U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
Quarterly report under Section 13 OR 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended September 30, 1999
Transition report under Section 13 OR 15(d) of the Exchange Act
For the transition period from __________ to ________
Commission File Number 000-21729
The viaLink Company
(Exact Name of Small Business Issuer as Specified in its Charter)
Oklahoma 73-1247666
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
13800 Benson Road, Suite 100
Edmond, Oklahoma 73013
(Address of Principal Executive Offices)
(405) 936-2500
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the past 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 __
As of November 10, 1999 there were 4,378,444 outstanding shares of the
issuer's Common Stock, par value $.001 per share.
Transitional Small Business Disclosure Format: Yes ___ No X
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
The viaLink Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
ASSETS September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,824 $ 715,446
Short-term investments 2,238,142 -
Accounts receivable-trade, net of allowance
for doubtful accounts of $32,841 and $7,841 89,597 158,117
Other receivables 625,100 585,778
Prepaid expenses 116,949 16,716
Marketable securities, available-for-sale 1,528,647 684,327
----------- ----------
Total current assets 4,603,259 2,160,384
Furniture, equipment & leasehold improvements, net 2,149,711 719,910
Software development costs, net 1,475,904 1,340,230
Note receivable, net of deferred gain on sale - 337,958
Deferred service fees 1,370,257 -
Other assets 66,109 38,564
----------- ----------
Total assets $ 9,665,240 $4,597,046
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,192,910 $1,066,273
Current portion of capital lease obligation 4,857 44,194
----------- ----------
Total current liabilities 2,197,767 1,110,467
ong-term debt 2,599,662 -
----------- ----------
Total liabilities 4,797,429 1,110,467
Stockholders' equity:
Common stock, $.001 par value; 30,000,000
shares authorized; 3,307,318 and 2,826,613
shares issued and outstanding at
September 30, 1999 and December 31,
1998, respectively 3,307 2,827
Additional paid-in capital 16,870,232 4,763,569
Unearned stock compensation (1,723,009) -
Accumulated deficit (10,811,366) (964,144)
Accumulated other comprehensive income (loss) 528,647 (315,673)
----------- ----------
Total stockholders' equity 4,867,811 3,486,579
----------- ----------
Total liabilities and stockholders' equity $ 9,665,240 $4,597,046
=========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<TABLE>
The viaLink Company
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For the Three Months Ended September 30, 1999 and 1998
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Revenues $ 129,860 $1,775,043
Expenses:
Direct cost of sales - 700,191
Salaries and benefits 1,563,300 1,183,741
Selling, general and
administrative 2,428,989 445,942
Interest expense, net 1,157,611 52,592
Depreciation and amortization 286,647 223,536
----------- ----------
Total expenses 5,436,547 2,606,002
----------- ----------
Income (loss) from operations (5,306,687) (830,959)
Gain on sale of assets - 2,998,453
Other income 227,880 132,770
----------- ----------
Income (loss) before income taxes (5,078,807) 2,300,264
Provision (benefit) for income taxes - 1,040,990
----------- ----------
Net income (loss) (5,078,807) 1,259,274
Other comprehensive income (loss):
Unrealized gain (loss) on securities (603,536) (74,259)
----------- ----------
Comprehensive income (loss) $(5,682,343) $1,185,015
=========== ==========
Weighted average shares outstanding-
Basic 3,138,442 2,741,001
Diluted 3,138,442 2,784,820
Net income (loss) per common share-
Basic $ (1.62) $ 0.46
Diluted $ (1.62) $ 0.45
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<TABLE>
The viaLink Company
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
(Unaudited)
For the Nine Months Ended September 30, 1999 and 1998
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Revenues $ 355,258 $7,920,746
Expenses:
Direct cost of sales - 1,681,305
Salaries and benefits 3,020,134 4,577,001
Selling, general and
administrative 4,865,688 1,592,193
Interest expense, net 2,928,288 153,246
Depreciation and amortization 651,291 725,723
----------- ----------
Total expenses 11,465,401 8,729,468
----------- ----------
Income (loss) from operations (11,110,143) (808,722)
Gain on sale of assets 462,041 2,998,453
Other income 800,880 132,770
----------- ----------
Income (loss) before income taxes (9,847,222) 2,322,501
Provision (benefit) for income taxes - 1,049,440
----------- ----------
Net income (loss) (9,847,222) 1,273,061
Other comprehensive income (loss):
Unrealized gain (loss) on securities 844,320 (74,259)
----------- ----------
Comprehensive income (loss) $(9,002,902) $1,198,802
=========== ==========
Weighted average shares outstanding-
Basic 2,962,857 2,736,042
Diluted 2,962,857 2,788,174
Net income (loss) per common share-
Basic $ (3.32) $ 0.47
Diluted $ (3.32) $ 0.46
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<TABLE>
The viaLink Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 1999
<CAPTION>
Common Stock Additional Unearned
----------------- Paid-in Stock Accumulated
Shares Amount Capital Compensation Deficit
---------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December
31, 1998 2,826,613 $2,827 $ 4,763,569 $ - $ (964,144)
Exercise of stock
options 109,633 109 297,399
Stock issued under
employee stock
purchase plans 172 - 1,891
Proceeds from Hewlett-
Packard note 6,000,000
Issuance of stock
options 2,185,736 (2,185,736)
Issuance of warrants 1,874,007
Amortization of
unearned stock
compensation 462,727
Proceeds from exercise
of common stock
warrants 370,900 371 2,063,079
Registration costs (315,449)
Net loss (9,847,222)
Unrealized gain on
securities
available for sale
Balance, September
30, 1999 3,307,318 $ 3,307 $16,870,232 $ (1,723,009) $(10,811,366)
=========== ======= =========== ============ ============
</TABLE>
<TABLE>
The viaLink Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
(Unaudited)
For the Nine Months Ended September 30, 1999
<CAPTION>
Accumulated
Other
Comprehensive
Income (Loss) Total
_____________ _____________
<S> <C> <C>
Balance, December $ (315,673) $ 3,486,579
31, 1998
297,508
Exercise of stock
options
Stock Issued under
employee stock
purchase plans 1,891
Proceeds from
Hewlett-Packard
note 6,000,000
Issuance of stock
options -
Issuance of warrants 1,874,007
Amortization of unearned
stock compensation 462,727
Proceeds from exercise of
common stock warrants 2,063,450
Registration costs (315,449)
Net loss (9,847,222)
Unrealized gain on
securities available
for sale 844,320 844,320
------------- ------------
Balance, September
30, 1999 $ 528,647 $ 4,867,811
============= ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<TABLE>
The viaLink Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 1999 and 1998
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(9,847,222) $ 1,273,061
Adjustments to reconcile net income (loss) to
Net cash provided by (used in) operating
activities:
Depreciation and amortization 651,291 725,723
Gain on sale of assets (462,041) (2,998,453)
Amortization of unearned stock compensation 462,727 -
Non-cash service costs for warrants issued 503,750 -
Deferred income tax provision (benefit) - 1,049,440
Non-cash interest expense on convertible debt 2,599,662 -
Increase (decrease) in cash for changes in:
Accounts receivable, net 68,520 (102,676)
Other receivables (39,322) (275,901)
Inventory - (3,605)
Prepaid expenses and other assets (127,778) (71,419)
Accounts payable and accrued liabilities 1,126,636 912,013
Deferred revenue - (236,134)
---------- -----------
Net cash provided by (used in) operating
activities (5,063,777) 272,049
Cash flows from investing activities:
Proceeds from sale of assets, net of costs - 483,944
Capital expenditures (1,775,682) (22,915)
Short-term investments, net (2,238,142) -
Capitalized expenditures, software development (441,084) (486,582)
Collection on note receivable from ijob 800,000 -
---------- -----------
Net cash used in investing activities (3,654,908) (25,553)
Cash flows from financing activities:
Decrease in book overdraft - (23,619)
Proceeds from convertible debt 6,000,000 -
Proceeds from long-term debt 3,522,639
Proceeds from exercise of stock options,
stock bonus and stock purchase plans 299,399 29,214
Proceeds from exercise of common stock warrants 2,063,450 -
Registration costs (315,449) -
Payments of capital lease obligations (39,337) (112,722)
Payments on long-term debt - (3,461,577)
---------- -----------
Net cash provided by financing activities 8,008,063 (46,065)
---------- -----------
Net increase(decrease)in cash and cash equivalents (710,622) 200,431
Cash and cash equivalents, beginning of period 715,446 80,769
---------- -----------
Cash and cash equivalents, end of period $ 4,824 $ 281,200
========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
The viaLink Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
NOTE 1. DESCRIPTION OF BUSINESS
The viaLink Company provides a business-to-business electronic commerce
solution for the food and consumer packaged goods industries. We have
developed a cost-effective, Internet-accessible shared database, the
viaLink Item Catalog, that enables subscribing manufacturers, distributors
and retailers to exchange product, pricing and promotional information. Our
viaLink services offer a single interface solution for retailers to receive
product, pricing and promotion information from all their suppliers,
regardless of the technological capabilities of the retailer or the supplier.
Using the Item Catalog, suppliers are able to efficiently communicate
product and pricing information to their customers, significantly reducing
the operational and administrative costs of supply chain management.
Product, pricing and promotional information contained in the viaLink
database is secured with firewalls and password protections. With the use
of a personal computer and commonly available software and a Web browser,
viaLink enables its subscribers to improve management of information flow,
reduce errors and invoice discrepancies, enhance the accounts receivable
collection process, achieve administrative efficiencies and reduce redundant
information processing.
Our strategy is to continue our investment in marketing and sales
activities, development of our viaLink services, and customer support
services to facilitate our plan to penetrate the market and build recurring
revenues generated from subscriptions to our viaLink services. In order to
implement this strategy, we believe that we will need significant additional
capital resources and we are seeking additional financing sources and other
potential technology, strategic and marketing partners. Consequently, we
resemble a development stage company and will face many of the inherent
risks and uncertainties that development stage companies face. There can be
no assurance, however, that these efforts will be successful or that we will
be able to obtain additional financing or agreements with other partners on
commercially reasonable terms, if at all. Our failure to successfully
negotiate such arrangements would have a material adverse affect on our
business, financial condition and results of operations, including our
viability as an enterprise. As a result of the high level of expenditures
for investment in technology development, implementation, customer support
services, and selling and marketing expenses, we expect to incur losses in
the foreseeable future periods until such time, if ever, as the recurring
revenues from our viaLink services are sufficient to cover the expenses.
Our clients and customers range from small, rapidly growing companies
to large corporations in the consumer packaged goods industries, and are
geographically dispersed throughout the United States.
NOTE 2. BASIS OF PRESENTATION
Reference is made to the Company's Annual Report on Form 10-KSB for the
year ending December 31, 1998.
We have prepared the accompanying unaudited consolidated financial
statements in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of our management, the accompanying unaudited
financial statements contain all adjustments (consisting solely of normal
recurring adjustments) considered necessary to present fairly our financial
position and results of operations and cash flow. These interim unaudited
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and related notes included in our
Annual Report on Form 10-KSB, for the year ended December 31, 1998, as filed
with the Securities and Exchange Commission on March 4, 1999.
Operating results for the nine month period and three month period
ended September 30, 1999 are not necessarily indicative of the results that
may be expected for the full year ending December 31, 1999.
NOTE 3. DIVESTITURES
On December 31, 1998, we sold our wholly-owned subsidiary, ijob, Inc.
to DCM Company ("DCM"), a corporation wholly-owned by David C. Mitchell, the
President and a member of the Board of Directors of ijob at the time of the
sale. DCM purchased all of the outstanding stock of ijob for a
collateralized, ten-year $800,000 promissory note that accrued interest at
8% per annum. The promissory note was collateralized by substantially all of
ijob's fixed assets, contract rights, accounts receivable and general
intangibles. The net gain of $462,041 on the sale was deferred and netted
against the $800,000 promissory note at December 31, 1998, as DCM was
considered to be a highly leveraged entity. On March 11, 1999, the
promissory note and accrued interest was paid in full. Accordingly, we have
recognized the gain on the sale of $462,041 in the consolidated statement of
operations for the nine months ending September 30, 1999.
Effective September 1, 1998, we sold the assets related to our
management consulting and systems integration services (including our
proprietary Retail Services Application software) to The Netplex Group, Inc
(the "Consulting Assets Sale"). We received $3.0 million in cash and 643,770
shares of Netplex preferred stock, with a market value of $1.0 million on
the date of the sale. In conjunction with the Consulting Assets Sale, we
entered into an earn-out agreement that may provide us with quarterly cash
payments up to $1.5 million in aggregate generated from the assets sold to
Netplex until March 31, 2000. The cash proceeds from the sale were used to
repay (a) $551,062 of long-term debt, (b) $565,094 of shareholder loans
including interest and (c) expenses attributable to the Consulting Assets
Sale. The net gain from the Consulting Assets Sale was $2,998,453 and is
included in the results of operations for the three month and nine month
periods ended September 30, 1998. As of September 30, 1999, the market
value of the 643,770 shares of NetPlex preferred stock was $1,528,647,
yielding an unrealized gain of $844,320, which has been included in
comprehensive income in our consolidated statement of operations for the
nine months ended September 30, 1999. For the nine months ended September
30, 1999, we accrued payments in accordance with the Consulting Assets Sale
earn-out agreement in the amount of $800,880.
Accordingly, our consolidated balance sheet as of September 30, 1999
and the consolidated statements of operations for the three and nine months
ended September 30, 1999, do not include the assets and operations of the
consulting and systems integration business, nor do they include the assets
and operations of ijob, which are included in the comparable period of 1998.
Therefore, the periods presented are not comparable.
We expect to report losses from operations throughout 1999 and into
2000. We expect to continue our high level of expenditures for selling and
marketing and continued investment in our viaLink services. The extent of
our quarterly losses will depend on revenues generated from implementation
fees and subscriptions to our viaLink services, which have not yet achieved
market acceptance, and the Earn-out payments from NetPlex. To date, gross
revenues from these subscription services have not been significant.
Our strategy is to continue our investment in marketing and sales
activities, development of our viaLink services, and customer support
services to facilitate our plan to penetrate the market and build recurring
revenues generated from subscriptions to our viaLink services. In order to
implement this strategy, we believe that we will need significant capital
resources in addition to our $6 million financing arrangement with Hewlett-
Packard, the $5 million equity investment by i2 Technologies, Inc. ("i2"),
and exercise of our common stock purchase warrants. We are also seeking
additional financing sources and negotiating with other potential technology,
strategic and marketing partners. There can be no assurance, however, that
these efforts will be successful or that we will be able to obtain additional
financing or agreements with other partners on commercially reasonable terms,
if at all. Our failure to successfully negotiate such arrangements would
have a material adverse affect on our operations and business, financial
condition and results of operations, including our viability as an enterprise.
As a result of the high level of expenditures for selling and marketing and
investment in our viaLink services, we expect to incur losses in the
foreseeable future periods until such time, if ever, as the recurring
revenues from subscriptions to our viaLink services are sufficient to cover
the expenses.
Note 4. RECONCILIATION FOR BASIC AND DILUTED EARNINGS PER SHARE ("EPS")
[CAPTION]
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic:
Net Income (loss) $(5,078,807) $ 1,259,274 $(9,847,222) $ 1,273,061
Weighted average shares
outstanding 3,138,442 2,741,001 2,962,857 2,736,042
----------- ----------- ----------- -----------
Earnings per share $ (1.62) $ 0.46 $ (3.32) $ 0.47
=========== =========== =========== ===========
Diluted:
Net Income (loss) $(5,078,807) $ 1,259,274 $(9,847,222) $ 1,273,061
Weighted average shares
outstanding 3,138,442 2,741,001 2,962,857 2,736,042
Add: Net effect of
dilutive stock options - 43,819 - 52,132
----------- ----------- ----------- -----------
Total 3,138,442 2,784,820 2,962,857 2,788,174
----------- ----------- ----------- -----------
Earnings per share $ (1.62) $ 0.45 $ (3.32) $ 0.46
=========== =========== =========== ===========
</TABLE>
Options to purchase 512,500 shares of common stock at a weighted
average exercise price of $4.63 per share were outstanding during the first
nine months of 1998 but were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than
the average market price of the common shares. These options expire on
November 30, 2001 through March 1, 2007.
At September 30, 1999, options to purchase 2,471,000 shares at a
weighted average exercise price of $7.80, warrants to purchase 631,850,
159,750 and 187,500 shares of common stock at $5.00, $6.00 and $8.00,
respectively, and 896,845 shares of common stock to be issued upon the
conversion of the note we issued to Hewlett-Packard, were outstanding, but
were not included in the computation of diluted earnings per share because
the effect of these outstanding options, warrants and stock issuable upon
conversion of debt would be antidilutive.
NOTE 5. CONVERTIBLE DEBT
On February 4, 1999, we entered into a financing agreement and note
purchase agreement with Hewlett-Packard pursuant to which Hewlett-Packard
purchased from us a $6.0 million secured subordinated promissory note. This
note bears interest at 11.5% per annum, with interest payments deferrable to
maturity in February 2004. We received the approval of our shareholders at
our 1999 annual meeting to exchange the original note for a subordinated
secured convertible promissory note, convertible into our common stock at a
conversion price of $7.00 per share. The closing of the purchase of the
note occurred as of February 5, 1999.
The Emerging Issues Task Force ("EITF") Topic D-60 requires that
beneficial conversion features present in convertible securities should be
recognized and measured by allocating a portion of the proceeds equal to the
value of that feature to additional paid-in capital. The value of the
beneficial conversion feature was approximately $20.0 million at the
commitment date. However, the value is limited to the $6.0 million proceeds
based on the prescribed accounting. Accordingly, we have allocated the full
amount of proceeds to the beneficial conversion feature and recorded $6.0
million as additional paid-in capital as of September 30, 1999, and
recognized an additional non-cash interest charge of $1.0 million and $2.6
million for interest expense for the three months and nine months ended
September 30, 1999, respectively, through establishing long-term debt in the
same amount. We expect to recognize approximately $1.0 million in non-cash
interest expense, per quarter, through August 2000.
Note 6. TAX PROVISION
SFAS 109, Accounting for Income Taxes, requires, among other things,
the separate recognition, measured at currently enacted tax rates, of
deferred tax assets and deferred tax liabilities for the tax effect of
temporary differences between the financial reporting and tax reporting
bases of assets and liabilities, and net operating loss and tax credit
carryforwards for tax purposes. A valuation allowance must be established
for deferred tax assets if it is "more likely than not" that all or a
portion will not be realized. The deferred tax asset at December 31, 1998
and September 30, 1999, generated by losses recorded in the fourth quarter
of 1998 and during the nine months ended September 30, 1999, was offset by a
full valuation allowance. We will continue to provide a full valuation
allowance for future and current net deferred tax assets until such time as
management believes it is more likely than not that the asset may be realized.
Note 7. ALLIANCE AGREEMENTS
On May 3, 1999, we entered into an agreement with Ernst & Young LLP,
pursuant to which Ernst & Young will provide us with consulting and
integration services and sales and marketing support, to assist in the
development and market penetration of our viaLink services. In connection
with this agreement, we issued Ernst & Young a warrant to purchase up to
250,000 shares of our common stock at a price of $8.00 per share contingent
upon our ability to register the common stock underlying the warrant
agreement. Additionally, we have agreed to pay a royalty of 7.0% of our
service revenues to Ernst & Young for a period of two years and in the event
that at least ten "significant clients" of Ernst & Young become subscribers
to our services during this two year period, we will be obligated to
continue this royalty payment in perpetuity. As of the date of the issuance
of the warrant, the warrant conversion price was below the fair value of
our stock. The issuance of this warrant resulted in recognition of an asset
and an increase in additional paid in capital of $1.9 million, representing
the fair value of the warrant issued. The asset will be amortized over the
service period and will result in non-cash charges to our statement of
operations. On August 9, 1999, Ernst & Young exercised warrants to purchase
62,500 shares of common stock resulting in gross proceeds received by us of
$500,000. On November 10, 1999, Ernst & Young exercised warrants to
purchase the remaining 187,500 shares of common stock resulting in gross
proceeds received by us of $1.5 million.
On October 12, 1999, we entered into a strategic relationship with i2
Technologies, Inc. ("i2"), the primary focus of which is to integrate the
products and services of our two companies and to extend the solutions
across multiple industries. i2 will use our Item Catalog services to provide
product, price and promotion information to facilitate business processes
between trading partners using an Internet-accessible shared database. Our
two companies will also develop joint sales and marketing programs, and
develop enhancements to the viaLink services. Additionally, i2 invested
$5.0 million in us in exchange for 223,884 shares of viaLink common stock
and a warrant to purchase up to an additional 186,567 shares of our common
stock at an exercise price of $26.80 per share, representing a twenty
percent (20%) premium over the market price of the stock at the time of the
agreement. The initial term of the agreement will expire on December 31,
2003 and will automatically renew on a year-to-year basis thereafter unless
terminated by either party. The issuance of this warrant will result in
recognition of an asset and an increase in additional paid in capital for the
fair value of the warrant issued to i2 and will result in non-cash charges
to our statement of operations during the term of the agreement.
Additionally we have agreed to pay i2 a royalty of five percent (5%) of the
Item Catalog and Chain Pricing Subscription revenues during the term of the
agreement. We will also pay a royalty in addition to the five percent,
based upon subscription revenues received from new customers with whom i2
had "significant involvement" in the sales process. i2 has agreed to pay us
a royalty based upon revenues i2 receives from providing Item Catalog and
Chain Pricing Services outside of the consumer packaged goods industry.
During October 1999, we entered into an alliance with Internet Commerce
Systems, Inc. ("ICS") FoodOne to offer complementary business-to-business
e-commerce solutions. We will work with ICS FoodOne to create a combined
solution enabling suppliers and retailers to execute new product
introductions and promotional annoucements.
Note 8. REGISTRATION STATEMENTS
On June 29, 1999, the Securities and Exchange Commission declared
effective a post-effective amendment to our registration statement on Form
SB-2 thereby permitting holders of viaLink's 920,000 redeemable common stock
purchase warrants to voluntarily exercise the warrants, subject to specific
state approvals. Each warrant allows the holder to purchase one share of
viaLink common stock at a price of $5.00 per share, on or before November 20,
1999 unless earlier redeemed by us. As of September 30, 1999, 288,150 of the
920,000 redeemable stock purchase warrants had been exercised. As of
September 30, 1999, 20,250 underwriter warrants and warrant underwriter
warrants had been exercised. Warrant exercises resulted in proceeds of
$2.1 million to the Company for the nine months ended September 30, 1999.
On October 4, 1999, we issued a Notice of Redemption to holders of our
redeemable common stock purchase warrants and set Friday, November 5, 1999,
as the date of redemption. As of November 10, 1999, 919,892 redeemable
stock purchase warrants had been exercised.
On August 5, 1999, the Securities and Exchange Commission declared
effective the Company's registration statement on Form SB-2 to register
472,500 shares of common stock issuable upon the exercise of certain options
and a warrant, 360,000 of which are subject to a promotional shares escrow
agreement until November 20, 1999, and 62,500 shares of which were issued
upon the exercise of the Ernst & Young warrant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements of our management's intentions, beliefs, anticipations,
expectations and similar expressions concerning future events contained in
this Report constitute "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Any
forward-looking statements are made by us in good faith, pursuant to the
safe-harbor provisions of the Reform Act. As with any future event, we
cannot assure you that the events described in forward-looking statements
made in this Report will occur or that the results of future events will
not vary materially from those described in the forward-looking statements.
These forward-looking statements reflect our management's current views and
projections regarding economic conditions, industry environments and our
performance. Important factors that could cause our actual performance and
operating results to differ materially from the forward-looking statements
include, but are not limited to, changes in the general level of economic
activity in the markets served by us, introduction of new products or
services by competitors, sales performance, expense levels, interest rates,
changes in our financial condition, availability of capital sufficient to
support our anticipated level of activity, delays in implementing further
enhancements to our viaLink service and other services, and our ability to
implement our business strategies.
Our expectations with respect to future results ofoperations that may
be embodied in oral and written forward-looking statements, including any
forward-looking statements that may be included in this Report, are subject
to risks and uncertainties that must be considered when evaluating the
likelihood of our realization of such expectations. Our actual results
could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in Item 5 of
Part II of this Report.
OVERVIEW
We provide a business-to-business electronic commerce solution for the
food and consumer packaged goods industries. We have developed a cost-
effective, Internet-accessible shared database, the viaLink Item Catalog,
that enables subscribing manufacturers, distributors and retailers to
exchange product, pricing and promotional information. Our solution offers a
single interface solution for retailers to receive product, pricing and
promotion information from all their suppliers, regardless of the
technological capabilities of the retailer or the supplier. Using the Item
Catalog, suppliers are able to efficiently communicate product and pricing
information to their customers, significantly reducing the operational and
administrative costs of supply chain management. Product, pricing and
promotional information contained in the viaLink database is secured with
firewalls and password protections. With the use of a personal computer,
commonly available software and a Web browser, we enable our subscribers to
improve management of information flow, reduce errors and invoice
discrepancies, enhance the accounts receivable collection process, achieve
administrative efficiencies and reduce redundant information processing.
We expect that our future revenues will be generated primarily from
monthly subscriptions to our services. Our pricing for these services is
based on a flat monthly rate with a variable component based on the level of
service utilized and the number of stores or warehouses exchanging data.
The variable portion of each subscriber's monthly service fee is calculated
based on the type of service and amount of service the subscriber uses. For
example, for the use of the Item Catalog service, retailers pay based on the
number of suppliers from whom they receive data at the rate of either $1.00
per store or $25.00 per warehouse, per month, as applicable; suppliers pay
based on the number of retailers that download their data at the rate of
$1.00 per store or $25.00 per warehouse, per month, as applicable. We price
our other services based on the number of stores or warehouses supported or
the amount of data stored and retrieved.
In order to achieve market penetration, we expect to continue our high
level of expenditures for sales and marketing and investment in the
continued development of our viaLink services. These expenses substantially
exceed our revenues, which to date have been minimal. One of our strategies
is to invest in new technology to facilitate deployment and acceptance
of our viaLink services. However, in order to implement this strategy, we
believe that we will need significant additional capital resources, as well
as hosting, technology, applications and marketing partners for our viaLink
services.
Until March 31, 2000, we will also receive quarterly payments up to
$1.5 million in aggregate pursuant to our earn-out agreement with Netplex.
We have recorded and received earn-out payments of $340,670, which we
recorded as other income in the fourth quarter 1998. We received an earn-
out payment of $289,000 for the first quarter 1999. A receivable for
$530,000 for the earn-out payments for the second and third quarter of 1999 is
included in Other Receivables on the consolidated balance sheet dated
September 30, 1999. Additionally, we currently receive revenues from the
performance of certain Web-hosting services, but expect to reduce our focus
and reliance on providing these services in the future. In the third
quarter of 1999, revenues pursuant to these Web-hosting services were
approximately $68,000.
On February 4, 1999, we entered into a Note Purchase Agreement with
Hewlett-Packard pursuant to which Hewlett-Packard purchased from us a $6.0
million Secured Subordinated Promissory Note. This note bears interest at
11.5% per annum, with interest payments deferrable to maturity in February
2004. Upon approval by our shareholders, in May 1999, the note was
exchanged for a Subordinated Convertible Promissory Note, convertible into
our common stock at a price of $7.00 per share. Hewlett-Packard may convert
the note to common stock beginning on August 5, 2000.
As discussed more fully in Note 5 to the financial statements, we have
adopted a policy regarding the accounting required for such convertible
securities. Based on the price of our common stock at the commitment date
and the conversion price of the debt into our common stock by Hewlett-
Packard at $7.00 per share, the value of the conversion feature at the
commitment date was approximately $20.0 million. However, the value is
limited by the amount of the proceeds and we have allocated the full amount
of proceeds to the beneficial conversion feature and recorded the $6.0
million as additional paid-in capital. Furthermore, we have recognized a
non-cash interest charge for the beneficial conversion feature in the amount
of $1.0 million and $2.6 million for the three months and nine months ended
September 30, 1999, respectively, by establishing long-term debt in the same
amount. We will continue to record a non-cash interest charge and increase
long-term debt by approximately $1.0 million each quarter until the
conversion date of August 5, 2000, 18 months after the effective date of the
transaction with Hewlett-Packard, at which date the amount of the principal
balance of the long-term debt will be $6.0 million.
On May 3, 1999, we entered into an agreement with Ernst & Young LLP,
pursuant to which Ernst & Young will provide us with consulting and
integration services and sales and marketing support, to assist in the
development of the viaLink services. In connection with this agreement, we
issued to Ernst & Young a warrant to purchase up to 250,000 shares of our
common stock at a price of $8.00 per share based upon certain criteria
established in the agreement. Additionally, we have agreed to pay a royalty
of 7.0% of our service revenues to Ernst & Young for a period of two years
and in the event that at least ten "significant clients" of Ernst & Young
become subscribers to our services during this two year period, we will be
obligated to continue this royalty payment in perpetuity. As of the date of
the issuance of the warrant, the warrant conversion price was below the fair
value of our stock. The issuance of this warrant resulted in recognition of
an asset and an increase in additional paid in capital of $1.9 million,
representing the fair value of the warrant issued. The asset will be
amortized over the service period and will result in non-cash charges to our
statement of operations. On August 9, 1999, Ernst & Young exercised warrants
to purchase 62,500 shares of common stock resulting in gross proceeds to the
Company of $500,000. On November 10, 1999, Ernst & Young exercised warrants
to purchase the remaining 187,500 shares of common stock resulting in gross
proceeds received by us of $1.5 million.
On October 12, 1999, we entered into a strategic relationship with i2
Technologies, Inc., the primary focus of which is to integrate the products
and services of our two companies and to extend the solutions across
multiple industries. i2 will use our Item Catalog services to provide
product, price and promotion information to facilitate business processes
between trading partners using an Internet-accessible shared database. Our
two companies will also develop joint sales and marketing programs, and
develop enhancements to the viaLink services. Additionally, i2 invested $5.0
million in us in exchange for 223,884 shares of viaLink common stock and a
warrant to purchase up to an additional 186,567 shares of our common stock
at an exercise price of $26.80 per share. The initial term of the agreement
will expire on December 31, 2003 and will automatically renew on a year-to-
year basis thereafter unless terminated by either party. The issuance of
this warrant will result in recognition of an asset and an increase in
additional paid-in capital for the fair value of the of the warrant issued
to i2 and will result in non-cash charges to our statement of operations
during the term of the agreement. Additionally we have agreed to pay i2 a
royalty of five percent (5%) of the Item Catalog and Chain Pricing
Subscription revenues during the term of the agreement. We will also pay
an additional royalty to i2 based upon subscription revenues received from
new customers with whom i2 had "significant involvment" in the sales
process. i2 has agreed to pay us a royalty based upon revenues i2 received
from providing Item Catalog and Chain Pricing Services outside of the
consumer packaged goods industry.
During October 1999, we entered into an alliance with Internet Commerce
Systems, Inc. ("ICS") FoodOne to offer complementary business-to-business
e-commerce solutions. We will work with ICS FoodOne to create a combined
solution enabling suppliers and retailers to execute new product
introductions and promotional annoucements much faster and with greater
accuracy.
We expect to report substantial losses from operations in 1999 and into
2000. The extent of these losses will depend primarily on the amount of
revenues generated from implementations of and subscriptions to our viaLink
services, which have not yet achieved market acceptance or significant
market penetration. To date, revenues from these services have not been
significant. As a result of our high level of expenditures for selling and
marketing and continued investment in the development of the suite of
viaLink services, we expect to incur losses in future periods until such
time as the recurring revenues from these services are sufficient to cover
expenses.
At our 1999 annual meeting of shareholders, our shareholders approved
the reincorporation of viaLink from Oklahoma to Delaware. We intend to
effect the reincorporation in November 1999. However, we retain the
discretion to delay our reincorporation until such time as the registration
statement for the resale of 472,500 shares of common stock issuable upon the
exercise of certain options and the 62,500 shares held by Ernst & Young U.S.
LLP, is no longer effective.
SALE OF CONSULTING ASSETS AND ijob, INC.
In order to focus on the development and deployment of our viaLink
services, we sold the assets related to our management consulting and
systems integration services (including our proprietary Retail Services
Application software) to NetPlex in September 1998 and the assets associated
with our wholly owned subsidiary, ijob, Inc. in December 1998. Historically,
approximately 97% of our revenues were generated from our consulting assets
and ijob. As a result of these sales, we resemble a development stage
company since our planned principal operations are underway, but have not
yet generated significant revenues.
We received $3.0 million in cash and 643,770 shares of NetPlex
preferred stock, having a market value at the time of the sale of $1.0
million. The cash proceeds from the sale were used to pay (i) $551,062 of
long-term debt, (ii) $565,094 of shareholder loans, including interest, and
(iii) expenses attributable to the sale. The net gain from the consulting
assets sale was approximately $3.0 million which is included in the
statement of operations for the three month and nine month periods ended
September 30, 1998. In conjunction with the consulting asset sale, viaLink
entered into an earn-out agreement with Netplex. Under the earn-out
agreement, we are entitled to receive a cash payment equal to the lesser of
$1.5 million or 50% of any net profits generated from the consulting and
systems integration assets until March 31, 2000. We also have entered into
a remarketing and relicensing agreement with Netplex to sell CHAINLINKr, our
proprietary communications software product. Under the remarketing and
relicensing agreement, we have agreed to cease our own marketing and selling
of CHAINLINK.
On December 31, 1998, we sold our wholly-owned subsidiary, ijob, to DCM
Company, Inc., a corporation wholly-owned by David C. Mitchell, the
President and a member of the Board of Directors of ijob at the time of the
sale. DCM purchased all of the outstanding stock of ijob for a
collateralized, ten-year $800,000 promissory note that accrued interest at
8%. A gain on the sale of ijob, of $462,000 was deferred at December 31,
1998, due to the highly leveraged nature of DCM. On March 11, 1999, the
promissory note plus accrued interest was paid in full, and the deferred
gain on the sale of $462,000 was recognized in the consolidated statement of
operations in the first quarter of 1999.
RESULTS OF OPERATIONS
Introduction. The sale of our consulting and systems integration
business to NetPlex was effective September 1, 1998, and the sale of ijob,
Inc. was effective December 31, 1998. Consequently, our results of
operations for the three and nine months ended September 30, 1999 do not
include the sales, expenses and results of operations related to the
consulting and systems integration operations and for the operations of ijob,
Inc. Our results of operations for the three and nine months ended September
30, 1998 include the sales, expenses and results of operations related to
the consulting and systems integration business through August 31, 1998 and
the operations of ijob for the entire period. Therefore, the results of
operations for the three and nine months ended September 30, 1999 are not
comparable to the same periods in 1998.
Revenues. Prior to the sale of our consulting and systems integration
business and ijob, revenues consisted primarily of management consulting and
system integration fees as well as sales of proprietary software licenses
and hardware and the ijob services. Therefore, without those revenue
sources, our total revenues decreased 93%, or $1.6 million to $130,000 in
the three months ended September 30, 1999, from $1.8 million for the same
period in 1998. Revenues for the third quarter 1999 were up slightly from
revenues of $117,000 in the second quarter 1999. Our total revenues
decreased 96%, or $7.6 million to $355,000 in the nine months ended
September 30, 1999, from $7.9 million for the same period in 1998.
Direct Cost of Sales. Direct cost of sales, which consist of purchased
hardware and certain software for resale, and costs associated with
viaLink's proprietary software products have been eliminated in 1999 with
the sale of our consulting business in 1998.
Salaries and Benefits Expense. Salaries and benefits expense consists
of direct payroll costs for salaries and wages, benefits, employment taxes,
contract programmers, and amortized stock compensation expense related to
the Company's issuance of options to purchase the Company's common stock to
employees. With the sale of our consulting business effective September 1,
1998, and the sale of ijob effective December 31, 1998, our employee count
decreased from a staff level of approximately 109 at June 30, 1998, to 86 at
September 30, 1998. Our employee count has increased from 61 at June 30,
1999, to 71 at September 30, 1999. These changes in headcount and
amortization of stock option compensation of $286,000 in the third quarter
of 1999, resulted in the increase in overall salaries, wages, taxes and
benefits expense of approximately 32%, or $380,000 to $1.6 in the three
months ended September 30, 1999, from $1.2 million for the same period in
1998. Salaries and benefits expense decreased 34%, or $1.6 million to $3.0
million in the nine months ended September 30, 1999, from $4.6 million for
the same period in 1998 reflecting the overall decreases in headcount from
1998 to 1999.
Selling, General and Administrative ("SG&A")Expense. SG&A expense
increased 445%, or $2.0 million, to $2.4 million in the third quarter 1999,
from $446,000 in the third quarter of 1998. SG&A expense increased 206%, or
$3.3 million to $4.9 million in the nine months ended September 30, 1999,
from $1.6 million in the same period in 1998. The increase in SG&A is
primarily attributable to increased expenses for recruiting, staffing and
relocation of key executive and management staff, legal, consulting and
other professional fees, insurance costs associated with increased
coverages, travel expenses related to the Company's increased sales and
marketing efforts, hosting costs for the Hewlett-Packard facility and
non-cash service costs related to the Ernst & Young consulting and services
agreement. Professional recruiting fees were $642,000 in the nine months
ended September 30, 1999 compared to only $47,000 in the same period in
1998. Legal, consulting and other professional fees were $1.6 million in
the nine months ended September 30, 1999 compared to $243,000 in the same
period in 1998. Insurance costs increased from $42,000 for the nine months
ended September 30, 1998 to $235,000 for the same period in 1999. Travel
expenses increased from $250,000 for the nine months ended September 30,
1998 to $439,000 for the same period in 1999. Non-cash service fees of
$504,000 for the Ernst & Young consulting and services agreement are
included in 1999 that were not incurred in 1998. Also included in SG&A
expense in 1999 is approximately $380,000 for hosting costs at the Hewlett-
Packard facility and $252,000 for trade show and marketing expenses that
were not incurred for the same period in 1998.
Interest Expense, Net. Interest expense, net, increased $1.0 million,
to $1.1 million for the three months ended September 30, 1999 from $53,000
for the same period in 1998. Interest expense, net, increased $2.8 million,
to $2.9 million for the nine months ended September 30, 1999 from $153,000
for the same period in 1998. These increases are due to the February 5, 1999
Hewlett-Packard promissory note and borrowing of $6,000,000 at 11.5%
interest, plus the accounting for the beneficial conversion feature of the
proceeds as more fully discussed in Note 5 to the unaudited interim financial
statements. We will record a non-cash interest charge of approximately
$1,000,000 per quarter until the conversion date of August 5, 2000. Monthly
interest expense is offset by interest income on short-term investments.
Depreciation and Amortization. Depreciation and amortization expense
increased $63,000, or 28%, to $287,000 for the three months ended September
30, 1999, compared to $224,000 for the same period in 1998. Depreciation and
amortization expense decreased $75,000 or 10%, to $651,000 for the nine
months ended September 30, 1999, compared to $726,000 for the same period in
1998. These changes are due to the sale of the consulting division assets
on September 1, 1998, the sale of the ijob assets in December 1998, and
increased capital expenditures during 1999.
Gain on Sale of Assets and Other Income. On March 11, 1999, DCM paid
the note receivable of $800,000 plus accrued interest in full and we
recognized the deferred gain of $462,000 during the first quarter of 1999.
We have also recorded $801,000 of income under the earn-out agreement with
NetPlex during the nine months ended September 30, 1999.
Tax Provision. SFAS 109, Accounting for Income Taxes, requires, among
other things, the separate recognition, measured at currently enacted tax
rates, of deferred tax assets and deferred tax liabilities for the tax
effect of temporary differences between the financial reporting and tax
reporting bases of assets and liabilities, and net operating loss and tax
credit carryforwards for tax purposes. A valuation allowance must be
established for deferred tax assets if it is "more likely than not" that all
or a portion will not be realized. Prior to the third quarter of 1998, we
had recorded a tax benefit of $1.0 million related to the pre-tax losses
incurred in prior years, and no valuation allowance had been established
prior to the third quarter of 1998. As a result of the net gain on the
consulting business sale, the deferred tax asset of $1.0 million was
realized and a valuation allowance of $190,000 was established for the
remaining net deferred tax asset as of September 30, 1998. The deferred tax
asset at December 31, 1998 and September 30, 1999, generated by losses
recorded in the fourth quarter of 1998 and during the nine months ended
September 30, 1999, was offset by a full valuation allowance. We will
continue to provide a full valuation allowance for future and current net
deferred tax assets until such time as management believes it is more likely
than not that the asset may be realized.
Other Comprehensive Income. During the second quarter of 1999 we
converted the 643,770 shares of preferred stock received as consideration of
the sale of the consulting division to 643,770 shares of freely tradable
common stock of Netplex which was underlying the preferred shares. Due to
the decrease in the market value of the common stock of NetPlex from June
30, 1999, to September 30, 1999, we have recorded an unrealized loss as part
of other comprehensive income of $604,000 during the three months ended
September 30, 1999. The market price at September 30, 1999 still results in
an increase in the market value of $844,000 from December 31, 1998, this
increase is reflected as other comprehensive income for the nine months
ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Due to the sale of our consulting business and the sale of ijob, we
expect that revenues in the foreseeable future will be substantially less
than historical revenues and cash requirements in connection with sales and
marketing and investment in our viaLink services will be substantial. As a
result of these sales, we now resemble a development stage company since our
planned principal operations are underway, but have not yet generated
significant revenues.
In February 1999, we completed the financing agreements with Hewlett-
Packard, whereby Hewlett-Packard provided us with $6.0 million in financing
through a Secured Subordinated Promissory Note. In March 1999, we received
proceeds of $812,444 in payment of the note receivable and accrued interest
due us in connection with the sale of ijob. In August 1999, we received
$500,000 net proceeds from Ernst & Young to exercise warrants to purchase
common stock.
Our working capital position was significantly enhanced as a result of
the receipt of the above funds. On September 30, 1999, we had $4.6 million
in current assets and $2.2 million in current liabilities, with working
capital of approximately $2.4 million. During the nine months ended
September 30, 1999, net cash and short term investments increased $1.5
million, compared to $200,000 in the same period in 1998. Net cash used in
operating activities in 1999 was $5.1 million, compared to net cash provided
by operating activities in 1998 of $272,000. We are currently spending
approximately $950,000 per month in excess of revenues, excluding any
amounts received from the earn-out agreement with NetPlex, and expect this
expenditure level to increase steadily over the next several months for
further technology development spending to enhance our viaLink services,
increased marketing expenditures, and other technology and database
licensing costs. We also expect to spend more for additional management and
support/service employees. To support this level of spending, we must use
our current cash, cash equivalents and collection of accounts receivable to
operate the business and/or obtain additional financing. We cannot predict
when operating revenues will exceed operating costs, if ever.
During the nine months ended September 30, 1999, we invested $1.1
million in computer hardware, $425,000 in computer software and $267,000 in
various other fixed assets, compared to $23,000 in total expenditures for
the same period in 1998. We also invested $441,000 in software development
costs during the nine months ended September 30, 1999, compared to $487,000
for the same period in 1998. We expect our cash requirements for capital
expenditures and increased operating expenses for the remainder of fiscal
1999 to be substantial.
During the nine months ended September 30, 1999, financing activities
provided net cash of $8.0 million, primarily the result of the $6.0 million
in financing from Hewlett-Packard and proceeds from the Company's stock
options and warrants of $2.4 million.
As of September 30, 1999, there were outstanding 631,850 of our
redeemable common stock purchase warrants. Each warrant allows the holder
to purchase one share of viaLink common stock at a price of $5.00 per share,
on or before November 20, 1999, unless earlier redeemed by us. As of
September 30, 1999, 288,150 redeemable common stock warrants had been
exercised and 20,250 of the Warrants to purchase common stock and/or
warrants issued to the underwriters in our initial public offering had been
exercised. Warrant exercises resulted in gross proceeds of $2.1 million to
the Company for the nine months ended September 30, 1999. On October 4,
1999, we issued a Notice of Redemption to holders of our redeemable common
stock purchase warrants and fixed Friday, November 5, 1999, as the date of
redemption. As of November 10, 1999, 99.99% of the redeemable stock purchase
warrants had been exercised resulting in additional proceeds of $3.2 million
subsequent to September 30, 1999.
On October 12, 1999, we entered into a strategic relationship with i2
Technologies, Inc., a Delaware corporation ("i2"). Additionally, i2
invested $5.0 million in us in exchange for 223,884 shares of viaLink common
stock and a warrant to purchase up to an additional 186,567 shares of our
common stock at an exercise price of $26.80 per share.
As of November 10, 1999, we had cash and cash equivalents, and short-
term investments totaling approximately $10.5 million. During the remainder
of 1999, we expect to receive net proceeds of approximately $300,000 from
the exercise of our warrant underwriter warrants.
We currently do not have any available working capital borrowing or
credit facility available for additional borrowings. We have borrowed $6.0
million from Hewlett-Packard, under a five year Subordinated Convertible
Promissory Note, bearing interest at 11.5%, with interest and principal
payable at maturity in February 2004. The note is also convertible into
shares of our common stock at a price of $7.00 per share beginning in August
2000. We have incurred operating losses and negative cash flow in the past
and expect to incur operating losses and negative cash flow in the
foreseeable future.
We anticipate that we will fund our operations for the next several
quarters from the cash and equivalents and short-term investments on hand
and proceeds expected to be received during the remainder of 1999. We
expect that such funds will enable us to meet our working capital and
capital expenditure requirements through 1999 and into 2000. After that
time, our future capital requirements will depend on our revenue growth,
profitability, working capital requirements, level of investment in long term
assets or other financing sources. Increases in these capital requirements
or a lack of revenue due to delayed or lower market acceptance of our
viaLink services would accelerate our use of our cash and cash equivalents
and short-term investments.
YEAR 2000 ISSUES
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. These date
code fields will need to accept four-digit entries to distinguish 21st
century dates from 20th century dates. This problem could result in system
failures or miscalculations causing disruptions of business operations. As a
result, in approximately seven weeks, computer systems and/or software used
by many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance.
Our vendors, customers, suppliers and service providers are under no
contractual obligation to provide Year 2000 information to us. Generally,
we believe our key internal software systems are either compliant. We are
also continuing our assessment of the readiness of external entities, such
as subcontractors, suppliers, vendors and service providers that interface
with us.
Based on our assessments and current knowledge, we believe we will not,
as a result of the Year 2000 issue, experience any material disruptions in
internal processes, information processing or services from outside
relationships. We presently believe that the Year 2000 issue will not pose
significant operational problems and that we will be able to manage our total
Year 2000 transition without any material effect on our results of
operations or financial condition. Accordingly, we currently have no
contingency plans in place in the event we do not complete all phases of
our Year 2000 program. We will continue to evaluate the status of completion
throughout the remainder of 1999 to determine whether such a contingency
plan is necessary.
The most likely risks to us from Year 2000 issues are external, due to
the difficulty of validating all key third parties' readiness for Year 2000.
We have sought and will continue to seek confirmation of such compliance and
seek relationships that are compliant.
We currently believe that substantially all of our internal systems and
equipment is Year 2000 compliant. However, the failure to properly assess a
material Year 2000 problem could result in a disruption in our normal
business activities or operations. Such failures, depending on the extent
and nature, could materially and adversely effect our operations and
financial condition.
Under the terms of the sale of our consulting business to NetPlex, we
retain a limited portion of the liability and responsibility concerning
Year-2000 capabilities for certain software programs developed and installed
in customer sites as delivered by us prior to September 1, 1998. We are
unable to determine at this time the extent to which potential liability
for Year 2000 requirements from those previous installations may exist. We
could incur substantial costs, which would potentially have a material
adverse effect on our business, financial condition and operating results.
We do not believe that the costs of our Year 2000 program have been or
are material to our financial position or results of operations. All
expenses have been charged against earnings as incurred, and we intend to
continue to charge such costs against earnings as the costs are incurred.
The estimates and conclusions set forth herein regarding Year 2000
compliance contain forward-looking statements and are based on management's
estimates of future events and information provided by third parties. In the
ordinary course of business we test and evaluate our own software products
on a continuous basis. We believe that our own developed software products
are generally Year 2000 compliant, meaning that the use or occurrence of
dates on or after January 1, 2000 will not materially affect the performance
of our software and network services products with respect to four digit
date dependent data or the ability of such products to correctly create,
store, process and output information related to such date data.
Notwithstanding such belief by management, the products tested for
compliance include all of the services and systems included in the viaLink
services. Since these are network database systems, there is not an issue
of earlier versions that will require upgrade to be Year 2000 compliant.
The estimates and conclusions set forth herein regarding Year 2000
compliance contain forward-looking statements and are based on management's
estimates of future events and information provided by third parties. There
can be no assurance that such estimates and information provided will prove
to be accurate. Risks to completing the Year 2000 project include the
availability of resources, our ability to discover and correct potential
Year 2000 problems and the ability of suppliers and other third parties to
bring their systems into Year 2000 compliance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December of 1998, the AICPA Accounting Standards Executive Committee
issued Statement of Position 98-9 ("SOP 98-9"), "Software Revenue
Recognition with Respect to Certain Transactions." SOP 98-9 amends certain
provisions of SOP 97-2 "Software Revenue Recognition" and extends the
deferral of the application of certain provisions of SOP 97-2 through fiscal
years beginning on or before March 15, 1999. We do not believe that the
adoption of SOP 98-9 will have a material impact on our financial position
and results of operations.
CONSULTING ASSETS AND IJOB SALES; CHANGE IN BUSINESS; EXPECTED LOSS
With the sale of our consulting assets to NetPlex and the ijob sale in
1998, approximately 97 percent of our historical revenues will not be
available to the Company in the future. In fact, as a result of these
sales, we should fundamentally be viewed as a development stage company
since our planned principal operations are underway, but we have not yet
generated significant revenues. We expect to report losses from operations
throughout 1999 and into 2000.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE
STATEMENT FOR FORWARD-LOOKING STATEMENT
In passing the Private Securities Litigation Reform Act of 1995,
Congress encouraged public companies to make "forward-looking statements" by
creating a safe harbor to protect companies from securities law liability in
connection with forward looking statements. We intend to qualify both our
written and oral forward-looking statements for protection under the Reform
Act.
In addition to the other information in this Quarterly Report on Form
10-QSB, shareholders should carefully consider the following factors in
evaluating us and our business.
To qualify oral forward-looking statements for protection under the
Reform Act, a readily available written document must identify important
factors that could cause actual results to differ materially from those in
the forward-looking statements. We provide the following information in
connection with our continuing effort to qualify forward-looking statements
for the safe harbor protection of the Reform Act.
DUE TO THE SALE OF OUR CONSULTING ASSETS TO NETPLEX, WE NEED TO REPLACE MOST
OF OUR REVENUE WITH OUR VIALINK SERVICES. SINCE OUR SERVICES ARE UNPROVEN,
OUR BUSINESS, FINANCIAL RESULTS AND STOCK PRICE COULD BE ADVERSELY AFFECTED
We have historically derived substantially all of our revenues from
providing management consulting services and computer system integration
services to the retail and wholesale distribution industries. In order to
permit us to focus our resources solely on developing and marketing our
viaLink services, we sold the assets underlying our management consulting
services and computer integration services to Netplex. We had previously
generated approximately 97% of our total revenues from the assets sold to
Netplex and from the ijob assets.
As a result of these sales, we are now substantially dependent on
revenues generated from our viaLink services. Our viaLink services have
achieved only limited market acceptance and, to date, have accounted for an
insubstantial amount of our historical revenues. Consequently, we resemble
a development stage company and will face many of the inherent risks and
uncertainties that development stage companies face. These risks include our:
- Need for our services to achieve market acceptance and produce a
sustainable revenue stream;
- Need to expand sales and support and product development organizations;
- Need to manage rapidly changing operations;
- Dependence upon key personnel;
- Reliance on strategic relationships; and
- Competition.
Our business strategy may not successfully address these risks, and our
viaLink services may not achieve market acceptance. If our viaLink services
fail to achieve market acceptance or if we fail to recognize significant
revenues to replace the revenues lost in the sale to Netplex, our business,
financial condition and operating results would be materially adversely
affected.
WE RELY SOLELY ON OUR VIALINK SERVICES. IF OUR VIALINK SERVICES FAIL TO
BECOME ACCEPTED BY THE FOOD AND CONSUMER PACKAGED GOOD INDUSTRIES, OUR
BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED
Virtually all of our revenues for the foreseeable future will be
derived from a single source: subscription sales of our viaLink services.
We have only recently introduced these services. They may not achieve
market acceptance. To date we have received only an insignificant amount of
revenues from these services. The market acceptance of our Item Catalog
service as an industry-wide shared database will depend upon subscriptions
from a large number of industry manufacturers, distributors and retailers.
A large number of manufacturers, distributors and retailers may not
subscribe to our services. Furthermore, we cannot predict the amount of
time required for a significant number of manufacturers, distributors and
retailers to subscribe to our services. If our services do not achieve
market acceptance, or if market acceptance develops more slowly than
expected, our business, operating results and financial condition will be
seriously damaged.
A number of factors will determine whether our services will achieve
market acceptance, including:
- Performance and functionality of our viaLink services;
- Ease of adoption;
- Satisfaction of our initial subscribers;
- Success of our marketing efforts;
- Success of our strategic relationships and alliances;
- Improvements in technological performance; and
- Continued acceptance of the Internet for business use.
The markets for business-to-business electronic commerce evolve
rapidly. If new markets evolve, customers in those markets, including our
current customers, may not choose our services.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES
By selling our consulting business and ijob, we lost the source of over
97% of our historical revenues. To date, revenues from our viaLink services
have been insignificant. Moreover, we expect to expend significant
resources in aggressively developing and marketing these services into an
unproven market. Therefore, we expect to incur negative cash flow and net
losses for the foreseeable future. We may not ever generate sufficient
revenues to achieve or sustain profitability or generate positive cash
flow. We have incurred net operating losses of approximately $1.0 million
in 1996, $3.0 million in 1997 and $1.6 million in 1998. As of September 30,
1999, we had an accumulated deficit of approximately $10.8 million,
representing the sum of our historical net operating losses.
THE UNPREDICTABILITY OF OUR QUARTER-TO-QUARTER RESULTS COULD CAUSE OUR STOCK
PRICE TO BE VOLATILE OR TO DECLINE
Our future operating results may vary significantly from quarter to
quarter due to a variety of factors, many of which are outside our control.
Our expense levels are based primarily on our estimates of future revenues
and are largely fixed in the short term. We may be unable to adjust
spending rapidly enough to compensate for any unexpected revenue shortfall,
including as a result of delayed or lack of market acceptance of our viaLink
services. Accordingly, any significant shortfall in revenues in relation to
our planned expenditures would materially adversely affect our business,
operating results and financial conditions.
Due in large part to our uncertainty regarding the success of the
viaLink services, we cannot predict with certainty our quarterly revenues
and operating results. Further, we believe that period-to-period
comparisons of our operating results are not necessarily a meaningful
indication of future performance, especially in light of the significant
changes in business, which we have undertaken. It is likely that in one or
more future quarters our results may fall below the expectations of
securities analysts and investors. If this occurs, the trading price of our
common stock would likely decline.
WE HAVE RECENTLY ENTERED INTO SEVERAL STRATEGIC RELATIONSHIPS AND MAY ENTER
INTO MORE IN THE FUTURE. IF THESE STRATEGIC RELATIONSHIPS DO NOT PRODUCE
THE ANTICIPATED BENEFITS OR IF WE ARE UNABLE TO ENTER INTO ADDITIONAL FUTURE
STRATEGIC RELATIONSHIPS, OUR VIALINK SERVICES MAY NOT ACHIEVE MARKET
ACCEPTANCE
Our business depends substantially on developing strategic
relationships to develop, market and sell our services.
We currently have formed strategic relationships with Ernst & Young,
Hewlett-Packard and i2. Ernst and Young may provide us with sales and
marketing support as well as consulting and integration services. Hewlett-
Packard has agreed to provide us with a technological platform to host our
services. i2 has agreed to integrate our products and services with those
of i2 and to develop joint sales and marketing programs. During October
1999, we entered into an alliance with Internet Commerce Systems, Inc. (ICS)
FoodOne to offer complementary business-to-business e-commerce solutions.
We will work with ICS FoodOne to create a combined solution enabling
suppliers and retailers to execute new product introductions and promotional
annoucements.
Our current strategic relationships may not prove to be beneficial to
us, and they may not be sustained. Further we may not be able to enter into
successful new strategic relationships in the future, which could have a
material adverse effect on our business, operating results and financial
condition. Maintaining these and other relationships will help us to
validate our technology, facilitate broad market acceptance of our services
and enhance our sales and marketing. We may not be able to enter into new
strategic relationships in the future. If we are unable to develop key
relationships or maintain and enhance existing relationships, we may have
difficulty achieving market acceptance for our viaLink services.
THE HEWLETT-PACKARD NOTE WILL LEVERAGE US CONSIDERABLY, CAUSING FINANCIAL
AND OPERATING RISK, AND MAY RESULT IN SIGNIFICANT DILUTION
As a result of our issuing a $6.0 million Subordinated Convertible
Promissory Note to Hewlett-Packard, our debt service requirements will
increase substantially when we are required to begin making repayments in
February 2004. The degree to which we are leveraged could materially
adversely affect our ability to obtain future financing and could make us
more vulnerable to industry downturns and competitive pressures. Our
ability to meet our debt obligations will be dependent upon our future
performance, which will be subject to financial, business and other factors
affecting our operations. All principal and interest due under the note
could be converted into shares of our common stock at $7.00 per share, a
substantial discount from our current stock price, resulting in substantial
dilution to our current shareholders.
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO GROW OUR BUSINESS
We intend to spend large amounts of capital to fund our growth and
develop a market and market acceptance for our Item Catalog service and
other viaLink services. We have incurred operating losses and negative cash
flow in the past and expect to incur operating losses and negative cash flow
in the future. We expect that the cash we have received in the Hewlett-
Packard financing, i2 investment, cash received from Ernst & Young to
exercise their warrants and cash received upon exercise of our outstanding
redeemable common stock purchase warrants will enable us to meet our working
capital and capital expenditure requirements throughout 1999 and into early
2000. After that time, our ability to fund our planned working capital and
capital expenditures will depend largely upon our ability to obtain
sufficient financing. Our future financing requirements will depend on a
number of factors, including our:
- Achieving and sustaining profitability;
- Growth rate;
- Working capital requirements;
- Market acceptance; and
- Costs of future research and development activities.
We may not be able to obtain the additional financing necessary to
satisfy our cash requirements or to implement our growth strategy
successfully. If we cannot obtain adequate additional financing, we will be
forced to curtail our planned business expansion and may be unable to fund
our ongoing operations, including the marketing and development of our Item
Catalog service and our other viaLink services. If adequate additional
financing is not available, we may also be required to license our rights to
commercialize our proprietary technologies to third parties, and we may not
be able to acquire complementary businesses and technologies.
Pursuant to an agreement with Barron Chase Securities, Inc., the
underwriter of our initial public offering, we have agreed not to issue any
preferred stock until November 20, 1999 without their prior written consent.
This could further limit our ability to obtain additional financing.
IF WE FACE INCREASED COMPETITION, WE MAY BE FORCED TO REDUCE THE PRICES OF
OUR SERVICES IN AN ATTEMPT TO GAIN OR PROTECT OUR MARKET SHARE
If we face increased competition, we may not be able to sell our
viaLink services on terms favorable to us. Furthermore, increased
competition could reduce our market share or require us to reduce the price
of our services. We currently compete principally on the basis of the
specialized and unique features and functions of the viaLink services
including their:
- Ability to operate with other network products and operating systems;
- Product quality;
- Ease-of-use;
- Reliability; and
- Performance.
To achieve market acceptance and thereafter to increase our market
share, we will need to continually develop additional services and introduce
new features and enhancements. Many of our competitors and potential
competitors have significant advantages that we do not, including:
- Significantly greater financial, technical and marketing resources;
- Greater name recognition;
- A broader range of products and services; and
- More extensive customer bases.
Consequently, they may be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements.
WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS TO REMAIN
COMPETITIVE
The Web-based e-commerce market in which we operate is characterized by
rapid changes due to technological innovation, evolving industry standards
and changes in subscriber needs. If our competitors introduce new products
and services embodying new technologies, our existing services may become
obsolete. Our future success will depend upon our ability to continue to
develop and introduce a variety of new services and enhancements, that are
responsive to technological change, evolving industry standards and customer
requirements on a timely basis to address the increasingly sophisticated
needs of our customers.
OUR ABILITY TO ACHIEVE MARKET ACCEPTANCE DEPENDS UPON THE FOOD AND CONSUMER
PACKAGED GOODS INDUSTRIES' WIDESPREAD ACCEPTANCE OF THE INTERNET AS A
VEHICLE FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
There are a number of critical issues concerning commercial use of the
Web, including security, reliability, cost, quality of service and ease of
use and access. Organizations that have already invested substantial
resources in other means of exchanging information may be reluctant to
implement Web-based business strategies. There can be no assurance that
Web-based information management utilizing viaLink, or any other product,
will become widespread.
UNDETECTED SOFTWARE ERRORS OR FAILURES FOUND IN OUR PRODUCTS MAY RESULT IN
LOSS OF OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS
Errors or defects in our products may result in loss of revenues or
delay in market acceptance and could materially adversely affect our
business, operating results and financial condition. Software products such
as ours may contain errors or defects, sometimes called "bugs," particularly
when first introduced or when new versions or enhancements are released. In
the past, we have discovered software errors in certain of our new products
after their introduction. Despite our testing, current versions, new
versions or enhancements of our products may still have defects and errors
after commencement of commercial operation. As a result of "bugs" in our
software, customers may experience data loss, data corruption or other
business disruption, which would subject us to potential liability.
WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS WHICH, WHETHER OR NOT
SUCCESSFUL, COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS
A product liability claim, whether or not successful, could damage our
reputation and our business, operating results and financial condition. Our
license agreements with our customers typically contain provisions designed
to limit our exposure to potential product liability claims. However, these
contract provisions may not preclude all potential claims. Product
liability claims in excess of insurance limits could require us to spend
significant time and money in litigation or to pay significant damages.
IF THE SECURITY MEASURES PROTECTING OUR SERVICES ARE INADEQUATE, OUR
BUSINESS WILL BE ADVERSELY AFFECTED
Our Item Catalog service and other viaLink services contain security
protocols. We have also contracted with third party providers to provide
security protocols for the transmission of data over the Internet. However,
our database and these services may be vulnerable to break-ins and similar
security breaches that jeopardize the security of the information stored in,
and transmitted through, the computer systems of our subscribers. Any
security breach could result in significant liability to us and also deter
potential subscribers. Moreover, the security and privacy concerns of
potential subscribers, as well as concerns related to computer viruses, may
inhibit the marketability of the viaLink services.
OUR PLANNED AGGRESSIVE GROWTH WILL STRAIN OUR RESOURCES
We intend to expand our operations rapidly in the foreseeable future to
pursue existing and potential market opportunities. If this rapid growth
occurs, it will place significant demand on our management and operational
resources. We will need to hire additional sales and marketing, research and
development and technical personnel to increase and support our sales. We
will also need to hire additional support and administrative personnel,
expand customer service capabilities and expand our information management
systems. From time to time, we have experienced, and we expect to continue
to experience, difficulty in hiring and retaining talented and qualified
employees. Our failure to attract and retain the highly trained technical
personnel that are essential to our product development, marketing, service
and support teams may limit the rate at which we can generate revenue and
develop new products or product enhancements. In order to manage our growth
effectively, we must implement and improve our operational systems,
procedures and controls on a timely basis. If we fail to implement and
improve these systems, our business, operating results and financial
condition will be seriously damaged.
OUR SUCCESS IS SUBSTANTIALLY DEPENDENT ON OUR ABILITY TO RETAIN OUR KEY
PERSONNEL
The loss of services of our key technical, sales and senior management
personnel would seriously damage our business, results of operations and
financial condition. On October 1, 1998, we entered into employment
agreements with both Lewis B. Kilbourne, our Chief Executive Officer, and
Robert N. Baker, our President and Chief Operating Officer. Both of these
agreements have a term of three years, with year-to-year renewals. We also
maintain a key man life insurance policy for Mr. Baker.
WE MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO ADDITIONAL JOINT VENTURE OR
ALLIANCE ARRANGEMENTS. THESE ACTIONS MAY DIVERT MANAGEMENT ATTENTION FROM
OUR OPERATIONS AND MAY BE UNSUCCESSFUL, EITHER OF WHICH COULD HAVE A
MATERIAL ADVERSE AFFECT ON OUR BUSINESS
In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture or alliance arrangements, that
could complement or expand our business. Management's negotiations of
potential acquisitions or joint ventures and alliance agreements and
management's integration of acquired businesses, products or technologies
could divert their time and resources. Any future acquisitions could require
us to issue dilutive equity securities, incur debt or contingent
liabilities, amortize goodwill and other intangibles, or write-off in-
process research and development and other acquisition-related expenses.
Further, we may not be able to successfully integrate any acquired business,
products or technologies with our existing operations or retain key
employees. If we are unable to fully integrate an acquired business,
product or technology, we may not receive the intended benefits of that
acquisition.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD-PARTY, WE COULD LOSE
OUR INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES
Our success is in part dependent upon our proprietary software
technology. Companies in the software industry have experienced substantial
litigation regarding intellectual property. We license our products under
agreements containing provisions prohibiting the unauthorized use, copying
and transfer of the licensed program. In addition, we rely on a combination of
trade secret, copyright and trademark laws as well as non-disclosure and
confidentiality agreements to protect our proprietary technology. We own no
patents. However, these measures provide only limited protection, and we
may not be able to detect unauthorized use or take appropriate steps to
enforce our intellectual property rights.
Any litigation to enforce our intellectual property rights may divert
management resources and may not be adequate to protect our business. We
also could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be required to indemnify our
end-users for similar claims made against them. Any claims against us could
require us to spend significant time and money in litigation, pay damages,
develop new intellectual property or acquire licenses to intellectual
property that is the subject of the infringement claims. These licenses, if
required, may not be available on acceptable terms. As a result,
intellectual property claims against us could have a material adverse effect
on our business, operating results and financial condition.
WE DEPEND ON THIRD-PARTY TECHNOLOGY FOR USE IN OUR PRODUCTS. IF WE ARE
UNABLE TO CONTINUE TO USE THESE SOFTWARE LICENSES OUR BUSINESS MAY BE
MATERIALLY ADVERSELY AFFECTED
We rely upon certain software that we license from third parties,
including software that is integrated with our internally developed software
and used in our products to perform key functions. These third-party
software licenses may not continue to be available to us on commercially
reasonable terms. The loss of, or inability to maintain or obtain any of
these software licenses, could result in delays in our ability to provide
our services or in reductions in the services we provide until we integrate
equivalent software that we internally develop, or identify and license
software from a third-party. Any delay in product development or in
providing our services could damage our business, operating results and
financial condition.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
Some computers, software and other equipment include programming code
in which calendar year data is abbreviated to only two digits. As a result
of this design decision, some of these systems could fail to operate or fail
to produce correct results if "00" is interpreted to mean 1900, rather than
2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are commonly referred to as the
"Year 2000 Problem."
The Year 2000 Problem presents us with several potential risks
including the following:
Internal infrastructure. The Year 2000 Problem could affect computers,
software and other equipment that we use internally as well as divert
management's attention from ordinary business activities. In addition to
computers and related systems, the operation of our office and facilities
equipment, such as fax machines, photocopiers, telephone switches, security
systems, elevators and other common devices, may be affected by the Year
2000 problem.
Suppliers/third-party relationships. There can be no assurance that
our vendors, customers, suppliers, service providers or other third parties
that we rely upon will resolve any or all Year 2000 Problems with their
systems on a timely basis.
Software/services. We believe that it is not possible to determine
with complete accuracy that all Year 2000 Problems affecting the software
used in providing our services have been identified or corrected due to the
complexity of this software.
Consulting services. We may be subject to Year 2000 Problem claims in
connection with software programs developed and previously installed on
customer sites through our recently discontinued consulting services. Under
our asset sale agreement with Netplex, we are responsible, and potentially
liable, for problems with the software installed by us in customer sites
prior to September 1, 1998.
We currently believe that substantially all of our internal systems and
equipment is Year 2000 compliant. However, we believe that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting us will be identified or corrected in a timely manner. If we fail
to identify and correct all Year 2000 Problems affecting our internal
systems, our business, financial condition or results of operations could be
materially adversely affected.
OUR STOCK MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS
The market prices for our common stock and redeemable warrants have
fluctuated substantially in the past and are likely to continue to be highly
volatile and subject to wide fluctuations. In addition, the stock market
has experienced extreme price and volume fluctuations. The market prices of
the securities of Internet-related companies have been especially volatile.
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation.
If we were to be the object of securities class action litigation, it could
result in substantial costs and a diversion of management's attention and
resources.
THE PRICE OF OUR COMMON STOCK MAY DECLINE DUE TO SHARES ELIGIBLE FOR FUTURE
SALE
Sales of a substantial number of shares of common stock could adversely
affect the market price of the common stock and could impair our ability to
raise capital through the sale of equity securities. As of November 10,
1999, we have outstanding 4,378,444 shares of common stock. Of these shares:
- 2,401,920 shares are freely tradable without restriction or further
registration under the Securities Act unless purchased by our
"affiliates";
- 74,861 shares will be freely tradable without restriction or further
registration under the Securities Act following the termination of
the lock-up arrangement under the promotional shares escrow agreement
described below;
- 1,425,139 shares held by affiliates will become available for sale
pursuant to the volume and manner of sale provisions of Rule 144
following the termination of the lock-up arrangement under the
promotional shares escrow agreement described below;
- 476,524 shares of common stock are "restricted securities" as defined
in Rule 144 of the Securities Act;
An additional 750,100 shares of common stock are issuable upon the
exercise of currently exercisable options. Substantially all shares issued
following the exercise of these options will be freely tradable.
An additional 326,317 shares of common stock are issuable upon the
exercise of currently exercisable warrants. Approximately, 140,000 of the
shares issued following the exercise of these will be freely tradable, the
remaining shares issued will be "restricted securities" as defined in Rule
144 of the Securities Act.
Pursuant to our agreement with Ernst & Young, Ernst & Young is entitled
to request the registration of 187,500 shares of our common stock which were
purchased by them upon the exercise of a warrant.
Beginning in August 2000, the $6.0 million promissory note we issued to
Hewlett-Packard becomes convertible into our common stock at a price of
$7.00 per share. In the event that Hewlett-Packard elects to convert this
note and these shares are registered for resale under the Securities Act,
the shares will be available for sale. The approximate number of conversion
shares at August 5, 2000, the initial conversion date, is 1,005,000 shares.
In connection with our initial public offering of common stock, our
executive officers, some former executive officers and certain holders of
stock options entered into a Promotional Shares Escrow Agreement. Under
this agreement, they agreed until November 19, 1999 not to sell or otherwise
dispose of any shares of our common stock, unless the subsequent holder
agrees to take such securities subject to the agreement.
OUR OFFICERS AND DIRECTORS OWN A SIGNIFICANT PERCENTAGE OF OUR COMPANY, AND
WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR COMPANY
Our executive officers and directors, in the aggregate, beneficially
own approximately 26% of our outstanding common stock. As a result, these
shareholders, if they act together, could control all matters submitted to
our shareholders for a vote, including the election of directors and the
approval of mergers and other business combination transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 1999, we had no derivative financial instruments.
Furthermore, our indebtedness bears a fixed interest rate. Therefore, we are
not sensitive to changes in market interest rates as it relates to our
indebtedness.
As with any entity's investment in marketable securities, we are
subject to the risk that certain unpredictable conditions can exist which
combine to have the effect of limiting our ability to liquidate our
investment in marketable securities through sale. We believe that our
exposure to this type of market risk is remote and limited only to our
investment in marketable securities received in connection with our
Consulting Assets Sale.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Securities Purchase Agreement, dated October 12, 1999,
by and between The viaLink Company and i2 Technologies,
Inc. (filed as Exhibit 4.1 to Registrant's Current
Report on Form 8-K dated October 12, 1999 (the "October
1999 8-K") and incorporated herein by reference).
4.2 Registration Rights Agreement dated October 12, 1999 by
and between The viaLink Company and i2 Technologies,
Inc. (filed as Exhibit 4.2 to the October 1999 8-K and
incorporated herein by reference).
4.3 Common Stock Purchase Warrant, dated October 12, 1999
(i2 may purchase up to 186,567 shares of viaLink's
common stock at an exercise price of $26.80 per share;
the warrant expires on October 12, 2001) (filed as
Exhibit 4.3 to the October 1999 8-K and incorporated
herein by reference).
10.1 Alliance and Marketing Agreement, dated October 12, 1999
by and between The viaLink Company and i2 Technologies,
Inc. (filed as Exhibit 10.1 to the October 1999 8-K and
incorporated herein by reference).
10.2 Software License Agreement, dated October 12, 1999 by
and between The viaLink Company and i2 Technologies,
Inc. (filed as Exhibit 10.2 to the October 1999 8-K and
incorporated herein by reference).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K dated October 4, 1999, reporting that
viaLink had sent a Notice of Redemption of Redeemable Common
Stock Purchase Warrants of The viaLink Company to the
holders of our Redeemable Common Stock Purchase Warrants.
Report on Form 8-K dated October 12, 1999, reporting
that The viaLink Company had entered into a strategic
relationship with i2 Technologies, Inc., a Delaware
corporation.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
The viaLink Company
By: _/s/Lewis B. Kilbourne_______
Lewis B. Kilbourne
Chief Executive Officer
November 12, 1999
By: _/s/J. Andrew Kerner___________
J. Andrew Kerner
Vice President, Finance and Chief
Financial Officer
November 12, 1999
EXHIBIT INDEX
4.1 Securities Purchase Agreement, dated October 12, 1999,
by and between The viaLink Company and i2 Technologies,
Inc. (filed as Exhibit 4.1 to Registrant's Current
Report on Form 8-K dated October 12, 1999 (the "October
1999 8-K") and incorporated herein by reference).
4.2 Registration Rights Agreement dated October 12, 1999 by
and between The viaLink Company and i2 Technologies,
Inc. (filed as Exhibit 4.2 to the October 1999 8-K and
incorporated herein by reference).
4.3 Common Stock Purchase Warrant, dated October 12, 1999
(i2 may purchase up to 186,567 shares of viaLink's
common stock at an exercise price of $26.80 per share;
the warrant expires on October 12, 2001) (filed as
Exhibit 4.3 to the October 1999 8-K and incorporated
herein by reference).
10.1 Alliance and Marketing Agreement, dated October 12, 1999
by and between The viaLink Company and i2 Technologies,
Inc. (filed as Exhibit 10.1 to the October 1999 8-K and
incorporated herein by reference).
10.2 Software License Agreement, dated October 12, 1999 by
and between The viaLink Company and i2 Technologies,
Inc. (filed as Exhibit 10.2 to the October 1999 8-K and
incorporated herein by reference).
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 27.1
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
[CAPTION]
<TABLE>
ITEM NUMBER ITEM DESCRIPTION AMOUNT
<S> <C> <C>
5-02(1) Cash and cash items. $ 4,824
5-02(2) Marketable securities. 1,528,647
5-02(3)(a)(1) Notes and accounts-receivable-trade. 122,438
5-02(4) Allowances for doubtful accounts. 32,841
5-02(6) Inventory.
5-02(9) Total current assets. 4,603,259
5-02(13) Property, plant and equipment. 4,037,501
5-02(14) Accumulated depreciation. 1,887,790
5-02(18) Total assets. 9,665,240
5-02(21) Total current liabilities. 2,197,767
5-02(22) Bonds, mortgages and similar debt. 2,599,662
5-02(28) Preferred stock-mandatory redemption.
5-02(29) Preferred stock-no mandatory redemption.
5-02(30) Common stock. 3,307
5-02(31) Other stockholders equity. 4,864,504
5-02(32) Total liabilities and stockholders'equity. 9,665,240
5-03(b)1(a) Net sales of tangible products.
5-03(b)1 Total revenues. 355,258
5-03(b)2(a) Cost of tangible goods sold.
5-03(b)2 Total costs and expenses applicable to sales
and revenues.
5-03(b)3 Other costs and expenses. 3,020,134
5-03(b)5 Provision for doubtful accounts and notes.
5-03(b)(8) Interest and amortization of debt discount. 2,928,288
5-03(b)(10) Income before taxes and other items. (9,847,222)
5-03(b)(11) Income tax expense.
5-03(b)(14) Income/loss continuing operations. (9,847,222)
5-03(b)(15) Discontinued operations.
5-03(b)(17) Extraordinary items.
5-03(b)(18) Cumulative effect-changes in accounting
principles.
5-03(b)(19) Net income or loss (9,847,222)
5-03(b)(20) Earnings per share-basic (3.32)
5-03(b)(20) Earnings per share-diluted (3.32)
</TABLE>
