UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996.
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _______ to ________.
Commission File No.:
NAVIDEC, INC.
(Exact name of registrant as specified in its charter)
COLORADO 33-0502730
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
14 INVERNESS DRIVE, SUITE F-116, ENGLEWOOD, CO 80112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, incl. area code: 303-790-7565
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
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ( ) No (X)
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and
no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. (X)
Revenues for the issuer's most recent fiscal year ended December
31, 1996 are $5,470,000.
As of March 28, 1997, there were 2,804,721 shares of Common Stock
issued and outstanding and the aggregate market value of the
issued and outstanding Common Stock held by non-affiliates was
approximately $6,634,195.
PART I
ITEM 1. BUSINESS
OVERVIEW
The Company is a leading provider of comprehensive Internet and
Intranet solutions for regional, national and international
business organizations. The Company also serves as a distributor
of various high technology and other products through traditional
and electronic channels. The Company provides its services and
distributes its products to over 500 customers as of the date of
this report. The Company's Internet/Intranet Solutions focus on
all aspects of commercial Internet and Intranet presence,
including design and development of World Wide Web ("WWW" or
"Web") sites, marketing, database integration, electronic
commerce and order fulfillment. Product distribution includes the
sale of high technology systems and components manufactured by
third parties, principally through traditional distribution
channels, and related services. The Company's core competencies
in Internet/Intranet technology and traditional product marketing
and distribution form its business model of providing complete
Internet/Intranet Solutions. These solutions include computer and
network infrastructure equipment, software and services, content
and aggregation, electronic commerce and fulfillment of orders.
The Company was formed as a Colorado corporation in July 1993 and
since that time has engaged in the distribution of high
technology products and related services. The Company merged with
Interactive Planet, Inc. ("IPI"), a designer and developer of
Internet World Wide Web sites, in July 1996. The Company issued
an aggregate of 678,877 shares of Common Stock to the
shareholders of IPI and a promissory note in the amount of
$75,000 to one shareholder of IPI in exchange for all of the
issued and outstanding stock of IPI. Prior to the merger, there
was no affiliation between the Company or its officers and
directors and IPI and its former officers, directors and
principal shareholders. The terms of the merger were determined
by arm's length negotiations between the Company and IPI. The
merger was consummated in order to establish the Company's
business model of combined expertise in traditional marketing and
distribution and Internet/ Intranet technology.
Business Strategy
The Company's goal is to enhance its position as a leading
provider of comprehensive networking and electronic marketing and
distribution solutions to regional, national and international
clients. To achieve this objective, the Company is pursuing the
following strategies.
Leverage Expertise and Core Competencies.
The Company leverages its expertise in two core businesses, high
technology product distribution and Internet/Intranet Solutions,
into complete electronic marketing and networking solutions. The
Company's solutions span all segments of the commercial Internet
industry, including networking equipment and routers, Internet
software, Internet/Intranet design and implementation, content
creation and aggregation, promotion and advertising, electronic
commerce and order fulfillment. Management believes that its
ability to offer this full range of Internet/Intranet products
and services as well as traditional distribution and marketing
services is unique in its industry.
Exploit Recurring Revenue Streams.
The Company emphasizes ongoing services to its Internet/ Intranet
Solutions clients, which services are a source of recurring
revenues often well in excess of the fees associated with initial
Web site development. Most of the Company's clients elect to
update and expand their Web sites on at least a monthly basis to
reflect updated information and the latest Internet technology.
The data underlying a number of client Web sites is stored on a
Company server which is connected to the Internet by a high-speed
T-1 connection. The Company receives a monthly maintenance fee
for this hosting service. The Company also develops and
markets advertising space on a number of client Web sites and
receives a portion of the revenues generated from such
advertisements. Annual recurring revenues derived from some
Internet/Intranet Solutions clients have been several times the
original site development revenues from those clients.
Develop Strategic Relationships.
The Company has developed technology, marketing and distribution
relationships with a number of leading Internet industry and
computer companies. Important relationships include those with
AT&T, IBM, Silicon Graphics, Sybase, Netscape, Netcom, Verity,
Ajilon Services and Ryan & Associates. The Company's strategic
relationships with IBM and AT&T have led to subcontracting
agreements with those companies whereby the Company provides
Internet/Intranet Solutions to customers of IBM and AT&T. As a
result of the Company's technical expertise, it has been
designated as a Netscape Commercial Applications Products
Provider Partner (NCAPP), which is Netscape's top reseller
designation and which allows the Company to offer all of
Netscape's high-end commercial Internet software products to its
clients. These and other strategic relationships have fueled
much of the recent growth of the Company, and management expects
them to continue to generate additional clients and revenue.
Emphasize Client Return on Investment.
The Company furnishes clients with solutions which are designed
to provide a return on their investment through generation of
leads, increased sales, reduced personnel expenses and/or
revenues from advertising. The Company intends to further promote
advertising on client Internet and Intranet sites as a means of
offsetting clients site development, update and maintenance
costs. The Company also intends to emphasize hardware solutions
such as on- and off-site free standing kiosks which include a
computer terminal linked to the Web site of the client. These
kiosks are designed to expand the audience for the client's
electronic marketing presence.
Promote Intranets.
The Company believes that many companies can benefit from the
ease of use and familiarity of a Web-style interface for their
internal networks. Intranets can provide an open, non-proprietary
enterprise interface to a closed, proprietary legacy database
system, thereby avoiding the need to replace the entire legacy
system when an updated enterprise interface is desired. The
Company has an informal strategic relationship with Ajilon
Services, a major provider of legacy/enterprise conversion and
data migration services, which allows the Company to offer
integrated database conversion and migration solutions as part of
its Intranet solutions. The Company has implemented a major
Intranet system for KN Energy and intends to promote its
expertise in this area to other large companies with a need for
an easy to use internal network interface.
Expand Traditional Distribution Channels.
To date, distribution of high technology products and related
services has accounted for the substantial majority of the
Company's revenue. The Company intends to expand its high
technology product distribution business by increasing its sales
staff and its national network of local representatives for
products distributed by the Company. The Company also plans to
implement and promote its own Internet Web site for direct sales
of high technology products.
INTERNET/INTRANET SOLUTIONS
Internet/Intranet Industry Overview
The Internet is a network of computer networks that are both
commercially and publicly owned. The networks all use a common
set of nonproprietary networking protocols. This commonality of
protocols provides what appears to the Internet user to be a
seamless, integrated virtual network notwithstanding the
heterogeneity of the computer hardware and communications systems
underlying the Internet. Although the individual networks
comprising the Internet are privately owned, no one organization
owns or controls the Internet. Any network may join or remove
itself from the Internet at any time and this open access has
allowed the Internet to grow exponentially as a resource in the
United States and world-wide. Each new network (or individual
connecting through a network) becomes not only a consumer of
information available on the Internet but also a potential
information or content provider to other users of the Internet.
Internet networks are connected in a variety of ways, including
regular analog phone lines, high-speed digital lines and fiber
optic links. The Internet permits users to communicate
electronically, share or publish information, download software
and participate in commercial transactions. Internet data packets
are transferred through flexible routing protocols which allow
signals to reach their destinations even though portions of the
network may be down or overburdened. Nonetheless, because of the
rapidly growing traffic on the Internet, users sometimes report
significant delays in data transfer and some loss of data. There
is a risk that as the Internet grows in popularity, its
infrastructure will become overwhelmed to the point where its
functionality is impaired, perhaps significantly.
Because connecting directly to the Internet requires expensive
equipment and considerable technical expertise, most Internet
users connect to the Internet through one of a rapidly growing
number of local and national Internet Service Providers (ISPs),
including the major on-line services such as America Online and
CompuServe. The Company is not one of these ISPs.
The World Wide Web
Much of the recent growth in Internet use has been attributable
to a network of servers and information available via open
protocols known as the World Wide Web. The Web can be accessed
through software programs such as Netscape Navigator and
Microsoft Explorer, which allow non-technical users to exploit
the capabilities of the Internet. The Web enables users to find,
retrieve and link to multimedia content on the Internet with easy
to use graphical interfaces. Electronic documents are published
on Web servers in a common format called hypertext markup
language (HTML). Web software browsers can retrieve these
documents across the Internet by making requests through a
standard communications protocol called Uniform Resource
Locators, or URLs.
The technical capabilities of the Web together with the
increasing availability of user-friendly navigational and utility
tools and search engines such as Yahoo, Excite, Webcrawler,
Magellan and Alta Vista are responsible for the rapid growth in
the popularity of the Web as a distribution channel.
The Web is growing exponentially with over 1,000 businesses
joining as participants each day. (Source: Network Wizards). In
October 1996, International Data Corp. estimated the number of
Web users at 31.4 million and projected the number of users to
grow to 163 million by the year 2000.
The term Web site is commonly used to describe the computer
screen layouts and the file server computer that are accessible
by users of the Web. Typically, a Web site has a collection of
Web pages which may contain text, graphics, pictures, sound,
animation, video or other multimedia content. One important
feature of the HTML format is that it allows a Web user to travel
to other sites simply by selecting with a mouse or other pointing
device a text or graphic marker on the current Web page. In this
manner, users can quickly and effortlessly connect to Web pages
that are part of the same Web site or to Web pages located on
servers in another continent. Web sites vary significantly in
their complexity and interactivity. A simple Web site may have
only text in outline form. More complex sites may have full
multimedia content. Web sites may also vary in their level of
interactivity with the user. Many Web sites are for inquiry only
(informational), while others allow the user to interact with,
enter and process information (interactive).
Commercial Uses of the Internet
Commercial uses of the Internet include business-to-business and
business-to-consumer transactions, product marketing,
advertising, entertainment, electronic publishing, electronic
services and Internet support. The Company views the Internet and
in particular the Web as presenting significant opportunities for
electronic marketing, sale and distribution of products. In the
Company's view, the Internet's benefits include:
- - Low cost in comparison to other marketing channels
- - Direct marketing of products and services
- - Audio/visual display and demonstration of products
- - Ability to capture orders electronically at significantly lower
personnel costs than traditional order-taking
- - Provision of client services such as order tracking and
trouble-shooting
- - Immediate fulfillment and satisfaction of certain orders, such
as software and information deliverable electronically
- - Customer convenience (24-hour, 7 days a week access)
- - Potential for narrowly-targeted marketing
A number of companies have developed systems to maintain the
security of transactions on the Internet and the Company has
developed its own proprietary merchandise engine which provides
security for order-taking functions. There can however be no
assurance that breaches in transaction security will not have an
adverse effect on the growth and viability of on-line commerce.
Advertising
The Internet is essentially a media outlet and as such serves as
an attractive platform for advertising. Typically, advertising on
the Web is in the form of a customized graphic box, or
billboard, covering a portion of the screen being viewed.
Viewers of the site who are attracted to the advertisement can
generally click on the billboard and be connected directly to the
Web site of the advertiser, which may be located on the server of
the host site or addressed to another Internet server. The
Company currently sells advertising on certain Web sites it
maintains to companies including AT&T, Silicon Graphics, Sybase,
Penzoil, The Rocky Mountain News, The Denver Post and BFI Waste
Services. Advertising proceeds are generally shared by the
Company and the client that commissioned the site.
Intranets
Because of the ease of use and widespread acceptance of Internet
protocols, HTML and other scripting languages and tools, a number
of companies have implemented internal networks, or Intranets,
based on such protocols. The use of these protocols allows
employees using personal computers and Web browser software to
access and interact with a broad range of information sources
within their company, independent of physical location and
underlying computer and database design, on the familiar platform
of Web browser software.
The Company's Internet/Intranet Solutions
The Company provides its Internet/Intranet Solutions through six
business units: Business Development Services, World Wide Web
Services, Marketing Services, Media Services, Client Services and
Channel Services. These units function as a team in providing
solutions for clients. The Internet/Intranet Solutions provided
to clients often also involve one or more of the traditional
distribution services offered by the Company.
Business Development Services are delivered through consulting
engagements, generally billed on an hourly basis, in which
Company professionals analyze client business requirements and
recommend comprehensive solutions for the client's Internet or
Intranet requirements. Proposed solutions offered by the Company
include one or more of the following components:
- Network solutions
- Web site specifications
- Private Intranets
- Web distribution strategies
- Traditional channel strategies
- Integrated marketing
- Image development
- Product introduction
- Project management
- Graphic design
- Product distribution
World Wide Web Services provide the design and implementation of
a Web site based upon specifications developed by the Company and
the client. The Company's World Wide Web Services also include
the design and implementation of private Intranets, including
hardware and software implementation.
The Company designs many of its Web sites with database system
integration, which allows the Web site to act as an interface to
selected portions of the client's internal legacy or enterprise
systems. Such integration allows the Web site to reflect
continuously the most current information concerning the client.
The Company has developed a set of proprietary software tools for
implementation on client Web sites. These tools are licensed to
clients for use on the particular site for so long as the site is
maintained by the Company. A brief description of each of the
Company's proprietary tools follows.
Navidex
The Navidex tool is a dynamic, database driven table of contents
that allows the user to intuitively navigate the Web site.
Navimap
The Navimap tool is a graphical representation of site
information with links to other areas on the site.
Merchandise Engine
The Merchandise Engine creates an on-line catalog of products
available for sale through the Web site. The Merchandise Engine
also contains a secure algorithm for transmitting credit card
information and is capable of capturing contact and marketing
information from customers placing orders.
Calendar Tool
The Calendar Tool provides a visual interface for searching
through a database of date oriented activities, announcements,
meetings or other events.
E-Mail Tool
The E-Mail Tool is an e-mail engine which allows e-mail to be
sent from the Web site to e-mail addresses designated by the
client for purposes such as customer feedback, customer
information capture and customer service inquiries.
Administration Tools
Administration Tools provide clients with the means to maintain
and update their sites themselves.
Marketing Services
Marketing Services consist of market research, marketing,
advertising and public relations consulting and implementations
designed to promote the client's Internet presence. Such services
are generally billed on an hourly basis. Marketing Services also
include the promotion and implementation of advertising on client
sites where appropriate. The Company generally charges for such
advertising placement through sharing of advertising revenues.
Media Services
Media Services include digital image capture, post-processing
services for scanned images and graphic arts production. The
Company offers these services to assist clients in developing a
uniform company image that spans both traditional and electronic
media. Actual output services provided by the Company include
photographic quality prints, color transparencies and printed
output in all sizes. The Company typically bills Media Services
on a project basis.
Client Services
Client Services include technical support, network
implementation, Web site maintenance and evolution, hosting of
Web sites on a Company Internet server, database management,
product support and electronic messaging implementation. The
Company charges a variety of fees for these services, ranging
from a specific one time fee for change requests to a monthly fee
for site maintenance.
Channel Services
Channel Services include all of the functions necessary to
implement an Internet marketing and distribution plan, including
on-line sales of merchandise, warehousing and order fulfillment.
The Company generates revenues from these services principally
through sales commissions which vary depending upon the level of
Company involvement in the distribution plan.
Significant Clients
The Company's major Internet/Intranet Solutions clients include
the following:
Hewlett Packard (http://www.hp.com). The Company designed the
layout, graphics and reusable templates for the Web pages of
three Hewlett Packard divisions (Electronic Measurements
Division, Test & Measurement Operations and the Colorado
Division) contained within Hewlett Packard's primary Web site.
KN Energy Online. The Company developed an Intranet for KN Energy
that is the primary resource for its employees to access company
information. The KN Energy Internet has a number of attractive
features, including:
- a user interface featuring an animated guide
- a fully integrated search engine
- download capabilities
- internal authority and signature verification
- an extensive employee database
The Company maintains and enhances this network on the basis of a
monthly retainer and several major enhancements are planned for
the network during 1997.
Live Entertainment (http://www.live-entertainment.com). The
Company, in partnership with Ajilon Services, Inc., designed and
implemented a Web site for Live Entertainment, which is a major
Los Angeles distributor of entertainment video tapes. The Web
site interfaces with Live Entertainment's internal database to
provide an on-line catalog of all videos offered by Live
Entertainment. The Company fulfills on-line orders of Live
Entertainment videos from the Company's warehouse facility. The
Company completed its initial work on the Live Entertainment Web
site in November 1996 and it became fully operational in December
1996.
Colorado Avalanche (http://www.coloradoavalanche.com). The
Company developed this site during the 1995-1996 hockey season
and the site has been redesigned for the 1996-1997 season. The
site received a four star rating (the highest rating) from
Magellan and it was chosen as the best site in the NHL by ISWire.
The site generates an average of 300,000 visitors a month, and
hosted 2,000,000 visitors after the Avalanche won the Stanley Cup
in June of 1996. The redesigned site features advanced graphics,
video and audio clips, player statistics and regularly updated
features about the team. The Company has a contract in place to
maintain the Avalanche site until the end of the 1996-1997 hockey
season.
Oklahoma City Bombing News Consortium. The Company completed in
March 1997 a secure Internet site to provide credentialed news
organizations with access to pleadings and court transcripts of
the trials of the suspects in the Oklahoma City bombing. The
site is accessible only by such credentialed news organizations,
and the Company believes that its ability to provide the
necessary security was an important factor in obtaining this
contract. The Company receives revenues from commercial
sponsors, a number of which underwrote the development costs of
the site.
Burt Automotive Group (http://www.burt.com). The Company created
and maintains a large Web site for this multi-dealer automobile
retailer. The Company has installed hardware at the various
dealerships and has deployed computer kiosks at some of the
dealerships to allow walk-in customers to access the Web site
information. The Burt Group, with the Company's assistance,
intends to place similar kiosks in remote locations such as
credit unions to further promote the dealership group. The
Company intends to use the Burt site as the prototype for the
development of a nationwide network of car dealerships through
the Company's association with Ryan & Associates, a national
provider of services to automotive dealerships.
All About Colorado (http://www.aaco.com). All About Colorado is a
community directory organized by the Company and KUSA-9News, a
Denver, Colorado, NBC-TV affiliate. The site contains general
information, activity and entertainment listings in over fifty
categories. Each category is located on a separate page and each
page has billboard advertising space available for sale. The site
was recently redesigned to provide substantial interactive
abilities, such as search capabilities and visitor profiles, and
to allow commerce to be performed over the site. The Company
believes that this site has the potential to generate substantial
advertising revenue, and pursuant to an agreement with the major
site sponsors, the Company is entitled to retain a significant
percentage of such revenue.
Other sites developed by the Company include PrimeStar
(http://www.primestar-tci.com), Kimmon Electric Co., Ltd.
(http://www.kimmon.com), the Denver-Metro Regional Transportation
District (http:// www.RTD-denver.com), Denver Metro Convention &
Visitors Bureau (http://www.denver.org), KUSA-9News
(http://www.9news.com), the Colorado Rockies (currently under
development), Colorado Recreation
(http://www.coloradorecreation.com) and the American Animal
Hospital Association (http:// www.healthypet.com).
DISTRIBUTION AND RELATED SERVICES
The Company distributes high technology systems and components
manufactured by third parties and provides related services such
as system integration and installation. Product distribution
clients range from small businesses to Fortune 100 companies.
Significant product distribution clients include Lockheed Martin,
Johnson Controls, Hughes Aircraft and US West. The Company serves
both as a national manufacturer's representative for the products
of certain international manufacturers and as a reseller of
selected computer products in the Rocky Mountain region. The
Company focuses its distribution efforts towards selling
specialized, higher margin products. The Company intends to
expand its product distribution activities into electronic
channels, including sales over the Internet on the Company's Web
site.
Distribution activities usually involve the receipt by the
Company of orders for equipment from prospective purchasers and
the delivery and/or installation of the equipment by the Company.
The Company purchases the equipment directly from the
manufacturer or vendor and resells it to the purchaser at a price
which includes the Company's cost and a profit margin. With the
exception of graphics supplies and certain imported components,
the Company does not generally maintain an inventory of products
it distributes. The Company specializes in components, lasers,
graphics, supplies, and systems integration.
Components
The Company represents and distributes component products from
several Japanese manufacturers, principally Hayashi Denko and
Sunmoulon. Products include temperature sensors, push-button
switches and numerous other specialized components. These
products are sold primarily through phone sales as well as
through a national network of manufacturer's representatives.
Most of these components are sold to original equipment
manufactures ("OEMs") which incorporate these components into
their product designs. Key industries for the Company's component
products include: industrial process control, heating,
ventilation and air conditioning (HVAC), energy management, food
processing, consumer appliances and medical monitoring.
Graphics
The Company sells graphics products focused in the areas of data
capture (scanning, digital cameras and X-terminals) and color
output (color printers and LCD projection devices). The sale of
many of these products is through territorial authorizations
granted to the Company by the manufacturers. The Company has
significant manufacturer alliances with Xerox, Tektronix, Sony,
InFocus and Hewlett Packard. Graphics products are sold primarily
to end-user customers by a direct sales team operating both in
the field as well as through an inside sales group which takes
orders from existing customers.
Supplies
The Company sells consumable supplies for color graphic output
devices. The Company stocks an inventory of popular consumables
in order to provide prompt response for customer orders. In
addition, the supplies division sells third-party extended
warranty agreements for all hardware products.
Systems Integration
The Company offers network design and implementation services to
corporate customers in the Rocky Mountain region, which services
often include the acquisition and location of network equipment
and servers. These services are performed by a direct sales team.
The primary manufacturers of network equipment and servers
distributed by the Company are Compaq, IBM and Hewlett Packard.
MARKETING
During 1997, the Company intends to hire additional personnel
dedicated to marketing efforts. In light of its current client
base, the Company's upcoming marketing efforts will be focused on
developing additional clients in the automotive, sports
franchise, corporate Intranet and regional directory businesses.
The Company will also focus on developing interest in electronic
commerce and order fulfillment by the Company amongst the
Company's existing and new clients.
The Company expects to generate additional Internet/Intranet
Solutions clients from subcontracting arrangements entered into
during August 1996 between the Company and AT&T and IBM. Under
the terms of each of these agreements, AT&T or IBM may refer
customers to the Company and AT&T and IBM will receive in
exchange a percentage of the revenues received from such
customers. Neither agreement obligates the Company to accept any
particular clients or projects or obligates IBM or AT&T to refer
any particular or minimum number of clients to the Company, and
both agreements are non-exclusive. Although there is no guarantee
that the Company will receive a substantial number of referrals
or derive substantial revenues from these agreements, management
does expect that these agreements will significantly expand the
Company's client and revenue base. Management plans to seek
additional subcontracting opportunities with other major computer
and Internet industry companies.
EMPLOYEES
There are currently 37 full-time employees of the Company. These
include five in Business Development, fifteen in World Wide Web
Services, three in Marketing Services, one in Client Services,
seven in Channel Services (which includes high technology product
sales personnel) and six in management and accounting.
The Company expects to hire twenty additional full-time employees
in the twelve months following this report. The Company
currently anticipates three new hires dedicated to sales, four
new hires dedicated to marketing and thirteen new technical
employees. The new employees will span all six of the Company's
business units, and some may be assigned to more than one unit.
COMPETITION
Existing competitors to the Internet/Internet Solutions business
include Online Systems Services, Inc., Eagle River Interactive,
Inc. and Open Market, Inc., all public companies traded on
NASDAQ, as well as a large number of regional firms providing
similar services to those of the Company. Potential competitors
in this business include browser software vendors, PC and UNIX
software vendors and on-line service providers. Additional
competition comes from numerous client/server companies, database
companies, multimedia companies, advertising agencies, document
management companies, networking software companies, network
management companies and educational software companies. In a
broader sense, the Company may compete with the more traditional
advertising and distribution mediums, such as radio, television
and mail order outlets.
Potential competition also comes from the Company's clients, who
could choose to address their Internet/Intranet needs through
in-house personnel. Some of the Company's current and many of the
Company's potential competitors have longer operating histories,
greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing
resources than those of the Company. Competitive factors in the
Internet/Intranet Solutions business include core technology,
breadth of services offered, creative and artistic ability,
marketing and distribution resources, customer service and
support and price.
A large number of companies act as re-marketers of computer
networks, graphics equipment and components, and the Company's
competition in the high technology product distribution business
is therefore also intense. In some instances, the Company, in
acting as a re-marketer, may compete with the original
manufacturer. In addition, a large number of companies offer the
reprographic services offered by the Company and competition in
this area is also intense. Many of the Company's competitors in
the high technology product distribution business have longer
operating histories, greater name recognition, larger installed
customer bases, larger sales staffs and substantially greater
financial, technical and marketing resources than those of the
Company.
Competitive factors in the distribution business include
technical expertise, breadth of products offered, product
quality, performance and reliability, price, name recognition,
customer service and support and access to distribution channels.
Both the Internet/Intranet Solutions business and the high
technology product distribution business are characterized by low
financial barriers to entry and frequent introductions of new
products. The Company therefore expects competition in each of
its businesses to increase in the future. There can be no
assurance that the Company will be able to successfully compete
in its businesses. Although the Company believes that it has the
requisite management, technical and creative abilities to
successfully compete, the intense level of competition in each of
the Company's businesses could materially, adversely affect the
Company's future operating results and financial condition.
ITEM 2. PROPERTIES
The Company's headquarters are located at 14 Inverness Drive,
Building F, Suite 116, Englewood, Colorado, in a 5,900 square
foot facility, which includes approximately 1,500 square feet in
warehouse space. The facility is occupied under a lease with an
unaffiliated party expiring in June 2001 and providing for a
current monthly lease rate of $4,166. The Company may lease
additional warehouse and office space if needed to support the
growth in traditional and on-line product distribution.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not involved in any material legal
proceedings.
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 the fiscal year ended December 31, 1996.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq
SmallCap Market under the symbol "NVDC" on February 11, 1997.
The Company also has a class of common stock purchase warrants
("Warrants") listed on the Nasdaq SmallCap market under the
symbol "NVDCW." The Warrants also commenced trading on February
11, 1997.
As of March 28, 1997, the Company had 79 common shareholders of
record.
The Company has not declared any cash dividends for the last two
fiscal years and does not intend to pay any cash dividends in the
foreseeable future on its Common Stock. The Company is not
currently a party to any agreement restricting the payment of
dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward Looking Statements
The matters discussed in this report, when not historical
matters, are forward looking statements that involve a number of
risks and uncertainties that could cause actual results to differ
materially from projected results. Such factors include, among
other things, the rapidly developing and unpredictable nature of
the Internet, intense competition in all of the Company's
markets, obsolescence of products and technological changes, the
need for management of growth and the dependence on relationships
of the Company with its customers and suppliers, as well as other
risk factors described from time to time in the Company's filings
with the Securities and Exchange Commission.
Overview
The company was organized as ACI Systems, Inc. in July 1993 and
changed its name to NAVIDEC, Inc. in July 1996. The Company's
principal sources of revenue are from the resale of computer
equipment, high technology peripherals and electronic components
manufactured by independent vendors ( Product Distribution ) and
services related to Internet/Intranet Solutions. Effective July
11, 1996, the Company acquired all of the outstanding common
shares of Interactive Planet, Inc. (IPI) in exchange for 678,877
shares of the Company's Common Stock and a promissory note for
$75,000 payable to a shareholder of IPI and merged IPI in the
Company. Management believes the merger with IPI has accelerated
implementation of the Company's Internet/Intranet Solutions
operating plan while contributing to continued growth in systems
integration and sales of networking and computer peripherals and
supplies. The historic operations of IPI prior to the merger
were minimal.
The Company's strategy is to increase revenue generated by its
two core competencies: (1) Internet/Intranet Solutions, which are
focused in five major market areas, including computer and
network infrastructure equipment, software and services, content
aggregation, electronic commerce and order fulfillment, and (2)
Product Distribution. The Company has built and intends to
continue to build an infrastructure that assumes this strategy
will succeed. The failure of the Company to achieve this
strategy could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company recognizes revenue upon delivery of its
Internet/Intranet Solutions and Product Distribution goods.
Internet/Intranet Solutions generally begin with consulting
arrangements that are billed on an hourly basis and progress to
a bid for a proposed project. Deposits are then taken upon
acceptance of the bid. Most of the Company's customers elect to
update and expand their Web sites frequently, and clients are
billed monthly on a time and materials basis for these services.
Additional sources of ongoing revenue include revenue from
advertising sold by the Company on clients Web sites, revenue
from sales of merchandise and services over clients Web sites
and revenue from maintenance and hosting of client Web sites.
The Company receives a percentage of gross revenue from
advertising and merchandise sales immediately upon completion of
these sales.
From August through October, 1996, the Company raised net
proceeds of approximately $1,233,000 from the sale of 10%
Unsecured Subordinated Convertible Promissory Notes (the "Bridge
Promissory Notes") in a private placement (the "Bridge Private
Placement"). These notes were converted by their terms into an
aggregate of 349,126 Units upon consummation of the Company's
public offering described below. The Units were identical to the
Units offered in the public offering.
On February 14, 1997, the Company consummated a public offering
of 1,000,000 Units consisting of one share of Common Stock and
one Common Stock purchase warrant ("Warrant"). Each Warrant
entitles the holder to purchase one share of Common Stock at a
price of $7.20 per share until February 10, 2002. The Warrants
are redeemable at the option of the Company, at $.05 per Warrant,
at any time on or after February 10, 1998 or such earlier date as
may be determined by Joseph Charles & Associates, the managing
underwriter in the public offering. Of the 1,000,000 shares of
Common Stock and 1,000,000 Warrants included in the offering,
755,000 shares of Common Stock and 1,000,000 Warrants were sold
by the Company, for net proceeds of approximately $3,504,000
(after subtracting the underwriting discount and other expenses
of the offering). The remaining 255,000 shares of Common Stock
were sold by the investors in the Bridge Private Placement.
As of the end of fiscal 1996 the Company was factoring its
receivables on a recourse basis allowing it to have readily
available access to cash from receivables at acceptable discount
rates. See note 7 to the Financial Statements. Based on the
Company's cash position, management has discontinued factoring in
order to lower its cost of capital.
Results of Operations
The following tables sets forth for the periods indicated the
percentage of net sales represented by certain line items
included in the Company's statement of operations.
Year Ended
December 31
1996 1995
Net Sales 100% 100%
Cost of Sales 81 81
Gross Margin 19 19
Operating Expense 40 19
Other Income (Expense) (3) (1)
Net Income (Loss) (24) (1)
Net sales for fiscal 1996 were $5,470,000 which represents an
increase of 33% over net sales of $4,121,000 in fiscal 1995. The
increase is primarily attributed to sales of Internet/Intranet
Solutions, which were not offered by the Company in fiscal 1995,
and increased sales of computer peripherals and supplies and
systems integration and networking products. Net sales generated
by Internet/Intranet solutions for the six months ended December
31, 1996 (the time during which the Company offered these
services) were $413,000. Net sales of Internet/Intranet
Solutions during such period increased by 147% over the $168,000
in net sales achieved by IPI during the six months ended December
31, 1995 and increased by 123% over the $185,000 in net sales
achieved by IPI during the six months ended June 30, 1996. The
increase in net sales in all three categories was primarily
attributable to increased marketing activities and greater market
penetration.
In 1997 Kimmon Electric, Inc., the Company's supplier of laser
products, began marketing its lasers directly in the United
States through Kimmon Electric USA, Inc. Management believes
that this will adversely affect future net sales for the laser
products division. Management however believes that growth in
Internet/Intranet Solutions and the distribution of new
peripheral equipment due out in the second quarter of 1997 will
more than offset the loss in net sales from Kimmon's direct
entrance into the U.S. market.
Gross margin was 19% during fiscal 1996, the same as during
fiscal 1995. Although the Company's gross margin overall was
stable, gross margin on Internet/Intranet Solutions was a very
strong 65% and gross margin on products imported from Japan
increased in fiscal 1996 compared to fiscal 1995 as a result of
the increased value of the Dollar against the Yen. This increase
was however offset by lower gross margin in computer peripherals,
which made up an increased percentage of net sales in fiscal 1996
compared to fiscal 1995 as a result of management's decision to
more aggressively market peripherals in an attempt to stimulate
sales of higher margin supplies. The decrease in gross margin
for peripherals was due to increased price competition in the
market for these products.
Gross margin for the second six months of fiscal 1996 was 21%
compared to 17% for the first six months of fiscal 1996. The
improvement was principally a result of the addition of the high
margin Internet/Intranet Solutions business through the Company's
merger with IPI. Management expects this trend of improved gross
margin to continue in fiscal 1997 through increased sales of
Internet/Intranet Solutions.
Operating expenses for fiscal 1996 were $2,259,000 compared with
$784,000 for fiscal 1995. The increase in operating expenses was
primarily the result of an increase in staff and marketing
activity and legal and consulting fees incurred in connection
with the acquisition of IPI and the Bridge Private Placement.
Operating expenses are expected to continue to increase as the
Company continues to invest in the development of high end
Internet/Intranet Solutions.
Net interest expense for fiscal 1996 was $204,000 compared with
$30,000 for fiscal 1995. The increase was a result of the Bridge
Promissory Notes, increased credit facilities with the Company's
banks and expenses related to loans from the primary
shareholders. Interest expense should decrease in 1997 as a
result of the conversion of the Bridge Promissory Notes in
February 1997.
Liquidity and Capital Resources
Through December 31, 1996, the Company funded its operations
primarily through revenues generated from operations, the Bridge
Private Placement, loans from principal shareholders and
employees, lines of credit and factoring arrangements made
available to it by banks. On December 31, 1996, the Company had
cash and cash equivalents of $231,000 and a net working capital
deficit of $711,000. This compares with cash and cash equivalents
of $106 and a working capital deficit of $92,000 on December 31,
1995.
As discussed above, the Company raised net proceeds of
approximately $3,504,000 from its public offering in February
1997. Management believes that such proceeds will be sufficient
to fund the Company's operations for at least the next twelve
months.
Cash used in operating activities for the Company totaled
$631,000 and $105,000 for fiscal 1996 and 1995, respectively.
Cash used in investing activities consisted of expenditures for
property and equipment and cost of the acquisition of IPI.
Capital expenditures increased to $472,000 during fiscal 1996
from $34,000 for fiscal 1995 primarily due to expanded
operations.
Cash from financing activities in fiscal 1996 consisted of
$1,435,000 from the Bridge Private Placement, $256,000 in loans
from shareholders and employees and $4,196,000 in advances
through the factoring arrangement with the Company's bank, net of
$226,000 in repayments of shareholder/employee loans and
$4,382,000 in factoring and line of credit payments. This
compares with $790,215 in bank borrowings in fiscal 1995, net of
$659,004 in payments.
The Company has not recorded a deferred tax asset as it cannot
conclude to date that it is more likely than not that the
deferred tax asset will be realized.
Inflation
The Company does not believe that inflation will have a material
impact on the Company's future operations.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
NAVIDEC, INC. (FORMERLY ACI SYSTEMS, INC.)
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report .. . .. . .. . . F-2
Balance Sheets - Pro-Forma December 31,
1996 (Unaudited) and December
31, 1996.. . .. . .. . .. . .. . .. . .. . . F-3
Statements of Operations - For the Years
Ended December 31, 1996
and 1995.. . .. . .. . .. . .. . .. . .. . . F-4
Statement of Changes in Stockholders'
Deficit - For the Years
Ended December 31,
1995 and 1996.. . .. . .. . .. . .. . .. . . F-5
Statements of Cash Flows - For the Years
Ended December 31, 1996
and 1995.. . .. . .. . .. . .. . .. . .. . . F-6
Notes to Financial Statements.. . .. . .. . . F-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
NAVIDEC, Inc.
Englewood, Colorado
We have audited the accompanying balance sheet of NAVIDEC, Inc.
as of December 31, 1996 and the related statements of operations,
changes in stockholders' deficit, and cash flows for the years
ended December 31, 1996 and 1995. 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 the Company as of December 31, 1996, and the results of its
operations and its cash flows for the years ended December 31,
1996 and 1995, in conformity with generally accepted accounting
principles.
Hein + Associates LLP
Denver, Colorado
March 14, 1997
<PAGE>
NAVIDEC, INC.
(Formerly ACI Systems, Inc.)
BALANCE SHEETS
Pro Forma
December 31, December 31,
1996 1996
(Unaudited) (Historical)
ASSETS
Current Assets:
Cash and cash equivalents $3,490,000 $ 231,000
Accounts receivable:
Trade, net of $50,000
allowance for
doubtful accounts 100,000 100,000
Retainage 45,000 45,000
Inventories 196,000 196,000
Prepaid expenses and
other current assets 100,000 28,000
Total current assets 3,931,000 600,000
Property and Equipment, net 465,000 465,000
Intangibles, net 788,000 788,000
Deferred Financing and
Offering Costs - 405,000
Total Assets $5,184,000 $2,258,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current portion of capital
lease obligations $ 31,000 $ 31,000
Notes payable - related
parties 97,000 160,000
Accounts payable 647,000 760,000
Other accrued liabilities 245,000 360,000
Total current liabilities 1,020,000 1,311,000
Capital Lease Obligations,
net of current portion 132,000 132,000
Related Party Notes Payable,
net of current portion - 87,000
Unsecured Subordinated
Convertible Promissory
Notes - 1,438,000
Commitments and Contingencies
(Notes 7 and 8)
Stockholders' Deficit:
Common Stock, no par value;
20,000,000 shares authorized;
1,701,000 shares issued and
outstanding (2,805,000 pro
forma) 5,343,000 401,000
Accumulated deficit (1,311,000) (1,111,000)
Total stockholders' deficit 4,032,000 (710,000)
Total Liabilities and
Stockholders' Deficit $ 5,184,000 $ 2,258,000
See accompanying notes to these financial statements.
NAVIDEC, INC.
(Formerly ACI Systems, Inc.)
STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
1996 1995
Net Sales $5,470,000 $4,121,000
Cost of Sales 4,425,000 3,340,000
Gross Margin 1,045,000 781,000
Operating expense 2,259,000 784,000
Operating Loss (1,214,000) (3,000)
Other Income
(Expense):
Interest expense,
net (204,000) (30,000)
Other 3,000 10,000
Other, Net (201,000) (20,000)
Net Loss $(1,415,000) $ (23,000)
Net Loss Per Share $ (.73) $ (.02)
Common Shares and
Equivalents Out-
standing 1,948,000 1,353,000
See accompanying notes to these financial statements.
NAVIDEC, INC.
(Formerly ACI Systems, Inc.)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
Common Stock Accumulated
Shares Amount Deficit Total
Balances, January
1, 1995 217,000 $ 63,000 $ (95,000)$ (32,000)
Net loss - - (23,000) (23,000)
Balances, December
31, 1995 217,000 63,000 (118,000) (55,000)
Exercise of stock
options 805,000 2,000 - 2,000
Compensation
recognized
related to
transfers of
common stock to
employees - 83,000 - 83,000
Shares issued
in acquisition
of IPI 679,000 675,000 - 675,000
Reclassification
of accumulated
deficit in
connection with
termination of
tax status as a
Subchapter
S-Corporation - (422,000) 422,000 -
Net loss - - (1,415,000) (1,415,000)
Balances, December
31, 1996 1,701,000 $ 401,000 $(1,111,000) $ (710,000)
See accompanying notes to these financial statements.
NAVIDEC, INC.
(Formerly ACI Systems, Inc.)
STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
1996 1995
Cash Flows from
Operating Activities:
Net Loss $(1,415,000) $ (23,000)
Adjustments to reconcile
net loss to net
cash used in operating
activities:
Depreciation and
amortization 173,000 34,000
Stock based
compensation 83,000 -
Provision for bad debt 59,000 22,000
Changes in operating
assets and liabilities:
(Increase) decrease in:
Accounts
receivable (56,000) (375,000)
Inventories 8,000 (53,000)
Other Assets (33,000) 13,000
Increase in:
Accounts
payable and
accrued
liabilities 352,000 245,000
Other liabilities 198,000 32,000
Net cash used in
operating activities (631,000) (105,000)
Cash Flows from
Investing Activities:
Capital expenditures
for property and
equipment (472,000) (34,000)
Cash acquired in
merger with IPI 5,000 -
Acquisition costs
incurred (38,000) -
Net cash used in
investing acti-
vities (505,000) (34,000)
Cash Flows from
Financing Activities:
Proceeds from sale of
accounts receivable 491,000 -
Proceeds from issuance
of common stock 2,000 -
Proceeds from issuance
of notes payable
and capital leases 5,887,000 790,000
Payment on notes
payable (4,608,000) (659,000)
Payment for deferred
financing and
offering costs (405,000) -
Net cash provided
by financing
activities 1,367,000 131,000
Increase (Decrease) in
Cash and Cash
Equivalents 231,000 (8,000)
Cash and Cash
Equivalents,
beginning of
period - 8,000
Cash and Cash
Equivalents,
end of period $ 231,000 $ -
Supplemental Schedule
of Cash Flow
Information:
Cash payments for
interest $ 155,000 $ 30,000
Net assets of cash
assumed, acquired
in merger of Navidec
with IPI $ 286,000 $ -
See accompanying notes to these financial statements.
<PAGE>
1. Organization and Significant Accounting Policies:
Organization and Nature of Operations - The Company was
incorporated in the State of Colorado in 1993 and distributes
various high technology and other products through traditional
and electronic channels. Effective on July 1, 1996, the Company
merged with Interactive Planet, Inc. (IPI) and as a result, the
Company also provides comprehensive Internet and Intranet
solutions, including design and development of World Wide Web
sites, marketing, database integration, electronic commerce and
order fulfillments.
Cash Equivalents - For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash
equivalents.
Inventories - Inventories are stated at the lower of cost or
market, determined by the first--in, first-out method and consist
primarily of products held for resale.
Property and Equipment - Property and equipment is stated at
cost. Depreciation is computed over the estimated useful lives
of the assets using the 200% declining balance method generally
over a three to seven year period. Leasehold improvements are
amortized on the straight-line method over the lesser of the
lease term or the useful life. Expenditures for ordinary
maintenance and repairs are charged to expense as incurred. Upon
retirement or disposal of assets, the cost and accumulated
depreciation are eliminated from the account and any gain or loss
is reflected in the statements of operations.
Intangibles - Intangibles represent the excess of the purchase
price paid over the net liabilities acquired in the IPI
acquisition of $888,000. This amount is being amortized over
five years.
Fair Value of Financial Instruments - The estimated fair values
for financial instruments are determined at discrete points in
time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision.
The carrying amounts of cash, trade accounts receivable, accounts
payable, and accrued liabilities approximate fair value. The
carrying amount of notes payable - related parties which have
interest rates of 5% and -0-% are considered to be at below
market rates, however, based on the short-term nature of these
notes, the fair value is not materially different from the stated
value.
Revenue Recognition - The Company recognizes revenue upon
delivery of its Internet/Intranet Solutions and Product
Distribution goods. Internet/Intranet Solutions generally begin
with consulting arrangements, which are billed on an hourly basis
and/or on a percentage of completion method on fixed bid
projects. Most of the Company's customers elect to update and
expand their Web site frequently, and clients are billed monthly
on a time and materials basis for these services. Additional
sources of ongoing revenue include revenue from advertising sold
by the Company on clients' Web sites, revenue from sales of
merchandise and services over clients' Web sites and revenue from
maintenance of client Web sites. The Company receives and
records a percentage of the gross revenue from advertising and
merchandise sales immediately upon completion of these sales.
Loss Per Share - Loss per share is generally computed based on
the weighted average number of shares outstanding. However, for
the periods presented, common and common equivalent shares,
including the options and convertible notes discussed in Notes 6
and 7, (using the treasury stock method and the public offering
price) have been included in the weighted average calculation, as
if they were outstanding for the periods presented through
September 30, 1996.
Income Taxes - During 1996, the Company converted to a "C
Corporation" and adopted Statement of Financial Accounting
Standards No. 109, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and
liabilities are determined, based on the difference between the
financial statements and tax bases of asset and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse. Pro forma income tax expense prior to
the adoption of the "C Corporation" status is not presented due
to losses for the year and a valuation allowance for the loss
carryovers which would have been recorded under FASB 109 after
the Company's proposed public offering and the termination of the
"S" corporate election. At December 31, 1996, the Company had a
net operating loss of approximately $690,000, which, if not
utilized, will expire in 2011. At December 31, 1996, the tax
effects of temporary differences that give rise to significant
portions of deferred tax assets are $260,000 for the net
operating loss carryforward and an offsetting liability of
$24,000 related to differences between book and tax depreciation,
net of a valuation of allowance totaling $236,000.
Use of Estimates - The preparation of the Company's financial
statements in conformity with generally accepted accounting
principles requires the Company's management to make estimates
and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results
could differ from those estimates. The Company makes significant
estimates, including the allowance for doubtful account and the
life of the excess of purchase price over net assets acquired
(goodwill) in the IPI merger. Due to the uncertainties inherent
in the estimation process, it is at least reasonably possible
that the life of goodwill could be revised over the next year and
such revisions could be material.
Impairment of Long-Lived Assets - In 1996, the Company adopted
Financial Accounting Standards Board Statement 121 (FAS 121). In
the event that facts and circumstances indicate that the cost of
assets or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow
value is required. Adoption of FAS 121 had no effect on the
December 31, 1996 financial statements.
Stock-based Compensation - In 1996, the Company adopted Financial
Accounting Standards Board Statement 123 (FAS 123) issued a new
statement titled "Accounting for Stock-Based Compensation" (FAS
123). FAS 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock
options, and other equity instruments to employees based on
fair value. Companies that do not adopt the fair value
accounting rules must disclose the impact of adopting the new
method in the notes to the financial statements. Transactions in
equity instruments with non-employees for goods or services must
be accounted for on the fair value method. The Company has
elected not to adopt the fair value accounting prescribed by FAS
123 for employees, and will be subject only to the disclosure
requirements prescribed by FAS 123.
During the year ended December 31, 1996, the Company granted
options for the purchase of 212,500 shares of common stock to an
employee at the fair market value as estimated by management of
the Company. The adoption of FAS 123 did not have an impact on
the Company's financial statements for the year ended December
31, 1996.
Pro Forma Unaudited Balance Sheet - The pro forma unaudited
balance sheet reflects the receipt of the net proceeds from the
sale of 755,000 shares of common stock and 1,000,000 warrants at
$5.90 and $.10, respectively, (see Note 8) in February 1997 as
though the offering was completed as of December 31, 1996. The
pro forma adjustments included:
- - The repayment of $150,000 notes payable.
- - The incurrance of an additional $846,000 in offering costs
subsequent to December 31, 1996, and repayment of other
offering costs, which were included in payables at year-end.
- - A $72,000 prepayment to the underwriter for future
consulting services.
- - The conversion of $1,438,000 in convertible debentures into
349,126 shares of common stock, of which 245,000 shares
were sold as part of the 1,000,000 units in the public
offering.
- - Recognizing $200,000 of deferred financing expense upon
conversion of the debentures.
2. Liquidity:
The Company has incurred net losses for the past two years and
has experienced negative cash flows from operations. As
described in Notes 3, 6, and 8, management has taken the
following actions to improve the Company's cash flow and
operating results.
In July, 1996, the Company acquired IPI. Even though IPI
had insignificant revenues at the time of the merger,
management believes that the merger will enhance the
operating results of the combined entity.
In October 1996, the Company completed a private offering
for the sale of $1,438,000 of unsecured subordinated
convertible promissory notes, which were converted into
common stock in conjunction with the public offering.
In February 1997, the Company completed an initial public
offering for the sale of its common stock and warrants which
resulted in gross proceeds of approximately $4,555,000.
The Company is also aggressively working to increase revenues and
improve operating results to ultimately achieve profitability,
although no assurances can be given that the Company will be
successful.
3. Acquisition of IPI:
Effective July 1, 1996, the Company acquired IPI in a purchase
transaction, where the Company acquired 100% of the stock of IPI
for 679,000 shares of common stock of the Company and a $75,000
note payable. The acquisition was valued at approximately
$750,000 and resulted in goodwill of approximately $850,000 being
recorded. The goodwill is being amortized over five years. IPI
develops, markets, and supports World Wide Web (Web) sites, on
the Internet or Intranets. IPI designs and implements Web sites
ranging from basic inquiry-only sites to complex, interactive
sites capable of providing on-line commerce, database integration
and manipulation, sophisticated graphics, animation, and other
multi-media content. IPI also serves as a value-added reseller
of software capable of allowing the Internet or Intranet user to
use self-service applications such as the on-line purchase of
products or services, product warranty and support, employee
benefit enrollments and other applications. IPI had not yet
experienced significant revenues from its planned operations at
the time of the acquisition. Immediately after the effective
date of the merger, IPI was dissolved. The unaudited following
pro forma information presents the effect of the merger as if it
occurred on January 1, 1995.
For the Years Ended
December 31,
1996 1995
Revenue $5,655,000 $4,288,000
Net loss $(1,601,000) $ (102,000)
Loss per share $ (.79) $ (.09)
Common share and
equivalents
outstanding 2,031,000 2,031,000
The above pro forma information is not necessarily indicative of
the financial results which would have occurred if such
acquisition had taken place at the earlier date, nor of future
operating results.
4. Concentration of Credit Risk:
Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when
they have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly effected
by changes in economic or other conditions described below.
A geographic concentration exists because the Company has
historically sold approximately 40% of its products and services
in the State of Colorado with remaining revenue derived from
sales throughout the United States. Financial instruments that
subject the Company to credit risk consist principally of
accounts receivable. At December 31, 1996, accounts receivable
totaled $145,000, and the Company has provided an allowance for
doubtful accounts of $50,000. For the years ended December 31,
1996 and 1995, bad debts totaled $60,000, and $18,000,
respectively. The Company performs periodic credit evaluations
on its customers' financial condition and believes that the
allowance for doubtful accounts is adequate.
At December 31, 1996, the Company maintained cash balances with a
commercial bank, which were approximately $185,000 in excess of
FDIC insurance limits.
The Company is dependent on four key suppliers. The Company has
contracts with these suppliers, however, they are not exclusive
and can be terminated at any time. Management believes that
while the Company may suffer a short-term adverse impact, it
would be able to replace anyone of these suppliers.
5. Property and Equipment:
Property and equipment at December 31, 1996 consists of the
following:
Furniture, fixtures and equipment $ 572,000
Leasehold improvements 12,000
584,000
Less accumulated depreciation (120,000)
$ 464,000
6. Notes Payable - Related Parties:
Notes payable - related parties at December 31, 1996, consists of
the following:
Note payable to an entity affiliated with an officer/
director/shareholder due on demand, non-interest
bearing. Subsequent to year-end, the Company repaid
this note from the proceeds of its initial public
offering. $ 33,000
Note payable to officers/director/shareholder,
principal along with interest at 10% per annum due in
December 31, 1997. 45,000
Note payable to a shareholder, non-interest bearing,
subordinated to all other indebtedness of the Company,
due in monthly installments of $6,250 through July 1,
1997. 52,000
Note payable to an officer/director/shareholder,
subordinated to all other indebtedness of the Company,
principal and interest at 9.75%. Subsequent to year
end, the Company repaid this note from the proceeds of
its initial public offering. 30,000
Note payable to a shareholder, principal and interest
at 5% per annum are due as determined by the Company's
shareholders. Subsequent to year-end, the Company
repaid this note from the proceeds of its initial
public offering. 87,000
$ 247,000
Private Offering of Unsecured Subordinated Convertible Promissory
Notes - In October 1996, the Company completed the sale of
$1,437,500 of unsecured subordinated convertible promissory
notes. This debt was converted into 349,126 shares of common
stock in February 1997 upon completion of the Company's initial
public offering of its common stock of which 245,000 shares were
then resold as part of the public offering. Upon conversion, the
debenture holder also received 104,126 warrants to purchase
common stock, which are exercisable at $7.20 per share until
February 2002. Interest accrued at 10% per annum up until the
time the notes were converted. The notes are subordinated to all
other indebtedness of the Company (Note 8).
7. Commitments:
Capital Lease Obligations - The Company leases certain equipment
under agreements classified as capital leases. Equipment under
the leases has a cost of approximately $174,000 and accumulated
amortization of approximately $8,700. The following is a
schedule of future minimum lease payments under capital leases at
December 31, 1996.
Future minimum lease payments $233,000
Less amount representing interest (71,000)
Present value of net minimum lease
payments 162,000
Less current portion (30,000)
$132,000
Office Leases - The Company leases its office under an operating
lease for a term expiring 2001. The lease calls for monthly
payments of $4,584. The aggregate minimum annual lease payments
are as follows:
Operating
Year Ending December 31, Leases
1997 $ 55,000
1998 55,000
1998 56,000
2000 56,000
2001 35,000
Total minimum lease payments $257,000
During 1996, the Company terminated another lease for office
space.
Receivables Sold With Recourse - In 1996, the Company entered
into an agreement with a bank to sell, with full recourse,
existing and future accounts receivable to a maximum of $750,000
at a 2.55% discount. The Company must maintain a cash reserve
account with the bank of up to 20% of the face amount of
receivables sold to the bank. The Company's recourse obligation
is secured by all of the Company's assets and is guaranteed by
two of the Company's shareholders. As of December 31, 1996, the
face amount of receivables sold was $491,000.
Employment Agreements - In July 1996, the Company entered into
employment agreements with two shareholders. The agreements
provide for payments totaling $165,000 per year through June 30,
1998 and include covenants not to compete during the term of
employment and for one year thereafter.
The Company entered into an employment agreement with an employee
which commenced on August 1, 1996, and was subsequently extended
through February 1999. The agreement provides for payments of
$5,400 per month plus options to purchase 212,500 shares of the
Company's common stock at $4.12 per share. The options are
exercisable from April 1999 to October 2001. The agreement
also contains a covenant not to compete during the term of the
employee's employment and for one year thereafter. In July 1996,
the Company borrowed $183,000 from this employee. The Company
repaid this in full in August 1996. Subsequent to year-end, the
Company loaned $60,000 to this employee at 5.5% interest, due in
semi-monthly installments of $2,300 beginning January 1, 1998,
collateralized by the options discussed above.
8. Stockholders' Equity:
Termination of S-Corporation Status - Effective July 1, 1996, the
Company terminated its S-Corporation status and became a
C-Corporation. As a result, the Company reclassified its
accumulated deficit attributable to the S-Corporation as a
reduction in common stock upon termination of S-Corporation
status.
Public Stock Offering - In February 1997, the Company completed
an initial public stock offering of 1,000,000 Units (comprised of
1,000,000 shares of common stock and warrants for the purchase of
1,000,000 shares of common stock) which provided gross proceeds
to the Company of approximately $4,555,000. Included in the
1,000,000 shares are 245,000 shares offered by the holders of the
unsecured subordinated convertible promissory notes (see Note 6).
Each warrant allows the holder to purchase one share of common
stock at an exercise price of $7.20 for a period of five years
after the date of the offering. The warrants are redeemable by
the Company at $.05 per warrant upon 30 days notice if the market
price of the common stock for 20 consecutive trading days within
the 30-day period preceding the date the notice is given equals
or exceeds $8.40. The underwriter has a 45-day option
(over-allotment option) to purchase up to 150,000 shares of
common stock and 150,000 warrants at the unit offering price.
The Company also sold to the underwriter at the close of the
public offering underwriters warrants, at a price of $0.001 per
warrant, to purchase 100,000 shares of common stock exclusive of
the over-allotment. The underwriters warrants are exercisable
for 4 years beginning in February 1998 at $7.38 per share.
Stock Split - During 1996, the Company declared a 1 for 2 reverse
stock split and 510.2041 to 1 stock split. The Company also
declared a .85 for 1 reverse stock split to be effective
immediately prior to the initial public offering. Accordingly,
all common stock reflected in the financial statements and
accompanying notes reflect the effect of the split and reverse
splits.
Common Stock Transfers and Options - In June 1996, an officer and
a shareholder transferred 83,725 shares of common stock to
employees at no cost. The Company recognized $83,000 in
compensation expense related to this transfer.
During 1994 and 1993, the Company issued stock options to an
officer and shareholder to purchase 804,881 shares of common
stock at an aggregate exercise price of $1,745. During June
1996, these options were exercised.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9. MANAGEMENT
The information required by this Item is incorporated by
reference from the Company's Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by
reference from the Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by
reference from the Company's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by
reference from the Company's Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Number Description
1.1 Form of Underwriting Agreement
1.2 Form of Selected Dealers Agreement
1.3 Warrant Exercise Fee Agreement
3.1 Amended and Restated Articles of Incorporation of ACI
Systems, Inc.
3.2 Amended and Restated Bylaws of ACI Systems, Inc.
3.3 Articles of Merger and Agreement and Plan of Merger
Between ACI Systems, Inc.
and Interactive Planet, Inc.
4.1 Form of Certificate for Common Stock of NAVIDEC, Inc.
4.2 Form of Warrant
4.3 Form of Warrant Agreement
4.4 Form of Representative's Option Agreement
4.5 Form of Private Placement Financing Converted Units
Registration Rights Agreement
4.6 Form of 10% Unsecured Subordinated Convertible
Promissory Note
4.7 Form of Placement Agent's Warrant Registration Rights
Agreement [Rescinded]
4.8 Form of Placement Agent's Warrant for the Purchase of
Shares of Common Stock and Warrants [Rescinded]
5.1 Opinion, with Consent, of Cohen Brame & Smith
Professional Corporation
10.1 Form of "Lock Up" Letter to be entered into by the
Company's current shareholders
10.2 Form of Shareholders' Agreement dated July 12, 1996,
among NAVIDEC, Inc. and its shareholders on such date.
10.3 Form of Confidentiality and Non-Disclosure Agreement
between the Company and its significant technical
employees
10.4 Employment Agreement dated July 3, 1996 between
NAVIDEC, Inc. and Ralph Armijo
10.5 Employment Agreement between NAVIDEC, Inc. and
John R. McKowen
10.6 Lease Agreement dated February 23, 1996 for the
premises located at 14 Inverness Dr., Building F, Suite
116, Englewood, Colorado 80112
10.7 Lease Agreement dated October 27, 1993 for the premises
located at 7002 S. Revere Parkway, Suite 40, Englewood,
Colorado 80112 [Terminated in December 1996]
10.8 Promissory Note as of October 1, 1993, in the principal
amount of $119,199, from ACI Systems, Inc. payable to
Arthur Armijo
10.9 Promissory Note as of March 31, 1996, in the principal
amount of $45,110 from Interactive Planet, Inc. payable
to Patrick Mawhinney
10.10 Promissory Note as of July 9, 1996, in the principal
amount of $75,000 from NAVIDEC, Inc. payable to Cynthia
Simmons
10.11 Business/Manager Agreement and Commercial Security
Agreement, each dated February 27, 1996, between
NAVIDEC, Inc. and Colorado State Bank of Denver
10.12 Form of Commercial Guarantee of Ralph Armijo and Arthur
Armijo in favor of Colorado State Bank of Denver in
connection with February 27, 1996 Promissory Note
10.13 Form of Commercial Continuing Guarantee of Ralph Armijo
and Arthur Armijo dated November 17, 1993 in favor of
Vectra Bank in connection with line of credit
terminated in February 1996
10.14 Promissory Note as of August 6, 1996, in the principal
amount of $70,000 from NAVIDEC, INC. payable to Ralph
Armijo
10.15 Promissory Note as of July 26, 1996 in the principal
amount of $30,000 from NAVIDEC, INC. payable to Patrick
Mawhinney
10.16 Promissory Note as of July 25, 1996, in the principal
amount of $182,500 from NAVIDEC, INC. payable to Little
Land Company
10.17 Netscape Commercial Applications Partner Program
(NCAPP) Guidelines
10.18 Form of Restated Agreement Not to Sell with Bridge
Financing Selling Stockholders
10.19 Form of Insider's Lock-up Agreement to be entered into
by the Company's officers, directors and 5%
shareholders
10.20 Form of Promissory Note in the principal amount of
$70,000 from NAVIDEC, Inc. payable to Trust Company of
America FBO Michael Hendricks SEP IRA and guaranteed by
Ralph Armijo and Patrick Mawhinney
21.1 Subsidiaries of the Registrant
23.1 Consent of Hein + Associates LLP
23.2 Consent of Cohen Brame & Smith Professional Corporation
(included in Exhibit 5.1)
23.3 Consent of Lloyd G. Chavez, Jr.
24.1 Power of Attorney with respect to certain signatures
in the Registration statement (see signature page to
Registration Statement)
27 Financial Data Schedule
_______________________
All exhibits are incorporated by reference to like numbered
exhibits to the Company's Registration Statement on Form SB-2
declared effective February 10, 1997 (SEC File Number 333-14497).
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 231,000
<SECURITIES> 0
<RECEIVABLES> 195,000
<ALLOWANCES> 50,000
<INVENTORY> 196,000
<CURRENT-ASSETS> 600,000
<PP&E> 585,000
<DEPRECIATION> 120,000
<TOTAL-ASSETS> 2,258,000
<CURRENT-LIABILITIES> 1,311,000
<BONDS> 0
0
0
<COMMON> 401,000
<OTHER-SE> (1,111,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,258,000
<SALES> 5,470,000
<TOTAL-REVENUES> 5,470,000
<CGS> 4,425,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,209,000
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 204,000
<INCOME-PRETAX> (1,415,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (1,415,000)
<EPS-PRIMARY> (.73)
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