleged misrepresentations and
omissions in the Prospectus issued in connection with our initial public
offering made in March 1998. Mr. Gordon and certain others have sought
designation as lead plaintiffs in the action. We believe the lawsuit is without
merit. Our response is not yet due.
From time to time ViaGrafix 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 our results of operations or financial position.
7. Acquisition
On July 31, 1998 ViaGrafix acquired certain assets of eTracks.com, Inc.
(formally known as Make It So, Inc.), a privately held company based in San
Mateo, California, that provides interactive email broadcast services for
businesses that rely on web-based commerce and transactions and operates
eTracks.com, an online community of currently more than 550,000 members, for
approximately $682,000. The transaction was financed with existing cash and was
accounted for as a purchase. The purchase price and related direct expenses
associated with the acquisition have been allocated based on the fair value of
the assets purchased. The results of operations for this acquisition have been
included in ViaGrafix's consolidated results of operations since the acquisition
date. Pro forma operating results are not presented, as they would not differ
materially from actual results for 1998. In January 1999 we issued common shares
equal to 5% ownership in eTracks.com to a key employee of eTracks.com. The value
per share of the issued shares equaled the fair value per share paid by
ViaGrafix in July 1998.
8. Merger with Learn2.com, Inc.
On June 7, 1999 it was announced that the ViaGrafix Board of Directors had
approved a merger agreement which provides for the combination of ViaGrafix with
Learn2.com, Inc., formerly known as 7th Level, Inc. Shareholder meetings for
both companies to vote on the merger will be held on August 23, 1999. If the
merger is completed, ViaGrafix will become a wholly-owned subsidiary of
Learn2.com, and holders of ViaGrafix common stock will receive 1.846 shares of
Learn2.com common stock for each share of ViaGrafix common stock held.
<PAGE 8>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This commentary should be read in conjunction with ViaGrafix's 10-K for the
fiscal year ended December 31, 1998 for a more complete understanding of our
financial condition and results of operations. The following discussion contains
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those contemplated by
the forward looking statements as a result of certain factors, including but not
limited to those disclosed under "Risk Factors" in our 10-K for fiscal year
ended December 31, 1998.
Results of Operations
ViaGrafix develops, produces and markets technology-based information technology
training products and graphics software products. Our information technology
training courses include interactive multimedia training courses delivered on
CD-ROM, LANs, intranets and the Internet, and video tutorials for a variety of
computer software. ViaGrafix has developed and markets more than 1,100 training
courses for most major 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 our multimedia
training products can offer them across a network to all employees. Our
principal graphics software product, DesignCAD, is a computer-aided design, or
CAD, package sold worldwide. ViaGrafix also produces several other CAD-related
software packages, and a line of graphics software products for the retail
market. The primary platform for both the training and software products is
Microsoft Windows. Our subsidiary, eTracks.com, Inc., provides interactive email
broadcast services for businesses that rely on web-based commerce and
transactions and operates eTracks.com, an online community of more than 550,000
members.
Net Sales. Net sales increased 42% to approximately $6.0 million in the three
months ended June 30, 1999 from approximately $4.2 million in the second quarter
of 1998. This reflects an increase in sales from existing and new information
technology training titles, and was primarily attributable to increases in the
volume of products sold rather than increases in prices. Net sales of more than
$1.0 million were contributed by our subsidiary eTracks.com, which was purchased
in July 1998. Net sales generated by eTracks.com in the second quarter of 1999
were 51% greater than their sales in the first quarter of 1999.
During the six months ended June 30, 1999 ViaGrafix's net sales were
approximately $13.3 million, a 61% increase over net sales of approximately $8.3
million during the same period in 1998. A significant portion of the
year-to-date increase in net sales was from sales to Internet resellers. Our
subsidiary, eTracks.com, generated approximately $1.7 million of our first half
sales in 1999.
Cost of Sales. Cost of sales increased 81% to approximately $1.8 million in the
three months ended June 30, 1999 from approximately $1.0 million for the three
months ended June 30, 1998. Cost of sales as a percentage of net sales increased
to 30.0% for the quarter ended June 30, 1999, from 23.6% for the same period in
1998. The increase in cost of sales as a percentage of net sales for 1999's
second quarter was primarily due to a higher cost of sales percentage realized
by eTracks.com on sales to its online community members, along with a lower
overall mix of high margin graphics software sales in the quarter.
<PAGE 9>
Cost of sales for the six months ended June 30, 1999 increased 86% to
approximately $3.7 million from approximately $2.0 million for the six months
ended June 30, 1998. Cost of sales as a percentage of net sales increased to
27.4% for the six months ended June 30, 1999, from 23.8% for the same period in
1998. The increase in the cost of sales as a percentage of net sales for the
first half of 1999 was primarily due to a higher cost of sales percentage
realized by eTracks.com on sales to its online community members.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased 97% to approximately $2.6 million in the three months ended
June 30, 1999 from approximately $1.3 million for the same period in 1998.
Selling, general and administrative expense as a percentage of net sales
increased to 44.2% for the quarter ended June 30, 1999, from 32.0% during the
same period in 1998. The increase was primarily a result of increased staffing
and commission expenditures, which increased 89% to $1.8 million in the second
quarter of 1999 compared to approximately $942,000 in 1998's second quarter. We
believe our staff additions will provide support for increased future sales. The
largest employee increases were in marketing and sales teams. ViaGrafix is
building an infrastructure to support our direct licensing and sales of training
courses to corporations, and we have increased our corporate sales staff from
two people at the end of the second quarter of 1998 to 15 people on June 30,
1999. Increased commission expenditures were a result of increased sales. The
balance of the increased selling, general and administrative expenditures was
primarily to service the planned increased staffing and facilities.
Selling, general and administrative expense increased 101% to approximately $4.9
million in the six months ended June 30, 1999 from approximately $2.5 million
for the same period in 1998. Selling, general and administrative expense as a
percentage of net sales increased to 37.0% for the first half of 1999, from
29.7% during the same period in 1998. The reasons for increased selling, general
and administrative expenditures during the first half of 1999 compared to the
first half of 1998 were the same as in the second quarter explained above.
Advertising. Advertising expense increased 132% to approximately $1.8 million in
the three months ended June 30, 1999 compared to approximately $787,000 during
the second quarter of 1998. Advertising as a percent of net sales increased to
30.6% during the second quarter of 1999 from 18.8% in 1998's second quarter.
Advertising expenditures are for cooperative advertising, advertising through
the channels of distribution, direct advertising, and print media advertising.
The majority of the increase in advertising is due to additional cooperative
advertising necessary to expand into Internet commerce. In addition, we expanded
our print media advertising and special product promotions during the quarter.
ViaGrafix expects our advertising expense to remain high in an effort to achieve
rapid growth in sales through Internet resellers.
Advertising expense increased 224% to approximately $5.2 million in the six
months ended June 30, 1999 compared to approximately $1.6 million during the
first half of 1998. Advertising as a percent of net sales increased to 39.1%
during the first half of 1999 from 19.4% in 1998's first half. The reasons for
increased advertising expenditures during the first six months of 1999 compared
to the same period in 1998 were the same as in the second quarter explained
above.
Research and Development Expense. Research and development expense increased 60%
to approximately $615,000 in the three months ended June 30, 1999 compared to
approximately $385,000 during the second quarter of 1998. Research and
development expense as a percentage of net sales increased to 10.3% during the
quarter ended June 30, 1999 from 9.2% during the same period in 1998. The
increase in research and development dollars expended reflects our commitment to
expand the number of information technology training courses offered. In
addition, the increase reflects costs associated with development of training
libraries in Spanish, French and German. Research and development expenditures
also included development efforts on Internet online delivery of training along
with research and development expenditures incurred by our subsidiary
eTracks.com to expand and enhance its interactive email broadcast services.
ViaGrafix believes that significant investment in research and development is
required to remain competitive in our markets and therefore, expects research
and development expense to continue to increase in future periods.
<PAGE 10>
Research and development expense increased 51% to approximately $1.1 million in
the six months ended June 30, 1999 compared to approximately $757,000 during the
first half of 1998. Research and development expense as a percentage of net
sales decreased to 8.6% during the six months ended June 30, 1999 from 9.2%
during the same period in 1998. The reasons for increased research and
development expenditures during the first half of 1999 compared to the same
period in 1998 were the same as in the second quarter explained above.
Depreciation and Amortization. Depreciation and amortization expense was
approximately $373,000 during the second quarter of 1999 representing 6.3% of
net sales, compared to approximately $119,000 representing 2.8% of net sales
during the second quarter of 1998. Depreciation and amortization related to
eTracks.com was approximately $138,000 during the second quarter of 1999. The
majority of the assets purchased from eTracks.com in July 1998 have depreciable
lives of 12 to 18 months. As a result, amortization related to eTracks.com will
be reduced significantly beginning in the third quarter of 1999. Amortization of
prepaid royalties to Learn2.com, Inc., formerly Street Technologies, was
approximately $78,000. The Development and Licensing Agreement with Learn2.com
was entered into in September 1998. The remainder of the increase in
depreciation and amortization expense was primarily attributable to asset
additions during the past year for expansion of facilities, production and
duplication equipment and computer hardware.
Depreciation and amortization expense was approximately $709,000 during the
first half of 1999 representing 5.3% of net sales, compared to approximately
$205,000 representing 2.5% of net sales during the first half of 1998.
Depreciation and amortization related to eTracks.com was approximately $271,000
during the first six months of 1999, and amortization of prepaid royalties to
Learn2.com, Inc., was approximately $155,000.
Net Interest Income. Net interest income was approximately $98,000 or 1.6% of
net sales for the three months ended June 30, 1999 compared to approximately
$161,000 or 3.8% of net sales during the second quarter of 1998. Interest income
was lower during the second quarter of 1999 due to lower available cash, cash
equivalents and short-term investment balances in 1999's second quarter compared
to the second quarter of 1998. The total of cash, cash equivalents and
short-term investment as of June 30, 1999 was approximately $10.3 million
compared to approximately $16.6 million as of June 30, 1998.
Net interest income was approximately $212,000 or 1.6% of net sales for the six
months ended June 30, 1999 compared to approximately $163,000 or 2.0% of net
sales during the first half of 1998. Net interest income was greater in the
first six months of 1999 in spite of lower available cash, cash equivalents and
short-term investment balances as a result of interest expense incurred during
the first quarter of 1998. A portion of the net proceeds from our initial public
offering on March 4, 1998 was used to retire all outstanding long-term debt.
Interest expense incurred in the first half of 1999, was approximately $2,000
compared to approximately $54,000 in interest expense in the first six months of
1998. Interest income generated in the first six months of 1999 was
approximately $214,000 compared to approximately $217,000 during the same period
in 1998.
<PAGE 11>
Liquidity and Financial Condition
ViaGrafix's cash, cash equivalents and short-term investments totaled
approximately $10.3 million at June 30, 1999. We announced on September 1, 1998
that our board of directors authorized the repurchase of up to $3 million of our
common stock. During the first quarter of 1999 we repurchased 124,200 shares of
our common stock for approximately $808,000. Since September 1, 1998 ViaGrafix
has repurchased 403,100 shares for approximately $2.3 million. In the first half
of 1999 and 1998, our employees exercised approximately 46,000 and 44,000
options for ViaGrafix common stock for approximately $61,000 and $53,000
respectively.
We believe that our cash, cash equivalents and short-term investment balances at
June 30, 1999 and cash generated from future operations will satisfy our
anticipated working capital requirements for at least the foreseeable future.
ViaGrafix operating activities during the period ending June 30, 1999 used net
cash of approximately $1.3 million, attributable primarily to the net loss of
$1.3 million, increased inventories due to increased operations and decreased
accounts payable, offset by decreased accounts receivable.
ViaGrafix's capital expenditures during the first half of 1999 were
approximately $585,000. Capital expenditures were primarily for expansion of
facilities, production and duplication equipment and computer hardware.
During the first quarter of 1999 we broke ground for a new 21,000 square-foot
building to expand our packaging, inventory handling and shipping operations. We
do not currently have any other significant commitments for capital
expenditures, and anticipate that we will continue to expand our facilities and
purchase equipment as needed to support our product research and development,
production of our products, sales and marketing, product support, and
administrative staff.
See note 3 and 8 for a discussion of change in effective tax rate between
periods and the proposed merger with Learn2.com, Inc.
Year 2000 Impact
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. ViaGrafix's computer
equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
ViaGrafix uses up-to-date, PC-based software for internal accounting and other
applications. We have completed testing of our internal accounting and other
significant applications and have found no Year 2000 defects. We have checked
our training products and graphics software products for Year 2000 defects and
have found none.
ViaGrafix may encounter some Year 2000 defects in the software it uses
internally, but it believes that these can be resolved as they are encountered.
We do not intend to do further testing of our internal systems for Year 2000
defects. ViaGrafix intends to continue to evaluate its products and services to
ensure they perform correctly in the year 2000. We have no contingency plans
related to the Year 2000 issue.
<PAGE 12>
We could encounter some Year 2000 defects in the products and services we
produce and market. If Year 2000 defects are encountered, we could be liable for
substantial legal claims and litigation, and the adverse publicity could have a
material adverse effect on the future sales of our products and services, even
after any Year 2000 defects are resolved. However, any material adverse effect
on our financial position and results of operations and cash flows cannot be
currently estimated.
ViaGrafix relies on outside suppliers for raw materials, outside distributors
for its finished products, financial institutions for its banking, and a number
of other third parties in its normal business operations. If these third-party
suppliers and service providers have substantial Year 2000 problems, it could
have a material adverse effect on our business. We are not requiring our
suppliers and service providers to provide Year 2000 readiness information.
ViaGrafix has not incurred and does not anticipate incurring material costs in
addressing Year 2000 issues.
We believe our largest risk regarding the Year 2000 issue is from legal claims
and litigation. ViaGrafix expects that there will be a large number of lawsuits
filed over Year 2000 issues in the United States because of the great publicity
of the Year 2000 issue. Even small Year 2000 problems encountered by ViaGrafix
could result in substantial legal claims, lawsuits, and class action lawsuits
against us, which in turn could have a material adverse effect on our financial
position.
Risk Factors
ViaGrafix encourages you to read the Risk Factors discussed in our Form 10-K for
the fiscal year ended December 31, 1998 as filed with the Securities and
Exchange Commission, as well as the Rick Factors discussed in the joint proxy
statement/prospectus dated July 22, 1999 included as a part of the Form S-4 as
filed with the Securities and Exchange Commission in connection with our
proposed merger with Learn2.com, Inc. Those risk factors are incorporated in
this Form 10-Q by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
ViaGrafix is exposed to the impact of interest rate and foreign currency
fluctuations. Our objective in managing this exposure to interest rate changes
is to maximize our potential interest income without sacrificing cash equivalent
and short-term investment quality. We will invest in instruments that are exempt
from Federal income taxes if the taxable equivalent yield is more attractive
than alternative fully taxed investments. ViaGrafix does not currently have
interest rate exposure from borrowing as we do not have a line of credit.
In the first half of 1999 and 1998 sales to countries other than the United
States and Canada accounted for 3% and 4%, respectively, of total net sales.
These international net sales are denominated in foreign currencies.
Consequently a decrease in the value of a relevant foreign currency in relation
to the U.S. dollar could adversely affect our net sales. ViaGrafix's foreign
currency transactional exposures exist primarily with the United Kingdom Pound,
the French Franc, the German Mark and the Japanese Yen.
ViaGrafix does not utilize interest rate swaps or hedge exposures with foreign
currency forward contracts.
<PAGE 13>
Part II. Other Information
Item 1. Legal Proceedings
See Note 6 to Consolidated Financial Statements, which is incorporated herein by
reference.
Item 2. Changes in Securities
See Note 8 to Consolidated Financial Statements, which is incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on May 20, 1999, the following
proposals were adopted by the margins indicated:
1. To elect a Board of Directors to hold office until the next annual
meeting of shareholders and until their successors are elected and
qualified.
Number of Shares
For Withheld
Michael Webster 5,129,987 200,031
Robert Webster 5,129,987 200,031
Roy Bliss 5,129,987 200,031
Stephen Gott 5,129,987 200,031
Gerald Harris 5,129,987 200,031
2. To approve an amendment to ViaGrafix's 1995 Stock Option Plan to increase
the number of shares covered by the Plan from 1,000,000 to 2,000,000.
For 3,447,641
Against 409,551
Abstain 39,200
Not voted 1,433,626
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Statement regarding computation of per share earnings (loss)
27. Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by ViaGrafix during the quarter ended
June 30, 1999
Items 3 and 5 are not applicable and have been omitted.
<PAGE 14>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ViaGrafix Corporation
Date: August 5, 1999 By: /s/ Robert C. Moore, Jr.
------------------------
Robert C. Moore, Jr.,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
<PAGE 15>
<TABLE>
Exhibit 11.
ViaGrafix Corporation
Computation of Earnings (Loss) Per Share
(Unaudited) (In thousands, except per share)
The following sets forth the computation of basic and diluted earnings (loss)
per share for the three and six months ended June 30:
1999 1998 1999 1998
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings (loss) per share:
Income (loss) available to common shareholders $ (710) $ 502 $ (1,261) $ 1,039
========== ========== ========== ==========
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares 5,788 6,144 5,814 5,272
Effect of dilutive securities:
Employee stock options N/A 104 N/A 125
Series A convertible preferred stock N/A - N/A 189
----- ----- ----- -----
Dilutive potential common shares N/A 104 N/A 314
----- ----- ----- -----
Denominator for diluted earnings (loss) per share -
adjusted weighted-average conversions 5,788 6,248 5,814 5,586
========== ========== ========== ==========
1999 1998 1999 1998
---- ---- ---- ----
Basic earnings per share $(0.12) $ 0.08 $(0.22) $0.20
Diluted earnings per share $(0.12) $ 0.08 $(0.22) $0.19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,203
<SECURITIES> 3,100
<RECEIVABLES> 3,648
<ALLOWANCES> 316
<INVENTORY> 2,757
<CURRENT-ASSETS> 18,245
<PP&E> 4,924
<DEPRECIATION> 1,602
<TOTAL-ASSETS> 22,758
<CURRENT-LIABILITIES> 1,892
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 20,783
<TOTAL-LIABILITY-AND-EQUITY> 22,758
<SALES> 13,304
<TOTAL-REVENUES> 13,518
<CGS> 3,651
<TOTAL-COSTS> 11,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (2,117)
<INCOME-TAX> (856)
<INCOME-CONTINUING> (1,261)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,261)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
</TABLE>
