10-Q 1 a65504e10-q.txt FORM 10-Q FOR THE PERIOD ENDED JULY 28,2000 1 -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 (No Fee Required) For the quarter ended July 28, 2000 OR [___] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ____________________ to____________________ Commission File No. 0-29396 AUTOLOGIC INFORMATION INTERNATIONAL, INC. ----------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3855697 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1050 Rancho Conejo Boulevard, Thousand Oaks, CA 91320 ------------------------------------------------ ------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (805) 498-9611 Not Applicable ------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of common stock outstanding as of September 1, 2000 was 5,787,970. 2 PART I - FINANCIAL INFORMATION ITEM 1--FINANCIAL STATEMENTS AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes 2 3 AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

See accompanying notes 3 4 AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)

See accompanying notes 4 5 AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes 5 6 AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. However, in the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company's financial position at July 28, 2000 and results of operations for the three months and nine months ended July 28, 2000 and July 30, 1999, and cash flows for the nine months ended July 28, 2000 and July 30, 1999. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. These statements should be read in conjunction with the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended October 29, 1999. The accounting policies used in preparing these financial statements are the same as those described in that Report. The Company's fiscal year ends on the Friday nearest October 31 and its fiscal quarters end on the Friday nearest the last day of January, April and July. The 2000 fiscal year will contain 53 weeks compared with 52 weeks in fiscal year 1999. NOTE B--FORMATION OF THE COMPANY AND MERGER The Company was incorporated in Delaware on September 5, 1995 as a wholly owned subsidiary of Volt Information Sciences, Inc. ("Volt"). On January 29, 1996, pursuant to the terms of an Agreement and Plan of Merger dated October 5, 1995, as subsequently amended (the "Merger Agreement"), among the Company, Volt and Information International, Inc. ("Triple-I"), Volt contributed to the capital of Autologic, Incorporated ("Autologic") and certain foreign subsidiaries of Volt ("Volt Subsidiaries") the amounts Autologic or such subsidiaries owed to Volt and, subsequent thereto, caused Autologic to merge with and into the Company. Volt also assigned to the Company all of the issued and outstanding shares of the Volt Subsidiaries. In addition, pursuant to the Merger Agreement, on January 29, 1996, following approval by its stockholders, Triple-I merged with and into the Company. As the Company, Autologic and the Volt Subsidiaries were under common control, the merger of Autologic and the transfer of the stock of the Volt Subsidiaries to the Company has been accounted for on a pooling of interest basis. The merger of Triple-I has been accounted for under the purchase method of accounting and, accordingly, the purchase price, which was based on the quoted market price of the Triple-I common stock at the time the general terms of the acquisition were agreed to and announced, plus the value of stock options issued in exchange for outstanding stock options of Triple-I, has been allocated to net assets based upon their estimated fair values. The $2,753,000 excess of the purchase price over the estimated fair value of Triple-I's identifiable assets, including the estimated future tax benefits of Triple-I's net operating loss carryforwards and deductible temporary differences, was recorded on the effective date of the merger and is being amortized over a five-year period. NOTE C--INVENTORIES Inventories consist of:

6 7 AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued (Unaudited) NOTE D--INCOME TAXES Income taxes are provided using the liability method. Significant components of the income tax provision (benefit) attributable to operations are as follows:

Deferred income taxes reflect the net tax effects of changes in the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As described in Note B, as of the date of the mergers, a deferred tax asset was established representing the estimated future tax benefit anticipated to be realized from the use of Triple-I's net operating loss carryforward and deductible temporary differences and the Company's deductible temporary differences existing at the date of mergers to reduce anticipated taxable income of the Company to be realized subsequent to the mergers. The Company believes that it is more likely than not that such tax benefits will be realized based on the combined companies' past and anticipated future results of operations and after considering provisions of the tax law, such as the change in ownership provisions, that restrict the future use of Triple-I's tax benefits. NOTE E--CHARGES FROM VOLT Volt incurs certain costs on behalf of the Company which are reflected in the results of operations and for which the Company reimburses Volt. In addition, during the nine months ended July 28, 2000 and July 30, 1999, the Company incurred $27,000 in legal fees payable to Volt under a $3,000 per month retainer arrangement that provides the Company access to Volt's in-house legal staff. 7 8 AUTOLOGIC INFORMATION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued (Unaudited) NOTE F--RELATED PARTY TRANSACTIONS A three-year lease, commencing on the effective date of the mergers, was entered into between the Company, as lessee, and a wholly-owned subsidiary of Volt, as lessor, for space previously occupied by Autologic as its headquarters and manufacturing facility in Thousand Oaks, California. Pursuant to the terms of the lease, as amended in December 1996, the Company's Board of Directors established a new rental rate based on prevailing rates in the general area, which resulted in a slight decrease in rent. The lease also provides for the Company to pay all real estate taxes, insurance, utilities and repairs related to the facility. The Company and the Landlord have continued to operate under the terms of the lease since its expiration on January 28, 1999, although there have been discussions to modify the lease. During each of the nine months ended July 28, 2000 and July 30, 1999, the Company paid rent to Volt of $582,000. NOTE G--PER SHARE DATA The Company calculates per share data in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). Under SFAS No. 128, earnings per share data is calculated for basic and diluted earnings per share. Basic earnings per share excludes dilutive securities including stock options, and is calculated using the weighted average common shares outstanding for the period. Diluted earnings per share reflects the dilution to earnings that would occur if stock options and other dilutive securities resulted in the issuance of common stock. Substantially all common stock equivalent shares from stock options (306,500 and 331,500 in 2000 and 1999, respectively) have been excluded from the computation of diluted earnings per share because the effect would be antidilutive, since the option prices were greater than the average market prices of the Company's common stock during the quarters and, for the reported 1999 periods, the Company reported a loss. NOTE H--REVENUE RECOGNITION Revenues are recognized when products are shipped and services are rendered, less estimated returns and warranty costs for which provisions are made at the time of sale. The Company also generates revenues from support and maintenance contracts, which generally provide for the Company to provide technical support and maintenance to its customers on its products. Support and maintenance revenues are recognized ratably over the contract periods. On December 3, 1999, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." The SEC Staff addresses several issues in SAB No. 101, including the timing for recognizing revenue derived from selling arrangements that involve contractual customer acceptance provisions, and installation of the product occurs after shipment and transfer of title. The Company's existing revenue recognition policy is to recognize revenue at the time the customer takes title to the product, generally at the time of shipment. The Company routinely meets its installation obligations and obtains customer acceptance. Applying the requirements of SAB No. 101 to the present selling arrangements may result in a change in the Company's accounting policy for revenue recognition and the deferral of the recognition of revenue from such sales until installation is complete and accepted by the customer. The effect of the change, if any, must be recognized as a cumulative effect of a change in accounting no later than the Company's first quarter of its fiscal year ending on November 2, 2001. To the extent SAB No. 101 is relevant to its future sales arrangements, the Company intends to adopt the new accounting on November 4, 2000. At the current time, it is not possible to determine the effect this change will have on the results of operations of the Company. However, management believes the effects on liquidity, cash flow and financial position will not be material. The Company is considering potential changes to its standard contracts for sales that could mitigate the impact of SAB No. 101. NOTE I--CONTINGENCIES The Company is currently involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate resolution of such claims and actions will not have a materially adverse effect on the Company's financial position or results of operations. 8 9 ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General In order to keep investors informed of the Company's future plans and objectives, this report (and other reports and statements issued by the Company and its officers from time to time) contains certain statements concerning the Company's future results, future performance, intentions, objectives, plans and expectations that are or may be deemed to be "forward-looking statements". These statements generally contain words such as "may," "should," "seeks," "believes," "expects," "anticipates," intends," "plans," "estimates," "projects," "strategies" and similar expressions or the negative of those words. The Company's ability to do this has been fostered by the Private Securities Litigation Reform Act of 1995 which provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information so long as those statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company believes it is in the best interests of investors to take advantage of the "safe harbor" provisions of that Act. Although the Company believes that its expectations are based on reasonable assumptions, these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause the Company's actual results, performance and achievements to differ materially from those described or implied in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: - general economic and business conditions in the United States and in the overseas markets where the Company distributes products, including the impact of the major economic problems that have occurred in Asia and Latin America; - the impact of the strengthening dollars in international prices; - the Company's ability to successfully expand its market base beyond its traditional newspaper market; - potential changes in customer spending and purchasing policies and practices; - the continuing availability of components, sub-assemblies, parts and end items on reasonable terms, and dependence on third parties for some components; - risks inherent in new product introductions, such as start-up delays, uncertainty of customer acceptance; - the success of the Company's new Computer-to-Plate (CTP) imager; - the Company's ability to maintain superior technological capability; - the Company's ability to foresee changes and to identify, develop and commercialize innovative and competitive products and systems in a timely and cost effective manner and achieve customer acceptance in markets characterized by rapidly changing technology and frequent new product introductions; - the Company's ability to meet competition in its highly competitive markets with minimal impact on prices and margins; - the Company's ability to attract and retain certain classifications of technologically qualified personnel, particularly in the areas of research and development and customer service; - the Company's ability to generate cash flows and obtain financing to support its operations and growth; and, - the impact of the introduction of the Euro currency in countries where it has not already been introduced. Three months ended July 28, 2000 compared to three months ended July 30, 1999 Results of Operations In the three month period ended July 28, 2000, revenues increased by $4,670,000, or 28.2%, due to an increase of $4,910,000, or 47.4%, in sales of systems and equipment, offset, in part, by a decrease of $240,000, or 3.9%, in customer service and support sales. The increase in systems and equipment sales was due primarily to sales of the Company's new Wide Computer-to-Plate (CTP) product to Latin American and European customers during the three-month period. The decrease in customer service and support sales was due to a decline internationally, as new equipment sales are still under warranty and therefore do not yet require service contracts. Gross margins decreased .8 percentage points (from 37.5% to 36.7%), due to lower margins on systems and equipment which decreased 5.9 percentage points (from 44.0% to 38.1%), higher service and support margins which increased 6.6 percentage points (from 26.6% to 33.2%), The decrease in systems and equipment margins was due primarily to discounting in response to competition and slightly higher manufacturing costs during the period. The higher manufacturing costs resulted from higher material costs for 3850 film imagers due to lower production volumes, lower volume discounts provided by vendors and unfavorable manufacturing variances 9 10 associated with the roll-out of the Company's new wide versions of the 3850 film imager and Computer-to-Plate (CTP). Typically, manufacturing variances are high on new products. However, as the production quantity increases, the material and labor variances are expected to reduce. The increase in service and support margins was due to higher margins domestically due to lower spare and warranty costs during the period. Operating expenses decreased by $382,000 from $7,807,000 in fiscal 1999 to $7,425,000 in fiscal 2000 due primarily to cost cutting measures implemented by the Company in October 1999 and February 2000 discussed below. In addition, engineering costs decreased as development expenses wind down on the CTP and wide 3850 film imagers. Operating expenses as a percentage of sales decreased by 12.2 percentage points (from 47.1% to 34.9%) as a result of the cost control measures previously mentioned, and higher sales revenue levels. The $78,000 increase in interest income is due to a higher average (over the comparable three-month period) cash balance and slightly higher interest rate in the fiscal 2000 period than in the comparable period in the prior year. A foreign exchange loss of $24,000 was realized in the three-month period ended July 28, 2000, compared to a loss in the similar period in 1999 of $123,000. The loss in both periods was due to unfavorable currency movements in the European and Pacific Rim currency markets. To reduce the potential impact from foreign currency changes on the Company's foreign currency receivables and firm commitments, foreign currency options are purchased. The Company's effective tax rate was 50.8% for the three months ended July 28, 2000 compared to a 19.5% benefit tax rate for the comparable prior year period due primarily to higher foreign taxes. Nine months ended July 28, 2000 compared to nine months ended July 30, 1999 Results of Operations In the nine month period ended July 28, 2000, revenues increased by $2,221,000, or 4.0%, due to an increase of $2,860,000, or 7.9%, in sales of systems and equipment, offset by a decrease of $639,000, or 3.4%, in customer service and support sales. The increase in systems and equipment sales was primarily due to increased sales of the Company's new wide CTP in Latin America and Europe. Presently the price of CTP plates is relatively high, which has delayed many potential users, domestically, from investing in the CTP technology. As this technology becomes more widespread, plate prices should decline and sales of CTP equipment should increase on a worldwide basis. The decrease in customer service and support sales was due to a decline in domestic service contracts being issued as a result of the lower systems and equipment sales domestically. Gross margins increased .4 percentage points (from 38.2% to 38.6%) due to higher service and support margins, which increased 9.2 percentage points (from 24.2% to 33.4%), offset by lower margins on systems and equipment which decreased 4.5 percentage points (from 45.5% to 41.0%). The increase in service and support margins was due to higher margins domestically due to lower spare and warranty costs during the period. The decrease in systems and equipment margins was due to discounting in response to competition and slightly higher manufacturing costs during the period. The higher manufacturing costs resulted from higher material costs for 3850 imagers due to lower production volumes, lower volume discounts provided by vendors and unfavorable manufacturing variances associated with the roll-out of the Company's new wide versions of the 3850 film imager and CTP. Typically, manufacturing variances are high on new products. However, as the production quantity increases the material and labor variances are expected to reduce. Operating expenses decreased by $1,256,000 from $22,470,000 in fiscal 1999 to $21,214,000 in fiscal 2000 due primarily to cost cutting measures implemented by the Company beginning in October 1999. As part of its ongoing cost-cutting initiatives, the Company implemented a 6% worldwide reduction in staffing in February 2000. Total personnel were reduced by 25, with the majority of the layoffs occurring in the Company's Thousand Oaks facility. The Company estimates the annual savings from the layoff and other cost cutting measures to be approximately $1.8 million. In addition, in February 2000, the Company terminated sales and engineering activities on its Laser Cinema Recorder, which is expected to generate annual savings of approximately $400,000. In addition, engineering costs decreased as development expenses wind down on the CTP and wide 3850 film imager. Operating expenses expressed as a percentage of sales decreased 3.8 percentage points (from 40.9% to 37.1%) due to the lower level of expenditures and higher sales volume. 10 11 The $149,000 increase in interest income is due to a higher average (over the comparable nine-month period) cash balance and slightly higher interest rates in the fiscal 2000 period than in the comparable period in the prior year. A foreign exchange loss of $105,000 was realized in the nine-month period ended July 28, 2000, compared to a loss in the same period in 1999 of $202,000. The loss in both periods was due to unfavorable currency movements in the European and Pacific Rim currency markets. To reduce the potential impact from foreign currency changes on the Company's foreign currency receivables and firm commitments, foreign currency options are purchased. The Company's effective tax rate was 49.3% for the nine months ended July 28, 2000 compared to a 22.1% benefit tax rate for the comparable prior year period due primarily to higher foreign taxes. Liquidity and Capital Resources As of July 28, 2000, the Company had cash and cash equivalents of $12,117,000 and working capital of $28,609,000. During the nine months ended July 28, 2000, the Company's operating activities used cash of $449,000 primarily due to changes in operating assets and liabilities of $2,955,000, offset in part by cash provided by net income of $245,000 and net non-cash charges related primarily to depreciation and amortization of $2,261,000. The changes in operating assets and liabilities resulted primarily from increases in accounts receivable ($2,254,000) and inventories ($1,511,000) and decreases in income taxes payable ($401,000) and accrued expenses ($101,000), partially offset by increases in customer advances of $1,345,000. The increase in customer advances was due primarily to orders in Europe for the Company's new wide version CTP product. The increase in accounts receivable was due to higher sales in the third quarter of fiscal 2000 as compared to the fourth quarter of fiscal 1999. The increase in inventories was due to the build-up of inventory to meet the increased backlog of orders for the wide CTP. Investing activities used cash of $1,142,000 for the purchase of property and equipment. The Company believes that its cash on hand will be sufficient to meet the Company's liquidity and capital needs in the normal course of business. The Effect of New Accounting Pronouncements In June 1998, the FASB issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). The provisions of SFAS No. 133 require companies to record all derivative instruments as assets or liabilities, measured at fair value. In June 1999, the FASB issued Statement 137, which deferred the effective date of SFAS No. 133. The Company does not expect that the effects of adopting this new standard in fiscal 2001 will be material. 11 12 ITEM 3--QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to changes in interest rates, foreign currency exchange rates and derivative financial instruments. The Company maintains a portfolio of highly liquid cash equivalents maturing in three months or less from the date of purchase. Given the short-term nature of these investments, and that the Company has no borrowings outstanding, the Company is not subject to significant principal risk. However, the Company's yield return on future short-term investments could be affected at the time of reinvestment as a result of intervening events. The Company presently has no borrowings and, accordingly, does not purchase interest rate swaps or other instruments to hedge against interest rate fluctuations. A significant portion of the Company's operations consists of sales activities in foreign locations, as the Company sells its products worldwide. The Company's financial results, therefore, could be significantly impacted by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since all of the Company's sales are denominated in U.S. dollars, the Company's foreign operations are net payers in currencies other than the U.S. dollar. As such, the Company's operating results may be adversely affected by the impacts of weaker foreign currencies relative to the U.S. dollar. To mitigate the short-term effect of changes in currency exchange rates on its foreign currency based expenses and receivables, the Company purchases foreign currency option contracts to hedge the adverse impact of currency fluctuations on its foreign currency receivables and firm commitments. Management believes that, due to its currency option positions, changes in currency rates would not have a significant impact on the Company's results of operations. Impact of the Euro Several European countries have adopted, as of January 1, 1999, and others are expected to adopt, a Single European Currency (the "Euro") with a transition period continuing through January 1, 2002. The Company believes, based on its experience to date, that its internal systems are, and will continue to be, Euro compatible without material modification cost. Further, the Company has not experienced to date, and does not expect, the introduction of the Euro currency to have a material adverse impact on the Company's financial position or results of operations. PART II - OTHER INFORMATION ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: ~~15 Independent Accountants' Report on Review of Interim Financial Information from Ernst & Young LLP 27 Financial Data Schedule~~

(b) Reports on Form 8-K: The only Report on Form 8-K filed by the Company during the quarter for which this Report is filed was dated (date of earliest event reported) June 13, 2000 reporting under Item 5, Other Events, and Item 7, Financial Statements and Exhibits. No financial statements were filed with that Report. 12 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTOLOGIC INFORMATION INTERNATIONAL, INC. Dated: Thousand Oaks, California September 8, 2000 BY: /s/ Anthony F. Marrelli ------------------------------------------ Anthony F. Marrelli Vice President and Chief Financial Officer 13 14 Exhibit Index

AUTOLOGIC INFORMATION INTERNATIONAL INC 10-Q