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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 0-21037
SOLOPOINT, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 77-0337580
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(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification Number)
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130-B KNOWLES DRIVE, LOS GATOS, CA 95030
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(Address of principal executive office) (Zip Code)
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Registrant's telephone number, including area code: (408) 364-8850
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The aggregate market value of the voting stock of the issuer held by non-
affiliates of the issuer on March 14, 1997 was approximately $10,061,868,
based upon the closing price of such stock on March 14, 1997 as reported on
NASDAQ.
As of March 14, 1997, 3,499,780 shares of Common Stock of the registrant
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 5, 9, 10, 11 and 12 of Form 10-KSB is
incorporated by reference from the Registrant's Definitive Proxy Statement for
the 1997 Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission within 120 days after the close of the
Registrant's fiscal year ended December 31, 1996.
Transitional Small Business Disclosure Format: Yes [_] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The following Business section contains forward-looking statements that
involve risks and uncertainties, including those referring to the period of
time the Company's existing capital resources will meet the Company's future
capital needs, the Company's operating results, the market acceptance of the
products of the Company, its efforts to establish and maintain distribution
partners, the development of new products and the Company's planned investment
in the marketing and distribution of its current products and research and
development with regard to future products. The Company's actual results could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including: dependence on market acceptance of
multifunction personal communications management products; lack of significant
sales and distribution channels; the Company's ability to timely develop new
products; business conditions and growth in the personal communications
management industry and general economy; competitive factors, such as rival
providers of personal communications management products and services, and
price pressures; compatibility with a wide variety of switching
configurations; reliance on sole source contract manufacturers and component
suppliers; dependence on a limited number of key personnel; rapid
technological changes; as well as other factors set forth elsewhere in this
Form 10-KSB.
SoloPoint, Inc. (the "Company") designs, develops and markets personal
communications management solutions for communications-dependent individuals.
The Company currently offers three products. The Company's first product,
SmartCenter, integrates and enhances existing broad based communication
services, like Voice Mail, to provide a feature rich, call management
environment. The Company's second product, SmartMonitor, allows customers to
monitor calls from a simultaneously ringing remote cellular or land-based
phone. These two products are geared for mobile, communications-dependent
Small Office and Home Office ("SOHO") individuals. The Company's third
product, SmartScreen, allows a customer to monitor local phone calls that go
into Voice Mail and to see that they have existing messages. The Company plans
to develop and market an expanded line of easy-to-use and flexible personal
call management solutions.
INDUSTRY OVERVIEW
The number of communications-dependent individuals has increased in recent
years, especially in the SOHO marketplace. These individuals include real
estate agents, entrepreneurs, consultants, attorneys, accountants, service
industry personnel and remote sales forces of corporations. According to BIS
Strategic Decisions, a market research firm, there were over 14.5 million SOHO
businesses in the United States at the end of 1995.
The SOHO individuals' success is substantially dependent upon the ability to
effectively manage business communications in a mobile environment, thereby
enabling them to be more responsive to their customers. Missed calls, delayed
responses to messages, or the appearance of an unprofessional image can cause
potential customers or clients to take their business elsewhere. While many
corporations provide a communications infrastructure for their employees that
includes, among other things, secretarial and administrative support and
computers and telephony services, mobile, communications-dependent SOHO
individuals must address their personal communications management demands,
typically without the benefit of such corporate communications
infrastructures.
SOHO individuals have attempted to address their communication needs through
the use of single function communications devices, such as cellular
telephones, pagers, fax machines and e-mail applications and broad based
communication services, such as Voice Mail, Call Forwarding, Caller ID and
Three-Way Calling, resulting in the creation of a confusing array of telephony
services and products, many of which are incompatible. The Company believes
that SOHO individuals require personal communications management solutions
that do not compromise customer convenience at the expense of user
accessibility, mobility and control.
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SoloPoint was founded to provide personal communications management products
for communications-dependent individuals. Initially, the Company is targeting
mobile, communications-dependent individuals in the SOHO marketplace with its
SmartCenter and SmartMonitor products. SmartCenter integrates and enhances
basic telephone services to provide a complete personal call management
solution that allows mobile individuals to increase their accessibility while
retaining control of their communications environment. SmartMonitor allows the
customer to remotely monitor and take if they choose a call placed to their
main phone number from a remote cellular or land-based phone.
In addition, the Company offers SmartScreen which allows a broad range of
customers, who have Voice Mail, to locally monitor calls, pick them up if they
choose to and to visually see that they have existing messages.
STRATEGY
The Company's objective is to be the leading provider of personal
communications management solutions for individuals that are currently
attempting to solve their communication needs through a multitude of broad
based, basic communications services and single function products, but who
require advanced features that integrate these basic services into a total
communications solution. The Company's strategy for achieving this objective
includes the following key elements:
Leverage Proprietary Technology to Create an Innovative Line of Personal
Communications Products
The Company intends to continue to leverage the proprietary technology
incorporated in SmartCenter to design and bring to market an innovative line
of personal communications management products designed to meet the needs of a
wide range of communications-dependent individuals. Although SmartCenter, a
multifunction communications solution, is designed to meet the needs of
mobile, communications-dependent SOHO individuals, the Company believes a
substantial market opportunity exists to develop and introduce a family of
lower priced, single function personal communications management products
aimed at the higher volume consumer market. In September 1996, the Company
began shipping the first product, SmartMonitor, whose technology has been
derived from SmartCenter. In early 1997, the Company shipped its second
derivative product, SmartScreen. The Company believes that this approach, if
successful, should facilitate the establishment of brand name recognition,
provide the Company certain manufacturing efficiencies and expand the
Company's distribution and marketing capabilities.
Establish Strategic Alliances and Business Relationships
The Company intends to establish strategic alliances and business
relationships with leading participants in various segments of the
communications markets. The Company believes these alliances and relationships
will enable it to take advantage of the superior financial resources,
technological capabilities, proprietary positions and market presence of these
companies in establishing and maintaining the Company's own position in the
communications industry. In accordance with this strategy, the Company has
received equity investments from Ameritech and 4C Ventures. The Company's
objective is to leverage these investments into strategic relationships
involving marketing, distribution or manufacturing agreements.
Combination of Telecommunications and Retail Distribution Channels
The Company intends to implement a multichannel distribution strategy that
will focus on the traditional telecommunications channel as well as the
consumer retail channel. Due to the unique characteristics that the Company
believes differentiate its products from most other personal communications
management products, the Company believes that its current product line and
any future personal communications management products will be sold primarily
through cellular distributors, the Regional Bell Operating Companies ("RBOC")
channel and to a lesser extent the retail channel. Accordingly, the Company
intends to expend significant resources to create end-user demand, establish
brand name recognition and provide support to its channel distributors.
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SMARTCENTER
SmartCenter, which the Company introduced in March 1996 and currently
retails for $495 per unit, is a multifunction, communications management
solution designed to meet the needs of mobile, communications-dependent SOHO
individuals. SmartCenter includes the following components:
SMARTCENTER COMMUNICATIONS APPLIANCE. SmartCenter is a highly integrated
communications management hardware appliance that fits under a telephone,
connects to two analog telephone lines and provides four general purpose
extensions for connecting personal office telephone equipment. The core
building block of SmartCenter is its efficient, feature rich, analog switching
matrix, which provides many of the PBX-like functions of larger, more
expensive switches. The configuration and management of SmartCenter can be
accomplished through either the convenience of a voice-prompted, touch-tone
menuing interface or a graphical configuration software application running on
a PC that can be connected to SmartCenter's serial interface. SmartCenter can
route, filter, prioritize and manage both incoming and outgoing calls through
the use of its proprietary SmartFunctions technology.
SMARTFUNCTIONS. SmartFunctions are SmartCenter features that collectively
provide a communications management system for mobile, communications-
dependent individuals. The Company has designed SmartCenter and intends to
design any future personal communications management products to comply with
specifications published by Bell Communications Research (the "Bellcore
specifications"), which the Company believes are used by most United States
local telephone service providers. SmartCenter's operation is entirely
dependent upon the Bellcore specifications. Due, however, to the wide range of
parameters contained within the Bellcore specifications, there are potentially
a large number of local switch configurations utilized by such service
providers. The Company has tested SmartCenter on only a limited number of
local switch configurations and has discovered that SmartCenter's SmartMonitor
feature is not compatible with GTE Corp. Voice Mail, a service provider that
is heavily used in Los Angeles and the Saratoga/Los Gatos area of Northern
California. There can be no assurance that SmartCenter or any of the Company's
future personal communications management products will work in conjunction
with existing or future switch configurations, or that local service providers
have configured their switches to fully conform to the Bellcore
specifications. The failure of SmartCenter or any of the Company's future
personal communications management products to work in conjunction with
existing or future switch configurations could have a material adverse effect
on the Company's business, financial condition and results of operations.
Since the Bellcore specifications are not predominantly used by service
providers outside the United States, the Company does not intend to market or
sell SmartCenter in foreign countries. While the Company intends to develop
future personal communications management products to address foreign markets,
there can be no assurance that the Company will be successful in its
development efforts, or that any developed personal communications management
products will function effectively, if at all, in any foreign markets.
SmartMonitor Feature. The SmartMonitor feature enables users to monitor
incoming office calls from either remote cellular or direct-dial land based
telephones. When callers dial the office number, SmartCenter simultaneously
rings users' local telephones and remote cellular or direct-dial land based
telephones. Users can optionally monitor calls as messages are left on an
answering machine. Users can also elect to instantly connect to callers by
simply pushing a button or entering a Personal Identification Number ("PIN").
A key benefit of the SmartMonitor feature is that it enables users to be more
accessible to their customers without disclosing their cellular or direct-dial
land based numbers or their current locations. Additionally, callers are not
inconvenienced by being put on hold. Another key feature of SmartMonitor is
that users' office telephones and remote telephones ring simultaneously, so
that users can answer their office telephones without having to disable the
SmartMonitor feature.
SmartScreen Feature. The SmartScreen feature enables users who utilize RBOC
Voice Mail to screen and access incoming calls at their offices while callers
are leaving messages on the users' RBOC Voice Mail. An added benefit of this
feature is the ability to return callers to RBOC Voice Mail anytime during the
call. This is convenient when callers have lengthy messages that users do not
want to listen to immediately and can access at a later time.
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SmartMenus Feature. The SmartMenus feature enables users to present
professional images of their businesses to callers by providing a customized,
voice-prompted menuing system. SmartMenus permit callers to direct calls to
answering machines, pagers, extensions, fax machines, or other remote
telephone numbers. A key benefit of SmartMenus is its ability to allow callers
to return to the main menu after a menu choice is made or if their selections
are busy. Multiple SmartMenus can be configured and stored in SmartCenter at
once for future use.
SmartRouter Feature. The SmartRouter feature enables users to route incoming
office calls to specified destinations based upon Caller ID, distinctive ring,
time of day or day of week, thereby simplifying call management for users that
have regular mobile schedules. Multiple Caller ID individuals or groups can be
created and stored in SmartCenter. Callers within a specific Caller ID list
will automatically be forwarded to the appropriate destination device
previously programmed in SmartCenter.
SmartID Feature. The SmartID feature enables users to route calls from
selected callers to specified destinations when callers enter their PINs.
Multiple PINs can be provided to different callers, enabling them to be routed
to different destinations specified by users. The SmartID feature enhances the
effectiveness of users' cellular telephones, while maintaining user privacy
and control over their cellular telephone numbers.
SmartFax Feature. The SmartFax feature provides a number of fax management
capabilities that make it easier and more convenient to send and receive
faxes. These capabilities include:
. Auto fax detection on either line. This capability can automatically
detect incoming faxes on either line and route them to a fax machine or
fax modem connected to one of SmartCenter's extension ports. Non-fax
calls are handled normally by SmartCenter. This feature allows a single
number to be given out for voice and fax calls, if desired.
. Auto fax re-routing. This capability allows users to immediately re-
route incoming faxes to other remote fax machines. SmartCenter can re-
route incoming faxes from either line.
. Auto fax interruption prevention. This capability prevents users from
accidentally breaking into lines that are receiving faxes. If a user
picks up an extension, SmartCenter automatically tries to find an unused
outgoing line or if both lines are in use, it returns a line busy
signal, thus preventing the interruption of the fax reception.
SETUP AND CONFIGURATION. SmartCenter can be configured and managed through a
customized, voice-prompted touch-tone menuing interface, either remotely or
locally, or through SmartStart, SmartCenter's graphical configuration software
application.
Touch-Tone Menu. Most basic features of SmartCenter can be configured
through voice-prompted touch-tone sequences, either from a local extension
telephone or a remote telephone. Callers dialing in are required to enter a
PIN to access the configuration menus, thus ensuring a secure communications
environment.
SmartStart Software Application. SmartStart, a graphical user interface, can
be used to configure and manage SmartCenter. SmartStart is a full 32-bit
Windows-based software application that can run under Windows 95, Windows NT
and Windows 3.11 (with 32-bit extensions). With SmartStart, the user can
configure any number of "call handlers" and store them on a PC. Any ten call
handlers can be downloaded into SmartCenter. Once configured and downloaded,
the SmartStart application can be terminated and the PC disconnected from
SmartCenter. SmartStart provides the following key features:
. Graphical call handler configurator. SmartStart provides visual
templates for building call handlers, which instruct SmartCenter how to
handle a call. These visual templates ease the ability to configure call
handlers by providing a visual flow diagram of how SmartCenter will
handle a call. Once created, using drag and drop object technology,
users can place up to two call handlers on any line. Any number of call
handlers can be pre-configured and stored on the hard drive of the PC.
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. Extensive configuration checking and problem resolution
functions. SmartStart provides a number of configuration and error
checking routines with extensive problem resolution hints. If a call
handler is configured which requires line services that have not been
subscribed to, such as Three-Way Calling or Caller ID, the call handler
is presented with a "strike" through its title and a "possible cause"
window is available for review.
. Complete call logging and report generation. Detailed call logging is
provided for every incoming and outgoing call. In addition to telephone
number, length of call and time of call information, SmartCenter records
Caller ID data, if available. Call Detail Records ("CDRs") are stored on
the PC's hard drive in ASCII delimited files for importing into other
applications.
. Complete phonebook with Caller ID extensions. SmartStart comes with an
enhanced phonebook that allows users to associate multiple telephone
numbers and helpful icons with each entry. In addition, the phonebook
supports Caller ID identification and grouping, so that callers can be
automatically routed based upon Caller ID.
. Easy to use setup and configuration wizards. Line and extension guides
and wizards are provided for setting up incoming lines and extensions.
These guides simplify initial setup, as well as any reconfiguration when
adding new services. Working in conjunction with the configuration
checking and problem resolution routines, SmartStart makes it easier to
install SmartCenter into existing customer environments.
The market in which the Company intends to compete is characterized by
rapidly changing technology, frequent new product introductions, evolving
industry standards and short product life cycles. Accordingly, the Company's
success will be substantially dependent upon a number of factors, including
its ability to identify and conform to emerging standards in the
communications industry, differentiate its products from those of its
competitors, achieve superior or competitive performance in its products,
reduce manufacturing costs and quickly bring products to market. Further,
short product life cycles are expected to expose SmartCenter and any of the
Company's future products to the risk of obsolescence, and therefore may
require the Company to frequently introduce competitive new and enhanced
products. If the Company is unable to develop or obtain access to advanced
communications technologies as they become available or is unable to design,
develop, contract for the manufacture of and introduce competitive new and
enhanced products on a timely basis, its business, financial condition and
results of operations would be materially adversely affected.
Products as complex as SmartCenter or any of the Company's future personal
communications management products frequently contain undetected software or
hardware errors when introduced or as new versions are released. The Company
has experienced such errors in the past as the Company has performed alpha and
beta testing on products in development. Although the Company is not presently
aware of such an error which would materially and adversely affect product
performance, there can be no assurance that SmartCenter and any of the
Company's future personal communications management products will not
experience errors in the future. From time to time, the Company may
temporarily suspend or delay shipments or divert development resources from
other projects to correct a particular product deficiency. Such efforts to
identify and correct errors and make design changes may be expensive and time
consuming. Failure to discover product defects in the future could result in
delayed product introductions or shipments, the recall of previously shipped
products, increased service and warranty costs, design modifications,
unfavorable publicity, or strained relationships with distributors and
strategic partners, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
SMARTMONITOR
The Company's second product SmartMonitor, which was released with first
customer shipment in September 1996, currently retails for $199.95. The
SmartMonitor product, a derivative product of SmartCenter, enables users to
monitor incoming office calls from either remote cellular or direct-dial land
based telephones. When callers dial the office number, SmartMonitor
simultaneously rings users' local telephones and remote cellular or direct-
dial land based telephones. Users can optionally monitor calls as messages are
left on an
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answering machine. Users can also elect to instantly connect to callers by
simply pushing a button. A key benefit of the SmartMonitor is that it enables
users to be more accessible to their customers without disclosing their
cellular or direct-dial land based numbers or their current locations.
Additionally, callers are not inconvenienced by being put on hold. Another key
feature of SmartMonitor is that users' office telephones and remote telephones
ring simultaneously, so that users can answer their office telephones without
having to disable the SmartMonitor feature, as they would with RBOC Call
Forwarding.
SMARTSCREEN
The Company's third product, SmartScreen, was announced in January 1997 with
first customer shipment in February 1997. This product retails for $99.95. The
SmartScreen product, another derivative product of the SmartCenter, enables
users who utilize RBOC Voice Mail to screen and access incoming calls at their
offices while callers are leaving messages on the users' RBOC Voice Mail. An
added benefit of this feature is the ability to return callers to RBOC Voice
Mail anytime during the call. This is convenient when callers have lengthy
messages that users do not want to listen to immediately and can access at a
later time.
SMARTCENTER TECHNOLOGY
The Company has developed a number of technology building blocks which the
Company believes will enable it to quickly develop new hardware and software
personal communications management products and to manufacture and package
products at a low cost. The Company's most important hardware building block
is the low cost, highly flexible analog switching core. In addition to
implementing the basic PBX-like switching function, this circuit implements
additional higher level PBX features such as DTMF detection/generation,
silence detect, full/half duplex separation and call progress monitoring.
Another key hardware building block is the automatic gain recovery circuitry,
used to dynamically control the voice quality and volume between two central
office lines that are connected together in either a half duplex or full
duplex manner. The Company believes that this circuit significantly reduces
any line loss, which might result in poor signal quality upon the connection
of the two central office lines.
The Company has a library of telephony-based software algorithms and
Application Programming Interfaces ("APIs") which provide the basis of all the
SmartFunctions in SmartCenter. These algorithms and APIs work in conjunction
with the hardware to provide unique functionality.
SALES AND MARKETING
The Company intends to sell its current product line and any future personal
communications management products primarily through the cellular channel, the
traditional RBOC channel and retail distributors ("Distributors"). The Company
utilizes three direct sales personnel as well as a number of independent sales
representatives in the sales process. The Company intends to continue to hire
and train a sales, marketing and technical support staff to support its
Distributors through education, training and customer assistance. In addition,
the Company intends to expend significant resources on advertising,
specialized packaging for diverse markets and point of sale displays to create
end-user demand and establish brand name recognition for its products and any
of the Company's future products.
To date, the Company has not achieved material product revenues and there
can be no assurance that the Company will achieve material product revenues in
the future. The Company has no significant experience marketing its product
line through Distributors or the RBOC channel. Additionally, certain
Distributors may have little or no experience offering personal communications
management products or may offer products that may compete with the Company's
products or any of the Company's future personal communications management
products. Additionally, Distributors may give higher priority to products of
other suppliers, thus reducing their efforts to sell the Company's products,
and agreements with these Distributors are generally terminable at the
Distributors' option. There can be no assurance that the Company will be able
to establish relationships with Distributors or, if established, that such
relationships will be sustained. The Company's inability to develop
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relationships with Distributors, or a reduction in sales effort or termination
of a Distributor's relationship with the Company, if established, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Use of Distributors also entails the risk that such
Distributors will accumulate inventories in anticipation of a growth in sales.
If such growth does not occur as anticipated, these Distributors may
substantially decrease the amount of product ordered in subsequent quarters.
Such fluctuations could contribute to significant variations in the Company's
business, financial condition and results of operations. The distribution
industry has been characterized by rapid change, including consolidations and
financial difficulties of distributors and the emergence of alternative
distribution channels. In addition, there are an increasing number of
companies competing for access to these channels. The loss or ineffectiveness
of the Distributors would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company intends to permit its Distributors, under certain circumstances,
to return a portion of their inventory to the Company for full credit against
other purchases. In addition, if the Company reduces its prices, the Company
will, under certain circumstances, credit its Distributors for the difference
between the purchase prices of products remaining in their inventory and the
Company's reduced prices for such products ("price protection"). There can be
no assurance that actual returns and price protection will not have a material
adverse effect on the Company's business, financial condition and results of
operations, particularly since the Company intends to introduce new and
enhanced products and is likely to face increasing price competition. In
addition, the Company currently offers a 30-day unconditional money back
guarantee and a limited one year warranty for all of the Company's products.
Future warranty claims, returns, stock rotation exchanges, or price protection
adjustments could be material, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
MANUFACTURING
The Company's manufacturing operations consist of final integration and test
of its products at the Company's facilities, in order to maintain overall
product quality. The Company subcontracts the manufacture of all of the
subassemblies of SmartCenter on a sole source basis offshore to CT Continental
(for circuit board fabrication) and Wellex Corporation (for circuit board
assembly). The Company subcontracts the manufacture of the subassemblies of
SmartMonitor on a sole source basis to Wellex Corporation (for circuit board
assembly) and AC International, Inc. (for circuit board fabrication). The
Company is currently subcontracting the subassemblies of SmartScreen on a sole
source basis to CT Continental offshore. The Company believes that there are
alternative contract manufacturers which could produce such subassemblies, but
it is not currently pursuing agreements or understandings with such
alternative sources. To date, the contract manufacturers have not been
required to assemble and deliver material quantities of subassemblies of
SmartCenter. Sole source integrated circuit suppliers include but are not
limited to Motorola, Inc., National Semiconductor Corporation, Exar
Corporation and DSP Technology, Inc. There can be no assurance that such
contract manufacturers or sole source integrated circuit suppliers will be
able to supply the Company with sufficient quantities of subassemblies or
components in a timely manner. If a contract manufacturer or sole source
supplier were unable to assemble or deliver the Company's subassemblies or
components in a timely manner, for any reason, the Company's business,
financial condition and results of operations would be materially adversely
affected. In the event of a reduction or interruption of supply to the Company
of such subassemblies or components, it could take a significant period of
time for the Company to qualify alternative suppliers, redesign the product as
necessary and commence manufacturing. The Company's inability to obtain
sufficient quantities of subassemblies or sole or limited source components in
the future or to develop alternative sources in the future, could result in
delays in product introductions or shipments, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has made a substantial investment in the
research and development of SmartCenter. The Company believes that its future
success, if any, will depend in large part on its ability to develop new
products for new and existing markets. While the Company expects to continue
to derive a portion of its revenues, if any, over the next 12 months from the
sale of its existing products, the Company believes its future success will
depend, in large part, on continuing to expand its product line beyond
SmartCenter,
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SmartMonitor and SmartScreen, as well as continuing to develop higher-end
multifunction products. As of December 31 1996, the Company's product
development staff consisted of three engineers. The Company does utilize
consultants on a project basis from time to time. The Company's total expenses
for research and development for the years ended December 31, 1996 and 1995
and for the period from inception to December 31, 1996 were $1,523,599,
$1,385,769 and $3,353,717, respectively. The Company anticipates that it will
continue to commit substantial resources, financial and otherwise, to research
and development in the future.
COMPETITION
The market for communications products is highly competitive and
characterized by rapid technological change, frequent new product
introductions, short product life cycles, evolving industry standards and
significant price erosion over the life of a product. Within specific ranges
of functionality, the Company experiences and expects to continue to
experience competition from many sources, including but not limited to: (i)
companies that provide communications management services, such as Priority
Call Management, Inc., Wildfire Communications, AccessLine Technologies, Inc.
and RBOCs such as Ameritech Corporation and Pacific Bell; (ii) companies that
directly provide personal communications management products, such as Bogen
Communications, Inc., Beond Communications, Centrepoint s/w Technologies,
Incorporated, Datacom and Jetstream Communications, Inc.; and (iii) large
consumer electronics companies that offer telephony products, such as enhanced
answering machines, including AT&T Corporation, Sony Corporation, Panasonic
Company and others. The Company believes that there will be intense
competition between companies that provide communications management services,
such as RBOCs, and companies that directly provide communications management
products.
Most of the Company's present and potential competitors have substantially
greater financial, marketing, technical and other resources than the Company.
Furthermore, the Company also expects to compete with companies that have
substantial manufacturing, marketing and distribution capabilities, areas in
which the Company has limited or no experience. Increased competition, direct
and indirect, could materially adversely affect the Company's revenues and
profitability through pricing pressure and loss of market share. There can be
no assurance that the Company will be able to compete successfully against
existing and new competitors as the market evolves, and the level of
competition increases. The failure to compete successfully against existing
and new competitors would have a material adverse effect upon the Company's
business, financial condition and results of operations.
Current and potential competitors have established and may establish
cooperative relationships with third parties to increase the ability of their
products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. As a
result, they may be able to respond more quickly to new or emerging
technologies and to changes in customer requirements or to devote greater
resources to the development, promotion and sales of their products than can
the Company. There can be no assurance that these competitive pressures will
not materially adversely affect the Company's business, financial condition
and results of operations.
The Company believes that the principal competitive factors affecting its
market include product features, compatibility with a wide variety of
switching configurations, price, ease of use, quality, customer service and
support and Company and product reputation.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of patents, trademarks and non-
disclosure agreements in order to establish and protect its proprietary
rights. The Company has filed applications for patents covering SmartCenter
and intends to continue to file applications for any of the Company's future
products. There can be no assurance that patents will issue from any of its
pending applications or, if patents do issue, that the claims allowed will be
sufficiently broad to protect the Company's technology. In addition, there can
be no assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that the right granted thereunder
8
<PAGE>
will provide proprietary protection to the Company. Since United States patent
applications are maintained in secrecy until patents issue and since the
publication of inventions in technical or patent literature tend to lag behind
such inventions by several months, the Company cannot be certain that it was
the first creator of inventions covered by its pending patent applications,
that it was the first to file patent applications for such inventions or that
the Company is not infringing on the patents of others.
The Company intends to trademark some of its proprietary product names and
logos and claims copyright protection for its proprietary software. There can
be no assurance that the Company can obtain trademarks or that the copyright
protection will be adequate. Litigation may be necessary to enforce the
Company's patents, if issued, trademarks, copyrights or other intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations regardless
of the final outcome of such litigation.
Despite the Company's efforts to safeguard and maintain its proprietary
rights, there can be no assurance that the Company will be successful in doing
so or that the Company's competitors will not independently develop or patent
technologies that are substantially equivalent or superior to the Company's
technologies. In addition, the laws of certain foreign countries do not
protect the Company's intellectual property rights to the same extent as do
the laws of the United States. Although the Company continues to implement
protective measures and intends to defend its proprietary rights vigorously,
there can be no assurance that these efforts will be successful.
The Company has received a letter from a third-party asserting certain
patents for various telephone call processing products and seeking to enter
into licensing agreements with the Company with respect to such patents. The
Company is currently reviewing the offer to determine the need for any such
licensing agreements. There can be no assurance that the Company will not be
obligated to defend itself in court against allegations of infringement of
third-party patents or that the Company would prevail in any such litigation
seeking either damages or an injunction against the sale of the Company's
products. An adverse outcome in such a suit could subject the Company to
significant liabilities to third parties, require disputed rights to be
licensed from third parties or require the Company to cease using such
technology. Management does not believe, based on information available to
date, that the outcome of this matter will have a material effect on the
Company's financial position, results of operations or cash flows.
PERSONNEL
As of December 31, 1996, the Company employed 18 people on a full-time
basis. Of these, nine were responsible for research and development, three
responsible for sales and marketing, four responsible for finance and
administration and two responsible for operations. The Company also utilizes
consultants to fulfill certain projects in the area of engineering as well as
corporate marketing. The Company's employees are not represented by a union
and the Company considers its relationship with its employees to be good.
The Company's future success depends substantially upon the efforts of
certain of its executive officers and key technical and other employees, many
of who have recently joined the Company and none of whom are covered by key
man life insurance. Edward M. Esber, Jr. joined the Company in October 1995 as
President, Chief Executive Officer, Chief Financial Officer and Director.
Arthur G. Chang joined the Company in February 1996 as Chief Operating Officer
and Vice President of Research and Development. Bryan Kerr joined the Company
in June 1996 as Vice President of Sales and Marketing. Ronald J. Tchorzewski
joined the Company in October 1996 as Vice President of Finance. Donald
Nanneman joined the Company in January 1997 as Vice President of Product
Marketing.
The Company's ability to successfully market and distribute SmartCenter and
any future personal communications management products will require it to
attract, retain and motivate additional key employees, including product
support, research and development and sales and marketing personnel. There can
be no assurance that the Company will be successful in achieving any of these
goals, and the failure to do so would have a material adverse effect on the
Company's business, financial conditions and results of operations.
9
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 8,200 square feet in a facility in Los
Gatos, California. The facility is subject to a lease which expires in
September 1997 renewable at the Company's option for one additional year. The
current monthly rent is approximately $7,442. The Company believes that its
current facilities are sufficient to meet its needs for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since the Company's initial public offering on August 6, 1996, the Company's
Common Stock has been traded on the NASDAQ "Small Cap" Market System under the
symbol "SLPT". As of December 31, 1996 there were 3,499,780 shares of Common
Stock outstanding and 35,000,000 shares of Common Stock were authorized.
The following table sets forth the range of the high and the low closing
sales price for each of the periods indicated for shares of the Company's
Common Stock.
1996
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ----- -----
<S> <C> <C>
September 30, 1996 (from August 6, 1996)........................ $5.34 $2.61
December 31, 1996............................................... $3.50 $1.75
</TABLE>
As of March 14, 1997 there were 97 holders of record of Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends and does not anticipate paying any
cash dividends in the foreseeable future. The Company intends to retain
earnings, if any, for future growth and expansion of its business.
RECENT SALES OF UNREGISTERED SECURITIES
Information required by this item, recent sales of unregistered securities,
will be contained in the Company's Notice of 1997 Annual Meeting of
Shareholders and Proxy Statement, pursuant to Regulation 14A, to be filed with
the Securities and Exchange Commission within 120 days after December 31,
1996. Such information is incorporated herein by reference.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following section contains forward-looking statements that involve risks
and uncertainties, including those referring to the period of time the
Company's existing capital resources will meet the Company's future capital
needs, the Company's operating results, the market acceptance of the products
of the Company, its efforts to establish and maintain distribution partners,
the development of new products and the Company's planned investment in the
marketing and distribution of its current products and research and
development with regard to future products. The Company's actual results could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including: dependence on market acceptance of
multifunction personal communications management products; lack of significant
sales and distribution channels; the Company's ability to timely develop new
products; business conditions and growth in the personal communications
management industry and general economy; competitive factors, such as rival
providers of personal communications management products and services, and
price pressures; compatibility with a wide variety of switching
configurations; reliance on sole source contract manufacturers and component
suppliers; dependence on a limited number of key personnel; rapid
technological changes; as well as other factors set forth elsewhere in this
Form 10-KSB.
Results of Operations
NET REVENUES
Since inception, the Company's focus has been on the design and development
of personal communications management solutions for communications-dependent
individuals. The Company's first product, SmartCenter, is targeted at mobile,
communications-dependent individuals in the Small Office and Home Office
("SOHO") market. The Company introduced its flagship product, SmartCenter, at
the end of March 1996 with the initial shipment of its second product,
SmartMonitor, at the end of September 1996. The Company recorded its initial
revenues in the quarter ended June 30, 1996. The Company's products currently
have a 30-day, unconditional, money-back guarantee. Revenue is recognized when
products are shipped and the 30-day money-back guarantee period has lapsed.
Allowances are provided for product returns based on estimated future product
returns, the timing of expected new product introductions and other factors.
These allowances are recorded as direct reductions of revenue and accounts
receivable.
Revenues for the year ended December 31, 1996, were $380,113. The Company
received no revenues during the year ended December 31, 1995. The increase in
net revenues is mainly attributable to shipment of the Company's first
product, SmartCenter. Revenue during the year ended December 31, 1996 from
sales of SmartMonitor was minimal.
DEPENDENCE ON KEY CUSTOMERS
During the year ended December 31, 1996, two customers, Office Depot and
Hello Direct, accounted for approximately 56% and 19% of revenues,
respectively. There can be no assurance that such customers will continue to
order similar volume of product from the Company. A significant reduction in
sales volume attributable to the loss of any of the Company's customers, or
the Company's inability to collect accounts receivable from any major customer
could have a materially adverse effect on the Company's business, financial
condition and results of operations.
COSTS OF GOODS SOLD
Cost of goods sold for the year ended December 31, 1996 was $289,050, which
was 76% of revenue. No goods were sold during the year ended December 31,
1995. The high percentage of cost of goods sold for the year ended December
31, 1996 was primarily due to low priced units offered to customers who had
participated in beta testing; free samples provided to prospective customers
to open new distribution channels; early, low production volume and the re-
working of certain items. Cost of goods sold for the year ended December 31,
1996 was also impacted by write-downs of obsolete inventory of $15,000 during
the second quarter of 1996.
11
<PAGE>
GROSS MARGIN
Gross margin for the year ended December 31, 1996, was 24%. No goods were
sold in the year ended December 31, 1995. The lower gross margin for the year
ended December 31, 1996 was due to higher cost of goods sold as set forth
above.
OPERATING EXPENSES
Research and Development Research and development expenses were $1,523,599
for the year ended December 31, 1996 as compared to $1,385,769 for the year
ended December 31, 1995. This increase of 10% resulted principally from higher
average headcount for the twelve months ended December 31, 1996 relative to
the prior year and increased engineering expenses incurred for prototypes and
tooling for products under development. The Company anticipates that research
and development expenses will increase in the future as it adds additional
engineers and programmers as well as incurs additional prototype and tooling
costs for products under development.
Sales and Marketing Sales and marketing expenses were $1,120,400 for the
year ended December 31, 1996 as compared to $501,580 for the year ended
December 31, 1995. This increase of 123% is primarily due to increased
expenses related to the marketing and the launch of the Company's flagship
product, SmartCenter, as well as the introduction of its second product,
SmartMonitor, at the end of September 1996. The Company anticipates that sales
and marketing expenses will continue to grow in future quarters, as it
increases marketing activities and efforts to expand distribution of its
current and anticipated future products.
General and Administrative General and administrative expenses were
$1,117,974 for the year ended December 31, 1996, as compared to $777,123 for
the year ended December 31, 1995. This increase of 44% is primarily due to
increased headcount and the higher professional services costs associated with
being a public company. The Company anticipates that general and
administrative expenses will grow in absolute dollars, but may decrease as a
percentage of revenue, as it adds the infrastructure and systems necessary to
meet the increased reporting requirements of being a public company.
OTHER INCOME (EXPENSE)
Other income is comprised primarily of interest income on cash balances,
which had been nominal until the completion of the Company's initial public
offering in August 1996. The net proceeds from the initial public offering
earned interest through investment in money market funds. For the year ended
December 31, 1996 the Company recognized interest income of $108,774 compared
with interest income of $12,850 for the year ended December 31, 1995. This was
offset by interest expense of $32,476 for the year ended December 31, 1996 and
interest expense of $22,857 for the year ended December 31, 1995.
PROVISION FOR INCOME TAXES
There was no provision for federal or state income taxes for the year ended
December 31, 1996 as the Company incurred net operating losses. As a result,
the net operating loss carryforwards have increased. At December 31, 1996, the
Company had federal and state net operating loss carryforwards of
approximately $3,800,000 and $3,700,000, respectively. The Company also had
federal and state research and development tax credit carryforwards of
approximately $80,000 and $50,000, respectively. The net operating loss
carryforwards will expire at various dates beginning in 1998 through 2011, if
not utilized. The utilization of the net operating losses and credits may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 (the "Code") and
similar state provisions. The Company's recent public offering may result in
such an ownership change for purposes of Section 382 of the Code. If an
ownership change were to occur, net operating losses and credits could expire
before utilization. For financial reporting purposes, a valuation allowance of
$3,052,000 has been recorded to offset deferred tax assets recognized under
the Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
primarily related to the net operating loss carryforwards.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash of $4,066,825 and working
capital of $4,788,146. The Company used cash of $4,142,417 in its operating
activities for the year ended December 31, 1996. Principal uses of cash were
to fund the Company's net loss and increases in accounts receivable of
$327,916 and inventories of $479,060. During 1996, the Company financed its
working capital requirements and capital expenditures primarily from the sale
of equity securities and convertible debt. The Company received proceeds from
the issuance of preferred stock totaling $1,178,657 and convertible loans from
Ameritech and 4C Ventures totaling $1,500,000 ($1,250,000 received in June
1996 and $250,000 received in July 1996). The $1,500,000 in convertible loans
was converted to common stock concurrent with the Company's initial public
offering during the quarter ended September 30, 1996. In August 1996, the
Company completed an initial public offering of its common stock which
provided the Company with net proceeds of approximately $5,200,000.
The Company expects to incur additional substantial losses at least through
the end of calendar year 1997, but anticipates that its existing capital
resources will provide adequate cash to fund its operations for the next
twelve months at its anticipated level of operations. However, the Company may
seek additional funding during calendar 1997 and will likely require
additional funding after such time. There can be no assurance that any
additional financing will be available on acceptable terms, or at all, when
required by the Company. Failure to obtain funding would have a material
adverse effect on the Company's business, financial condition and results of
operations. In February 1997, the Company entered into a $1,500,000 Line of
Credit with Silicon Valley Bank which is based upon accounts receivable. As of
December 31, 1996 the Company did not have any significant commitments for
capital or other expenditures.
FUTURE OPERATING RESULTS
Since its inception in 1993, the Company has incurred significant losses,
has had substantial negative cash flow, and has realized limited revenues. At
December 31, 1996, the Company had an accumulated deficit of $7,391,269, and
had incurred operating losses of $3,670,910 and $2,664,472 for the years ended
December 31, 1996 and 1995, respectively. The Company expects to continue to
incur substantial operating losses at least through its fiscal year ending
December 31, 1997.
Potential Fluctuations in Quarterly Results
The Company anticipates that it will experience significant fluctuations in
operating results in the future. Fluctuations in operating results may result
in volatility in the price of the Company's common stock. Operating results
may fluctuate as a result of many factors, including volume and timing of
orders received, if any, during the period, the timing of commercial
introduction of future products and enhancements, competitive products and the
impact of price competition on the Company's average selling prices, product
announcements by the Company and its competition and the Company's level of
research and development and sales and marketing activities. Many of these
factors are beyond the Company's control. In addition, due to the short
product life cycles that characterize the personal communications management
market, the Company's failure to introduce competitive new and enhanced
products in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's operating and other expenses are relatively fixed in the short
term. As a result, variations in timing of revenues, if any, will cause
significant variations in quarterly results of operations. Notwithstanding the
difficulty in forecasting future sales, the Company generally must undertake
its research and development and sales and marketing activities and other
commitments months or years in advance. Accordingly, any shortfall in product
revenues, if any, in a given quarter may materially adversely affect the
Company's business, financial condition and results of operations due to the
inability to adjust expenses during the quarter to match the level of product
revenues, if any, for the quarter. Once commitments for such expenditures are
undertaken, the Company may be unable to reduce them quickly if product
revenues are less than expected. In addition, the Company's sales expectations
are based entirely on its internal estimates of future demand. Due to these
and other factors, the Company believes that quarter to quarter comparisons of
its results of operations are not necessarily meaningful, and should not be
relied upon as indications of future performance.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SoloPoint, Inc.
We have audited the accompanying balance sheets of SoloPoint, Inc. (a
development stage company, formerly SoHo Communications, Inc.) as of December
31, 1996 and 1995 and the related statements of operations, redeemable
convertible preferred stock and shareholders' equity (net capital deficiency)
and cash flows for the years then ended and for the period from inception
(March 26, 1993) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SoloPoint, Inc. (a
development stage company) at December 31, 1996 and 1995, and the results of
its operations and its cash flows for the years then ended and for the period
from inception (March 26, 1993) to December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 10, 1997
14
<PAGE>
SOLOPOINT, INC.
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $4,066,825 $ 331,017
Accounts receivable, net of allowances of $20,777...... 327,916 --
Inventories............................................ 835,254 356,194
Other current assets................................... 39,330 11,671
---------- ----------
Total current assets.................................... 5,269,325 698,882
Furniture and equipment, at cost:
Computers and software................................. 231,479 128,994
Furniture and fixtures................................. 148,944 147,156
---------- ----------
380,423 276,150
Accumulated depreciation and amortization.............. 205,165 99,609
---------- ----------
175,258 176,541
Deposits and other assets............................... 37,997 28,000
Notes receivable from shareholder....................... -- 35,000
---------- ----------
Total assets............................................ $5,482,580 $ 938,423
========== ==========
Liabilities, redeemable convertible preferred stock and
shareholders' equity
(net capital deficiency)
Current liabilities:
Accounts payable....................................... $ 299,926 $ 350,712
Accrued compensation................................... 137,872 23,853
Convertible notes payable to shareholders.............. -- 1,120,000
Convertible notes payable.............................. -- 313,000
Notes payable, current portion......................... 39,594 9,710
Other accrued liabilities.............................. 3,787 --
---------- ----------
Total current liabilities............................... 481,179 1,817,275
Notes payable, non-current portion...................... 140,165 91,400
Commitments
Redeemable convertible preferred stock:
Issued and outstanding shares--0 at December 31, 1996,
599,585 in 1995...................................... -- 2,798,513
Shareholders' equity (net capital deficiency):
Preferred stock, no par value;
Authorized shares--5,000,000 (10,000,000 in 1995)
Issued and outstanding shares--see redeemable
convertible preferred stock above..................... -- --
Common stock, no par value:
Authorized shares--35,000,000 (20,000,000 in 1995)
Issued and outstanding shares--3,499,780 in 1996,
425,164 in 1995...................................... 12,410,005 17,852
Deficit accumulated during the development stage....... (7,391,269) (3,786,617)
Notes receivable from shareholders..................... (157,500)
---------- ----------
Total shareholders' equity (net capital deficiency)..... 4,861,236 (3,768,765)
---------- ----------
Total liabilities, redeemable convertible preferred
stock and shareholders' equity (net capital
deficiency)............................................ $5,482,580 $ 938,423
========== ==========
</TABLE>
See accompanying notes.
15
<PAGE>
SOLOPOINT, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
PERIOD FROM
MARCH 26,
1993
(INCEPTION)
THROUGH
DECEMBER 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues............................. $ 380,113 $ -- $ 380,113
Cost of sales........................ 289,050 -- 289,050
------------ ------------ ------------
Gross margin......................... 91,063 -- 91,063
Costs and expenses:
Research and development............ 1,523,599 1,385,769 3,353,717
Sales and marketing................. 1,120,400 501,580 1,621,980
General and administrative.......... 1,117,974 777,123 2,542,390
------------ ------------ ------------
Loss from operations................. 3,670,910 2,664,472 7,427,024
Other income (expense):
Interest income..................... 108,774 12,850 126,346
Other income........................ 1,000 2,000 3,000
Interest expense.................... (32,476) (22,857) (60,473)
------------ ------------ ------------
Net loss............................. $ (3,593,612) $ (2,672,479) $ (7,358,151)
------------ ------------ ============
Net loss per share................... $ (1.46) $ (1.35)
============ ============
Shares used in computing net loss per
share............................... 2,461,715 1,974,329
============ ============
</TABLE>
See accompanying notes
16
<PAGE>
SOLOPOINT, INC.
(a development stage company)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
REDEEMABLE DEFICIT TOTAL
CONVERTIBLE ACCUMULATED NOTES SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK DURING THE RECEIVABLE EQUITY (NET
----------------- ---------------- DEVELOPMENT FROM CAPITAL
SHARES AMOUNT SHARES AMOUNT STAGE SHAREHOLDERS DEFICIENCY)
------- --------- -------- ------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of founders' stock in November 1993 at
$.001 per share............................... -- $ -- 300,000 $ 300 $ -- $ -- $ 300
Common stock to be issued in January 1994...... -- -- -- 3,675 -- -- 3,675
Series A-1 redeemable preferred stock to be
issued in January 1994........................ -- 250,000 -- -- -- -- --
Issuance of Series A-1 redeemable preferred
stock......................................... 25,000 -- -- -- -- -- --
Recapitalization exchange of common stock for
Series A-1 redeemable preferred stock at $.04
per share..................................... 7,500 300 (300,000) (300) -- -- (300)
Issuance of Series A-1 redeemable preferred
stock in exchange for services in January 1994
at $10.00 per share........................... 13 125 -- -- -- -- --
Issuance of common stock from January 1994
through April 1994 at $.01 per share.......... -- -- 396,100 286 -- -- 286
Issuance of common stock in exchange for
services, from February 1994 through October
1994 at prices ranging from $.01 to $.40 per
share......................................... -- -- 16,870 4,935 -- -- 4,935
Issuance of Series A-2 redeemable preferred
stock in May 1994 at $3.50 per share, less
issuance costs of $8,653...................... 78,571 266,347 -- -- -- -- --
Issuance of Series A-2 redeemable preferred
stock in May 1994 at $3.50 per share in
exchange for interest payable................. 956 3,345 -- -- -- -- --
Issuance of Series A-3 redeemable preferred
stock in July and August of 1994 at $4.00 per
share, less issuance costs of $13,292......... 143,750 561,708 -- -- -- -- --
Issuance of Series A-4 redeemable preferred
stock in December 1994 at $4.50 per share,
less issuance costs of $6,587................. 82,378 364,114 -- -- -- -- --
Net loss from inception through December 31,
1994.......................................... -- -- -- -- (1,092,060) -- (1,092,060)
------- --------- -------- ----- ---------- ----- ----------
Balance at December 31, 1994.................... 338,168 1,445,939 412,970 8,896 (1,092,060) -- (1,083,164)
Issuance of common stock in exchange for
services from January 1995 through December
1995 at prices ranging from $.40 to $.50 per
share......................................... -- -- 14,086 6,873 -- -- 6,873
Issuance of common stock from July 1995 through
November 1995 at $.50 per share............... -- -- 2,400 1,200 -- -- 1,200
Exercise of stock options...................... -- -- 2,375 950 -- -- 950
Repurchase of common stock..................... -- -- (6,667) (67) -- -- (67)
Issuance of Series A-4 redeemable preferred
stock in January 1995 at $4.50 per share, less
issuance costs of $3,583...................... 18,417 79,295 -- -- -- -- --
Issuance of Series A-5 redeemable preferred
stock from March 1995 through May 1995 at
$5.00 per share, less issuance costs of
$13,227....................................... 154,000 756,773 -- -- -- -- --
Issuance of Series A-6 redeemable preferred
stock in June 1995 at $6.00 per share, less
issuance costs of $15,572..................... 85,000 494,428 -- -- -- -- --
Net loss....................................... -- -- -- -- (2,672,479) -- (2,672,479)
Accretion of redeemable preferred stock........ -- 22,078 -- -- (22,078) -- (22,078)
------- --------- -------- ----- ---------- ----- ----------
</TABLE>
17
<PAGE>
SOLOPOINT, INC.
(a development stage company)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------- ----------------------
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
SHARES AMOUNT SHARES AMOUNT STAGE SHAREHOLDERS
---------- ---------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ 595,585 $2,798,513 425,164 $ 17,852 $(3,786,617) $ --
Exercise of stock options.......... -- -- 26,141 11,281 -- --
Repurchase of common stock......... -- -- (52,813) (528) -- --
Conversion of A-6 to A-7 redeemable
preferred stock................... 17,000 -- -- -- -- --
Issuance of common stock at $.50
per share......................... -- -- 11,000 5,500 -- --
Issuance of Series A-7 redeemable
preferred stock for bridge notes
in February 1996.................. 286,600 1,433,000 -- -- -- --
Issuance of Series A-7 redeemable
preferred stock from February 1996
through March 1996 at $5.00 per
share, less issuance costs of
$18,843........................... 239,500 1,178,657 -- -- -- --
Issuance of common stock for notes
receivable........................ -- -- 315,000 157,500 -- (157,500)
Issuance of redeemable preferred
stock in exchange for services
from January 1996 through July
1996.............................. 8,004 40,000 -- -- -- --
Issuance of Series A-7 redeemable
preferred stock in March 1996 at
$5.00 per share in exchange for
interest payable.................. 6,753 33,767 -- -- -- --
Accretion of redeemable preferred
stock............................. -- 11,040 -- -- (11,040) --
Issuance of common stock in
exchange for services for 1996.... -- -- 16,302 26,767 -- --
Issuance of common stock in
exchange for bridge note.......... -- -- 300,000 1,500,000 -- --
Issuance of common stock in
exchange for interest associated
with bridge note.................. -- -- 2,544 12,720 -- --
Shares repurchased................. (5,000) (20,000) (42,000) (63,000) -- --
Conversion of redeemable preferred
stock to common stock upon public
offering in August 1996........... (1,148,442) (5,474,977) 1,148,442 5,474,977 -- --
Issuance of common stock upon the
initial public offering net of
issuance costs of $1,483,064...... -- -- 1,350,000 5,266,936 -- --
Net loss........................... -- -- -- -- (3,593,612) --
---------- ---------- --------- ----------- ----------- ---------
Balance at December 31, 1996........ -- $ -- 3,499,780 $12,410,005 $(7,391,269) $(157,500)
- --------------------------------------------------
========== ========== ========= =========== =========== =========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY (NET
CAPITAL
DEFICIENCY)
-------------
<S> <C>
Balance at December 31, 1995........ $(3,768,765)
Exercise of stock options.......... 11,281
Repurchase of common stock......... (528)
Conversion of A-6 to A-7 redeemable
preferred stock................... --
Issuance of common stock at $.50
per share......................... 5,500
Issuance of Series A-7 redeemable
preferred stock for bridge notes
in February 1996.................. --
Issuance of Series A-7 redeemable
preferred stock from February 1996
through March 1996 at $5.00 per
share, less issuance costs of
$18,843........................... --
Issuance of common stock for notes
receivable........................ --
Issuance of redeemable preferred
stock in exchange for services
from January 1996 through July
1996.............................. --
Issuance of Series A-7 redeemable
preferred stock in March 1996 at
$5.00 per share in exchange for
interest payable.................. --
Accretion of redeemable preferred
stock............................. (11,040)
Issuance of common stock in
exchange for services for 1996.... 26,767
Issuance of common stock in
exchange for bridge note.......... 1,500,000
Issuance of common stock in
exchange for interest associated
with bridge note.................. 12,720
Shares repurchased................. (63,000)
Conversion of redeemable preferred
stock to common stock upon public
offering in August 1996........... 5,474,977
Issuance of common stock upon the
initial public offering net of
issuance costs of $1,483,064...... 5,266,936
Net loss........................... (3,593,612)
-------------
Balance at December 31, 1996........ $ 4,861,236
=============
</TABLE>
See accompanying notes.
18
<PAGE>
SOLOPOINT, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 26, 1993
YEAR ENDED DECEMBER 31, (INCEPTION)
------------------------ THROUGH
1996 1995 DECEMBER 31, 1996
----------- ----------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................... $(3,593,612) $(2,672,479) $(7,358,151)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Common stock and preferred stock
issued for services............. 66,767 6,873 78,700
Common stock and preferred stock
issued for interest payable..... 46,487 -- 49,832
Depreciation..................... 105,556 68,381 205,274
Changes in operating assets and
liabilities:
Accounts Receivable............. (327,916) -- (327,916)
Inventories..................... (479,060) (356,194) (835,254)
Other assets and liabilities.... (23,872) (6,548) (35,543)
Accounts payable................ (50,786) 282,210 299,926
Accrued compensation............ 114,019 (151) 137,872
----------- ----------- -----------
Net cash used in operating
activities....................... (4,142,417) (2,677,908) (7,785,260)
INVESTING ACTIVITIES
Acquisitions of furniture and
equipment........................ (104,273) (125,935) 366,025
Loan to shareholder............... -- (35,000) (35,000)
Payment received from shareholder. 1,500 -- 1,500
Deposits and other assets......... (9,997) (3,050) (38,107)
----------- ----------- -----------
Net cash used in investing
activities....................... (112,770) (163,985) (437,632)
FINANCING ACTIVITIES
Proceeds from convertible notes
payable to shareholders.......... -- 1,120,000 1,120,000
Proceeds from convertible notes
payable.......................... 1,500,000 313,000 1,813,000
Proceeds from notes payable....... 90,386 101,110 191,496
Principal payments on notes
payable.......................... (11,737) (8,996) (26,134)
Proceeds from sale of preferred
stock, net of issuance costs..... 1,178,657 1,330,496 3,951,622
Repayment of bridge loan.......... -- -- --
Issuance of common stock, net of
repurchases...................... 5,233,689 2,083 5,239,731
----------- ----------- -----------
Net cash provided by financing
activities....................... 7,990,995 2,857,693 12,289,717
----------- ----------- -----------
Net increase in cash and cash
equivalents...................... 3,735,808 15,800 4,066,825
Cash and cash equivalents at
beginning of period.............. 331,017 315,217 --
----------- ----------- -----------
Cash and cash equivalents at end
of period........................ $ 4,066,825 $ 331,017 $ 4,066,825
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest......................... $ 33,831 $ 2,080 $ 39,866
=========== =========== ===========
Income taxes..................... $ 800 $ 1,600 $ 6,400
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING AND FINANCING
ACTIVITIES
Equipment acquired under capital
lease financing.................. $ -- $ -- $ 14,397
=========== =========== ===========
Conversion of preferred stock to
common stock..................... $ 5,474,977 $ -- $ 5,474,977
=========== =========== ===========
Accretion of preferred stock...... $ 11,040 $ 22,078 $ 33,118
=========== =========== ===========
Common stock issued for note
receivable from shareholder...... $ 157,500 $ -- $ 157,500
=========== =========== ===========
Common and preferred stock
forfeited for note receivable.... $ 33,500 $ -- $ 33,500
=========== =========== ===========
Conversion of notes payable to
common stock..................... $ 1,500,000 $ -- $ 1,500,000
=========== =========== ===========
Conversion of notes payable to
preferred stock.................. $ 1,433,000 $ -- $ 1,433,000
=========== =========== ===========
</TABLE>
See accompanying notes
19
<PAGE>
SOLOPOINT, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
SoloPoint, Inc. (the "Company") was incorporated on March 26, 1993. The
Company changed its name from SoHo Networks, Inc. to SoHo Communications, Inc.
in September 1993 and from SoHo Communications, Inc. to SoloPoint, Inc. in
October 1995. The Company designs, develops and markets personal
communications management solutions for communications dependent individuals.
Through December 31, 1995, the Company was active in product development,
financial planning, the acquisition of facilities and equipment, raising
capital and had begun to build inventory. The Company began shipping its first
product in March 1996 with its second product shipping in September 1996. Only
limited revenues have been realized through December 31, 1996; as a result,
the Company is still considered to be in the development stage.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Inventories
Inventories consist principally of fabricated boards and integrated circuits
and are valued at the lower of cost (determined on the first-in, first-out
(FIFO) basis) or market. Realization of the value of inventories is dependent
upon the Company achieving adequate levels of revenues. Inventories at
December 31, consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Raw materials.......................................... $345,886 $183,049
Work-in-process........................................ 355,236 142,427
Finished goods......................................... 134,132 30,718
-------- --------
$835,254 $356,194
======== ========
</TABLE>
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line method over the assets' estimated useful lives of three to
five years.
Software Development Costs
The Company expenses software development costs incurred prior to
establishing technological feasibility as incurred. Software development
expenses that would be capitalized pursuant to Statement of Financial
Accounting Standards No. 86, "Software Development Costs," which have been
incurred after the product has reached technological feasibility have not been
material and, accordingly, have been charged to operations as incurred.
Revenue Recognition
Revenue is recognized when products are shipped and the 30-day money-back
guarantee period has lapsed. Allowances are provided for product returns based
on estimated future product returns, the timing of expected new product
introductions and other factors. These allowances are recorded as direct
reductions of revenue and
20
<PAGE>
SOLOPOINT, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
accounts receivable. While the Company closely monitors product returns to
maintain appropriate allowances, actual product returns may differ from the
Company's estimates, and such differences may be material to the financial
statements.
Per Share Data
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from redeemable convertible
preferred stock and from stock options and warrants are not included in the
computation as they are antidilutive. In accordance with Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued by the Company at prices below the public offering price during
the period beginning one year prior to the initial filing of the registration
statement for the Company's initial public offering have been included in the
calculation as if they were outstanding for periods prior to the initial public
offering (using the treasury stock method and the initial public offering
price).
The 1995 calculation of net loss per share presented in the statement of
operations has been computed as described above and also gives effect to the
conversion of all outstanding shares of redeemable convertible preferred stock
into shares of common stock upon the closing of the Company's initial public
offering using the if-converted method.
NOTE 2. NOTES RECEIVABLE FROM SHAREHOLDER
The Company loaned $35,000 in cash to a shareholder in two installments in
November 1995. The notes were secured by common and redeemable convertible
preferred stock owned by the shareholder. Interest was payable bimonthly at 7%
per annum. Payments for these notes were received in August 1996 upon the
completion of the Company's initial public offering.
NOTE 3. NOTES PAYABLE
In December 1995, the Company borrowed $101,110 from Venture Lending and
Leasing pursuant to a promissory note. The note is secured by the Company's
furniture and equipment. The note is due in monthly installments of $2,841 with
interest payable monthly and at specified dates at rates ranging from 12% to
15.17%. In April 1996 and June 1996 the Company borrowed an additional $45,193
and $45,193, respectively, from Venture Lending and Leasing pursuant to
promissory notes. The 1996 notes are secured by the Company's furniture and
equipment. The notes are due in monthly installments of $1,270 each with
interest payable monthly and at specific dates at a rate of 15.53%. In
connection with the loans, the Company issued to the lender a warrant to
purchase the Company's Series B redeemable convertible preferred stock in the
amount of $32,000 at a per share price equal to the most recent venture capital
equity financing after December 11, 1995. The redeemable convertible preferred
stock was converted to common stock and the warrants were converted into
warrants to purchase the same number of common shares at the completion of the
Company's initial public offering in August 1996. Future maturities of notes
payable for the years ended December 31 are as follows:
<TABLE>
<S> <C>
1997............................................... $ 39,594
1998............................................... 46,107
1999............................................... 51,078
2000............................................... 42,980
--------
$179,759
========
</TABLE>
21
<PAGE>
SOLOPOINT, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In June 1996, the Company issued a total of $1,500,000 of convertible notes
to Ameritech and 4C Ventures. The notes accrued interest at 5.76% per annum and
were due on June 14, 1997. In connection with the issuance of these notes, the
Company also issued to the note holders warrants to purchase an aggregate of
60,000 shares of the Company's common stock at an exercise price equal to the
Company's initial public offering price. Pursuant to the convertible notes and
warrant agreements, the Company appointed one representative from each of the
two convertible note holders to the Company's Board of Directors. These notes
were converted to 300,000 shares of common stock in connection with the
Company's initial public offering.
NOTE 4. CONVERTIBLE NOTES PAYABLE TO SHAREHOLDERS
In October and November 1995, the Company borrowed $1,120,000 from certain
existing preferred and common shareholders and $313,000 from others in exchange
for promissory notes and warrants to purchase $286,000 of the Company's Series
A-7 redeemable convertible preferred stock at an exercise price per share
equivalent to the Series A-7, redeemable convertible preferred stock issuance
price. The notes were unsecured with interest at 5.75% per annum.
In February 1996, the notes were converted into 286,600 shares of Series A-7
redeemable convertible preferred stock (see Note 6). At the completion of the
Company's initial public offering, the warrants to purchase Series A-7
preferred stock were converted into warrants to purchase the same number of
common shares.
NOTE 5. INCOME TAXES
As of December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $3,800,000 and $3,700,000, respectively. The
Company also had federal and state research and development tax credit
carryforwards of approximately $80,000 and $50,000, respectively. The net
operating loss carryforwards will expire at various dates beginning in 1998
through 2011, if not utilized.
Utilization of the net operating losses and credits is subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Deferred income taxes reflect the net tax effects of carryforwards and
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets at December 31, are
as follow:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $1,500,000 $ 722,000
Research credits................................. 133,000 101,000
Capitalized research costs....................... 1,383,000 654,000
Other............................................ 36,000 23,000
---------- ----------
Total deferred tax assets......................... 3,052,000 1,500,000
Valuation allowance for deferred tax assets....... (3,052,000) (1,500,000)
---------- ----------
Net deferred tax assets........................... $ -- $ --
========== ==========
</TABLE>
The valuation allowance increased by $1,552,000 and $1,040,000 for 1996 and
1995, respectively.
22
<PAGE>
SOLOPOINT, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
In February 1996, the Company amended its Articles of Incorporation to
increase the number of shares of authorized common and preferred stock to
35,000,000 and 25,000,000, respectively. The Company then issued 624,855 shares
of Series A-7 preferred stock at $5.00 per share, in exchange for cash of
$1,200,500 and cancellation of $1,433,000 of convertible notes payable plus
$30,770 of accrued interest. Investors purchasing Series A-7 preferred shares
for cash were issued a warrant to purchase 50% of the number of shares they
purchased resulting in the issuance of warrants for 120,500 shares of Series A-
7 preferred stock at an exercise price of $5.00 per share. Holders of
convertible notes payable who converted their notes into Series A-7 preferred
and purchased shares of Series A-7 preferred for cash as requested by the
Company, were issued additional warrants to purchase the number of shares of
Series A-7 preferred stock that when combined with the warrants previously
issued in connection with the convertible promissory notes, equaled 50% of the
number of shares of Series A-7 preferred purchased in the financing by cash or
cancellation of indebtedness. This resulted in the issuance of warrants to
purchase an additional 66,900 shares of Series A-7 preferred stock at $5.00 per
share. As part of the Series A-7 financing, 76,667 shares of Series A-6
preferred stock were converted into 92,000 shares of Series A-7 preferred
stock.
In connection with the completion of the Company's initial public offering in
August 1996, all of the shares of preferred stock were converted into shares of
common stock and the warrants to purchase Series A-7 preferred stock converted
into warrants to purchase common stock.
In July 1996 the Company amended its Articles of Incorporation to reduce the
number of shares of authorized preferred stock to 5,000,000 and to effect a one
for ten reverse stock split. All share and per share information has been
restated to reflect the reverse stock split.
Common Stock
Certain issuances of common stock are subject to repurchase agreements. At
December 31, 1995, there were approximately 23,990 shares subject to such
repurchase rights by the Company at $.01 to $.50 per share.
In February and May 1996, the Company issued a total of 215,000 and 100,000
shares respectively, of common stock at $.50 per share to certain officers in
exchange for promissory notes totaling $107,500 and $50,000 respectively,
secured by such stock. These notes receivable are recorded as an offset to
shareholders' equity in the balance sheet. The Company also issued 11,000
shares of common stock at $.50 per share for $5,500 in cash to a director.
Employee Stock Option Plan
The Company's 1993 Incentive Stock Plan (the Plan) provides for the grant of
incentive stock options and nonstatutory stock options to employees, directors
and consultants of the Company. Incentive stock options may be granted at
prices ranging from 100% to 110% (depending on the type of grant) of the fair
market value of the common stock on the date of grant as determined by the
Board of Directors. The price for nonstatutory stock options is determined by
the Board of Directors. The options generally vest at a rate of 25% one year
after the grant date and one-forty eighth every month thereafter. The vesting
and exercise provisions of the option grants are determined by the Board of
Directors. Common stock purchased prior to the Company's initial public
offering on August 6, 1996 under the Plan is subject to a right of repurchase
by the Company.
23
<PAGE>
SOLOPOINT, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Activity under the Plan was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
NUMBER WEIGHTED
OF SHARES AVERAGE EXERCISE PRICE
---------- ----------------------
<S> <C> <C>
Balance at March 26, 1993............... -- $ --
Granted................................ 64,700 $ .40
-------
Balance at December 31, 1994............ 64,700 $ .40
Granted................................ 62,300 $ .50
Exercised.............................. (2,375) $ .40
-------
Balance at December 31, 1995............ 124,625 $ .45
Granted................................ 161,667 $3.07
Exercised.............................. (26,141) $ .44
Canceled............................... (75,060) $ .46
-------
Options outstanding at December 31,
1996................................... 185,091 $2.77
=======
Shares available for grant at December
31, 1996............................... 90,079
=======
Outstanding options exercisable at
December 31, 1996...................... 20,825
=======
</TABLE>
Stock-based Compensation
As permitted under FASB No. 123, "Accounting for Stock-based Compensation"
("FASB 123"), the Company has elected to follow Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for stock-based awards to employees. Under APB 25, the Company
generally recognizes no compensation expense with respect to such awards.
Pro forma information regarding net income and earnings per share is required
by FASB 123 for awards granted after December 31, 1994 as if the Company had
accounted for its stock-based awards to employees under the fair value method
of FASB 123. The fair value of the Company's stock-based awards to employees
was estimated using a Black-Scholes option pricing model. Limitations of the
effectiveness of the Black-Scholes option valuation model are that it was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable and that the model requires the
use of highly subjective assumptions including expected stock price volatility.
Because the Company's stock-based awards to employees have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards to employees. The
Company's plan awards employee stock options, ("Options"), at time of hire and
occasionally as incentive awards. The fair value of the Company's stock-based
awards to employees for the years ended December 31, was estimated assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
OPTIONS TO PURCHASE COMMON STOCK 1996 1995
----------------------------------------------- ----- -----
<S> <C> <C>
Expected life (in years)....................... 4.00 3.33
Expected volatility............................ 0.70 0.70
Risk free interest rate........................ 6.45% 6.42%
Fair value..................................... $1.44 $ .20
</TABLE>
24
<PAGE>
SOLOPOINT, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
RANGE OF WEIGHTED AVERAGE
EXERCISE NUMBER OF REMAINING CONTRACT WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
PRICE SHARES LIFE IN YEARS EXERCISE PRICE SHARES EXERCISE PRICE
-------- --------- ------------------ ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ .40-$3.00 93,591 9.07 $1.38 20,045 $ .79
$3.13-$4.25 91,500 9.52 $4.20 780 $4.25
------- ------
185,091 20,825
======= ======
</TABLE>
The effect of applying the Black-Scholes value method in determining the fair
values of stock options did not result in pro forma net loss and net loss per
share that are materially different from historical amounts reported.
Therefore, such pro forma information is not presented herein.
Warrants
In connection with a debt financing agreement entered into in November 1993,
the Company issued warrants to purchase 8,570 shares of Series A-2 preferred
stock at $3.50 per share. The warrants are currently exercisable, subject to
certain antidilution provisions and expire ten years after the date of grant.
As of December 31, 1996 the Company had issued 6,400 warrants to a third party
at an exercise price of $5.00 per share as part of an equipment financing
agreement. In connection with the Series A-7 redeemable convertible preferred
financing agreement the Company issued warrants to purchase 244,270 shares of
Series A-7 preferred stock at $5.00 per share between August 1995 and March
1996. In connection with a bridge note, entered into in June 1996, the Company
issued warrants to purchase 60,000 shares of common stock at $5.00 per share.
In connection with the Company's initial public offering, in August 1996, the
Company issued warrants to purchase 135,000 shares of common stock at $6.00 per
share. Upon the closing of the Company's initial public offering on August 6,
1996 all warrants to purchase preferred stock became exercisable for an
equivalent number of shares of common stock at an identical per share exercise
price.
Warrants outstanding at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
TYPE OF SHARES SHARES PER SHARE EXPIRATION DATE
-------------------------- --------- -------------- ----------------------
<S> <C> <C> <C>
Common.................... 8,570 $3.50 November 2003
Common.................... 6,400 $5.00 December 2005
Common.................... 244,270 $5.00 August 1999-March 2000
Common.................... 60,000 $5.00 June 2000
Common.................... 135,000 $6.00 August 2000
</TABLE>
The Company believes that the value of these warrants at the date of issuance
was not material and no value has been attributed to them in these financial
statements.
Common Stock Reserved
As of December 31, 1996, the Company has reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Warrants............................................ 454,240
Stock option plan................................... 275,170
-------
729,410
=======
</TABLE>
25
<PAGE>
SOLOPOINT, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. RETIREMENT PLAN
The Company has a deferred compensation plan for all full-time employees
which qualifies under Section 401(k) of the Internal Revenue Code. The Plan
provides for discretionary employer contributions to the Plan. As of December
31, 1996 there have been no employer contributions to the Plan.
NOTE 8. COMMITMENT
The Company leases its facilities under a noncancelable operating lease that
expires on September 30, 1997. The lease is renewable at the Company's option
for one additional year. Total rent expense for the years ended December 31,
1996 and 1995 was $116,000 and $78,138, respectively. Future minimum lease
payments under the noncancelable facilities lease total $66,986.
NOTE 9. MAJOR CUSTOMERS
During the year ended December 31, 1996, two customers, Office Depot and
Hello Direct, accounted for approximately 56% and 19% of revenues,
respectively.
26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information about the Company's directors required by this item will be
contained in the Company's Notice of 1997 Annual Meeting of Shareholders and
Proxy Statement, pursuant to Regulation 14A, to be filed with the securities
and Exchange Commission within 120 days after December 31, 1996. Such
information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item will be contained in the Company's Notice
of 1997 Annual Meeting of Shareholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the securities and Exchange Commission within
120 days after December 31, 1996. Such information is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be contained in the Company's Notice
of 1997 Annual Meeting of Shareholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the securities and Exchange Commission within
120 days after December 31, 1996. Such information is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be contained in the Company's Notice
of 1997 Annual Meeting of Shareholders and Proxy Statement, pursuant to
Regulation 14A, to be filed with the securities and Exchange Commission within
120 days after December 31, 1996. Such information is incorporated herein by
reference.
27
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Exhibits
The following exhibits are filed as part of, or incorporated by
reference into, this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------- ----------------------------------------------------------------------
<C> <S>
* 3.1 Company's Articles of Incorporation, as currently in effect.
* 3.2 Company's Bylaws, as currently in effect.
* 4.1 Specimen Certificate of Company's Common Stock.
* 4.2 Form of Representative's Warrant.
* 4.3 Amended and Restated Information and Registration Rights Agreement
(included in Exhibit 10.9).
* 4.4 Form of Series A-2 Preferred Stock Warrant and Warrant Amendment
Agreement.
* 4.5 Form of Series A-7 Preferred Stock Warrant.
* 9.1 Voting Agreement (included in Exhibit 10.9).
*10.1 Multi-Tenant Net Lease Agreement dated August 24, 1995, between the
Company and Dell Enterprises, as amended.
*10.2 Form of Indemnification Agreement.
*10.3 Purchase Agreement dated December 18, 1995, by and between Ameritech
Corporation and the Company.
*10.4 Supplier Agreement dated February 22, 1996, by and between Hello
Direct, Inc. and the Company.
*10.5 Amended and Restated 1993 Incentive Stock Plan.
*10.6 1995 Profit Sharing 401(k) Plan.
*10.7 Employment Letter dated October 26, 1995, between the Company and
Edward M. Esber, Jr.
*10.8 Loan Agreement dated as of December 11, 1995, between SoloPoint, Inc.
and Venture Lending & Leasing, Inc.
*10.9 Bridge Loan and Warrant Purchase Agreement dated June 14, 1996, by and
between Ameritech Corporation, 4C Ventures, L.P., and the Company,
including a Security Agreement, a Patent Security Agreement, a Voting
Agreement, an Amended and Restated Information and Registration Rights
Agreement, Warrants and Secured Convertible Promissory Notes.
*10.10 Employment Letter dated February 1, 1996, between the Company and
Arthur Chang.
*10.11 Employment Letter dated July 1, 1996, between the Company and Bryan
Kerr.
*10.12 Agreement dated June 14, 1996 by and between Ameritech Corporation and
the Company.
10.13 Employment Letter dated October 8, 1996, between the Company and
Ronald J. Tchorzewski.
11.1 Statement Regarding Computation of Net Income (Loss) Per Share.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney included on page 29 of this Form 10-KSB.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to the same-numbered exhibit in Registrant's
Registration Statement on Form SB-2, (commission file number 333-5056-LA),
declared effective by the Securities and Exchange Commission on August 6,
1996.
(b)Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SOLOPOINT, INC.
a California Corporation
/s/ Edward M. Esber, Jr.
By: _________________________________
Edward M. Esber, Jr.
President, Chief Executive
Officer, Chief Financial Officer
and Director
Date: March 28, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Edward M. Esber and Ronald J. Tchorzewski,
jointly and severally his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendment to this
Report on Form 10-KSB, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President, Chief Executive March 28, 1997
/s/ Edward M. Esber, Jr. Officer, Chief Financial
_______________________________ Officer and Director
Edward M. Esber, Jr. (Principal Executive Officer)
/s/ Ronald J. Tchorzewski Vice President of Finance March 28, 1997
______________________________ (Principal Financial and Ac-
Ronald J. Tchorzewski counting Officer)
/s/ Arthur G. Chang Chief Operating Officer and March 28, 1997
______________________________ Vice President of
Arthur G. Chang Research and Development
/s/ Charlie Bass March 28, 1997
______________________________ Chairman of the Board of Di-
Charlie Bass rectors
/s/ Patrick Grady March 28, 1997
______________________________
Patrick Grady Director
/s/ Giuliano Raviola March 28, 1997
______________________________
Giuliano Raviola Director
/s/ Charles Ross March 28, 1997
______________________________
Charles Ross Director
</TABLE>
29
<PAGE>
[LETTERHEAD OF SOLOPOINT]
EXHIBIT 10.13
October 8, 1996
Ronald J. Tchorzewski
1988 Pulsar Avenue
Livermore, CA 94550
Dear Ron:
On behalf of the Board of Directors, I am pleased to offer you the position of
Vice President of Finance, reporting directly to myself, the CEO of SoloPoint.
Your anticipated start date is no later than Wednesday, October 16,1996.
Your salary, will be at the $130,000 per year rate. There will be no bonus for
1996. But it is the intent of the Board of Directors to adopt a 1997 Executive
Bonus Plan. You will participate in such a plan, if adopted.
You will also receive a stock option to purchase 25,000 shares of SoloPoint
common stock. Your stock option will be issued in accordance with the terms set
forth in SoloPoint's 1994 Incentive Stock Option Plan. The price of the optioned
shares will be the fair market value of SoloPoint common stock on the date of
the grant of the stock option, either at the next meeting of the Board of
Directors or by written consent of the Board of Directors, as determined by the
Board. Twenty-five percent of the optioned shares will vest one year after your
start date, and the balance will vest monthly over the next three years
(approximately 2.08% per month).
Your position is classified as professional, and therefor is "exempt" under
state law. Since this is a startup company, we expect that our employees will be
working substantially more than 40 hours per week. You agree that you will not
have any outside employment or consulting activities without SoloPoint's written
permission.
Solopoint has instituted a medical plan under TriNet Employment Group which
offers four different options from which to choose - Travelers POP, Travelers
EPO, HealthNet EPO and Kaiser HMO. The company pays 100% for the employee
medical and dental coverage, 75% for the dependents medical coverage and does
not cover the dependents dental. You will be eligible for coverage on your start
date.
<PAGE>
In addition, you will be entitled to receive SoloPoint's employee benefits,
which currently include fifteen days of paid vacation and five days sick leave
per year. These benefits accrue in equal increments over the course of the year.
A maximum of twenty-five vacation days may be accrued and a maximum of five
vacation days may be carried over the next year.
This offer of employment is open until Friday, October 11,1996
This offer is contingent upon: (I) your providing SoloPoint with the legally
required proof of your identity and authorization to work in the United States,
and (ii) your completing, signing and returning to us, in the enclosed envelope,
both this offer letter and the SoloPoint Employment, Confidential Information,
and Invention Assignment Agreement (ECIIAA), which contains additional terms
applicable to your employment. (Two copies of the ECIIA and of this letter are
enclosed). Please return one of each, and keep the others for your records.
Your employment with SoloPoint is not for any specified period of time, and can
be terminated by you or by us at any time, for any reason, with or without
cause. Please note that this provision is a condition of your employment with
SoloPoint.
This letter agreement and the enclosed ECIIAA set forth the complete agreement
and understanding between you and SoloPoint concerning your employment, and
supersede any prior or contemporaneous representations or understandings with
respect to your employment. Any additions to or modifications of these
agreements must be in writing and signed by the CEO and President of SoloPoint.
I look forward to working with you.
Sincerely yours,
/s/EDWARD M. ESBER, JR.
- -----------------------
Edward M. Esber, Jr.
President and CEO
By: /s/RONALD J. TCHORZEWSKI Start Date: OCTOBER 16, 1996
-------------------------------- ------------------------------
Ronald J. Tchorzewski
<PAGE>
EXHIBIT 11.1
SOLOPOINT, INC.
WEIGHTED AVERAGE SHARES COMPUTATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1996 1995
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding........... 1,359,679 413,559
Common equivalent shares from stock options,
warrants, and Series A-6 and A-7 preferred stock
granted or issued during the twelve-month period
prior to the Company's Initial Public Offering...... -- 1,050,185
Common equivalent shares attributable to:
Convertible preferred stock, as if converted........ 1,102,036 510,585
--------- ---------
2,461,715 1,974,329
========= =========
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-20703) pertaining to the 1993 Incentive Stock Plan of
SoloPoint, Inc. of our report dated Febraury 10, 1997, with respect to the
financial statements of SoloPoint, Inc. included in the Annual Report (Form 10-
KSB) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Palo Alto, California
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,066,825
<SECURITIES> 0
<RECEIVABLES> 348,693
<ALLOWANCES> 20,777
<INVENTORY> 835,254
<CURRENT-ASSETS> 5,269,325
<PP&E> 380,423
<DEPRECIATION> 205,165
<TOTAL-ASSETS> 5,482,580
<CURRENT-LIABILITIES> 481,179
<BONDS> 0
0
0
<COMMON> 12,410,005
<OTHER-SE> (157,500)
<TOTAL-LIABILITY-AND-EQUITY> 5,482,580
<SALES> 380,113
<TOTAL-REVENUES> 380,113
<CGS> 289,050
<TOTAL-COSTS> 3,761,973
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,476
<INCOME-PRETAX> (3,593,612)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,593,612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,593,612)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> (1.46)
</TABLE>
