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 SecuritiesExchange Act
of 1934
[X] For the quarterly period ended March 31, 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 April 30, 1999 there were 2,874,342 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
The viaLink Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS March December
31, 1999 31, 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,333,977 $ 715,446
Short-term investments 2,646,284 -
Accounts receivable-trade, net of allowance
for doubtful accounts of $7,841 at March
31, 1999 and at December 31, 1998 91,684 158,117
Other receivables 546,426 585,778
Prepaid expenses 111,527 16,716
Marketable securities, available-for-sale 2,132,183 684,327
Deferred offering costs 134,127 -
----------- ----------
Total current assets 8,996,208 2,160,384
Furniture, equipment & leasehold improvements, net 732,960 719,910
Software development costs, net 1,372,934 1,340,230
Note receivable, net of deferred gain on sale - 337,958
Other assets 49,631 38,564
----------- ----------
Total assets $11,151,733 $4,597,046
=========== ==========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,136,040 $1,066,273
Current portion of capital lease obligation 24,138 44,194
----------- ----------
Total current liabilities 1,160,178 1,110,467
Convertible debt 592,322 -
----------- ----------
Total liabilities 1,752,500 1,110,467
Stockholders' equity:
Common stock, $.001 par value; 30,000,000
shares authorized; 2,874,342 and 2,826,613
shares issued and outstanding at March 31,
1999 and December 31, 1998, respectively 2,874 2,827
Additional paid-in capital 10,850,613 4,763,569
Accumulated deficit (2,586,437) (964,144)
Accumulated other comprehensive income (loss) 1,132,183 (315,673)
----------- ----------
Total stockholders' equity 9,399,233 3,486,579
----------- ----------
Total liabilities and stockholders' equity $11,151,733 $4,597,046
=========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
The viaLink Company
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revenues $ 108,178 $3,098,404
Expenses:
Direct cost of sales - 377,068
Salaries and benefits 501,358 1,787,430
Selling, general and
administrative 1,150,822 558,599
Interest expense, net 634,498 36,116
Depreciation and amortization 178,834 248,452
---------- ----------
Total expenses 2,465,512 3,007,665
---------- ----------
Income (loss) from operations (2,357,334) 90,739
Gain on sale of assets 462,041 -
Other income 273,000 -
---------- ----------
Income (loss) before income taxes (1,622,293) 90,739
Provision for income taxes - 34,481
---------- ----------
Net income (loss) (1,622,293) 56,258
Other comprehensive income:
Unrealized gain on securities 1,447,856 -
---------- ----------
Comprehensive income (loss) $ (174,437) $ 56,258
========== ==========
Weighted average shares
outstanding-Basic 2,866,802 2,729,521
========== ==========
Net income (loss) per common
share-Basic $ (0.57) $ 0.02
========== ==========
Weighted average shares
outstanding-Dilutive 2,866,802 2,779,665
========== ==========
Net income (loss) per common
share-Dilutive $ (0.57) $ 0.02
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
The viaLink Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in Accumulated Comprehensive
Shares Amount Capital (Deficit) Income (Loss)
--------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, Dec. 31,
1998 2,826,613 $2,827 $ 4,763,569 $ (964,144) $ (315,673)
Exercise of stock
options 47,633 47 86,090 - -
Stock issued under
Employee Stock
Purchase Plan 96 - 954 - -
Proceeds from
Hewlett-Packard
Note - - 6,000,000 - -
Net income (loss) - - - (1,622,293) -
Unrealized gain
on Securities
Available for
Sale - - - - 1,447,856
--------- ------ ----------- ---------- ----------
Balance, March 31,
1999 2,874,342 $2,874 $10,850,613 $(2,586,437) $1,132,183
========= ====== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
The viaLink Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,622,293) $ 56,258
Adjustments to reconcile net income (loss) to
Net cash provided by (used in) operating
activities:
Depreciation and amortization 178,834 248,452
Gain on sale of ijob (462,041) -
Deferred income tax provision - 34,481
Decrease (increase) in accounts receivable 66,433 (411,569)
Decrease in other receivables 39,352 685
Increase in inventory - (1,825)
Increase in prepaid expenses (94,811) (79,819)
Increase in other assets (11,067) (3,500)
Increase in accounts payable and
accrued liabilities 69,767 444,098
Decrease in deferred revenue - (101,294)
---------- ---------
Net cash provided by (used in) operating
activities (1,835,826) 185,967
Cash flows from investing activities:
Capital expenditures (97,814) (21,771)
Capitalized expenditures for software
development (126,775) (198,202)
Collection on note receivable from ijob 800,000 -
---------- ---------
Net cash provided by (used in) investing
activities 575,411 (219,973)
Cash flows from financing activities:
Decrease in book overdraft - (23,619)
Payment of deferred offering costs (134,127) -
Purchase of short term investments (2,646,284) -
Proceeds from convertible debt 6,000,000 616,864
Proceeds from exercise of stock options,
stock bonus and stock purchase plans 87,091 2,649
Payments of capital lease obligations (20,056) (36,523)
Payments on long-term debt - (490,000)
Non-cash interest on convertible debt 592,322 -
---------- ---------
Net cash provided by financing activities 3,878,946 69,371
---------- ---------
Net increase in cash 2,618,531 35,365
Cash and cash equivalents at beginning of
period 715,446 80,769
---------- ---------
Cash and cash equivalents at end of period $3,333,977 $ 116,134
========== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
The viaLink Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 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 viaLinkT Item Catalog, that
enables subscribing manufacturers, suppliers and retailers to
exchange product, pricing and promotional information. Our
solution offers a single interface solution for retailers to
receive product information from all their suppliers, regardless
of the technological capabilities of the retailer or the
supplier. Suppliers and manufacturers 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 and reduce
redundant information processing.
Our strategy is to invest in new network information systems
to facilitate our plan to build recurring network service
revenues with higher profit margins. In order to implement this
strategy, we believe that we will need significant additional
capital resources and we are seeking additional financing sources
and negotiating with other potential technology, strategic or
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
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 these systems are
sufficient to cover the expenses.
Our clients and customers range from small, rapidly growing
companies to large corporations 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 three month period ended March 31,
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 accrues interest at 8%. 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
three months ending March 31, 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").
Netplex paid us $3.0 million in cash and issued us 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 sale of our
consulting assets, we entered into an earn-out agreement that may
provide us with quarterly cash payments up to $1.5 million
generated from the assets sold to Netplex until March 31, 2000.
We used the cash proceeds from the sale to repay (i) $551,062 of
long-term debt, (ii) $565,094 of shareholder loans including
interest and (iii) expenses attributable to the Consulting Assets
Sale. The net gain from the Consulting Assets Sale was
$2,998,453. As of March 31, 1999, the market value of the
643,770 shares of NetPlex preferred stock was $2,132,183,
yielding an unrealized gain of $1,447,856, which has been
included in comprehensive income in our consolidated statement of
operations for the three months ended March 31, 1999.
Accordingly, our consolidated balance sheet as of March 31,
1999 and the consolidated statements of operations for the three
months ended March 31, 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.
We expect to continue our high level of expenditures for
investment in technology, development, implementation, customer
support services, and sales and marketing of, our viaLink
services. The extent of our quarterly losses will depend on
revenues from network services and application products, which
have not yet achieved market acceptance, and the Earn-out
payments from NetPlex. To date, gross revenues from these
sources have not been significant. Our strategy is to invest in
new network information systems to facilitate our plan to build
recurring network service revenues with higher profit margins.
In order to implement this strategy, we believe that we will need
significant additional capital resources in addition to our $6
million financing arrangement with Hewlett-Packard. We are
negotiating and finalizing the hosting agreement with Hewlett-
Packard as of the date of this Form 10-QSB. We are also seeking
additional financing sources and negotiating with other potential
technology, strategic or 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
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 these systems are
sufficient to cover the expenses.
Note 4. RECONCILIATION FOR BASIC AND DILUTIVE EARNINGS PER SHARE
("EPS")
For the Three Months Ended 3/31/98
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
<S>
Basic EPS <C> <C> <C>
Income available to common
shareholders $ 56,258 2,729,521 $ 0.02
=====
Effect of Dilutive Securities
Options - 50,144
---------- ---------
Dilutive EPS
Income available to common
shareholders plus assumed
conversions $ 56,258 2,779,665 $ 0.02
========== ========= =====
</TABLE>
Options to purchase 360,000, 50,000 and 102,500 shares of
common stock at $5.00, $3.50 and $3.875, respectively, per share,
and warrants to purchase 920,000 and 180,000 shares of common
stock at $5.00 and $6.00, respectively per share, were
outstanding during the first quarter of 1998, but were not
included in the computation of diluted EPS because the exercise
prices were greater than the average market price of the common
shares. The options, which expire on November 30, 2001 through
March 1, 2007, respectively, were still outstanding at March 31,
1998.
At March 31, 1999, options to purchase 1,579,958 shares at
an average price of $3.63, warrants to purchase 920,000 and
180,000 shares of common stock at $5.00 and $6.00, respectively,
and 857,143 shares of common stock to be issued upon the
conversion of the Hewlett-Packard note, were outstanding during
the three month period ending March 31, 1999, 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 viaLink 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. Subject to authorization and approval by our
shareholders to issue the common stock underlying the convertible
note to be issued to Hewlett-Packard, which we are seeking at our
1999 annual meeting of shareholders, the note will be exchanged
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 on
February 5, 1999 (the "Effective Date").
The Emerging Issues Task Force ("EITF") has issued EITF
issue number 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios", which addresses issues surrounding
convertible debt securities with a nondetachable conversion
feature that is in-the-money at the commitment date (a
"beneficial conversion feature"). The task force reached a
tentative conclusion that beneficial conversion features present
in convertible securities should be recognized and measured by
allocating a portion of the proceeds equal to the intrinsic value
of that feature to additional paid-in capital. The intrinsic
value of the beneficial conversion feature was approximately
$20,000,000 at the commitment date. However, the value is
limited to the $6,000,000 proceeds based on the prescribed
accounting. Accordingly, we have allocated the full amount of
proceeds to the beneficial conversion feature and recorded
$6,000,000 as additional paid-in capital as of March 31, 1999,
and recognized an additional non-cash interest charge of $592,322
for interest expense from February 5, 1999 through March 31,
1999, through establishing long-term debt in the same amount.
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. At March 31, 1998, we had recorded a tax benefit of
$970,000 related to the pre-tax losses incurred in prior years,
and no valuation allowance had been established. As a result of
the net gain on the consulting business sale, the deferred tax
asset was realized. The deferred tax asset at December 31, 1998
and March 31, 1999, generated by losses recorded in the fourth
quarter of 1998 and the first quarter of 1999, respectively, 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. The
intrinsic value of the beneficial conversion feature was
approximately $20,000,000 at the commitment date. However, the
value is limited to the $6,000,000 proceeds based on the
prescribed accounting.
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 ("Act"). Any forward-looking
statements are made by us in good faith, pursuant to the safe-
harbor provisions of the 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 of
operations 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
viaLink 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, suppliers and retailers to exchange product,
pricing and promotional information. Our solution offers a
single interface solution whereby retailers receive product
information from their suppliers, regardless of the
technological capabilities of the retailer or the supplier.
Suppliers and manufacturers are able to efficiently communicate
product and pricing information to their customers, significantly
reducing the operational and administrative costs of supply chain
management. We also offer the Exchange Manager and ItemXpress
services to complement our Item Catalog service. Exchange
Manager allows subscribers to exchange order and invoice
transactions through a single interface, regardless of their
number of trading partners. ItemXpress allows subscribers to
quickly and accurately create an initial setup of their pricebook
through a custom load for each retailer's system.
We expect that our future revenues will be generated
primarily from monthly subscriptions to these viaLink services.
Under our former pricing model, monthly subscription fees
collected from retailers, wholesalers and manufacturers in the
food and consumer packaged goods industries were calculated based
on the amount of each service the subscriber used. Fees were
generated when retailers and suppliers would "match" transactions
through the Item Catalog service system. We have recently
changed our pricing model to begin pricing our services based on
a flat monthly rate and a variable component based on usage or
number of stores supported. 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 use of the Item Catalog service, retailers pay based
on the number of suppliers from whom they receive data; suppliers
pay based on the number of retailers that download their data;
and manufacturers pay based on the number of retailers that
subscribe to the service. We price our other services based on
the number of stores supported or the amount of data stored and
retrieved.
Until March 31, 2000, we will also receive quarterly
payments up to $1.5 million in the aggregate pursuant to our earn-
out agreement with Netplex. In the first quarter of 1999, we
accrued payments in accordance with this earn-out agreement in
the amount of $273,000. Additionally, we currently receive
revenues from certain Web hosting services we perform, but expect
to reduce our focus and reliance on this service. In the first
quarter of 1999, revenues pursuant to these Web-hosting services
were approximately $70,000.
In order to achieve market penetration, we expect to
continue our high level of expenditures for investment in
technology development, implementation, customer support
services, and sales and marketing of the 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 the viaLink
services. However, in order to implement this strategy, we
believe that we will need significant additional capital
resources, as well as hosting, technology, and marketing partners
for our viaLink services. We are currently seeking additional
capital financing and negotiating with additional potential
hosting and marketing partners.
As discussed more fully in Note 5, 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 intrinsic value of the conversion feature at the
commitment date was approximately $20,000,000. 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 $6,000,000 as additional paid-
in capital. Furthermore, we have recognized a non-cash interest
charge of the beneficial conversion feature in the amount of
$592,322 during the first quarter of 1999, by establishing long-
term debt in the same amount. We will continue to record a non-
cash interest charge of approximately $1,000,000 and increase the
long-term debt 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 $6,000,000.
On February 4, 1999, we entered into a financing agreement
and note purchase agreement with Hewlett-Packard pursuant to
which Hewlett-Packard purchased from viaLink 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. Subject to authorization and approval by the
shareholders of viaLink to issue the common stock underlying the
convertible note to be issued to The Hewlett-Packard Company
which we are seeking at our 1999 annual meeting of shareholders,
the note will be exchanged 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 on February 5, 1999, and as of April 30,
1999, we had cash and cash equivalents, and short-term
investments totaling approximately $5.1 million.
Also in January 1999, we announced signing a letter of understanding
with Ernst & Young LLP, whereby they would provide sales and marketing
support, consulting, systems integration services and potentially financing
to us to assist in the deployment of the viaLink services at subscriber sites.
We expect to report substantial losses from operations in
1999. The extent of these losses will depend primarily on the
amount of revenues generated from implementation services and
subscriptions to our viaLink services, which have not yet
achieved market acceptance. To date, revenues from these
services have not been significant. As a result of our current
and expected future high level of expenditures for technology
development, selling, marketing, implementation and customer
services we expect to incur losses in future periods until such
time as the recurring revenues from these services are sufficient
to cover expenses.
We recognize revenue from subscriptions to our viaLink
services as the services are performed. Revenue from the earn-
out agreement with Netplex, which is expected to pay us
approximately $1.5 million in the aggregate over the term of the
earn-out period, is recognized quarterly as earned. Actual
payments are rendered to viaLink from Netplex, according to the
terms of the earn-out agreement. Web site hosting and other
miscellaneous revenues are recognized as the services are
performed. We have recorded and received 1998 earn-out payments
of $340,670, which we recorded as other income. A receivable for
$273,000 for the earn-out payment for the first quarter of 1999
is included in Other Receivables on the consolidated balance
sheet at March 31, 1999.
Sale of Consulting Assets and ijob, Inc.
In order to focus on the development and deployment of our
viaLink services, we recently 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.
Netplex paid us $3.0 million in cash and issued us 643,770
shares of Netplex preferred stock, having a market value at the
time of the sale of $1.0 million. We used certain of the cash
proceeds from the sale 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 $2,998,453. 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.
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
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 months ended March 31, 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 months ended March 31, 1998 include the sales, expenses
and results of operations related to the consulting and systems
integration business and the operations of ijob. Therefore, the
results of operations for the three months ended March 31, 1999
are not comparable to the three months ended March 31, 1998.
Results of Operations
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 97%, or $3.0 million to $108,000 in the three
months ended March 31, 1999, from $3.1 million for the three
months ended March 31, 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 and contract programmers. With the
sale of our consulting business effective September 1, 1998, and
the sale of ijob effective December 31, 1998, our employee count
has decreased from a staff of approximately 146 at the end of the
first quarter of 1998 to approximately 45 at the end of the first
quarter of 1999. Therefore, overall salaries, wages, taxes and
benefits expense decreased by 72%, or $1.3 million to $501,000 in
the three months ended March 31, 1999.
Selling, General and Administrative Expense. SG&A increased
106%, or $590,000, to $1.2 million in the first quarter 1999,
from $559,000 in the first quarter of 1998. The increase in SG&A
is primarily attributable to increased expenses for recruiting
and staffing of key executive and management staff, and
professional fees associated with the Hewlett-Packard financing
arrangement and regulatory filings. Professional recruiting fees
were $223,000 in the first quarter of 1999 compared to only
$11,000 in the first quarter of 1998. Also included in
professional fees in the first quarter of 1999 is approximately
$189,000 for trade show and marketing expenses that were not
incurred in the first quarter of 1998.
Interest Expense, Net. Interest expense, net, increased
1657%, or $598,000, to $634,000 for the three months ended March
31, 1999, from $36,000 for the same period in 1998. This
increase was 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. 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 decreased $70,000, or 28%, to $179,000 for
the three months ended March 31, 1999, compared to $249,000 for
the same period in 1998. This decrease was due to the sale of
the consulting division and ijob assets in 1998.
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 $273,000 of income
under the earn-out agreement with NetPlex.
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 March 31, 1999, generated by losses recorded in the fourth
quarter of 1998 and the first quarter of 1999, respectively, 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. Due to the increase in the
market value at March 31, 1999, of the common stock of NetPlex
underlying the 643,770 shares of preferred stock received as
consideration of the sale of the consulting division, we have
recorded other comprehensive income of $1.4 million. Reporting
of comprehensive income in the current period is a result of the
adoption of SFAS 130 in 1998.
Liquidity and Capital Resources
Due to the sale of our consulting business, we expect that
revenues in the foreseeable future will be substantially less
than historical revenues and cash requirements in connection with
developing, selling and marketing of 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.
On February 4, 1999, we completed the financing agreements
with Hewlett-Packard, whereby Hewlett-Packard provided us with
$6.0 million in financing to viaLink through a collateralized,
subordinated Promissory Note, bearing interest at 11.5%, with
interest payments deferred until maturity of the note in February
2004. Furthermore, on March 11, 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. As of April 30,
1999, we had cash and cash equivalents, and short-term
investments totaling approximately $5.1 million.
Our working capital position was significantly enhanced as a
result of the receipt of the above funds. On March 31, 1999, we
had $9.0 million in current assets and $1.2 million in current
liabilities, with working capital of approximately $7.8 million.
During the three months ended March 31, 1999, net cash increased
$2.6 million, compared to $35,000 in the first quarter of 1998.
Net cash used in operating activities in 1999 was $1,244,000,
compared to net cash provided by operating activities in 1998 of
$186,000. We are currently spending approximately $650,000 per
month in excess of revenues, and expect this expenditure level to
increase steadily over the next several months upon completion of
our hosting agreement with Hewlett-Packard, 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 can not predict when operating
revenues will exceed operating costs, if ever.
During the three months ended March 31, 1999, we invested
$98,000 in various fixed assets and $127,000 in software
development costs, compared to total expenditures of $22,000 and
$198,000, respectively, for the same items in the similar period
in 1998. As of April 30, 1999, we had firm cash commitments for
capital expenditures, other than capitalized internal staff costs
for further development of our viaLink services, of approximately
$800,000. We expect our cash requirements for capital
expenditures and increased operating expenses for the remainder
of fiscal 1999 to be substantial.
During the three months ended March 31, 1999, financing
activities provided net cash of $3,879,000, primarily the result
of the $6 million in financing from Hewlett-Packard including a
non-cash interest charge of $592,000, plus $87,000 from the
exercise of stock options during the first quarter, offset by
payments on the capital leases of $20,000, and the short-term
investments of $2,646,000.
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 secured subordinated promissory note, bearing interest at
11.5%, with interest and principal payable at maturity in
February 2004. 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 12 months from the cash
we received in the Hewlett-Packard financing and cash we may
receive upon exercise of our outstanding redeemable warrants
expiring in November 1999, which 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.
Year 2000 Plan
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 eight months, 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, or the problems can be corrected by
purchasing small amounts of hardware, software or software
upgrades, where necessary. 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. 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 anticipate that all of our internal systems and
equipment will be Year 2000 compliant by the end of the second
quarter of 1999 and that the associated costs will not have a
material adverse effect on our results of operations and
financial condition. However, the failure to properly assess or
timely implement 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. We
are currently developing a contingency plan and expect to have
such a plan in place by the end of the second quarter of 1999.
Under the terms of the sale of our consulting business to
Netplex, we retain the liability and responsibility for software
programs developed and installed in customer sites 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 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 being 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 Consulting Asset Sale 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, 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.
We expect to continue our high level of expenditures for
investment in technology, development, implementation, customer
support services, and sales and marketing of, our viaLink
services. The extent of our quarterly losses will depend on
revenues from network services and application products, which
have not yet achieved market acceptance, and the earn-out
payments from NetPlex. To date, gross revenues from these
sources have not been significant. Our strategy is to invest in
new network information systems to facilitate our plan to build
recurring network service revenues with higher profit margins.
In order to implement this strategy, we believe that we will need
significant additional capital resources and we are seeking
additional financing sources and negotiating with other potential
technology, strategic or 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
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 these systems are
sufficient to cover the expenses.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the first quarter ended March 31, 1999.
ITEM 5. OTHER INFORMATION
CERTAIN 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 sold to DCM.
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 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 March 31, 1999, we had an accumulated deficit of
approximately $1,942,000, representing the sum of our historical
net operating losses.
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, suppliers and
retailers. A large number of manufacturers, suppliers and
retailers may not subscribe to our services. Furthermore, we
cannot predict the amount of time required for a significant
number of manufacturers, suppliers 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;
Our ability to successfully manage the transition of our
database to the Hewlett-Packard hosting facility;
Success of our strategic relationships;
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.
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 two 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 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. We
currently have formed strategic relationships with Ernst & Young
and Hewlett-Packard. 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. 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. However, these relationships are
informal or, if written, terminable with little or no notice. 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
secured 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. Moreover, we are seeking
shareholder approval for the issuance of shares of our common
stock to Hewlett-Packard upon their conversion of the $6.0
million note. 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 received in the Hewlett-Packard financing
and cash we may receive upon exercise of our outstanding
redeemable common stock purchase warrants expiring in November
1999 will enable us to meet our working capital and capital
expenditure requirements throughout 1999 and into 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. Moreover, if our stock price drops
significantly, the warrant holders may choose not to exercise
their warrants and purchase the underlying shares of our common
stock, which will adversely affect our 1999 cash flow. 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
Our market is susceptible to 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, which respond to technological change,
evolving industry standards and customer requirements on a timely
basis to address the increasingly sophisticated needs of our
customers.
If Internet usage does not continue to grow, we may not be able
to continue our business plan
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 Internet, 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 Internet-based business strategies. There can be no
assurance that Internet-based information management utilizing
viaLink, or any other product, will become widespread. If the
Internet fails to become widely accepted by the food and consumer
packaged goods industries, viaLink subscribers may be required to
utilize private communications networks, at comparatively higher
cost.
Undetected software errors or failures found in new 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.
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. 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 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
arrangements, that could complement or expand our business.
Management's negotiations of potential acquisitions or joint
ventures 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 expect to identify and resolve all Year 2000 Problems by
the end of the second quarter of 1999, that could materially
adversely affect our business, financial condition or results of
operations. We are currently developing contingency plans to be
implemented as part of our efforts to identify and correct Year
2000 Problems affecting our internal systems and expect to
complete our contingency plans by June 30, 1999. 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, or if we are forced to implement our
contingency plans, our business, financial condition or results
of operations could be materially adversely affected.
As an Internet company, our stock and warrants may experience
extreme price and volume fluctuations
The market prices for our common stock and redeemable
warrants have fluctuated 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. If all of our warrants are exercised, we will
have outstanding 3,974,342 shares of common stock, assuming no
exercise of outstanding options after April 30, 1999. Of these
shares:
2,494,975 shares will be 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 a
promotional shares escrow agreement;
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 a
promotional shares escrow agreement; and
1,738,003 shares of common stock will be "restricted
securities" as defined in Rule 144 of the Securities Act.
An additional 502,372 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.
Our 920,000 outstanding redeemable warrants are currently in-
the-money and exercisable. The closing price of our common stock
on April 30, 1999 was $21.25 per share and the warrants may be
exercised to purchase one share of common stock at a price of $5
per share.
In connection with our initial public offering of common
stock, our executive officers, certain 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 40% 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.
Continuing Registration is Required to Exercise Warrants
We are in the process of registering with the Securities and
Exchange Commission and certain state security commissions the
issuance of shares of common stock upon the exercise of our
publicly traded redeemable warrants. However, we will only be
able to issue shares of common stock upon such exercise if the
sale of the common stock underlying the redeemable warrants is
lawful under applicable federal and state securities laws. We
may decide not to seek to qualify the common stock underlying the
redeemable warrants for sale in all of the states in which the
redeemable warrant holders reside. Even if we seek to qualify
the common stock, we cannot be sure that such qualification will
occur. If we are unable to qualify the common stock for sale or
fail to maintain an effective registration statement, the market
value of the redeemable warrants may be diminished and the market
for the redeemable warrants may be limited.
Securities Laws Restrictions on Exercise of Redeemable Warrants
The sale of our common stock upon exercise of the redeemable
warrants could violate the securities laws of certain states or
other jurisdictions. We have and will use our best efforts to
cause the sale of the common stock to be lawful upon exercise of
redeemable warrants. However, we are not required to accept the
exercise of the redeemable warrants if, in the opinion of
counsel, the sale of the common stock upon such exercise would be
unlawful under applicable securities laws. In this case, the
redeemable warrants will not be accepted for exercise.
Consequently, the redeemable warrant holder will be required to
sell the redeemable warrants in the open market, if a public
trading market exists, or hold the redeemable warrants until they
expire or, if applicable, we redeem the warrants for $.125 per
redeemable warrant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Asset Acquisition Agreement dated August 31, 1998 by and
between Registrant and The Netplex Group, Inc. (filed as
Appendix A to Definitive 14-C Information Statement
dated October 15, 1998 (the "1998 14-C") and
incorporated herein by reference)
2.2 First Amendment to Asset Acquisition Agreement dated
September 9, 1998 by and between Registrant and The
Netplex Group, Inc. (filed as Appendix A-2 to the 1998
14-C and incorporated herein by reference)
2.3 Stock Purchase Agreement dated December 31, 1998 by and
among Registrant, DCM Company, Inc., David C. Mitchell
and ijob, Inc. (filed as Exhibit 2.5 to Registrant's
Annual Report on Form 10-KSB for the year ending
December 31, 1998 (the "1998 10-KSB") and incorporated
herein by reference)
3.1 Registrant's Certificate of Incorporation, as amended
and restated (filed as Exhibit 3.1 to Registrant's
Registration Statement on Form S-8 (Reg. No. 333-69203)
(the "December 1998 Form S-8") and incorporated herein
by reference)
3.2 Registrant's Bylaws (filed as Exhibit 3.2 to
Registrant's Registration Statement on Form SB-2 (Reg.
No. 333-5038-D) and incorporated herein by reference)
10.1 Note Purchase Agreement dated as of February 4, 1999 by
and between Registrant and Hewlett-Packard Company
(filed as Exhibit 10.1 to Registrant's Current Report on
Form 8-K filed on March 2, 1999 and dated February 4,
1999 (the "February 1999 8-K") and incorporated herein
by reference)
10.2 Secured Subordinated Promissory Note dated February 4,
1999 issued by Registrant in favor of Hewlett-Packard
Company (filed as Exhibit 10.2 to the February 1999 8-K
and incorporated herein by reference)
10.3 Security Agreement dated as of February 4, 1999 by and
between Registrant and Hewlett-Packard Company (filed as
Exhibit 10.3 to the February 1999 8-K and incorporated
herein by reference)
10.4 Earn-out Agreement dated September 30, 1998 by and
between Registrant and The Netplex Group, Inc (filed as
Exhibit 10.49 to the 1998 14-C and incorporated herein
by reference)
10.5 Administrative Services Agreement dated August 31, 1998
by and between Registrant and The Netplex Group, Inc
(filed as Exhibit 10.51 to Registrant's Current Report
on Form 8-K filed on October 28, 1999 and dated
October 16, 1998 (the "October 1998 8-K") and
incorporated herein by reference)
10.6 Sublease dated September 1, 1998 by and between Applied
Intelligence Group, Inc. and The Netplex Group, Inc.
(filed as Exhibit 10.52 to the October 1998 8-K and
incorporated herein by reference)
10.7 Software Remarketing and Reselling Agreement effective
as of September 1, 1998 by and between Registrant and
The Netplex Group, Inc. (filed as Exhibit 10.53 to the
October 1998 8-K and incorporated herein by reference)
10.8 Form of Indemnification Agreement dated February 9, 1998
by and between Registrant and Registrant's executive
officers (filed as Exhibit 10.16 to the 1998 10-KSB and
incorporated herein by reference)
10.9 Employment Agreement dated October 1, 1998 by and
between Registrant and Lewis B. Kilbourne (filed as
Exhibit 10.17 to the 1998 10-KSB and incorporated herein
by reference)
10.1 Employment Agreement dated October 1, 1998 by and
0 between Registrant and Robert N. Baker (filed as Exhibit
10.18 to the 1998 10-KSB and incorporated herein by
reference)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K filed on March 2, 1999 and dated February
4, 1999, reporting that viaLink had entered into a Note Purchase
Agreement with Hewlett-Packard Company pursuant to which Hewlett-
Packard purchased from viaLink a $6 million secured subordinated
promissory note.
Report on Form 8-K filed on March 17, 1999 and dated
December 31, 1998 reporting the sale by viaLink of our wholly-
owned subsidiary, ijob, Inc. to DCM Company, Inc. in exchange for
an $800,000 promissory note, secured by principally all of the
fixed assets, contract rights, accounts receivable and general
intangibles of ijob.
Report on Form 8-K/A filed on March 18, 1999 amending the
Current Report on Form 8-K filed on October 28, 1998 to include
pro forma financial information provided in accordance with the
instructions for Item 7.
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
May 12, 1999 By: _/s/Lewis B. Kilbourne_______
Lewis B. Kilbourne
Chief Executive Officer
May 12, 1999 By: _/s/J. Andrew Kerner___________
J. Andrew Kerner
Vice President, Finance and Chief
Financial Officer
EXHIBIT INDEX
2.1 Asset Acquisition Agreement dated August 31, 1998 by and
between Registrant and The Netplex Group, Inc. (filed as
Appendix A to Definitive 14-C Information Statement
dated October 15, 1998 (the "1998 14-C") and
incorporated herein by reference)
2.2 First Amendment to Asset Acquisition Agreement dated
September 9, 1998 by and between Registrant and The
Netplex Group, Inc. (filed as Appendix A-2 to the 1998
14-C and incorporated herein by reference)
2.3 Stock Purchase Agreement dated December 31, 1998 by and
among Registrant, DCM Company, Inc., David C. Mitchell
and ijob, Inc. (filed as Exhibit 2.5 to Registrant's
Annual Report on Form 10-KSB for the year ending
December 31, 1998 (the "1998 10-KSB") and incorporated
herein by reference)
3.1 Registrant's Certificate of Incorporation, as amended
and restated (filed as Exhibit 3.1 to Registrant's
Registration Statement on Form S-8 (Reg. No. 333-69203)
(the "December 1998 Form S-8") and incorporated herein
by reference)
3.2 Registrant's Bylaws (filed as Exhibit 3.2 to
Registrant's Registration Statement on Form SB-2 (Reg.
No. 333-5038-D) and incorporated herein by reference)
10.1 Note Purchase Agreement dated as of February 4, 1999 by
and between Registrant and Hewlett-Packard Company
(filed as Exhibit 10.1 to Registrant's Current Report on
Form 8-K filed on March 2, 1999 and dated February 4,
1999 (the "February 1999 8-K") and incorporated herein
by reference)
10.2 Secured Subordinated Promissory Note dated February 4,
1999 issued by Registrant in favor of Hewlett-Packard
Company (filed as Exhibit 10.2 to the February 1999 8-K
and incorporated herein by reference)
10.3 Security Agreement dated as of February 4, 1999 by and
between Registrant and Hewlett-Packard Company (filed as
Exhibit 10.3 to the February 1999 8-K and incorporated
herein by reference)
10.4 Earn-out Agreement dated September 30, 1998 by and
between Registrant and The Netplex Group, Inc (filed as
Exhibit 10.49 to the 1998 14-C and incorporated herein
by reference)
10.5 Administrative Services Agreement dated August 31, 1998
by and between Registrant and The Netplex Group, Inc
(filed as Exhibit 10.51 to Registrant's Current Report
on Form 8-K filed on October 28, 1999 and dated
October 16, 1998 (the "October 1998 8-K") and
incorporated herein by reference)
10.6 Sublease dated September 1, 1998 by and between Applied
Intelligence Group, Inc. and The Netplex Group, Inc.
(filed as Exhibit 10.52 to the October 1998 8-K and
incorporated herein by reference)
10.7 Software Remarketing and Reselling Agreement effective
as of September 1, 1998 by and between Registrant and
The Netplex Group, Inc. (filed as Exhibit 10.53 to the
October 1998 8-K and incorporated herein by reference)
10.8 Form of Indemnification Agreement dated February 9, 1998
by and between Registrant and Registrant's executive
officers (filed as Exhibit 10.16 to the 1998 10-KSB and
incorporated herein by reference)
10.9 Employment Agreement dated October 1, 1998 by and
between Registrant and Lewis B. Kilbourne (filed as
Exhibit 10.17 to the 1998 10-KSB and incorporated herein
by reference)
10.1 Employment Agreement dated October 1, 1998 by and
0 between Registrant and Robert N. Baker (filed as Exhibit
10.18 to the 1998 10-KSB and incorporated herein by
reference)
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE BALANCE SHEET
FOR MARCH 31, 1999 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,333,977
<SECURITIES> 2,132,183
<RECEIVABLES> 99,525
<ALLOWANCES> 7,841
<INVENTORY> 0
<CURRENT-ASSETS> 8,996,208
<PP&E> 2,359,631
<DEPRECIATION> 1,626,671
<TOTAL-ASSETS> 11,151,733
<CURRENT-LIABILITIES> 1,160,178
<BONDS> 0
0
0
<COMMON> 2,874
<OTHER-SE> 9,396,359
<TOTAL-LIABILITY-AND-EQUITY> 11,151,733
<SALES> 0
<TOTAL-REVENUES> 108,178
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,831,014
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 634,498
<INCOME-PRETAX> (1,622,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (174,437)
<EPS-PRIMARY> (.57)
<EPS-DILUTED> (.57)
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