UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
---------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1354168
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One American Way, Pryor, Oklahoma 74361
---------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (918) 825-6700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's $.01 par value common stock as
of April 28, 1999 was 5,788,184.
<PAGE 2>
ViaGrafix Corporation
FORM 10-Q
For the Quarter Ended March 31, 1999
INDEX
Part 1. Financial Information
Item 1. Consolidated Financial Statements Page
----
(a) Consolidated Statements of Operations
for the Three Months Ended March 31, 1999 and 1998 3
(b) Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998 4
(c) Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part 2. Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
<PAGE 3>
<TABLE>
Part 1. Financial Information
Item 1. Consolidated Financial Statements
ViaGrafix Corporation
Consolidated Statements of Operations Three Months Ended
(Unaudited) (In thousands, except per share) March 31,
1999 1998
---- ----
<CAPTION>
<S> <C> <C>
Net sales $ 7,345 $ 4,077
Cost of sales 1,863 974
------- -------
Gross profit 5,482 3,103
Selling, general and administrative 2,291 1,119
Advertising 3,377 820
Research & development 530 372
Depreciation & amortization 336 86
------- -------
Operating profit (loss) (1,052) 706
Net interest income 114 2
------- -------
Income (loss) before income taxes (938) 708
Provision (benefit) for income taxes (387) 171
------- -------
Net income (loss) $ (551) $ 537
Basic earnings (loss) per share ($0.09) $0.12
Weighted average common shares used in
computing basic earnings (loss) per share 5,839 4,400
Diluted earnings (loss) per share ($0.09) $0.11
Weighted average common shares used in
computing diluted earnings (loss) per share 5,839 4,923
</TABLE>
<PAGE 4>
<TABLE>
ViaGrafix Corporation (Unaudited)
Consolidated Balance Sheets (In thousands) March 31, December 31,
1999 1998
---- ----
<CAPTION>
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 8,468 $ 10,046
Short -term investments 3,000 3,000
Accounts receivable 4,215 4,713
Income taxes receivable 312 205
Inventories 2,047 1,909
Prepaid expenses 576 518
Deferred income taxes 412 57
---------- ----------
Total current assets 19,030 20,448
Property, plant and equipment 4,620 4,380
Accumulated depreciation (1,443) (1,316)
---------- ----------
3,177 3,064
Goodwill net of amortization 84 88
Capitalized customer lists net of amortization 118 207
Capitalized software net of amortization 131 169
Prepaid royalties & licenses net of amortization 465 543
Note receivable-officer 185 188
Deferred income taxes 435 509
---------- ---------- ---
Total assets $ 23,625 $ 25,216
Liabilities and stockholders' equity Current liabilities:
Trade accounts payable $ 1,611 $ 1,767
Accrued liabilities 341 512
Notes payable 105 103
---------- ---------- ---
Total current liabilities 2,057 2,382
Minority interest in subsidiary 29 -
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 19,755 20,506
Unearned compensation (96) (104)
Retained earnings 1,822 2,373
---------- ----------
Total stockholders' equity 21,539 22,834
---------- ----------
Total liabilities and stockholders' equity $ 23,625 $ 25,216
</TABLE>
<PAGE 5>
<TABLE>
ViaGrafix Corporation Three Months Ended
Consolidated Statements of Cash Flows March 31,
(In Thousands) (Unaudited) 1999 1998
---- ----
<CAPTION>
<S> <C> <C>
Operating Activities
Net income (loss) $ (551) $ 537
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 336 86
Deferred income tax provision (281) 107
Non-cash compensation expense for sale of
minority interest in subsidiary 34 -
Minority interest in loss of subsidiary (5) -
Non-cash interest expense 1 45
Bad debt expense 9 71
Amortization of unearned compensation 9 10
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 488 (599)
Decrease (increase) in inventories (138) (127)
Decrease (increase) in prepaid expenses (58) 34
Increase (decrease) in accounts payable (156) 120
Increase (decrease) in accrued liabilities (170) (69)
Increase in income taxes receivable (107) -
Decrease in income taxes payable - (196)
------ ------
Net cash provided (used) by operating activities (589) 19
Investing Activities
Purchase of property, plant & equipment (240) (364)
Note receivable-officer 3 -
------ ------
Cash used in investing activities (237) (361)
Financing Activities
Initial public offering of common stock - 20,491
Repurchase of common stock (808) -
Repayments of debt - (3,661)
Exercise of stock options 56 53
------ ------
Net cash provided by (used in) financing activities (752) 16,883
------ ------
Net increase (decrease) in cash and cash equivalents (1,578) 16,538
Cash and cash equivalents at beginning of year 10,046 217
------ -------
Cash and cash equivalents at end of period $8,468 $16,755
</TABLE>
<PAGE 6>
ViaGrafix Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management of ViaGrafix Corporation ("ViaGrafix" or the
"Company"), the accompanying balance sheets and related interim statements of
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. 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 Company's 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)
March 31, December 31,
1999 1998
---- ----
Finished goods.............................. $ 977,608 $ 996,164
Raw materials............................... 1,068,910 912,564
--------- ----------
$ 2,046,518 $ 1,908,728
3. 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.
4. 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 the Company and certain of its officers and directors claiming
violations of the Securities Act of 1933 for alleged misrepresentations and
omissions in the Company's Prospectus issued in connection with its initial
public offering made in March 1998. Mr. Gordon and certain others have sought
designation as lead plaintiffs in the action. The Company believes the lawsuit
is without merit. The Company's response is not yet due.
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 the Company's results of operations or financial
position.
<PAGE 7>
5. Acquisition
On July 31, 1998 the Company acquired certain assets of Make It So, Inc., a
privately held company based in San Mateo, California, that provides interactive
e-mail broadcast services for businesses that rely on web-based commerce and
transactions and operates ClubMail, an online community of currently more than
500,000 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 the Company'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 the Company issued common shares equal to 5% ownership in Make It
So to a key employee of Make It So. The fair value per share of the issued
shares equaled the fair value per share paid by the Company in July 1998. In
April 1999 the name of Make It So, Inc. was changed to eTracks.com, Inc. so as
to better describe the company's core business.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This commentary should be read in conjunction with the Company's 10-K for fiscal
year ended December 31, 1998 for a more complete understanding of the Company's
financial condition and results of operations. The following discussion contains
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those contemplated by
the forward looking statements as a result of certain factors, including but not
limited to those disclosed under "Risk Factors" in the Company's 10-K for fiscal
year ended December 31, 1998.
Results of Operations
ViaGrafix develops, produces and markets technology-based information technology
("IT") training products and graphics software products. The Company's IT
training courses include video tutorials and interactive multimedia training
courses delivered on CD-ROM, LANs, intranets and the Internet for a variety of
computer software. ViaGrafix has developed and markets more than 1,000 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 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. ViaGrafix also produces
several other CAD-related software packages, and a line of graphics software
products for the retail market. The primary platforms for both the training and
software products are Windows 3.1, Windows 95,Windows 98 and Windows NT. The
Company's subsidiary, eTracks.com, Inc., provides interactive email broadcast
services for businesses that rely on web-based commerce and transactions and
operates ClubMail, an online community of more than 500,000 members.
Net Sales. Net sales increased 80% to $7.3 million in the three months ended
March 31, 1999 from $4.1 million in the three months ended March 31, 1998. This
increase reflects an increase in sales from existing and new IT training titles,
and was primarily attributable to increases in the volume of products sold
rather than increases in prices. A significant portion of the increase in net
sales was from sales to Internet resellers. In addition, eTracks.com, which was
purchased in July 1998, contributed approximately $690,000 in sales for the 1999
quarter.
<PAGE 8>
Cost of Sales. Cost of sales increased 91% to $1.9 million in the three months
ended March 31, 1999 from approximately $974,000 for the three months ended
March 31, 1998. Cost of sales as a percentage of net sales increased to 25.4%
for the quarter ended March 31, 1999, from 23.9% for the same period in 1998.
The increase in the cost of sales as a percentage of net sales for 1999's first
quarter 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 105% to approximately $2.3 million in the three months ended
March 31, 1999 from approximately $1.1 million for the same period in 1998.
Selling, general and administrative expense as a percentage of net sales
increased to 31.2% for the quarter ended March 31, 1999, from 27.4% during the
same period in 1998. The increase was primarily a result of increased staffing
and commission expenditures, which increased 110% to $1.7 million in the first
quarter of 1999 compared to approximately $822,000 in 1998's first quarter.
Increased commission expenditures were a result of increased sales. The Company
believes its staff additions will provide support for increased future sales.
The largest employee increases were in marketing and sales teams. The Company is
building an infrastructure to support its direct licensing and sales of training
courses to corporations, and has increased its corporate sales staff from two
people at the end of the first quarter of 1998 to 15 people on March 31, 1999.
The balance of the increased selling, general and administrative expenditures
was primarily to service the planned increased staffing and facilities.
Advertising. Advertising expense increased 312% to approximately $3.4 million in
the three months ended March 31, 1999 compared to approximately $820,000 during
the first quarter of 1998. Advertising as a percent of net sales increased to
46.0% during the first quarter of 1999 from 20.1% in 1998's first 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, the Company
expanded its print media advertising and special product promotions during the
quarter. The Company expects its advertising expense to remain high in an effort
to achieve rapid growth in sales through Internet resellers.
Research and Development Expense. Research and development expense increased 42%
to approximately $530,000 in the three months ended March 31, 1999 compared to
approximately $372,000 during the first quarter of 1998. Research and
development expense as a percentage of net sales decreased to 7.2% during the
quarter ended March 31, 1999 from 9.1% during the same period in 1998. The
increase in research and development dollars expended reflects the Company's
commitment to expand its number of IT 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. The Company
believes that significant investment in research and development is required to
remain competitive in its markets and therefore, expects research and
development expense to continue to increase in future periods.
Depreciation and Amortization. Depreciation and amortization expense was
approximately $336,000 during the first quarter of 1999 representing 4.6% of net
sales, compared to approximately $86,000 representing 2.1% of net sales during
the first quarter of 1998. Depreciation and amortization related to eTracks.com
was approximately $134,000 during the quarter and amortization of prepaid
royalties to 7th Street.com, Inc., formerly Street Technologies, was
approximately $78,000. The Development and Licensing Agreement with 7th
Street.com was entered into in September 1998. 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. 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.
<PAGE 9>
Net Interest Income. Net interest income was approximately $114,000 or 1.6% of
net sales in the three months ended March 31, 1999 compared to approximately
$2,000 during the first quarter of 1998. A portion of the net proceeds from the
Company's initial public offering on March 4, 1998 were used to retire all
outstanding long-term debt, which lowered interest expense to approximately
$54,000 in the first quarter of 1998. Interest income in the first quarter of
1998 was approximately $56,000.
Provision (Benefit) for Income Taxes. During the three months ended March 31,
1999 the effective tax rate was 41.3% compared to 24.2% for the same period in
1997. In the first quarter 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.
Liquidity and Financial Condition
The Company's cash, cash equivalents and short-term investments totaled
approximately $11.5 million at March 31, 1999. The Company announced on
September 1, 1998 that its board of directors authorized the repurchase of up to
$3 million of its common stock. During the first quarter of 1999 the Company
repurchased 124,200 shares of its common stock for approximately $808,000. Since
September 1, 1998 the Company has repurchased 403,100 shares for approximately
$2.3 million. In the first quarter of 1999 and 1998 employees exercised
approximately 46,000 and 44,000 options for common stock of the Company for
approximately $56,000 and $53,000 respectively.
The Company believes that its cash, cash equivalents and short-term investment
balances at March 31, 1999 and cash generated from future operations will
satisfy its anticipated working capital requirements for at least the
foreseeable future. However, the Company could need additional funds in order to
fund business expansion, develop new or enhanced products, respond to
competitive pressures or acquire complementary products, businesses or
technologies. In the normal course of business, the Company evaluates
acquisitions of businesses, product lines and technologies that complement the
Company's business, like the eTracks.com acquisition in July 1998.
Company operating activities during the period ending March 31, 1999 used net
cash of approximately $618,000. Operating activities generated cash flows
through a decrease in accounts receivable of approximately $488,000 and
depreciation and amortization of approximately $336,000. During the quarter,
operating activities used cash from a net loss of approximately $551,000, a
deferred income tax benefit of $281,000, and increases in inventories and income
taxes receivable of approximately $303,000 and decreases in accounts payable and
accrued liabilities of approximately $326,000.
<PAGE 10>
The Company's capital expenditures during the first three months of 1999 were
approximately $240,000. Capital expenditures were primarily for expansion of
facilities, production and duplication equipment and computer hardware.
During the first quarter of 1999 the Company broke ground for a new 21,000
square-foot building to expand its packaging, inventory handling and shipping
operations. The Company does not currently have any other significant
commitments for capital expenditures, and anticipates that it will continue to
expand its facilities and purchase equipment as needed to support its product
research and development, production of its products, sales and marketing,
product support, and administrative staff.
Year 2000 Disclosure
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company'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.
The Company uses up-to-date, PC-based software for its internal accounting and
other applications. The Company has completed testing of its internal accounting
and other significant applications and has found no Year 2000 defects. The
Company has checked its training products and graphics software products for
Year 2000 defects and has found none.
The Company may encounter some Year 2000 defects in the software it uses
internally, but believes that these can be resolved as they are encountered. The
Company does not intend to do further testing of its internal systems for Year
2000 defects. The Company intends to continue to evaluate its products and
services to ensure they perform correctly in the year 2000. The Company has no
contingency plans related to the Year 2000 issue.
The Company could encounter some Year 2000 defects in the products and services
it produces and markets. If Year 2000 defects are encountered, the Company could
be liable for substantial legal claims and litigation, and the adverse publicity
could have a material adverse effect on the future sales of the Company's
products and services, even after any Year 2000 defects are resolved. However,
any material adverse effect on the Company's financial position and results of
operations and cash flows cannot be currently estimated.
The Company 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 the Company's business. The Company is not
requiring its suppliers and service providers to provide Year 2000 readiness
information.
The Company has not incurred and does not anticipate incurring material costs in
addressing Year 2000 issues.
The Company believes its largest risk regarding the Year 2000 issue is from
legal claims and litigation. The Company 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 the Company could result in substantial legal claims, lawsuits,
and class action lawsuits against the Company, which in turn could have a
material adverse effect in the Company's financial position
<PAGE 11>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of interest rate and foreign currency
fluctuations. The Company's objective in managing its exposure to interest rate
changes is to maximize its potential interest income without sacrificing cash
equivalent and short-term investment quality. The Company will invest in
instruments which are exempt from Federal income taxes if the taxable equivalent
yield is more attractive than alternative fully-taxed investments. The Company
does not currently have interest rate exposure from borrowing as it does not
have a line of credit, and its short-term loan is at a fixed 5% rate and matures
June 1, 1999.
In the first quarter 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 the Company's net sales. The Company's
foreign currency transactional exposures exist primarily with the U.K. Pound,
the French Franc, the German Mark and the Japanese Yen.
The Company does not utilize interest rate swaps or hedge exposures with foreign
currency forward contracts.
Part II. Other Information
Item 1. Legal Proceedings
See Note 4 to Consolidated Financial Statements, which is incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Statement regarding computation of per share earnings
27. Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by ViaGrafix during the quarter ended
March 31, 1999
Items 2, 3, 4 and 5 are not applicable and have been omitted.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ViaGrafix Corporation
Date: April 28, 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 12>
Exhibit 11.
<TABLE>
ViaGrafix Corporation
Computation of Earnings (Loss) Per Share
(Unaudited) (In thousands, except per share)
Thefollowing sets forth the computation of basic and diluted earnings (loss)
per share for the three months ended March 31:
1999 1998
---- ----
<CAPTION>
<S> <C> <C>
Numerator for basic and diluted earnings (loss) per share:
Income (loss) available to common shareholders $ (551) $ 537
========== =========
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares 5,839 4,400
Effect of dilutive securities:
Employee stock options N/A 145
Series A convertible preferred stock N/A 378
------ ------
Dilutive potential common shares N/A 523
------ ------
Denominator for diluted earnings (loss) per share -
Adjusted weighted-average conversions 5,839 4,923
========= =========
1999 1998
---- ----
Basic earnings (loss) per share $(0.09) $ 0.12
Diluted earnings (loss) per share $(0.09) $ 0.11
========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,468
<SECURITIES> 3,000
<RECEIVABLES> 4,372
<ALLOWANCES> 157
<INVENTORY> 2,047
<CURRENT-ASSETS> 19,030
<PP&E> 4,620
<DEPRECIATION> 1,443
<TOTAL-ASSETS> 23,625
<CURRENT-LIABILITIES> 2,057
<BONDS> 0
0
0
<COMMON> 58
<OTHER-SE> 21,481
<TOTAL-LIABILITY-AND-EQUITY> 23,625
<SALES> 7,345
<TOTAL-REVENUES> 7,460
<CGS> 1,863
<TOTAL-COSTS> 6,534
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (938)
<INCOME-TAX> (387)
<INCOME-CONTINUING> (551)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (551)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
