UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
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(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Registrant's voting stock held by non-affiliates
of the registrant as of March 19, 1999, was approximately $19,355,000. For
purposes of this computation, all officers, directors and 5% beneficial owners
of Registrant are deemed to be affiliates.
As of March 19, 1999, Registrant had outstanding a total of 5,788,184 shares of
its $.01 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed in connection
with the Annual Meeting of Stockholders to be held May 20, 1998, are
incorporated into Part III.
<PAGE 2>
ViaGrafix Corporation
Form 10-K Annual Report
For the Year Ended December 31, 1998
Table of Contents
Item Number and Caption Page Number
Part I.
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Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II.
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants and
Financial Disclosure 23
Part III.
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Item 10. Directors and Executive Officers of Registrant 23
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management 24
Item 13. Certain Relationships and Related Transactions 24
Part IV.
- --------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 24
Signatures 25
<PAGE 3>
PART I.
Item 1. Business
GENERAL
ViaGrafix Corporation (the "Company") 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 950 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. In 1998 the Company
introduced ViaDraw, its initial entry into a new 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.
Through its wholly owned subsidiary, Make It So, Inc., an Internet direct
marketing company, the Company provides e-mail list management services and
operates an Internet online community.
ViaGrafix 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.
On July 31, 1998, with the acquisition of Make It So, Inc. ("Make It So"), the
Company's product offerings were further expanded to include Internet direct
marketing with broadcast e-mail for businesses, and an online community of over
450,000 members that enables members to purchase products at a discount from
advertised retail prices.
Potential training customers include anyone who has a need to learn to use
computer software, including individuals, small businesses, corporations and
government agencies. Graphics software customers include architects, engineers,
designers and hobbyists. Potential customers for Make It So include any
individuals and businesses that are Internet-active.
ViaGrafix sells its products through distributors and resellers and direct
to end-users. ViaGrafix uses its own catalog, promotion of its 800 number and
its Internet web site to sell training and software products directly to
end-users. Direct sales are also achieved by direct-mail advertising to the
Company's database of existing customers and exhibition at approximately 100
trade shows, such as COMDEX, throughout the United States annually.
The Company has experienced growth in revenues since its inception
primarily as a result of internal product development. The Company's sales have
grown from $4.9 million in 1994 to $18.8 million in 1998.
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 International Data Corporation
("IDC"), the U.S. market for computer education and training grew to $8.3
billion in 1997 and is expected to reach $14 billion by the year 2002.
<PAGE 4>
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, system
integrators, network integrators, colleges, universities, and independent
service organizations.
The majority of IT training is still delivered by instructor-led training,
which accounted for $6.5 billion, or 78% of the total market, in 1997. 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 quickly gaining acceptance as a competent and
efficient method for software education. IDC estimates that technology-based IT
training [which includes computer-based training (CBT) CD-ROM/multimedia,
video-based training and electronic performance support systems (EPSS) and
distance learning] will grow from $1.5 billion in 1997 to $7.7 billion in 2002,
representing an annual growth rate of 40%.
Graphics Software Market. 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.
The ViaGrafix Solution
ViaGrafix designs, develops, markets, sells and supports its
technology-based IT training products and graphics software products based on
the following principles:
Leverage Internet Technologies. The Company's products employ Internet
technologies for delivery and communication. The Company's multimedia IT
training products are available via corporate intranets and the Internet. The
Company's software products utilize Internet technologies by offering Internet
file compatibility and direct e-mail support.
Optimize Training Products for Productivity. ViaGrafix 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. These courses allow users to fit training to their work
schedules, begin training at a level that 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. ViaGrafix 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 more technical
topics, such as MCSE certification, Visual C++ programming, Visual Basic, and
HTML programming.
Offer Easy-to-Use Graphics Software Products. ViaGrafix designs its
graphics software products, including DesignCAD and ViaDraw, to be fully
functional, easy-to-learn and easy-to-use. These products are used by
architects, engineers, inventors, designers, home hobbyists and others needing
computer-aided drafting and computer drawings.
Offer Products with Superior Value. ViaGrafix attempts to develop products
that can be marketed at a lower price than similar competing products.
Release Products to the Market Quickly. ViaGrafix attempts to develop its
products and release them to the market in a relatively short time frame.
<PAGE 5>
Growth Strategy
The Company's objective is to become a leading provider of technology-based
IT training products and graphics software products to the computer market. The
following are the key elements of the Company's strategy to achieve that
objective:
Expand Internet Sales and Delivery. The Company believes that its products
are well positioned for Internet commerce. The price points of the products,
which typically fall between $20 and $100, are affordable, and the products can
appeal to virtually any Internet user. The Company has developed its training
products to be deliverable via the Internet in real time, using audio and video
streaming. The Company will attempt to reach strategic relationships with major
Internet companies regarding the sales and delivery of Company products on the
Internet. The content of the Company's training courses is something that it
considers a valuable asset in the Internet marketplace.
Increase Direct Corporate Sales. ViaGrafix has created an internal
corporate sales force to increase direct sales to the corporate market.
Corporate sales currently account for a nominal portion of the Company's sales
and represent an area of potential sales growth for the Company's existing
product line. In addition to the Company's expanded sales force, the Company is
also adding additional features to its training products focused on the
corporate client. The Company's subscription licensing model offers customers
access to its courses using video, CD, client-server, intranet, or Internet
delivery.
Increase Sales through Major Retailers. The Company's sales to major
retailers have grown significantly 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
Expand Training Product Offerings. ViaGrafix has created a product
development system that utilizes development technologies and a streamlined
development process to reduce development time frame and cost. The Company
increased its development staff in 1998 to increase the size of its product
offering and introduce new training products earlier in the software product
sales cycle. This increase in development staff will continue in 1999. ViaGrafix
began adding courses on more technical material in 1998. A training library
containing comprehensive training for MCSE, Oracle, SQL, and technical Internet
topics is appealing to many consumer and corporate clients.
Expand Software Product Development. The Company expects to successfully
market new "easy-to-use" graphics software utilizing its established customer
base and sales channel. The Company has the ability to use its core DesignCAD
technology to produce these new products at a lower incremental cost. The
Company has new graphics software products under current development. These
products will expand the Company's software line into broader, less technical
areas. The Company also plans to create industry specific applications using the
DesignCAD engine.
Increase International Sales. The Company intends to boost international
sales and to continue a long-term effort to translate its products into other
languages, beginning with translations of its products into Spanish, German and
French. International sales account for more than 50% of many major software
companies' sales, but account for less than 10% of the Company's sales.
Expand Through Acquisition. The Company may engage from time to time in
discussions with respect to potential acquisitions. The Company will look
primarily for acquisitions that can offer additional content, additional sales
channels, or technology. The Company will consider its long-term prospects the
most important criteria.
<PAGE 6>
Products
Technology-based IT Training Products. The Company has developed and
markets more than 950 video and multimedia courses. The Company's principal
educational products are training videos and multimedia courses teaching today's
most popular software, including Microsoft Windows, Microsoft Office, the
Internet, Visual C++, Visual Basic, ACT!, Quicken, PageMaker, CorelDraw, Lotus
Notes, DesignCAD, and more.
Each application above may have from one to thirteen courses associated
with it. For example, the DesignCAD Pro 2000 training series consists of
"Learning DesignCAD Pro 2000, Introduction," "Learning DesignCAD Pro 2000,
Advanced," and "Learning DesignCAD Pro 2000, Solid Modeling." There are six
courses for Microsoft Excel 97, 12 courses for Windows NT 4 Microsoft Certified
Professional (Core), and five courses for Programming in Visual C++.
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 enable
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, corporate 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.
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 Pro 2000 is the latest CAD product offered
by the Company. DesignCAD Pro 2000, with a retail price of $299, offers true
solid modeling, extensive dimensioning, animation, Internet capability, file
compatibility with all the major file types, and object linking and embedding.
The Company introduced a line of graphics software products for the
consumer market in late 1998. ViaDraw, a general-purpose graphics package
released in November 1998, is the Company's first entry in this line. ViaCAD, a
low cost CAD package, was released in the first quarter of 1999. ViaPage, a
web-page editor, is currently under development and scheduled for release in the
second quarter of 1999. All of these new products are targeting the consumer
marketplace via retail stores and Internet commerce at a price point of $40-60.
Internet Marketing Products and Services. The Company's wholly owned
subsidiary, Make It So, provides Internet direct marketing services with
broadcast e-mail for businesses, and it offers a membership in ClubMail, an
online community of over 450,000 members. ClubMail members can purchase products
at a discount from advertised retail prices.
<PAGE 7>
Product Development
Since inception, the Company has made substantial investments in product
research and development. During 1998, 1997 and 1996, research and development
expenses were approximately $1.7 million, $1.2 million and $467,000,
respectively. As of December 31, 1998, the Company had 62 employees engaged in
research and development. Substantially all of the Company's product research
and development activities take place in its Pryor, Oklahoma facility.
Sales and Marketing
The Company sells and markets its technology-based IT training products and
graphics software products directly and through resellers and distributors.
During 1998, the Company achieved approximately 29% of its revenues through
direct sales and approximately 71% of its revenues through resellers and
distributors.
The Company relies heavily upon sales to Ingram Micro, Inc. ("Ingram"), a
major distributor that supplies computer-related products to other resellers,
including some major retailers. Sales to Ingram accounted for approximately 29%
of the Company's 1998 revenues. The Company also relies heavily upon sales to
certain retailers, including Best Buy Company, Inc., CompUSA Inc., Fry's
Electronics, Inc., Hastings Entertainment, Inc., Micro Center (trade name of
Micro Electronics, Inc.) and Office Max, Inc. Direct and indirect sales to the
Company's six top retailers accounted for 33% of the Company's 1998 revenues
[indirect sales of the Company's products are supplied to these retailers
through distributors such as Ingram or Tech Data Corporation ("Tech Data")]. The
Company is currently investing, and intends to continue to invest, significant
resources to develop these channels.
The Company expects to utilize the increasing influence of the Internet by
relying heavily upon sales to certain Internet commerce partners. Subsequent to
December 31, 1998 the Company's training products were made available by America
On Line, Inc. ("AOL") to its subscribers on the AOL service.
Of the Company's sales in 1998, 1997 and 1996, 83%, 81% and 69%,
respectively, were of the Company's training products and 13%, 19% and 31%,
respectively, were of the Company's software products. The Company acquired the
assets of Make It So, Inc. on July 31, 1998, and for the last five months of the
year the subsidiary generated approximately 4% of the Company's total 1998
sales.
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 its end-user customers is essential to the
continued acceptance of its products. The Company has a 60-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.
<PAGE 8>
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
The majority of the production of the Company's products takes place at its
Pryor, Oklahoma facility. This primarily includes duplicating and packaging.
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 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 or material returns
due to product defects or product availability.
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
factors such as 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.
The Company provides its products to customers on a "right-to-use" basis
under non-exclusive licenses, which generally are nontransferable 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., 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.
Some of the Company's competitors in the graphics software business such as
Autodesk, Inc., Visio Corporation, and International Microcomputer Software,
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.
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.
<PAGE 9>
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, in an effort to
respond to customer feedback and new technological advances, the Company is
currently developing additional products and enhancements for its multimedia
training product line that is deliverable via CD-ROM, LAN, intranet, or
Internet.
Backlog and 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.
The Company's business has been affected somewhat by seasonal trends,
including higher net revenues in the fiscal quarter ended December 31 as a
result of strong calendar year-end holiday purchases by end users of its
products. As a result, the Company may experience lower net revenues in the
fiscal quarters ended March 31, June 30 and September 30. These seasonal
patterns may be overshadowed in particular quarters by the timing of new product
introductions, expansion into new markets and other factors affecting the
Company's business.
Employees
As of December 31, 1998, the Company had a total of 216 employees,
including 58 employees in sales, marketing, technical support and customer
service, 62 employees in research and development, 46 employees in production
and product handling, 39 employees in administration and support roles, and 11
employees employed by Make It So. The Company has allocated approximately 8,000
square feet of its facilities to recreational, physical fitness and child-care
facilities for, 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.
Item 2. Properties
The Company's administrative, marketing, production and product development
facilities consist of approximately 68,000 square feet at one location in Pryor,
Oklahoma. The Company owns and occupies this facility and the five acres of land
on which it is located. In December 1998 the Company purchased an additional ten
acres of land in Pryor, Oklahoma for expansion of its facilities and expects to
begin construction in the first quarter of 1999.
Item 3. Legal Proceedings
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 10>
Item 4. Submission of Matters to a Vote of Security Holder
No matter was submitted to a vote of security holders, through solicitation
of proxies or otherwise, during the period from October 1, 1998, through
December 31, 1998.
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol "VIAX". The range of sales prices for the Company's Common Stock since
the Company's initial public offering on March 4, 1998 as reported by National
Association of Securities Dealers, Inc., was as follows:
Quarter Ended High Bid Low Bid
- ------------- -------- -------
March 31, 1998 $15.25 $11.75
June 30, 1998 $16.00 $5.25
September 30, 1998 $8.13 $4.63
December 31, 1998 $7.50 $2.53
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the
financial statements and related notes thereto for the periods indicated, which
are included elsewhere in this report.
<TABLE>
Years Ended December 31,
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----------- ------------ ----------- ---------- ----------
1998 1997 1996 1995 (1) 1994
----------- ------------ ----------- ---------- ----------
Statement of Operations Data (2): (In thousands, except per share data)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Sales $ 18,750 $ 13,695 $ 10,077 $ 7,230 $ 4,884
Gross Profit 14,205 10,652 7,463 4,984 3,204
Operating Expenses:
Selling, general and administrative 6,212 4,120 3,704 2,828 1,462
Advertising 4,443 1,961 1,207 1,062 208
Research and development 1,697 1,162 467 320 207
Purchased research and development (3) - - - 1,397 -
Depreciation and amortization 734 319 685 433 54
-------- -------- -------- -------- --------
Operating profit (loss) 1,119 3,090 1,400 (1,056) 1,273
Net interest income (expense) 481 (251) (262) (109) 3
-------- -------- -------- -------- --------
Income (loss) before income taxes 1,600 2,839 1,138 (1,165) 1,276
Net Income (loss) $1,246 $2,023 $ 675 $ (707) $ 1,039
=========== ============ =========== ========== ==========
Diluted earnings per share (4) $ 0.21 $ 0.45 $ 0.15 $ (0.21) $0.24
=========== ============ =========== ========== ==========
Diluted weighted average shares (4) 5,842 4,498 4,405 3,503 4,286
Pro Forma Data:
Pro forma net income (loss) (5) $1,246 $2,023 $ 675 $ (707) $ 791
=========== ============ =========== ========== ==========
Pro forma net income (loss) per diluted
common share (4) (5) $ 0.21 $ 0.45 $ 0.15 $ (0.21) $ 0.18
=========== ============ =========== ========== ==========
<PAGE 11>
Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 13,046 $ 218 $1,009 $ 35 $ 389
Working capital 18,066 2,324 1,637 676 872
Total assets 25,216 7,419 6,112 5,283 1,302
Long-term debt - 2,827 3,482 3,478 -
Total shareholders' equity 22,834 2,513 937 243 979
Dividends per common share equivalent - $0.12 - $0.05 -
Supplemental Data:
Number of training courses offered 950 670 460 335 230
</TABLE>
(1) The operating results of ASBC are included in the statements of operations
from the August 15, 1995 acquisition date forward.
(2) Cooperative advertising expense and certain staff expenses previously
reported in cost of sales have been reclassified to advertising expense and
to selling, general, and administrative expense. Prior periods have been
reclassified for consistency.
(3) 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.
(4) Shares have been adjusted in 1997-1994 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
from January 1 to August 16, 1994.
Item 7. 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
Consolidated Financial Statements and Notes, presented on pages F-1 through
F-25, and the other financial information included elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data expressed in percentages:
<TABLE>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
---- ---- ----
<CAPTION>
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 24.2 22.2 25.9
Gross profit 75.8 77.8 74.1
Selling, general and administrative 33.1 30.1 36.8
Advertising 23.7 14.3 12.0
Research & development 9.1 8.5 4.6
Depreciation & amortization 3.9 2.3 6.8
Operating profit 6.0 22.6 13.9
Net interest income (expense) 2.6 (1.8) (2.6)
Income before income taxes 8.5 20.7 11.3
Net income 6.6 14.8 6.7
</TABLE>
<PAGE 12>
1998 COMPARED WITH 1997
Net Sales. Net sales increased 37% to $18.8 million for the year ended
December 31, 1998, compared to $13.7 million for the year ended December 31,
1997. This increase in sales results primarily from existing and additional
training products, along with sales of approximately $826,000 or 4% of total
1998 sales, from the Company's subsidiary, Make It So, Inc. for the last five
months of 1998. IT training product sales for the year ended December 31, 1998
increased 40% to approximately $15.5 million, or 83% of total sales, compared to
approximately $11.1 million, or 81% of total sales, in 1997. 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,
1998, decreased 8.5% to approximately $2.4 million, or 13% of total sales,
compared to approximately $2.6 million, or 19% of total sales, in 1997. This
decrease was primarily due to lower than expected sales of the Company's
DesignCAD upgrade, DesignCAD Pro 2000, that was introduced in late August 1998.
Cost of Sales. Cost of sales increased 49% to $4.5 million for the year
ended December 31, 1998, compared to $3.0 million in 1997. Cost of sales as a
percentage of total sales increased to 24.2% for the year ended December 31,
1998, from 22.2% for 1997. The increase in cost of sales as a percent of sales
was a result of increased sales to major retailers of lower margin products. In
addition, there was a higher cost of sales percentage (43.2%) from Make It So,
Inc. that affected the Company's sales mix during the last five months of 1998.
The classification of certain expenses on the Company's Consolidated
Statements of Income has been changed in 1998. Cooperative advertising expense
and certain staff expenses previously reported in cost of sales have been
reclassified to advertising expense and to selling, general, and administrative
expense. Prior periods have been reclassified for consistency.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 51% to $6.2 million for the year ended December
31, 1998, compared to $4.1 million in 1997. Selling, general and administrative
expenses as a percentage of total sales increased to 33.1% for the year ended
December 31, 1998, from 30.1% for 1997. The increase was primarily a result of
increased staffing and commission expenditures. Staffing and commission
expenditures increased 53% to $4.2 million in the year ended December 31, 1998
from $2.7 million in 1997. Increased commission expenditures were a result of
increased sales. Staffing increased during the year to 216 employees (154
non-R&D) as of December 31, 1998 compared to 145 employees (101 non-R&D) on
December 31, 1997. The Company believes these 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 corporate sales efforts, and increased its corporate sales staff from two
people to 14 people during 1998. The balance of the increased selling, general
and administrative expenditures during 1998 were primarily to service the
planned increased staffing and facilities.
Advertising Expense. Advertising expense increased 127% to $4.4 million in
the year ended December 31, 1998 from $2.0 million in 1997. Advertising expense
as a percentage of total sales increased to 23.7% for the year ended December
31, 1998, from 14.3% in 1997. Advertising expenses are for cooperative
advertising, advertising through the channels of distribution, direct
advertising, and print media advertising.
Research and Development Expense. Research and development expense
increased 46% to $1.7 million for the year ended December 31, 1998 compared to
$1.2 million in 1997. Research and development expense as a percentage of net
sales increased to 9.1% for the year ended December 31, 1998, from 8.5% in 1997.
This increase reflects the Company's commitment to expand its number of IT
training courses offered, as it released 280 new computer-training titles in
1998. Included in the research and development expense for 1998 are costs
associated with the initiation of the development of training libraries in
Spanish, French and German. The Company expects to have completed a library of
core titles in Spanish to market through international distributors by the
second quarter of 1999. A library of core titles in German and French is
expected later in 1999. The Company released DesignCAD Pro 2000 during the third
quarter, and DesignCAD LT 2000 in the fourth quarter of 1998. ViaDraw, the
Company's first entry in a line of graphics software products for the consumer
market, was released in late November 1998. Two additional graphics software
products for the consumer market, ViaCAD, a low cost CAD package, was released
in the first quarter of 1999, and ViaPage, a web-page editor, is scheduled to be
released in the second quarter of 1999. Research and development expenditures
also included development efforts on the Company's web site and on Internet
online delivery of training. The Company continued to increase its development
staff during 1998 and as of December 31, 1998 had 62 employees in research and
development compared to 44 on December 31, 1997. 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.
<PAGE 13>
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 130% to approximately $734,000 during the year ended December
31, 1998 from approximately $319,000 during 1997. Depreciation and amortization
expense as a percentage of sales increased to 3.9% for the year ended December
31, 1998 compared to 2.3% in 1997. In 1998 depreciation and amortization of
approximately $219,000 was attributable to the assets purchased on July 31, 1998
from Make It So, Inc. The majority of the assets purchased from Make It So, Inc.
have depreciable lives of 12 to 18 months. The remainder of the increase in
depreciation and amortization expenses in 1998 was primarily attributable to
asset additions during the year for expansion of facilities, production and
duplication equipment and computer hardware. During the fourth quarter the
Company recognized approximately $78,000 in amortization of prepaid royalties to
7th Street.com, Inc., formerly Street Technologies, Inc.
Net Interest Income (Expense). Net interest income was approximately
$481,000 or 2.6% of sales for the year ended December 31, 1998 compared to net
interest expense of approximately $252,000 or 1.8% of sales in 1997. A portion
of the net proceeds from the Company's initial public offering on March 4, 1998
was used to retire all outstanding long-term debt, which lowered interest
expense to approximately $54,000 for the year ended December 31, 1998 compared
to approximately $272,000 in interest expense in 1997. A significant portion of
the net proceeds from the initial public offering was invested in highly liquid
investments with maturities of six months or less. These investments generated
interest income of approximately $535,000 for the year ended December 31, 1998
compared to interest income of approximately $21,000 in 1997.
Income Taxes. In the year ended December 31, 1998, the effective tax rate
improved to 22% compared to 29% in 1997. The reduction in the effective tax rate
was due to several factors, including the realization of research and
development tax credits for 1995 through 1998. The amount of available credits
for 1995 through 1997 was quantified and the benefit recorded in the first
quarter of 1998. During 1998 approximately $383,000 of the $535,000 of interest
income was derived from federal tax exempt investments, while there was no
interest income in 1997 derived from federal tax exempt investments.
1997 COMPARED WITH 1996
Net Sales. Net sales increased 36% 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 60% 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 17% 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.
<PAGE 14>
Cost of Sales. Cost of sales increased 16% to $3.0 million for the year
ended December 31, 1997, compared to $2.6 million in 1996. Cost of sales as a
percentage of total sales decreased to 22.2% for the year ended December 31,
1997, from 25.9% 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 a minimal increase in duplicating and packaging
personnel.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 11% to $4.1 million during the year ended
December 31, 1997, compared to $3.7 million in 1996. Selling, general and
administrative expense as a percentage of total sales decreased to 30.1% for the
year ended December 31, 1997, from 36.8% in 1996, due largely to the Company's
ability to control its growth in payroll and trade show expenses.
Advertising Expense. Advertising expense increased 62% to $2.0 million
during the year ended December 31, 1997, compared to $1.2 million in 1996.
Advertising expense as a percentage of total sales increased to 14.3% for the
year ended December 31, 1997, from 12.0% in 1996. Advertising expenses are for
cooperative advertising, advertising through the channels of distribution,
direct advertising, and print media advertising.
Research and Development Expense. Research and development expense
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.
Depreciation and Amortization Expense. Depreciation and amortization
expense decreased from approximately $685,000 during the year ended December 31,
1996, to approximately $319,000 in 1997. Depreciation and amortization as a
percentage of sales decreased from 6.8% for the year ended 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.
LIQUIDITY AND FINANCIAL CONDITION
The Company's cash, cash equivalents and short term investments totaled
approximately $13.0 million at December 31, 1998. Following the Company's
initial public offering on March 4, 1998, the Company realized net proceeds from
the offering of approximately $20.5 million. Long-term debt of $3.7 million was
retired after the Company received the offering proceeds. The Company has no
long-term debt as of December 31, 1998.
The Company believes that its cash and short-term investment balances at
December 31, 1998 and cash generated from future operations will satisfy its
anticipated needs for working capital and capital expenditures for 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 Make It So, Inc. acquisition.
<PAGE 15>
During the year ended December 31, 1998 the Company's operating activities
generated net cash of approximately $58,000. Operating activities generated cash
flows through approximately $1.2 million in net income, $1.2 million in
increases in accounts payable and accrued liabilities, and approximately
$734,000 in depreciation and amortization. Non-cash items, including an increase
in the deferred income tax provision, bad debt expense, a loss on disposal of
assets and interest expense generated cash flow of approximately $291,000.
During 1998 the most significant use of cash by operating activities was from a
$2.4 million increase in trade accounts receivable. Trade accounts receivable
increased $1.0 million during the fourth quarter primarily due to increased
sales to major retailers, including the Company's largest shipment ever of $1.4
million to CompUSA through the Company's largest customer, distributor Ingram
Micro. Cash flow used in operating activities during 1998 also included
increased inventories of approximately $497,000, increased income tax receivable
and prepaid expenses of approximately $408,000, and a reduction in income taxes
payable of approximately $209,000.
The Company's capital expenditures during 1998 were approximately $1.1
million. Capital expenditures were primarily for expansion of facilities,
production and duplication equipment and computer hardware. On July 31, 1998 the
Company purchased the assets of Make It So, Inc., a California corporation, for
approximately $682,000 (including approximately $665,000 in capital and
intangible assets), and subsequently contributed those assets to a newly formed
Oklahoma subsidiary, Make It So, Inc. On September 30, 1998 the Company executed
a $620,000 Development and Licensing Agreement with 7th Street.com, Inc. The
President and Chief Executive Officer of 7th Street.com, Inc. is a director of
the Company. The Company loaned approximately $188,000 to its Vice President and
Chief Marketing Officer in July 1998 as a part of an employment agreement. The
loan is secured by a first mortgage on his residence, at a rate of 8%, and is
being repaid monthly with a balloon payment due at the end of two years.
In December 1998 the Company purchased land in Pryor, Oklahoma for
expansion of its facilities for $115,000, and to accommodate the seller, agreed
to finance $103,500 of the purchase price at 5% interest until June 1, 1999. The
Company expects to begin construction in the first quarter of 1999. The Company
does not currently have any other significant commitments for capital
expenditures. The Company anticipates that it will continue to expand its
facilities and purchase equipment as needed to support its product research and
development, production of its products, sales and marketing, product support,
and administrative staff.
The Company announced on September 1, 1998 that its Board of Directors had
authorized the repurchase of up to $3 million of its common stock. As of
December 31, 1998 the Company had repurchased 278,900 shares, for approximately
$1.5 million.
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 has no contingency plans related to the Year 2000
issue.
<PAGE 16>
The Company could encounter some Year 2000 defects in the products and
services it produces and markets. The Company intends to continue to evaluate
its products and services to ensure they perform correctly in the year 2000. 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.
Future performance and additional Risk Factors
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. 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 and keep pace with
technological and competitive developments. 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.
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 lengthy 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.
<PAGE 17>
Reliance on a Major Distributor
The Company relies heavily upon sales to Ingram, a distributor that
supplies resellers, including some major retailers. Sales to Ingram accounted
for approximately 29% of the Company's 1998 revenues, approximately 17% of the
Company's 1997 revenues, and were less than 10% of the Company's 1996 revenues.
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 relationships 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 Best Buy Company, Inc., CompUSA Inc., Fry's Electronics, Inc.,
Hastings Entertainment, Inc., Micro Center (trade name of Micro Electronics,
Inc.) and Office Max, Inc. Direct and indirect sales to the Company's six top
retail customers accounted for 33% of the Company's 1998 revenues (indirect
sales of the Company's products are supplied to these retailers through
distributors such as Ingram or Tech Data). 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 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 Note 10
of Notes to Financial Statements.]
Reliance on Internet Commerce Partners
The Company expects to utilize the increasing influence of the Internet by
relying heavily upon sales to certain Internet commerce partners. The Company's
ability to achieve significant revenue growth in the future will depend in part
on adding Internet commerce partners along with leveraging its relationships
with those partners. Subsequent to December 31, 1998 the Company's training
products were made available by AOL to its subscribers on the AOL service. The
Company is currently investing, and intends to continue to invest, significant
resources to develop this channel. There can be no assurance that the Company
will be able to add new Internet commerce partners, retain those partners or
leverage its relationships with Internet commerce partners. The inability to do
so could have a material adverse effect on the Company's business, results of
operations and financial condition.
Dependence on Resellers
The Company distributes its products primarily 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, retailer 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.
<PAGE 18>
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 small number of small private companies, and a few
large public companies. 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.
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
98, 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 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.
Risks Associated with the Internet
The technology marketplace has recently experienced a higher emphasis on
Internet-related services and content tailored for the Internet and corporate
intranets. The Company has incurred costs and made investments to take advantage
of opportunities created by the Internet and corporate intranets. The Company
expects to incur significant additional costs as it continues to pursue these
and other Internet-related opportunities. There can be no assurance that the
Company's Internet strategy will be successful, or that the costs and
investments in this area will provide satisfactory results. The Company's
failure to execute its Internet strategy successfully and in a timely manner
could materially and adversely affect its competitive position and its financial
results.
Risks Associated with the Corporate Sales Efforts
The Company has recently begun a major effort to achieve sales directly to
corporate customers. The Company has incurred costs and made investments in a
direct corporate sales force and the infrastructure to support this sales force.
The Company expects to incur significant additional costs as it continues to
pursue these opportunities. Direct sales to corporate customers normally involve
a longer sales cycle than the Company's sales through other activities. The
sales and timing of licensing agreements to corporate customers could cause
volatility in, and materially adversely affect, the Company's quarterly
operating results. There can be no assurance that the Company's corporate sales
efforts will be successful, or that the costs and investments in this area will
provide satisfactory results. The Company's failure to execute its corporate
sales strategy successfully could materially and adversely affect its
competitive position and its financial results.
<PAGE 19>
Dependence on Key Personnel
The Company's future success will depend to a significant extent on the
efforts and abilities of Michael A. Webster, the Chairman of the Board,
President and Chief Executive Officer; Robert E. Webster, the 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.
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, products 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.
Management Discretion over Use of Capital
The Company currently has no specific plan for a substantial amount of
capital. 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 capital
to uses which shareholders may not deem desirable, and there can be no assurance
that the capital can or will be invested to yield a significant return.
Future Capital Needs
The Company currently anticipates that the available funds and cash flows
generated from operations, will be sufficient to meet its anticipated needs for
working capital and capital expenditures for the next two years. 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. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage of ownership of the shareholders will be reduced, shareholders may
experience additional dilution and such securities may have rights, preferences
or privileges senior to those of the holders of the Company's common stock.
There can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or are
not available on acceptable terms, the Company may not be able to fund
expansion, take advantage of unanticipated acquisition opportunities, develop or
enhance services or products or respond to competitive pressures. Such inability
could have a material adverse effect on the Company's business, operating
results and financial condition.
<PAGE 20>
Potential Fluctuations in Quarterly Operating Results
The Company's quarterly revenue and operating results have varied in the
past and are likely to vary in the future. 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.
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
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 16 of Notes to Financial Statements.]
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. 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.
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.
<PAGE 21>
International Sales and Operations
The Company sells its products in certain international markets and
intends to expand its sales in these markets. The Company has entered into
distribution arrangements in the United Kingdom, France, Germany, Japan,
Australia, and Turkey. 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.
Possible Volatility of Stock Price
The trading prices of the Company's common stock is highly volatile and
could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in the Company's operating results, announcements of
technological innovations, new products or services introduced by the Company or
its competitors, changes in earnings estimates by securities analysts, general
market conditions and other factors. Historically, the trading volume of the
common stock has been very small and the market for the common stock has been
materially less liquid than that of most other publicly traded companies.
Significant sales of the Company's common stock could have an adverse effect on
the market price of the common stock. Further, the stock markets, and in
particular The Nasdaq Stock Market, have experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many technology companies and that often have been unrelated or
disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect price to earnings ratios substantially above historical levels. There
can be no assurance that these trading prices and price to earnings ratios will
be sustained. These broad market factors may adversely affect the market price
of the Company's common stock. These market fluctuations, as well as general
economic, political and market conditions such as recessions, interest rates or
international currency fluctuations may adversely affect the market price of the
common stock.
Potentially Adverse Impact from Acquisitions
The Company has in the past acquired, and may continue from time to time in
the future to acquire, businesses, services, product lines, or technologies.
There can be no assurance that the anticipated benefits of recently concluded
acquisitions will be realized, or that the Company will be successful in
identifying suitable acquisition opportunities in the future. There can be no
assurance that the Company will be able to successfully integrate acquired
businesses, services, product lines, or technologies. Failure of the Company to
integrate and manage acquired businesses successfully, to retain their employees
and to address successfully new markets associated with such acquired
businesses, services, product lines, or technologies may have a material adverse
effect on the Company's business, operating results and financial condition.
Certain of the Company's acquisitions have resulted in various charges and
expenses that have adversely affected, and will continue to adversely affect,
the Company's operating results and financial condition. Future acquisitions may
also result in potential charges that may adversely affect the Company's
earnings and may involve the issuance of shares of the Company's stock to owners
of acquired businesses, resulting in dilution in the percentage of the Company's
stock owned by other shareholders.
<PAGE 22>
Ownership Concentration
The Company's directors and executive officers, (primarily Michael A.
Webster and Robert E. Webster), beneficially own in the aggregate approximately
54% of the Company's outstanding Common Stock. 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, including any amendment of
the Company's certificate of incorporation and certain mergers and other
business combinations. 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.
Anti-Takeover Considerations
The Company has 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.
Seasonality
The Company's business has been affected somewhat by seasonal trends,
including higher net revenues in the fiscal quarter ended December 31 as a
result of strong calendar year-end holiday purchases by end users of its
products. As a result, the Company may experience lower net revenues in the
fiscal quarters ended March 31, June 30 and September 30. These seasonal
patterns may be overshadowed in particular quarters by the timing of new product
introductions, expansion into new markets and other factors affecting the
Company's business.
Absence of Dividends
Although the Company paid dividends on its capital stock in 1997, the
Company does not intend to pay any cash dividends on its Common Stock for the
foreseeable future.
Forward-Looking Statements
All statements other than statements of historical fact in this 10-K
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 10-K, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "will," 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 "Future Performance and Additional Risk
Factors," including but not limited to technological change, product development
risks, competitive factors and 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.
<PAGE 23>
Item 7a. 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 1998 and 1997 sales to countries other than the United States and Canada
accounted for 6% and 7%, respectively, of total revenues. These international
revenues 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 revenues. 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.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included as an exhibit
in Item 14 (a).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1999 Annual Meeting of Stockholders.
<PAGE 24>
Item 11. Executive Compensation
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1999 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1999 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the
Company's 1999 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of This Annual Report on Form 10-K
1. Financial Statements. See Index to Consolidated Financial Statements
on page F-1
2. Financial Statement Schedule II. See Index to Consolidated Financial
Statements on page F-1
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the period from
October 1, 1998, to December 31, 1998.
(c) Exhibits:
(3.1) Amended and Restated Certificate of Incorporation (i)
(3.2) Amended and Restated Bylaws (i)
(10.1) ViaGrafix Corporation 1995 Stock Option Plan (ii)
(10.2) Agreement with Robert Moore Regarding Change in Control
(21.1) Subsidiaries of the Registrant
(23.1) Consent of Ernst & Young LLP, Independent Auditors
(27.1) Financial Data Schedule
(i) Incorporated herein by reference to the exhibits to the Company's
Post-Effective Amendment No. 1 to Form S-1 Registration Statement No.
333-42633 dated March 4, 1998
(ii) Incorporated herein by reference to the Company's Form S-8
Registration Statement No. 333-59591 dated July 22, 1998
<PAGE>
ViaGrafix Corporation
Consolidated Financial Statements and Schedule
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
<PAGE F-1>
ViaGrafix Corporation
Consolidated Financial Statements
Index to Consolidated Financial Statements and Schedule
Report of Independent Auditors...............................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997.................F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996...........................................F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996.......................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996...........................................F-6
Notes to Consolidated Financial Statements...................................F-7
Schedule II - Valuation and Qualifying Accounts for the
years ended December 31, 1998, 1997 and 1996..............................F-25
Not covered by Report of Independent Auditors:
Quarterly Financial Information (unaudited).............................F-24
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.
<PAGE F-2>
Report of Independent Auditors
The Board of Directors and Shareholders
ViaGrafix Corporation
We have audited the accompanying consolidated balance sheets of ViaGrafix
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule included in the Index to Consolidated
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 audit 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ViaGrafix Corporation at December 31, 1998 and 1997, and the consolidated
results of operations and cash flows for each of the three years in the period
ended December 31, 1998, 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
/s/ Ernst & Young LLP
(Original Manually Signed)
Tulsa, Oklahoma
March 19, 1999
<PAGE F-3>
<TABLE>
ViaGrafix Corporation
Consolidated Balance Sheets
December 31
1998 1997
--------------------------------
<CAPTION>
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $10,046,123 $ 217,654
Short-term investments 3,000,000 -
Trade accounts receivable (net of allowance for doubtful accounts
of $147,714 and $60,254 in 1998 and 1997, respectively) 4,713,140 2,455,752
Income tax receivable 205,172 -
Inventories 1,908,728 1,411,257
Prepaid expenses 517,918 314,668
Deferred income taxes 57,165 4,150
--------------------------------
Total current assets 20,448,246 4,403,481
Property, plant and equipment 4,379,992 3,262,637
Accumulated depreciation (1,315,517) (959,025)
--------------------------------
3,064,475 2,303,612
Capitalized customer lists (net of accumulated
amortization of $147,662 in 1998) 206,727 -
Capitalized software (net of accumulated amortization of $63,987 in 1998) 169,307 -
Prepaid royalties and licenses (net of accumulated
amortization of $77,500 in 1998) 542,500 -
Goodwill (net of accumulated amortization of $44,614 87,575 100,794
and $31,395 in 1998 and 1997, respectively)
Note receivable - officer 187,902 -
Deferred income taxes 509,490 611,022
--------------------------------
Total assets $25,216,222 $7,418,909
================================
Liabilities and shareholders' equity Current liabilities:
Trade accounts payable $ 1,767,109 $ 847,890
Notes payable 103,500 -
Accrued liabilities 511,707 232,961
Income taxes payable - 208,768
Current portion of long-term debt - 789,513
--------------------------------
Total current liabilities 2,382,316 2,079,132
Long-term debt - 2,826,727
Shareholders' equity:
Common stock, $.01 par value, authorized 40,000,000 shares; issued
5,866,340 and 3,861,881 shares in 1998 and 1997, respectively 58,663 38,619
Series A convertible preferred stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding 855,000 shares in 1997 - 8,550
Additional paid-in capital 20,505,713 1,487,420
Unearned compensation (104,135) (148,798)
Retained earnings 2,373,665 1,127,259
--------------------------------
Total shareholders' equity 22,833,906 2,513,050
--------------------------------
Total liabilities and shareholders' equity $25,216,222 $7,418,909
================================
</TABLE>
See accompanying notes.
<PAGE F-4>
<TABLE>
ViaGrafix Corporation
Consolidated Statements of Income
Year ended December 31
1998 1997 1996
------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Net sales $18,750,439 $13,694,696 $10,076,742
Cost of sales 4,545,335 3,042,290 2,613,583
------------------------------------------------------
Gross profit 14,205,104 10,652,406 7,463,159
Selling, general and administrative expense 6,211,810 4,120,114 3,704,267
Research and development expense 1,696,948 1,162,000 467,000
Depreciation and amortization 733,862 319,281 684,882
Advertising expense 4,443,085 1,960,625 1,207,347
------------------------------------------------------
Operating income 1,119,399 3,090,386 1,399,663
Other income (expense):
Interest income and other 535,002 20,535 62,459
Interest expense (53,713) (272,349) (324,547)
------------------------------------------------------
Income before income taxes 1,600,688 2,838,572 1,137,575
Provision for income tax 354,282 815,930 463,058
------------------------------------------------------
Net income $ 1,246,406 $ 2,022,642 $ 674,517
======================================================
Basic earnings per common share $.22 $.51 $.18
======================================================
Weighted average common shares used in
computing basic earnings per share 5,640,044 3,859,443 3,831,360
======================================================
Diluted earnings per common and
common equivalent share $.21 $.45 $.15
======================================================
Weighted average common and common
equivalent shares used in computing
diluted earnings per share 5,841,978 4,497,589 4,404,739
======================================================
</TABLE>
See accompanying notes.
<PAGE F-5>
<TABLE>
ViaGrafix Corporation
Consolidated Statements of Changes in Shareholders' Equity
Common Preferred Additional Unearned Retained
Stock Stock Paid-in Capital Compensation Earnings
------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $57,143 $8,550 $ 1,491,450 $ - $ 681,614
Purchase of 4,886 treasury common shares, at cost - - - - -
Exercise of 28,943 stock options - - 14,445 - -
Net income - - - - 674,517
------------------------------------------------------------------------
Balance at December 31, 1996 57,143 8,550 1,505,895 - 1,356,131
Purchase of 1,143 treasury common shares, at cost - - - - -
Exercise of 29,252 stock options - - 18,777 - -
Stock options granted at less than
estimated fair market value - - 180,835 (180,835) -
Amortization of unearned compensation - - - 32,037 -
Declared and paid $.117 dividend per common share
equivalent on common and preferred shares outstanding - - - - (505,800)
Cancellation of 1,852,405 treasury
common shares, at cost (18,524) - (218,087) - (1,745,714)
Net income - - - - 2,022,642
------------------------------------------------------------------------
Balance at December 31, 1997 38,619 8,550 1,487,420 (148,798) 1,127,259
------------------------------------------------------------------------
Exercise of 44,783 stock options 447 - 54,236 - -
Cancellation of 6,114 stock options granted
at less than estimated fair market value - - (12,626) 12,626 -
Amortization of unearned compensation - - - 32,037 -
Conversion of preferred stock to 4,886 (8,550) 3,664 - -
488,571 shares of common stock
Initial public offering of 1,750,000 common shares 17,500 - 20,464,476 - -
Purchase and cancellation of 278,900 common shares (2,789) - (1,491,457) - -
Net income - - - - 1,246,406
------------------------------------------------------------------------
Balance at December 31, 1998 $58,663 $ - $20,505,713 $(104,135) $2,373,665
========================================================================
</TABLE>
<TABLE>
Consolidated Statements of Changes in Shareholders' Equity (Continued)
Common Shares
in Treasury Total
----------------------------------
<CAPTION>
<S> <C> <C>
Balance at December 31, 1995 $(1,995,600) $ 243,157
Purchase of 4,886 treasury common shares, at cost (5,148) (5,148)
Exercise of 28,943 stock options 10,130 24,575
Net income - 674,517
----------------------------------
Balance at December 31, 1996 (1,990,618) 937,101
Purchase of 1,143 treasury common shares, at cost (2,200) (2,200)
Exercise of 29,252 stock options 10,493 29,270
Stock options granted at less than
estimated fair market value - -
Amortization of unearned compensation - 32,037
Declared and paid $.117 dividend per common share
equivalent on common and preferred shares outstanding - (505,800)
Cancellation of 1,852,405 treasury
common shares, at cost 1,982,325 -
Net income - 2,022,642
----------------------------------
Balance at December 31, 1997 - 2,513,050
----------------------------------
Exercise of 44,783 stock options - 54,683
Cancellation of 6,114 stock options granted
at less than estimated fair market value - -
Amortization of unearned compensation - 32,037
Conversion of preferred stock to - -
488,571 shares of common stock
Initial public offering of 1,750,000 common shares - 20,481,976
Purchase and cancellation of 278,900 common shares - (1,494,246)
Net income - 1,246,406
----------------------------------
Balance at December 31, 1998 $ - $22,833,906
==================================
</TABLE>
See accompanying notes.
<PAGE F-6>
<TABLE>
ViaGrafix Corporation
Consolidated Statements of Cash Flows
Year ended December 31
1998 1997 1996
-----------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Operating activities
Net income $1,246,406 $ 2,022,642 $ 674,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 733,862 319,281 684,882
Deferred income tax provision (benefit) 48,517 186,437 (137,885)
Noncash interest expense 44,760 - 142,342
Loss on disposal of assets 79,089 9,419 -
Bad debt expense 118,962 107,497 -
Write-off of purchased research and development 36,933 - -
Amortization of unearned compensation 32,037 32,037 -
Cash provided by (used in) changes in
operating assets and liabilities:
Trade accounts receivable (2,365,722) (1,363,859) 2,987
Inventories (497,471) (580,685) (5,585)
Income tax receivable (205,172) - -
Prepaid expenses (203,250) (32,782) (113,418)
Trade accounts payable 919,219 519,468 (401,036)
Accrued liabilities 278,746 83,772 102,562
Income taxes payable (208,768) (250,219) 428,447
-----------------------------------------------
Net cash provided by operating activities 58,148 1,053,008 1,377,813
Investing activities
Purchases of property, plant and equipment (1,149,295) (744,013) (285,282)
Purchase of Make-It-So, Inc. assets (681,528) - -
Proceeds from disposal of equipment 27,633 - -
Purchase of short-term investments (3,000,000) - -
Issuance of note receivable - officer (187,902) - -
Prepaid royalties and licenses (620,000) - -
-----------------------------------------------
Net cash used in investing activities (5,611,092) (744,013) (285,282)
Financing activities
Initial public offering of common stock 20,481,976 - -
Purchase and cancellation of common stock (1,494,246) - -
Repayment of debt (3,661,000) (621,958) (137,623)
Dividend to common and preferred shareholders - (505,800) -
Purchase of treasury common stock - (2,200) (5,148)
Exercise of stock options 54,683 29,270 24,575
-----------------------------------------------
Net cash provided by (used in) financing activities 15,381,413 (1,100,688) (118,196)
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,828,469 (791,693) 974,335
Cash and cash equivalents at beginning of year 217,654 1,009,347 35,012
-----------------------------------------------
Cash and cash equivalents at end of year $10,046,123 $ 217,654 $1,009,347
===============================================
Supplemental cash flow information:
Interest paid $ 8,953 $ 300,626 $ 168,794
===============================================
Income taxes paid $ 719,705 $ 479,000 $ 173,000
===============================================
</TABLE>
See accompanying notes.
<PAGE F-7>
ViaGrafix Corporation
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
1. Summary of Business and Significant Accounting Policies
General
ViaGrafix Corporation is engaged primarily in the business of developing,
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") as well as
Computer-Aided Design ("CAD") software, which is primarily used in the
engineering and architectural fields. Beginning in August 1998, the Company
entered the business of providing e-mail list management and Internet marketing
services through its new wholly-owned subsidiary, Make-It-So, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of ViaGrafix
Corporation and its wholly-owned subsidiary, Make-It-So, Inc. (collectively, the
"Company"). All intercompany transactions have been eliminated in consolidation.
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 $9,652,746 and $166,394 at
December 31, 1998 and 1997, respectively.
<PAGE F-8>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Business and Significant Accounting Policies (continued)
Revenue Recognition
Revenue is recognized on all products at the time of delivery. 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. The Company sells its CAD software with 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 sale is not contingent upon
resale of the products or affected by damage or theft of the products.
Short-Term Investments
Short-term investments are comprised of an investment in a municipal security
with an original maturity of six months. The security matures June 28, 1999.
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, which totaled $167,467 and $111,193 at December 31, 1998 and
1997, respectively, are included in prepaid expenses.
<PAGE F-9>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Business and Significant Accounting Policies (continued)
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using
accelerated methods over the following estimated useful lives:
Years
------------------
Building and building improvements 10-39
Production equipment 5-7
Automobiles 5-7
Furniture and fixtures 5-7
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. Depreciation expense for the
years ended December 31, 1998, 1997 and 1996 was $431,494, $300,562 and
$349,572, respectively.
Goodwill
Goodwill, which represents the excess of the purchase price and liabilities
assumed over the fair value of tangible and specifically identified intangible
assets acquired, is being amortized over 10 years.
Amortization of goodwill was $13,219 in 1998, 1997 and 1996, respectively.
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.
<PAGE F-10>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Business and Significant Accounting Policies (continued)
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 capitalized software and amortized over the
expected remaining life of the specific software products. Capitalized software
amortization expense was $63,987, $5,500 and $322,091 for the years ended
December 31, 1998, 1997 and 1996, respectively.
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. All treasury stock was canceled in December
1997.
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.
<PAGE F-11>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Business and Significant Accounting Policies (continued)
Advertising Costs
Costs incurred for advertising are expensed when incurred.
Earnings Per Share
Basic earnings per share are based on the average number of common shares
outstanding. Diluted earnings per share for 1998, 1997 and 1996 assumes
conversion of the Company's Series A convertible preferred stock and exercise of
stock options outstanding using the treasury stock method.
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 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 was required
in 1998 but did not impact the Company's financial position, results of
operations or cash flows, and had no impact on the form and content of the
Company's disclosures.
<PAGE F-12>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Business and Significant Accounting Policies (continued)
In November 1997, Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition," was issued which supersedes SOP No. 91-1, "Software Revenue
Recognition." The Company was required to adopt SOP No. 97-2 for transactions
entered into in 1998. The adoption of this SOP had no impact on the Company's
financial position, results of operations or cash flows.
In 1998, SOP No. 98-1, "Accounting for the Costs of Software Developed or
Obtained for Internal Use," was issued. This SOP requires capitalization of
certain costs incurred in connection with an internal-use software project. SOP
No. 98-5, "Reporting on the Costs of Start-up Activities," was also issued in
1998. This SOP requires costs related to start-up activities, including
organization costs, to be expensed as incurred. Adoption of these SOPs is not
required until 1999. Neither the Company's financial position, results of
operations nor cash flows are expected to be significantly impacted by these
SOPs when they are adopted in 1999.
In 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued which requires that all derivative instruments be
recorded as assets or liabilities on the balance sheet at fair value. SFAS No.
133 is not required to be adopted by the Company until 2000. The Company's
financial position, results of operations or cash flows are not expected to be
significantly impacted by this SFAS when adopted in 2000.
Reclassification
Certain 1997 and 1996 amounts have been reclassified to be consistent with the
1998 presentation.
2. Acquisitions
On July 31, 1998, the Company acquired certain assets of Make-It-So, Inc., a
privately held company based in San Mateo, California, that provides e-mail list
management and Internet marketing services. The purchase consideration totaled
$681,528 and was financed with existing cash balances and was accounted for as a
purchase, in accordance with APB No. 16, "Accounting for Business Combinations."
<PAGE F-13>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
2. Acquisitions (continued)
In accordance with APB No. 16, the purchase price was allocated to the tangible
and specifically identified intangible assets acquired based upon the estimated
fair value of such assets. The fair value of software development projects and
customer lists was computed based upon the 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
technological feasibility had been achieved is being amortized over the
remaining life of the respective product, which was estimated at 18 months.
Customer lists are being amortized over their estimated life of 12 months.
The following table presents the allocation of the purchase price to the assets
acquired:
Customer lists $354,389
Software development 229,706
Property, plant and equipment 43,498
In-process research and development 36,933
Accounts receivable 16,055
Prepaid expenses 947
----------------
$681,528
================
The operating results of Make-It-So, Inc. are included in the statements of
operations from the acquisition date forward. The capitalized customer lists
amortization expense was $147,662 for the year ended December 31, 1998. Research
and development expense includes $36,933 of acquired in-process research and
development which was expensed as the associated products were not
technologically feasible. The pro forma effect of the transaction on the
Company's revenues and net income if the transaction had occurred on January 1,
1996 is not significant.
<PAGE F-14>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
3. Inventories
Inventories as of December 31 consist of the following:
<TABLE>
1998 1997
------------------------------------
<CAPTION>
<S> <C> <C>
Finished goods $ 996,164 $ 721,370
Raw materials 912,564 689,887
------------------------------------
$1,908,728 $1,411,257
====================================
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment as of December 31 consists of the following:
<TABLE>
1998 1997
------------------------------------
<CAPTION>
<S> <C> <C>
Land $ 215,000 $ 100,000
Building and building improvements 1,796,527 1,614,696
Production equipment 2,011,689 1,309,148
Automobiles 221,291 183,016
Furniture and fixtures 135,485 55,777
------------------------------------
$4,379,992 $3,262,637
====================================
</TABLE>
5. Income Taxes
The components of the provision for income taxes for the years ended December 31
are as follows:
<TABLE>
1998 1997 1996
------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Current:
Federal $201,427 $491,989 $ 534,839
State 104,338 137,504 66,104
------------------------------------------------------
305,765 629,493 600,943
Deferred:
Federal 43,180 165,929 (122,718)
State 5,337 20,508 (15,167)
------------------------------------------------------
48,517 186,437 (137,885)
------------------------------------------------------
$354,282 $815,930 $ 463,058
======================================================
</TABLE>
<PAGE F-15>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
A reconciliation of the statutory federal income tax rate to the provision for
income taxes for the year ended December 31 is as follows:
<TABLE>
1998 1997 1996
------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Expected provision for
federal income taxes
at the statutory rate $544,234 $965,114 $386,776
State income taxes - net of
federal benefit 63,387 112,407 45,048
Income tax credits (153,379) (282,602) -
Interest from tax-exempt
municipal securities (130,261) - -
Other 30,301 21,011 31,234
------------------------------------------------------
Provision for income taxes $354,282 $815,930 $463,058
======================================================
</TABLE>
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are as follows:
<TABLE>
1998 1997
------------------------------------
<CAPTION>
<S> <C> <C>
Deferred income tax assets:
Accrued vacation $ - $ 4,150
Capitalized software 592,796 632,144
Related party interest - 78,147
Accrued liabilities not deductible for tax 66,564 -
Goodwill 26,906 26,531
Allowance for doubtful accounts 57,165 -
------------------------------------
Total deferred income tax assets 743,431 740,972
Deferred income tax liabilities:
Tax over book depreciation (176,776) (125,800)
------------------------------------
Net deferred income tax assets $566,655 $615,172
====================================
</TABLE>
<PAGE F-16>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
6. Long-Term Debt and Notes Payable
At December 31, 1997, the Company had two 7.5% promissory notes with principal
of $3,616,240 outstanding at December 31, 1997. This amount included $142,342 of
interest that was reclassified as additional principal in 1996. The notes were
payable in equal monthly installments over the term of the notes with all unpaid
principal and interest due August 15, 2000. All interest not paid when due was
considered additional principal. The notes were equal in priority with no
discrimination in favor of either holder as to payments or any other actions
under the promissory notes. The notes were repaid with proceeds from the
Company's initial public offering in March 1998. An additional $44,760 of
interest was reclassified as additional principal in 1998 prior to the repayment
of the notes.
In December 1998, the Company issued a 5.0% promissory note for $103,500 to
purchase land. The note and unpaid interest is payable in June 1999. This
transaction has been accounted for as a noncash transaction in the 1998
statement of cash flows.
7. Series A Convertible Preferred Stock
Prior to March 1998, there were 855,000 shares of Series A convertible preferred
stock outstanding. The holders of preferred stock were entitled to receive a
preferred dividend at the discretion of the Board of Directors, and were 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 were entitled to the number of votes per share equal to the
number of shares of common stock into which each share was convertible. In March
1998, all 855,000 shares of preferred stock outstanding were converted to
488,571 shares of common stock in accordance with the Series A Convertible
Preferred Stock Purchase Agreement as a result of the Company's initial public
offering.
8. Stock Option Plan
The Company has an incentive stock option plan (the "Plan") under Section 422(b)
of the Internal Revenue Code. 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 prior to the
Company's initial public offering in March 1998 and market price subsequent to
March 1998, to selected qualified employees and contractors, respectively, of
the Company. Options may be granted under the Plan at
<PAGE F-17>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plan (continued)
any time prior to January 1, 2005. Options vest and are exercisable as
determined by the Board of Directors on a grant-by-grant basis. In 1997, the
Board of Directors increased the number of shares of common stock which is
reserved under the Plan 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>
Stock Options Outstanding
and Exercisable
-----------------------------------------------
Weighted
Average
Options Exercise
Shares Exercisable Price
-----------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Shares under option:
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 94,206 1.12
Granted 527,857 11.13
Canceled (7,143) 1.33
Exercised (29,252) 1.12
-----------------------------------------------
Balance at December 31, 1997 611,977 94,239 9.75
Granted 320,000 6.64
Canceled (29,537) 8.67
Exercised (44,783) 1.22
-----------------------------------------------
Balance at December 31, 1998 857,657 144,290 $ 9.07
===============================================
</TABLE>
<PAGE F-18>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plan (continued)
Further information concerning the options outstanding at December 31, 1998 is
as follows:
<TABLE>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Life Exercise Options Exercise
Exercise Prices of Options (Years) Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
$ .20 to $4.75 170,657 8.25 $ 2.44 59,890 $ .99
$ 7.06 to $7.25 265,000 10.00 $ 7.09 - -
$ 13.00 422,000 10.00 $ 13.00 84,400 $13.00
</TABLE>
At December 31, 1998, 26,794 common shares were reserved by the Company for
future option grants under the Plan.
Prior to March 1998, 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 its initial public stock
offering in March 1998, management, for financial statement purposes, reassessed
the fair value of its common stock as of each grant date prior to March 1998 for
the purpose of determining the amount of unearned compensation expense, 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
recognized in 1997 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 prior to the initial
public offering in March 1998 and the Black-Scholes option pricing model
subsequent to March 1998. The following weighted-average assumptions for 1998
and 1997 were used: risk-free interest rate of 6%; a
<PAGE F-19>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plan (continued)
dividend yield of zero; volatility of the expected market price of the Company's
common stock of 104% (1998 only) 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
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Using the Black-Scholes
option valuation model, the weighted average grant date value of options granted
during the year ended December 31, 1998 was $4.77 per option.
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>
1998 1997 1996
----------------- ----------------- ----------------
<CAPTION>
<S> <C> <C> <C>
Pro forma net income $505,856 $1,960,612 $659,673
================= ================= ================
Pro forma basic earnings
per common share $.09 $.49 $.17
================= ================= ================
Pro forma diluted
earnings per common
and common equivalent
share $.09 $.44 $.15
================= ================= ================
</TABLE>
<PAGE F-20>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
9. Earnings Per Share
The following sets forth the computation of basic and diluted earnings per share
for the year ended December 31:
<TABLE>
1998 1997 1996
--------------- ---------------- ---------------
<CAPTION>
<S> <C> <C> <C>
Numerator:
Net income $1,246,406 $2,022,642 $674,517
Preferred stock dividend - (57,162) -
--------------- ---------------- ---------------
Numerator for basic earnings
per share - income available
to common shareholders 1,246,406 1,965,480 674,517
Effect of dilutive securities -
preferred stock dividend - 57,162 -
--------------- ---------------- ---------------
Numerator for diluted earnings
per share - income available
to common shareholders
after assumed conversions $1,246,406 $2,022,642 $647,517
=============== ================ ===============
Denominator:
Denominator for basic
earnings per share -
weighted average shares * 5,640,044 3,859,443 3,831,360
Effect of dilutive securities:
Employee stock options 201,934 149,575 84,808
Series A convertible
preferred stock - 488,571 488,571
--------------- ---------------- ---------------
Dilutive potential common
shares 201,934 638,146 573,379
--------------- ---------------- ---------------
Denominator for diluted
earnings per share -
adjusted weighted-average
conversions 5,841,978 4,497,589 4,404,739
=============== ================ ===============
</TABLE>
* Adjusted for the 1 for 1.75 reverse stock split. See Note 1.
<PAGE F-21>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
9. Earnings Per Share (continued)
<TABLE>
1998 1997 1996
--------------- ---------------- ---------------
<CAPTION>
<S> <C> <C> <C>
Basic earnings per share $.22 $.51 $.18
=============== ================ ===============
Diluted earnings per share $.21 $.45 $.15
=============== ================ ===============
</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, 1998, 1997, and 1996
were 83%, 81% and 69%, respectively, of total net sales. During the year ended
December 31, 1998, approximately 29% of the Company's net sales were through
direct sales and 71% through resellers, major retailers and distributors.
Approximately 29% and 17% of total net sales were with one customer for the
years ended December 31, 1998 and 1997, respectively. The Company did not have
any customers which individually accounted for more than 10% of total sales for
the year ended December 31, 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 7.5% promissory notes described in Note 6 were payable to two shareholders
of the Company. The Company incurred $53,713, $300,748 and $324,547 of interest
expense during the years ended December 31, 1998, 1997 and 1996, respectively,
related to these promissory notes.
<PAGE F-22>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
11. Related Party Transactions (continued)
In January 1997, the Company entered into a developing and licensing agreement
with Street Technologies, Inc., now known as 7th Street.com, 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 years ended December 31, 1998 and 1997, Street paid net
royalties excluding the $620,000 prepayment discussed below of $291,846 and
$315,000, respectively, to the Company. The president and chief executive
officer of Street is a director of the Company.
In 1998, the Company rented an airplane from an affiliate for use in traveling
to trade shows and other marketing activities. Total costs charged by the
affiliate during the year ended December 31, 1998 was $36,813.
In September 1998, the Company paid $620,000 to amend the developing and
licensing agreement with Street whereby the royalty paid to Street on
networkable licenses sold for multimedia training products developed using
Street products was reduced through September 30, 2000. At that time, the
Company has the option to pay an additional $250,000 to reduce the royalty paid
on Street's products for the life of Street's products. The $620,000 payment was
capitalized as prepaid royalty and license and is being amortized over 24
months. Prepaid royalty and license amortization expense was $77,500 for the
year ended December 31, 1998.
In July 1998, the Company issued a $188,000 note receivable to an officer as
part of an employment agreement. The note receivable is secured by a first
mortgage on his residence, earns interest at 8% per annum and is payable monthly
with a balloon payment in July 2000.
12. Lease Commitments
The Company has noncancellable lease commitments relating to computer equipment.
The future minimum lease payments for all leases are as follows:
1999 $13,434
2000 5,396
------------------
$18,830
==================
<PAGE F-23>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
12. Lease Commitments (continued)
The Company incurred $9,633, $55,032 and $30,919 of rental expense during the
years ended December 31, 1998, 1997 and 1996, respectively.
13. Employee Benefit Plan
In November 1997, the Company began 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 years ended December 31, 1998 and 1997 were
$82,563 and $10,983, respectively. The Company does not provide any
post-retirement benefits other than the 401(k) plan.
14. Legal Contingencies
On May 22, 1998, a lawsuit was filed 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. The Company believes the lawsuit is without merit.
The Company is involved in various other 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.
15. Subsequent Event
Subsequent to December 31, 1998, the Company settled a lawsuit filed in December
1998, arising out of operations. The amount of the settlement was $172,000 and
it is reflected in 1998 selling, general and administrative expenses.
<PAGE F-24>
ViaGrafix Corporation
Notes to Consolidated Financial Statements (continued)
16. Quarterly Financial Information (unaudited)
The quarterly financial information is as follows (in thousands, except for
earnings per share data):
<TABLE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- --------------- -------------- --------------
<CAPTION>
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Sales $4,077 $4,187 $4,017 $6,469
Gross profit 3,103 3,197 3,216 4,689
Income (loss) before taxes 708 729 171 (7)
Net income 537 502 157 50
Basic earnings per share $ .12 $ .08 $ .03 $ .01
Diluted earnings per share $ .11 $ .08 $ .03 $ .01
Year ended December 31, 1997:
Sales 2,866 3,280 3,656 3,893
Gross profit 2,129 2,468 3,060 2,995
Income before taxes 642 646 1,132 419
Net income 395 398 689 541*
Basic earnings per share .09 .10 .18 .14
Diluted earnings per share .09 .09 .15 .12
</TABLE>
* 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.
<PAGE F-25>
ViaGrafix Corporation
Schedule II - Valuation and Qualifying Accounts
<TABLE>
Balance at Amounts Balance at
Beginning Charged End of
Description of Period to Expense Deductions Period
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts $60,254 $118,962 $(31,502)(1) $147,714
Reserve for sales returns - 533,496 - 533,496
Year ended December 31, 1997:
Allowance for doubtful accounts - 107,497 (47,243)(1) 60,254
Year ended December 31, 1996:
Allowance for doubtful accounts - - - -
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
<PAGE 25>
Signatures
Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, hereunto duly authorized on March 19, 1999.
ViaGrafix Corporation
By: /s/ Michael Webster
-----------------------------
Michael Webster
Chairman of the Board of Directors, Chief Executive Officer,
and President
Pursuant to the Requirement of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 19, 1999.
By: /s/ Michael Webster
-----------------------------
Michael Webster
Chairman of the Board of Directors, Chief Executive Officer,
and President
By: /s/ Robert Webster
-----------------------------
Robert Webster
Executive Vice President, Secretary and Director
By: /s/ Robert Moore
-----------------------------
Robert Moore
Treasurer and Chief Financial Officer
(principal financial officer and principal accounting officer)
By: /s/ Roy Bliss
-----------------------------
Roy Bliss
Director
By: /s/ Gerald Harris
-----------------------------
Gerald Harris
Director
<PAGE 26>
Exhibit 10.2 Agreement with Robert Moore Regarding Change in Control
A G R E E M E N T
AGREEMENT made and entered into effective the 1st day of January, 1999, by
and between ViaGrafix Corporation, an Oklahoma corporation ("ViaGrafix"), and
Robert C. Moore, Jr. ("Bob"), as follows:
1. In the event that there is a change in control (as defined below) of
ViaGrafix, ViaGrafix agrees that:
(a) If Bob is not offered a position with ViaGrafix of at least comparable
responsibilities and compensation, he may, at any time thereafter upon
thirty (30) days' written notice to ViaGrafix, elect to (i) terminate
his employment and receive severance pay equal to eighteen (18) months
of his salary immediately prior to the change in control, (ii) require
ViaGrafix to purchase his home (if any) or home site in Mayes County,
Oklahoma, at its then fair market value and/or (iii) purchase the
ViaGrafix vehicle then provided for his use at its current N.A.D.A.
loan value; and all of his stock options with ViaGrafix shall
immediately vest and shall be exercisable by Bob at any time within
twelve (12) months after his termination of employment from ViaGrafix.
(b) Bob shall have the same rights as specified in (a) above if his
employment with ViaGrafix is terminated thereafter by ViaGrafix,
unless such termination is for "cause". "Cause" means being convicted
of a felony, drug or alcohol abuse or dereliction of duties.
2. A "change in control" shall occur when, by reason of a sale of stock or
assets, merger or other business combination, Michael A. Webster and Robert
E. Webster no longer have effective control over ViaGrafix or the
designation of nominees to its Board of Directors.
3. This agreement shall be binding on and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above shown. ViaGrafix Corporation
By: /s/ Mike Webster
-----------------------------
Mike Webster, President
/s/ Robert C. Moore, Jr.
-----------------------------
Robert C. Moore, Jr.
<PAGE 27>
Exhibit 21.1 Subsidiaries of the Registrant
Make It So, Inc.
ViaKids, Inc.
American Small Business Computers, Inc.
DesignCAD, Inc.
<PAGE>
Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-59591) pertaining to the 1995 Stock Option Plan of ViaGrafix
Corporation of our report dated March 19, 1999, with respect to the consolidated
financial statements and schedule of ViaGrafix Corporation included in the
Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ERNST & YOUNG LLP
Tulsa, Oklahoma
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001051556
<NAME> ViaGrafix Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,046
<SECURITIES> 3,000
<RECEIVABLES> 4,861
<ALLOWANCES> 148
<INVENTORY> 1,909
<CURRENT-ASSETS> 20,448
<PP&E> 4,380
<DEPRECIATION> 1,316
<TOTAL-ASSETS> 25,216
<CURRENT-LIABILITIES> 2,382
<BONDS> 0
0
0
<COMMON> 59
<OTHER-SE> 22,834
<TOTAL-LIABILITY-AND-EQUITY> 25,216
<SALES> 18,750
<TOTAL-REVENUES> 19,285
<CGS> 4,545
<TOTAL-COSTS> 13,085
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
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</TABLE>
