U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended September 30, 1999.
[ ] 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 0-29098
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)
Registrant's telephone number: 303-790-7565
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 X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 1999, Registrant had 7,455,964 shares of common stock
outstanding
<PAGE>
NAVIDEC, INC.
INDEX
PART I. FINANCIAL INFORMATION
=============================
Item 1. Financial Statements
Balance Sheets as of December 31, and September 30, 1999
Statements of Operations, Three months and Nine months
ended September 30, 1998 and 1999
Statements of Cash Flows,
Nine months ended September 30, 1998 and 1999
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
==========================
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NAVIDEC, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31 September 30
1998 1999
------------ ------------
(unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 711,000 $ 8,996,000
Wells Fargo Funds Held in Escrow 0 25,000,000
Accounts receivable, net of allowance for doubtful
accounts of $125,000 as of December 31, 1998 and
$205,000 as of September 30, 1999 2,167,000 1,726,000
Costs and estimated earnings in excess of billings 107,000 105,000
Inventories 341,000 472,000
Restricted cash 280,000 470,000
Prepaid expenses and other 52,000 764,000
------------ ------------
Total current assets 3,658,000 37,533,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $717,000 as of December 31, 1998
and $1,068,000 as of September 30, 1999 981,000 3,397,000
OTHER ASSETS:
Goodwill and intangibles, net of accumulated
amortization of $100,000 as of December 31, 1998
and $193,000 as of September 30, 1999 619,000 526,000
Debt Issuance Costs - Wells Fargo 0 1,018,000
Other 7,000 157,000
------------ ------------
Total other assets 626,000 1,701,000
------------ ------------
TOTAL ASSETS $ 5,265,000 $ 42,631,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,851,000 $ 927,000
Accounts payable offering 0 1,200,000
Accrued liabilities 423,000 893,000
Payable to factor 203,000 0
Notes payable 821,000 100,000
Deferred revenue 0 289,000
Current capital lease obligations 74,000 136,000
------------ ------------
Total current liabilities 3,372,000 3,545,000
CAPITAL LEASE OBLIGATIONS, net current portion 94,000 244,000
CONVERTIBLE DEBT OBLIGATIONS
net of unamortized discount of 1,390,000 as of
September 30,1999 0 19,810,000
WARRANTS FOR DriveOff.com 0 440,000
SHAREHOLDERS' EQUITY:
Common stock, no par value, 20,000,000 shares authorized,
4,709,000 and 7,456,000 shares issued and outstanding
as of December 31, 1998 and September 30, 1999,
respectively 8,059,000 30,976,000
Warrants for common stock 2,891,000 1,410,000
Accumulated deficit (9,151,000) (13,794,000)
------------ ------------
Total shareholders' equity 1,799,000 18,592,000
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 5,265,000 $ 42,631,000
============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAVIDEC, INC.
STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1998 1999 1998 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE $ 2,139,000 $ 4,473,000 $ 5,678,000 $ 12,706,000
COST OF REVENUE 1,394,000 2,442,000 3,733,000 7,457,000
------------ ------------ ------------ ------------
GROSS PROFIT 745,000 2,031,000 1,945,000 5,249,000
OPERATING EXPENSES
Product Development 427,000 811,000 1,069,000 2,332,000
General & Administrative 623,000 1,637,000 1,964,000 3,792,000
Selling & Marketing 216,000 1,970,000 463,000 3,986,000
------------ ------------ ------------ ------------
Total Operating Expenses 1,266,000 4,418,000 3,496,000 10,110,000
LOSS FROM OPERATIONS (521,000) (2,387,000) (1,551,000) (4,861,000)
OTHER INCOME (EXPENSES) (96,000) 105,000 (105,000) 218,000
------------ ------------ ------------ ------------
NET LOSS $ (617,000) $ (2,282,000) $ (1,656,000) $ (4,643,000)
============ ============ ============ ============
NET LOSS PER SHARE BASIC
AND DILUTED $ (.17) $ (.31) $ (.50) $ (.69)
BASIC AND DILUTED WEIGHTED-
AVERAGE COMMON SHARES
OUTSTANDING 3,606,000 7,433,000 3,335,000 6,717,000
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAVIDEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended
September 30,
1998 1999
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,656,000) $ (4,643,000)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 422,000 444,000
Provision for bad debt 0 80,000
Changes in operating assets and liabilities-
Accounts receivable (776,000) 361,000
Costs and estimated earnings in excess of billings (219,000) 2,000
Amortization of Loan Discount 75,000 0
Inventories 47,000 (131,000)
Restricted cash 300,000 (190,000)
Other assets (161,000) (863,000)
Accounts payable 254,000 (924,000)
Accrued liabilities 74,000 470,000
------------ ------------
Net cash used in operating activities (1,640,000) (5,394,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in Notes Receivable 37,000 0
Purchases of property and equipment (432,000) (2,570,000)
------------ ------------
Net cash used in investing activities (395,000) (2,570,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from factoring of accounts receivable 1,059,000 257,000
Payments to factor (1,047,000) (460,000)
Proceeds from issuance of notes payable 800,000 0
Proceeds from issuance of common stock and warrants 1,551,000 17,158,000
Proceeds from related party note receivable 40,000 0
Payments on notes payable and capital leases (342,000) (706,000)
------------ ------------
Net cash provided by financing activities 2,061,000 16,249,000
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 26,000 8,285,000
CASH AND CASH EQUIVALENTS, beginning of period 369,000 711,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 395,000 $ 8,996,000
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 18,000 $ 88,000
------------ ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Proceeds from Offering Held in Escrow 0 $25,00,000
Equipment acquired with capital leases 0 300,000
------------ ------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND MANAGEMENT OPINION
The unaudited financial statements and related notes to the financial statements
presented herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The accompanying financial
statements were prepared in accordance with the accounting policies used in the
preparation of the Company's audited financial statements included in its Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998, and should be
read in conjunction with such financial statements and notes thereto.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair presentation of operating
results for the interim period presented have been made.
(2) ACQUISITIONS
Effective December 28, 1998, the Company acquired 100% of the stock of both
CarWizard.com Inc. and LeaseSource Online, Inc. for a total of 250,000 shares of
common stock. The combined purchased price was valued by issuing $500,000 of the
Company's common stock and the assumption of $39,000 of net liabilities,
resulting in goodwill of $539,000 being recorded. Included in the net
liabilities assumed was $80,000 of intangibles for acquired technology. The
acquisition was accounted for under the purchase method of accounting, and
accordingly the operating results of CarWizard and LeaseSource have been
included in the accompanying consolidated financial statements from the
effective date of the acquisitions. The purchase agreement includes an earn-out
provision for up to an additional $1,000,000 of purchase price, which is based
on the success of web site leads provided in 1999 and 2000.
(3) CONVERTIBLE DEBT OBLIGANTIONS AND SHAREHOLDERS' EQUITY
On September 30, 1999, WFC Holdings Corporation ("WFC"), a subsidiary of Wells
Fargo & Company, made an investment of $25 million in the Company and
DriveOff.com. Wells Fargo purchased 410,811 shares of the Company's common stock
for $3,800,000 or $9.25 per share and received a note for $6,200,000 that is
convertible into 670,270 shares of the Company's common stock. For its $15
million investment in DriveOff.com, WFC received a note convertible into 3.2
million shares (representin twenty percent of DriveOff.com's common stock
outstanding as of the closing of the transaction). WFC also received a five-year
warrant for an additional 160,000 shares of DriveOff.com, exercisable one year
after the transaction's closing at $6.5625 per share. The Company and
DriveOff.com received the $25 million investment from escrow on October 4, 1999.
Warrants and Options Exercised and Redeemed in 1999
On February 12, 1999 the Company called all publicly traded warrants. These
warrants entitled the holder to purchase one share of common stock for each
warrant for $7.20. In total, 1,918,000 warrants were exercised prior to the
expiration date of March 15, 1999. The warrants generated $13,810,000 net of
offering costs of approximately $100,000. In addition, the Company issued
200,000 warrants to representatives for solicitation for the exercise of the
warrants.
During the first six months of 1999, VSI Holdings exercised a warrant on 177,175
shares of stock at $4.50 per share resulting in proceeds to the Company of
$797,000. In addition, during the first nine months of 1999, the Company had
340,000 warrants exercised resulting in net proceeds of $1,435,000 and 290,000
employee options exercised resulting in $1,117,000.
<PAGE>
(4) COMPREHENSIVE INCOME
In June, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 defines comprehensive income as all changes in shareholder
equity exclusive of transactions with owners, such as capital investments.
Comprehensive income includes net income or loss, changes in certain assets and
liabilities that are reported directly in equity such as translation adjustments
on investments in foreign subsidiaries, and certain changes in minimum pension
liabilities. The Company's comprehensive loss was equal to its net loss for the
nine-month periods ended September 30, 1998 and 1999.
(5) NOTES PAYABLE
Notes payable consist of the following as of September 30, 1999:
Note payable; interest at 9%, due on October 18,
1999, secured by assets of LeaseSource $ 100,000
Less-current portion (100,000)
---------
Long-term portion $ 0
=========
(6) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
Costs and estimated earnings in excess of billings as of December 31, 1998 is
comprised of the following:
Costs incurred on contracts in progress $ 31,000
Estimated earnings 76,000
--------
107,000
Less progress billings --
--------
$107,000
========
Costs and estimated earnings in excess of billings as of September 30, 1999 is
comprised of the following:
Costs incurred on contracts in progress $ 35,000
Estimated earnings 70,000
--------
105,000
Less progress billings --
--------
$105,000
========
(7) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market, and
consist primarily of products held for resale.
(8) NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss available to common
shareholders for the period by the weighted average number of common shares
outstanding for the period. Diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number of common and
potential common shares outstanding during the period if the effect of the
potential common shares is dilutive. The Company has excluded the weighted
average effect (using the treasury stock method) of common stock issuable upon
conversion of all warrants and stock options from the computation of diluted
earnings per share as the effect of all such securities is anti-dilutive for all
periods presented. The shares excluded are approximately 294,000, 916,000 and
943,000 for fiscal 1998, nine months ended September 30, 1999 and three months
ended September 30, 1999, respectively.
(9) SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires
disclosure of operating segments, which as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
The Company operates in three different segments: Internet Solutions, Online
Automotive Solutions ("Automotive"), and Product Distribution. Management has
chosen to organize the Company around these segments based on differences in
products and services.
Internet Solutions provides custom solutions, including the architecture,
design, development and integration of high tech solutions, utilizing web
technology. Automotive provides total online automotive solutions through its
web sites, in addition to providing custom solutions to companies in or with
relationships in the automotive industry. Product Distribution provides the
resale and configuration of third party software and hardware components,
graphical printers and supplies.
<PAGE>
Segment operations are measured consistent with the accounting policies used in
these consolidated financial statements.
The following provides information on the Company's segments:
<TABLE>
<CAPTION>
For the Three Months Ended
September 30, 1999
(In thousands)
-----------------------------------
Internet Product
Solutions Automotive Distribution Corporate Total
--------- ---------- ------------ --------- -----
<S> <C> <C> <C> <C> <C>
Revenues from external
customers ............ $ 3,209 $ 796 $ 468 $ -- $ 4,473
Loss from operations . $ (33) $ (2,156) $ (37) $ (161)(1) $ (2,387)
Identifiable assets .. $ 12,052 $ 18,453 $ 667 $ 11,459(2) $ 42,631
For the Three Months Ended
September 30, 1998
(In thousands)
-----------------------------------
Internet Product
Solutions Automotive Distribution Corporate Total
--------- ---------- ------------ --------- -----
<S> <C> <C> <C> <C> <C>
Revenues from external
customers .............. $ 1,399 $ 177 $ 563 $ -- $ 2,139
Loss from operations ... $ (116) $ (350) $ 23 $ (78)(1) $ (521)
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1999
(In thousands)
-----------------------------------
Internet Product
Solutions Automotive Distribution Corporate Total
--------- ---------- ------------ --------- -----
<S> <C> <C> <C> <C> <C>
Revenues from external
customers ............ $ 8,810 $ 2,378 $ 1,518 $ -- $ 12,706
Loss from operations . $ (390) $ (3,994) $ (59) $ (418)(1) $ (4,861)
Identifiable assets .. $ 12,052 $ 18,453 $ 667 $ 11,459(2) $ 42,631
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1998
(In thousands)
-----------------------------------
Internet Product
Solutions Automotive Distribution Corporate Total
--------- ---------- ------------ --------- -----
<S> <C> <C> <C> <C> <C>
Revenues from external
customers .............. $ 3,238 $ 681 $ 1,759 $ -- $ 5,678
Loss from operations ... $ (602) $ (811) $ 158 $ (296)(1) $(1,551)
</TABLE>
(1) Corporate loss from operations represents depreciation expense.
(2) Corporate assets are those that are not directly identifiable to a
particular segment and includes cash, restricted cash, property and equipment
and prepaids and other assets.
<PAGE>
(10) SUBSEQUENT EVENTS
On October 26, 1999, we completed a secondary offering of 2,500,000 shares at an
offering price of $9.25. The offering resulted in net proceeds to us, after
underwriting fees and expenses, of approximately $21,000,000.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are a provider and incubator of innovative e-businesses solutions and
services. We provide e-business services to a wide range of customers, from
start-up enterprises to Fortune 1000 businesses. Our services enable our
customers to transform their Internet, intranet and extranet operations from a
basic web presence to an integrated e-business.
We were organized in July 1993 as ACI Systems, Inc. as a value-added reseller of
computer products. In July 1996, we merged with Interactive Planet, Inc., a
designer and developer of Internet web sites and subsequently changed our name
to Navidec, Inc. In July 1997, we acquired TouchSource, Inc., a designer and
developer of interactive kiosks. Through the merger and the acquisition, we
significantly enhanced our business model by combining expertise in traditional
marketing and distribution and Internet/Intranet technology. In December 1998,
we acquired CarWizard.com and LeaseSource.com, two prominent online automotive
sites, in order to expand our online automotive presence.
Currently, we derive revenue from three divisions: Internet solutions, online
automotive solutions and product distribution. The majority of our Internet
solutions revenue is generated from fixed-price, fixed-time contracts. We
consider many factors in developing the fixed-price and fixed-time of a
contract, including the technical complexity of the engagement, the resources
required to complete the engagement and the extent to which we will be able to
deploy internally developed software tools to deliver the solution. Since most
of our solutions are delivered within a 90 to 120-day time frame, revenue is
recognized using percentage-of-completion accounting based on the ratio of labor
hours incurred as compared to the estimated total labor hours needed to complete
the engagement. We plan to expand our Internet solutions revenue base to
incorporate applications management and hosting services, which will generate
recurring revenues.
Our online automotive solutions' revenue is primarily derived from the sale of
leads generated by our CarWizard.com, LeaseSource.com and USWheels.com web
sites. During the second quarter of 1999, we contributed substantially all of
the assets associated with our online automotive solutions division to a new
subsidiary, DriveOff.com, Inc. Currently, we are selling sales leads to dealers;
however, with the launch of DriveOff.com's web site in the third quarter of
1999, we have changed our revenue model. DriveOff.com has entered into an
exclusive contract with the Internet Auto Dealers Marketing Associations
(IADMA)under which all vehicle transactions generated by DriveOff.com will be
delivered to IADMA member dealers in return for a marketing fee. In addition,
DriveOff.com will earn a fee on each lease or loan associated with an IADMA
supplied automobile, as well as various fees from the sale of after-market
products such as credit life insurance, gap insurance and warranties which is
expected to be offered in the second quarter of 2000.
Our product distribution business generates revenue through the resale of third
party software and hardware components, graphical printers and supplies. Since
product distribution is not related to our core strategy, we expect that revenue
from this business will become a smaller percentage of total revenue as our
Internet and online automotive solutions businesses continue to grow.
Our operating expenses typically consist of product development costs, general
and administrative expense and selling and marketing expense.
Product development costs include salaries and out-of-pocket expenses incurred
in developing new technologies for our own use and for future customer
applications generally, as opposed to customer-specific development expenses.
General and administrative expense consists primarily of salary and benefit
expenses for our 140 employees. It also includes lease expenses associated with
our office facility and various equipment. Selling and marketing expense
includes advertising costs, costs associated with participation in trade shows
and related travel expenses.
<PAGE>
RECENT DEVELOPMENTS
On October 26, 1999, we completed a secondary public offering of 2,500,000
shares resulting in net proceeds to us of approximately $21,000,000.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1998 1999 1998 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
<S> <C> <C> <C> <C>
Internet solutions $ 1,399 $ 3,209 $ 3,238 $ 8,810
Online automotive solutions 177 796 681 2,378
Product distribution 563 468 1,759 1,518
-------- -------- -------- --------
Total revenue $ 2,139 $ 4,473 $ 5,678 $ 12,706
Cost of revenue 1,394 2,442 3,733 7,457
-------- -------- -------- --------
Gross profit $ 745 $ 2,031 $ 1,945 $ 5,249
Operating Expense:
Product development 427 811 1,069 2,331
General & administrative 623 1,637 1,964 3,793
Selling & marketing 216 1,970 463 3,986
-------- -------- -------- --------
Total operating expense $ 1,266 $ 4,418 $ 3,496 $ 10,110
Loss from operations $ (521) $ (2,387) $ (1,551) $ (4,861)
</TABLE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS AS A PERCENTAGE OF REVENUES
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1998 1999 1998 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
<S> <C> <C> <C> <C>
Internet solutions 65.4% 71.7% 57.0% 69.3%
Online automotive solutions 8.3% 17.8% 12.0% 18.7%
Product distribution 26.3% 10.5% 31.0% 11.9%
------ ------ ------ ------
Total revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 65.2% 54.6% 65.7% 58.7%
------ ------ ------ ------
Gross profit 34.8% 45.4% 34.3% 41.3%
Operating Expense:
Product development 20.0% 18.1% 18.8% 18.3%
General & administrative 29.1% 36.6% 34.6% 29.9%
Selling & marketing 10.1% 44.0% 8.2% 31.4%
------ ------ ------ ------
Total operating expense 59.2% 98.8% 61.6% 79.6%
Loss from operations -24.4% -53.4% -27.3% -38.3%
</TABLE>
<PAGE>
Revenue for the nine months ended September 30, 1999 increased 123.8% over the
same period in 1998, from $5.7 million to $12.7 million. Revenue for the three
months ended September 30, 1999 increased by 109.1% over the same period in
1998, from $2.1 million to $4.5 million. The increase was due to increased
revenues from our Internet solutions and online automotive solutions businesses.
Internet solutions revenue for the nine months ended September 30, 1999
increased 172.1% over the same period in 1998, from $3.2 million to $8.8
million. Internet solutions revenue for the three months ended September 30,
1999 increased 129.4% over for the same period in 1998, from $1.4 million to
$3.2 million. The increase in Internet solutions was primarily due to increased
project size as we performed more complex and comprehensive solutions for our
clients.
Online automotive solutions revenue for the nine months ended September 30, 1999
increased 249.2% over the same period of 1998, from $681,000 to $2.4 million.
Online automotive solutions revenue for the three months ended September 30,
1999 increased 349.7% over the same period of 1998, from $177,000 to $796,000.
The increase in online automotive solutions revenue was a result of increased
site traffic to our web sites and a corresponding increase in purchase requests
and advertising revenues. The Company generated 82,000 automotive purchase
requests for the nine months ended September 30, 1999, an increase of 1,540.0%
over 5,000 purchase request for the same period 1998. Page views for the nine
months ended September 30, 1999 were 69.7 million versus 1.5 million for the
same period of 1998. For the nine months ended September 30, 1999 our online
automotive solutions division's web sites attracted 4.7 million unique visitors,
versus 173,000 for the same period of 1998.
Revenue from the product distribution division for the nine months ended
September 30, 1999, decreased by 13.7% over the same period of 1998, from $1.8
million to $1.5 million. Revenue from the product distribution division for the
three months ended September 30, 1999, decreased by 16.9% over the same quarter
of 1998, from $563,000 to $468,000. The decrease in sales was due to the
Company's decision to focus less on product distribution and devote more
resources to Internet solutions and online automotive solutions.
Gross profit for the nine months ended September 30, 1999 increased $3.3 million
or 169.9% over gross profit for the same period in 1998, from $1.9 million to
$5.2 million. As a percent of revenue, gross margin increased from 34.3% to
41.3% as a result of a changing mix of sales. Our Internet solutions division's
gross margin for the nine months ended September 30, 1999 increased 6.3
percentage points over gross margin for the same period in 1998, from 28.0% to
34.3%. The online automotive solutions' division's gross margin for the nine
months ended September 30, 1999 decreased 1.6 percentage points from the same
period in 1998, from 77.5% to 75.9%. The decrease in gross profit was the result
of leads being sold to third party sources at lower revenue as we moved out of
the lead model.
Gross profit for the three months ended September 30, 1999 increased $1.3
million or 172.6% over gross profit for the same period in 1998, from $745,000
to $2.0 million. As a percent of sales, gross margin increased from 34.8% to
45.4% as a result of a changing mix of sales. The increase is primarily
attributed to the ability to reuse previously developed modules in new projects.
The online automotive solutions' division's gross margin for the three months
ended September 30, 1999 decreased from 74.0% to 69.0% from the same period in
1998. The decrease was primarily a result of the Company' s changing from the
lead model which resulted in a lower revenue per lead than in 1998.
Operating expenses for the nine months ended September 30, 1999 were $10.1
million, or 79.6% of sales, compared with $3.5 million, or 61.6% of sales, for
the same period in 1998. Operating expenses for the three months ended September
30, 1999 were $4.4 million, or 98.8% of sales, compared with $1.3 million, or
59.2% of sales, for the same quarter in 1998.
Product development costs were $2.3 million, or 18.3% of sales, for the nine
months ended September 30, 1999 compared to $1.1 million, or 18.8% of sales, for
the same period 1998. Product development costs were $811,000, or 18.1% of
sales, for the three months ended September 30, 1999 compared to $427,000 or
<PAGE>
20.0% of sales, for the same period in 1998. Product development costs are
projected to increase during the remainder of 1999 as we expand our product
sets.
General and administrative expenses for the nine months ended September 30, 1999
were $3.8 million, or 29.9% of sales, compared to $2.0 million, or 34.6% of
sales, for the same period in 1998. General and administrative expenses for the
three months ended September 30, 1999 were $1.6 million, or 36.6% of sales,
compared to $623,000, or 29.1% of sales, for the same quarter in 1998. General
and administrative expenses increased as a percentage of sales due to the
expansion and development of the corporate infrastructure that can support
future growth.
Selling and marketing expenses were $4.0 million, or 31.4% of sales, for the
nine months ended September 30, 1999, compared to $463,000, or 8.2% of sales,
for the same period of 1998. Sales and marketing expenses were $2.0 million, or
44.0% of sales, for the three months ended September 30, 1999, compared to
$216,000, or 10.1% of sales, for the same period of 1998. The increase in sales
and marketing expenses is the result of our efforts to expand brand recognition
and is projected to increase in 1999 as we expand our marketing for our Internet
solutions division and services provided by DriveOff.com.
Other income was $217,000 for the nine months ended September 30, 1999, an
increase of $322,000 from other expense of $105,000 for the same period of 1998.
Other income was $105,000 for the three months ended September 30, 1999, an
increase of $201,000 from other expenses of $96,000 for the same period of 1998.
The increase was a result of decreased borrowings and increased interest income
from larger cash balances in 1999.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through September 30, 1999, we funded our operations
primarily from the following sources:
_ equity investments through an initial public offering and subsequent
private placements of our securities;
_ revenues generated from operations;
_ loans from principal shareholders and employees;
_ lines of credit; and
_ accounts receivable factoring arrangements made available by banks.
As of September 30, 1999, we had cash and cash equivalents of $9.0 million and
net working capital of $34.1 million. This compares with cash and cash
equivalents of $711,000 and net working capital of $286,000 as of December 31,
1998 and cash and cash equivalents of $369,000 and a working capital $678,000 as
of December 31, 1997. In March 1999, we completed a warrant call that resulted
in net cash to us of approximately $13.8 million. On September 30, 1999 we
closed a private financing transaction with affiliates of Wells Fargo & Company
that resulted in approximately $23.8 million of net proceeds.
Cash used in our operating activities totaled $5.4 million for the nine months
ended September 30, 1999, $1.6 million for the same period of 1998. Cash used in
our investing activities totaled $2.7 million for the nine months ended
September 30, 1999, compared with $95,000 for same period of 1998. Cash used in
our investing activities during those periods consisted primarily of
expenditures for property and equipment.
Cash provided by our financing activities was $16.2 million during the nine
months ended September 30, 1999. That amount was raised primarily through the
issuance of our common stock as a result of warrants and options being
exercised, which generated $17.2 million. Cash used in financing activities for
the nine months ended September 30, 1999 consisted of advances from factoring
arrangements of $257,000, less repayments of $460,000, and the repayment of
notes/leases payable of $706,000. Cash provided by our financing activities was
$2.1 million in the nine months ended September 30, 1998. The Company plans to
<PAGE>
fund its operations during 1999 from cash flows from continuing operations ,
funds generated from the recent investment from Wells Fargo and the Company's
secondary offering.
Through September 30, 1999 the Company had a net operating loss of $11.8
million. The ability to utilize these net operating loss carry forwards to
offset future taxable income will be limited, possibly significantly, by certain
provisions of the Internal Revenue Code of 1986, and, in particular, Section 382
of the Code relating to certain ownership changes of corporations which have
losses. The Company believes that it is more likely than not that a significant
portion of the benefits of these net operating loss carry forwards (i.e., tax
assets) will not be realized. Accordingly, a valuation allowance has been
recorded against the entire deferred tax asset in the Company's financial
statements.
We believe that our available cash resources, combined with the net proceeds of
our secondary offering and the Wells Fargo transaction, will be sufficient to
meet our anticipated working capital and capital expenditure requirements for at
least the next twelve months.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, such computer
applications could fail or create erroneous results by or at the Year 2000. We
have completed all phases of our Year 2000 compliance, with the exception of the
remediation and testing phases for certain of our non-information technology
systems.
Our Year 2000 compliance program consists of three phases: identification and
assessment; remediation; and testing. For any given system, the phases occur in
sequential order, from identification and assessment of Year 2000 problems, to
remediation and, finally, to testing our solutions. However, as we acquire
additional businesses, each information technology and non-information
technology system of the acquired business must be independently identified and
assessed. As a result, all three phases of our Year 2000 compliance program may
occur simultaneously as they relate to different systems. Each phase may have a
varying timetable to completion, depending upon the system and the date when a
particular business was acquired by us.
We have completed the identification and assessment, remediation and testing of
most of our information technology systems, and those systems address or have
been modified to address Year 2000 problems. We will continue to assess the
information technology systems of businesses that we may acquire in the future.
We are in the identification and assessment phase with respect to
non-information technology systems of currently-owned businesses. We have
received assurances from our vendors and suppliers that their products and
businesses are Year 2000 compliant. However, we have no direct control over
these third parties and cannot assure you that any third-party software and
hardware systems will be timely converted. The failure of certain individual
vendors or suppliers, or a combination of vendors or suppliers, to make their
systems Year 2000 compliant could have a material adverse effect on our
financial results.
In addition, we rely on third party network infrastructure providers to gain
access to the Internet. If such providers experience business interruptions as a
result of their failure to achieve Year 2000 compliance, our ability to provide
our services could be impaired, which could harm our business, financial
conditions and operating results.
Our costs to date for our Year 2000 compliance program have not been material.
Although we have not completed our assessment of non-information technology
systems, we do not currently believe that the future costs associated with our
Year 2000 compliance program will be material.
We are currently unable to determine our most reasonably likely worst case Year
2000 scenario, because we have not identified and assessed all of our
non-information technology systems. Because most of our information technology
systems address or have been modified to address Year 2000 problems and because
most of our businesses do not employ a high degree of process of plant
<PAGE>
automation, we do not anticipate that the Year 2000 will have a significant
impact on our operations. However, a failure to address all of our Year 2000
issues successfully could have a material adverse effect on our business,
results of operations and financial condition.
OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on
accounting for the cost of such software. SOP No. 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. Our
adoption of SOP No. 98-1 in fiscal 1999 did not have a material impact on the
financial statements.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities ("SOP No. 98-5"). In general, SOP No. 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred and
specifies that initial application of SOP No. 98-5 should be reported as the
cumulative effect of a change in accounting principle. The provisions of SOP No.
98-5 are effective for fiscal years beginning after December 15, 1998. The
adoption of SOP No. 98-5 in fiscal 1999 did not have a material impact on our
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). We are required to adopt
SFAS No. 133, as amended by SFAS No. 137 in June 1999, in the year ending
December 31, 2001. SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. We do not believe adoption of SFAS No. 133
will have a material impact upon our financial statements.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio and long-term debt obligations. We do not use
derivative financial instruments in our investment portfolio. We place our
investments with high credit quality issuers and by policy are adverse to
principal loss and ensures the safety and preservation of its invested funds by
limiting default risk, market risk and reinvestment risk. As of September 30,
1999, our investments consisted of short-term money market funds and commercial
paper.
Our interest expense is sensitive to changes in the general level of U.S.
interest rates. Our debt is fixed rate in nature and mitigates the impact of
fluctuations in interest rates. The fair value of our debt approximates the
carrying amount at September 30, 1999. We believe the potential effects of
near-term changes in interest rates on our fixed rate debt is not material.
INFLATION
The Company does not believe that inflation will have a material impact on our
future operations.
<PAGE>
FORWARD LOOKING INFORMATION
Information contained in this report, other than historical information, should
be considered forward looking and reflects management's current views of future
events and financial performance that involve a number of risks and
uncertainties. The factors that could cause actual results to differ materially
include, but are not limited to, the following: general economic conditions;
year 2000 issues, and developments within the Internet and Intranet industries;
competition; market acceptance of our products and services; length of sales
cycle; variability of sales order flow; management of growth; and other risk
factors identified from time to time in the Company's filings with the
Securities and Exchange Commission. These filings are available on-line at
http://www.sec.gov.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are currently not involved in any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Form 8-K
Current Report on Form 8-K reporting events dated July 29, 1999.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAVIDEC, INC.
By /S/RALPH ARMIJO
Ralph Armijo
President and CEO
Date: November 15, 1999
By /S/ PAT MAWHINNEY
Pat Mawhinney
Chief Financial Officer
Date: November 15, 1999
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