<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For 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 00-23527
---------------------------------------------
eSoft, Inc.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-0938960
------------------------ ------------------------
(State of Incorporation) (IRS Employer ID Number)
295 Interlocken Boulevard #500 Broomfield, CO 80021
- --------------------------------- --------------------------------
(Address of principle executive offices) (city) (state) (zip code)
(303) 444-1600
-------------------------------------------------
Registrant's telephone number including area code
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Transitional Small Business Disclosure format (check one):
YES NO X
----- -----
The number of shares outstanding of the Registrant's $0.01 par value common
stock on October 31, 1999 was 10,963,942.
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Consolidated Financial Statements 3 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 24
PART II OTHER INFORMATION 25 - 27
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
ESOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 732,384 $ 1,965,284
Investment securities 2,174,730 -
Accounts receivable:
Trade, net of allowance for doubtful accounts 2,830,981 3,001,020
Other - 306,000
Inventories 1,617,889 834,210
Prepaid expenses and other 259,696 160,160
----------- -----------
Total current assets 7,615,680 6,266,674
----------- -----------
PROPERTY AND EQUIPMENT
Computer equipment 546,720 652,350
Furniture and equipment 328,333 327,330
Manufacturing tools and equipment 26,423 26,423
Leasehold Improvements 175,915 176,314
----------- -----------
1,077,391 1,182,417
Less accumulated depreciation 483,495 575,410
----------- -----------
Net property and equipment 593,896 607,007
----------- -----------
OTHER ASSETS
Capitalized software costs, net of accumulated
amortization of $314,453 and $439,932 867,072 744,243
Restricted cash and cash equivalents 85,000 -
Deferred financing costs 780,891
-
Other assets 7,039 32,984
----------- -----------
Total other assets 959,111 1,558,118
----------- -----------
TOTAL ASSETS $ 9,168,687 $ 8,431,799
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,497,276 $ 1,891,542
Margin loan on investments 39,544 -
Marketing loan agreement 356,060 459,855
Current portion of long-term debt 136,865 28,182
Deferred revenue 259,307 282,603
Customer deposits 248,287 -
Accrued expenses:
Payroll and payroll taxes 258,184 149,740
Legal fees 53,400 200,000
Other 310,666 546,915
------------ ------------
Total current liabilities 3,159,589 3,558,837
LONG TERM LIABILITIES
Long-term debt, less current portion - 2,949,455
------------ ------------
Total liabilities 3,159,589 6,508,292
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; 96,947 109,580
authorized 50,000,000 shares; 9,694,673
and 10,957,985 issued and outstanding
December 31, 1998 and September 30, 1999,
respectively
Additional paid-in capital 10,215,840 14,234,281
Notes receivable - (152,420)
Accumulated deficit (4,303,689) (12,267,934)
------------ ------------
Total stockholders' equity 6,009,098 1,923,507
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 9,168,687 $ 8,431,799
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE $2,932,041 $ 2,233,872 $ 7,371,531 $ 6,040,710
COST OF GOODS SOLD 1,140,208 859,235 2,949,809 2,761,928
---------- ----------- ----------- -----------
GROSS PROFIT 1,791,833 1,374,637 4,421,722 3,278,782
---------- ----------- ----------- -----------
EXPENSES
Sales and marketing expense 1,303,634 1,033,505 2,929,561 4,836,333
General & administrative expense 1,069,840 1,515,914 2,581,963 5,006,055
Engineering expense 286,831 332,074 694,301 1,047,163
Software amortization costs 54,695 41,826 156,788 125,479
Research and development 179,740 137,885 466,591 493,594
---------- ----------- ----------- -----------
2,894,740 3,061,204 6,829,204 11,508,624
---------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Other income (expense) 64 95,063 (7,032) 10,898
Realized gain on sale of investments 194,185 - 194,185 109,895
Unrealized gain on sale of investments 44,692 - 80,873 -
Interest income 95,062 6,518 114,958 43,161
Interest expense (6,687) (223,306) (18,449) (283,297)
---------- ----------- ----------- -----------
327,316 (121,725) 364,535 (119,343)
---------- ----------- ----------- -----------
NET LOSS $ (775,591) $(1,808,292) $(2,042,947) $(8,349,185)
========== =========== =========== ===========
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.08) $ (0.17) $ (0.26) $ (0.81)
========== =========== =========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 9,590,216 10,751,198 7,972,581 10,302,233
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN NOTES ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
----------- -------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1999 9,694,673 $ 96,947 $10,215,840 $ - ($4,303,689) $6,009,098
Issuance of options to consultant - - 45,383 - - 45,383
Issuance of compensatory options - - 40,420 - - 40,420
Exercise of warrants and options 879,853 8,798 853,121 - - 861,919
Issuance of stock pursuant to private
placement, May 1999 156,250 1,563 498,437 - - 500,000
Issuance of common stock for payment of
accounts payable 5,500 55 21,945 - - 22,000
Issuance of warrants pursuant to private
placement of debt, June 1999 - - 1,478,325 - - 1,478,325
To reclassify the undistributed losses
of Technologic, Inc. (an S-Corporation
through the date of merger) to
additional paid-in capital - - (384,940) - 384,940 -
Issuance of common stock to brokers 75,000 750 289,875 - - 290,625
Issuance of warrants pursuant to private
placement of debt, September 1999 - - 968,308 - - 968,308
Issuance of notes receivable for exercise of
options and warrants, net of collections 146,709 1,467 207,567 (152,420) - 56,614
Net loss for the nine months ended
September 30, 1999 - - - - (8,349,185) (8,349,185)
---------- -------- ----------- ---------- ------------- ----------
BALANCE, September 30, 1999 10,957,985 $109,580 $14,234,281 ($152,420) ($12,267,934) $1,923,507
========== ======== =========== ========== ============= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
6
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1998 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss from operations $ (2,042,947) $ (8,349,185)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation & software amortization 268,000 217,394
Realized gain from sale of trading securities (194,185) (109,445)
Proceeds from sale of trading securities 194,185 292,634
Unrealized (gain) from trading securities (80,873) -
Gain on sale of fixed assets (611) (450)
Provision for losses on accounts receivable 174,598 151,639
Interest income on subscription receivable - (1,009)
Amortization of discount on investments - (8,459)
Amortization of debt discounts and financing costs - 204,150
Issuance of compensatory options 46,400 40,420
Issuance of consultant options - 45,383
Issuance of common stock to brokers - 290,625
Amortization of warrant valuation granted for
prepaid consulting 51,466 101,767
Changes in operating assets and liabilites:
Accounts receivable - trade (2,776,327) (627,678)
Inventories (317,405) 783,679
Other assets 8,932 (25,945)
Prepaid expenses (408,724) (2,231)
Accounts payable 903,003 416,266
Accrued expenses 296,003 26,120
Deferred revenue 99,373 23,296
------------- ------------
Net cash used in operating activities (3,779,112) (6,531,029)
------------- ------------
INVESTING ACTIVITIES
Proceeds from investments - 2,000,000
Purchase of equipment (452,337) (141,873)
Proceeds from sale of assets 4,217 37,296
Restricted cash - 85,000
Capitalized software costs (60,000) (2,650)
------------- ------------
Net cash (used in) provided by investing activities (508,120) 1,977,773
------------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
7
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Due to related party 100,000 -
Payment on related party borrowings (20,000) -
Proceeds from subscription receivable 200,000 56,487
Payments on short term debt (121,955) (159,151)
Proceeds from short term debt 365,984 114,719
Proceeds from issuance of convertible debt - 4,950,000
Payment of dividends (249,998) -
Debt offering costs paid - (538,953)
Proceeds from exercise of options and warrants and sale
of stock 7,779,797 1,363,054
------------- ------------
Net cash provided by financing activities 8,053,828 5,786,156
------------- ------------
INCREASE IN CASH 3,766,596 1,232,900
CASH: BEGINNING OF PERIOD 1,228,143 732,384
------------- ------------
CASH: END OF PERIOD $ 4,994,739 $ 1,965,284
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Common Stock issued for subscriptions receivable - $ 209,034
Warrants issued in connection with debt offering - $ 2,466,633
Issuance of notes receivable for exercise of options and warrants - $ 62,049
Common stock issued for payment of accounts payable - $ 22,000
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
8
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The consolidated interim financial statements include the accounts of
eSoft, Inc. and its two wholly-owned subsidiaries, Apexx Technology,
Inc. ("Apexx") and Technologic, Inc. ("Technologic"), (collectively
eSoft or the "Company") and have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting of normal
recurring adjustments, which in the opinion of management, are
necessary for fair presentation of the information contained therein.
It is suggested that these consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended December
31, 1998. The Company follows the same accounting policies in
preparation of interim reports.
The consolidated financial statements of the Company for the three and
nine months ended September 30, 1999 and 1998 have been restated to
give retroactive effect to the mergers with Apexx on May 25, 1999 and
Technologic on September 10, 1999, which have been accounted for using
the pooling of interests method and, as a result, the financial
position, results of operations and cash flows are presented as if the
combining companies had been consolidated for all periods presented and
the consolidated statement of stockholders' equity reflect the accounts
of eSoft as if the additional common stock issued in connection with
the mergers had been issued for all periods presented. It is further
suggested that these consolidated financial statements be read in
conjunction with the supplemental consolidated financial statements and
notes thereto included in the Company's Current Report on Form 8-K
and 8-K/A filed with the Securities & Exchange Commission on
August 9, 1999 and with an amendment to the Company's Current Report
on Form 8-K filed with the Securities & Exchange Commission on
September 27, 1999, which will be filed with the Commission within
75 days after September 10, 1999.
Results of operations for the interim periods are not necessarily
indicative of annual results.
2. Business Acquisitions
Effective May 25, 1999, the Company completed the merger with Apexx
located in Boise, Idaho which provided for the exchange of all of the
outstanding stock of Apexx for 1,591,365 shares of eSoft common stock
and for the conversion of all Apexx stock options into
9
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
eSoft stock options to acquire 1,356,003 shares of eSoft common stock.
The Merger has been accounted for as a pooling of interests.
Effective September 10, 1999, the Company completed the merger with
Technologic located in Norcross, Georgia which provided for the
exchange of all of the outstanding stock of Technologic for 1,244,436
shares of eSoft common stock and for the conversion of all Technologic
stock options into eSoft stock options to acquire 180,555 shares of
eSoft common stock. This Merger also issued 75,000 shares of the
Company's common stock to the investment bankers of Technologic in
connection with the Merger. The Merger has been accounted for as a
pooling of interests. Merger costs of about $725,000 in relation to
this merger were expensed during the third quarter, which include
bankers fees, audit fees, legal fees, and printing fees.
<TABLE>
<CAPTION>
Pooling Company Nature of Operations Merger Date
--------------- -------------------- -----------
<S> <C> <C>
Apexx Technology, Inc. Internet connectivity solutions May 25, 1999
Technologic, Inc. Internet connectivity solutions September 10, 1999
</TABLE>
Revenue, net loss and net loss per common share of eSoft, Apexx and
Technologic as consolidated for the periods presented are as follows:
<TABLE>
<CAPTION>
---------------------------------------------- ---------------- -----------------
REVENUE:
Three Months Ended September 30, 1998 1999
---------------------------------------------- ---------------- -----------------
restated
---------------------------------------------- ---------------- -----------------
<S> <C> <C>
---------------------------------------------- ---------------- -----------------
eSoft $1,480,199 $ 1,086,657
---------------------------------------------- ---------------- -----------------
Apexx 918,706 442,564
---------------------------------------------- ---------------- -----------------
Technologic 533,136 710,147
---------------------------------------------- ---------------- -----------------
Eliminations - (5,496)
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
eSoft, consolidated $2,932,041 $2,233,872
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
Nine Months Ended September 30, 1998 1999
---------------------------------------------- ---------------- -----------------
Restated
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
eSoft $3,335,139 $2,116,145
---------------------------------------------- ---------------- -----------------
Apexx 2,624,441 2,598,003
---------------------------------------------- ---------------- -----------------
Technologic 1,411,951 1,827,765
---------------------------------------------- ---------------- -----------------
Eliminations - (501,203)
---------------------------------------------- ---------------- -----------------
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
---------------------------------------------- ---------------- -----------------
eSoft, consolidated $7,371,531 $6,040,710
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
NET LOSS:
---------------------------------------------- ---------------- -----------------
Three Months Ended September 30, 1998 1999
---------------------------------------------- ---------------- -----------------
restated
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
eSoft $(651,528) $(2,011,228)
---------------------------------------------- ---------------- -----------------
Apexx (235,988) 310,607
---------------------------------------------- ---------------- -----------------
Technologic 111,925 (104,649)
---------------------------------------------- ---------------- -----------------
Eliminations - (3,022)
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
eSoft, consolidated $(775,591) $(1,808,292)
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
Nine Months Ended September 30, 1998 1999
---------------------------------------------- ---------------- -----------------
restated
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
eSoft $(1,479,448) $(7,635,798)
---------------------------------------------- ---------------- -----------------
Apexx (485,051) 168,876
---------------------------------------------- ---------------- -----------------
Technologic (78,448) (601,667)
---------------------------------------------- ---------------- -----------------
Eliminations - (280,596)
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
eSoft, consolidated $(2,042,947) $(8,349,185)
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
NET LOSS PER COMMON SHARE:
---------------------------------------------- ---------------- -----------------
Three Months Ended September 30, 1998 1999
---------------------------------------------- ---------------- -----------------
restated
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
As previously reported:
---------------------------------------------- ---------------- -----------------
Basic and diluted $ (0.10) N/A
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
Consolidated:
---------------------------------------------- ---------------- -----------------
Basic and diluted $(0.08) $ (0.17)
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
Nine Months Ended September 30, 1998 1999
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
As previously reported:
---------------------------------------------- ---------------- -----------------
Basic and diluted $ (0.29) N/A
---------------------------------------------- ---------------- -----------------
---------------------------------------------- ---------------- -----------------
Consolidated:
---------------------------------------------- ---------------- -----------------
Basic and diluted $ (0.26) $ (0.81)
---------------------------------------------- ---------------- -----------------
</TABLE>
11
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Trade Receivables
The following information summarizes accounts receivable:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------- -----------
<S> <C> <C>
Accounts Receivable $ 3,144,222 $ 3,465,900
Allowance for doubtful accounts (313,241) (464,880)
----------- -----------
$ 3,001,020
$ 2,830,981 $ 8,478,000
=========== ===========
</TABLE>
The Company did not have any customers which accounted for 10% or
more of the sales through the nine months ending September 30, 1999.
One customer represented 48% of total accounts receivable at
September 30, 1999. The Company has seven distributors which accounted
for 16% of the Company's sales through the nine months ending
September 30, 1999.
The Company with regard to its foreign sales does not take the risk of
foreign currency fluctuation. All sales are designated as payment in US
denominated funds at the time of sale.
4. Subscription Receivable
The Company issued two promissory notes receivable in the amounts of
$56,487 and $75,411 on March 10, 1999 and March 24, 1999 resulting from
the exercise of 49,550 and 66,150 warrants with an exercise price of
$1.15, by Transition Partners Limited and Copeland Consulting Group,
Inc., respectively. At the time of exercise, $1,157 was paid in cash.
The notes are due in March 2000 without interest and at 12% penalty
interest thereafter and are secured by the shares of common stock being
issued. At September 30, 1999, $56,487 has been paid on these notes
receivable and $1,009 of interest receivable has been recognized. The
Company also issued promissory notes receivable in the amount of
$76,000 to employees during June 1999. The notes are due in June 2001
with annual interest at the rate of 5.75% due upon maturity and are
secured by the shares of common stock being issued. The notes become
due and payable upon termination of employment.
12
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Long-term debt
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Note payable to bank, payable in monthly installments of
$3,171, including interest at prime plus 1.5% (9.25% at
December 31, 1998), maturing March 15, 2002, equipment,
inventory, and accounts receivable are provided as collateral,
due on demand as a result of the Apexx merger. $ 104,309 $ 15,160
Note payable to bank, payable in monthly installments of
$2,170, including interest at prime plus 2% (9.75% at December
31, 1998), maturing March 10, 2000, collateralized by
guarantees from certain shareholders, due on demand as a
result of the Technologic merger. 32,556 13,022
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
Term note payable to a small business investment company. Interest is
at 5% per annum, payable quarterly. Principal is due June 2002. The
note, in the principal amount of $5,000,000, has been discounted by
$2,146,270. The discount, which is being amortized through June 2002,
represents the value assigned to 1,277,955 stock purchase warrants
which were granted to the lender and a 2.5% discount on the $2,000,000
note payable. The value of the discount has been calculated using the
Black-Scholes option pricing model. The stock purchase warrants are
exercisable through June 2002 to purchase an equal number of common
shares at a per share price of $4.4994. The unamortized discount at
September 30, 1999 was $2,050,545. The note is convertible at any time
at the investor's option into a fixed number of shares of eSoft common
stock at $3.9125 per share, subject to certain anti-dilution
provisions and adjustments. The Company has the ability, under certain
circumstances, to obligate the investor to convert the debentures into
common stock and to exercise the warrants. The investor has the option
to purchase an additional $3 million of debentures, together with
associated warrants, in the final tranche. The final tranche of $3
million of debentures would be convertible at the lower of (i) the
Company's then current market price or (ii) $5.50, but in no event
less than $3.9125 per share. This tranche of debentures would be
accompanied by warrants with an exercise price of 115% of the
debenture conversion price. The debentures are manditorily convertible
if the average per share market value over thirty consecutive trading
days exceeds 200% of the exercise price of the warrants. - 2,949,455
---------- -----------
Total long term debt 136,865 2,977,637
136,865 28,182
Less current portion ---------- -----------
$ - $ 2,949,455
Total long term debt ========== ===========
</TABLE>
14
<PAGE>
ESOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Net Loss per Share
Basic loss per share is calculated by dividing the net loss by the
weighted average common shares outstanding during the period. For
purposes of computing diluted earnings per share, dilutive securities
are not included when the effect is anti-dilutive.
Options and warrants to purchase 3,132,986 and 4,933,140 shares of
common stock and notes convertible into 0 and 1,277,955 shares of
common stock were not included in the computation of diluted earnings
per share because their effect was anti-dilutive for the period ending
September 30, 1998 and 1999.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-QSB that are not historical or
current facts are "forward-looking statements" made pursuant to the
safe harbor provisions of Section 27A of the Securities Act of 1933
("The ACT") and Section 21E of the Securities Exchange Act of 1934.
These statements often can be identified by the use of terms such as
"may," "will," "expect," "believes," "anticipate," "estimate,"
"approximate" or "continue," or the negative thereof. The Company
intends that such forward-looking statements be subject to the safe
harbors for such statements. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which
speak only as of the date made. Any forward-looking statements
represent management's best judgment as to what may occur in the
future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond the control of the Company
that could cause actual results and events to differ materially from
historical results of operations and events and those presently
anticipated or projected. These factors include adverse economic
conditions, entry of new and stronger competitors, inadequate capital,
unexpected costs, failure to gain product approval in foreign countries
and failure to capitalize upon access to new markets. Additional risks
and uncertainties which may affect forward-looking statements about the
Company's business and prospects include the possibility that a
competitor will develop a more comprehensive or less expensive
solution, delays in market awareness of eSoft and its products,
possible delays in eSoft's marketing strategy, which could have an
immediate and material adverse effect by placing eSoft behind its
competitors. The Company disclaims any obligation subsequently to
revise any forward-looking statements to reflect events or
circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TEAM INTERNET IS A REGISTERED TRADEMARK OF ESOFT, INC.
The primary market pursued by the Company to date consists of
small-to-medium sized businesses ("SMB") that wish to initiate, or
expand, their connection and presence on the Internet. The Company
believes that the SMB market is not only expanding exponentially into
the Internet arena, but also requires a solution that is more cost
effective and easier to install and maintain than systems typically
available for the Fortune 1000 companies. The SMB segment comprises the
largest portion of the installed local area networks and increasingly
recognizes the importance of the Internet to grow their business and
improve productivity. Internet penetration has been estimated to
increase from 54.9% of small business PC owners in 1998 to 68.5% in
2002. The number of small businesses online is expected to increase
from 3.2 million in 1998 to 4.6 million in 2002.
The Company's business strategy consists of three primary areas
of focus: Internet Server Products, Software Licensing, and Internet
Services.
16
<PAGE>
The Internet Server Products effort focuses on building on the
Company's core business of developing, marketing and selling the
Company's market-leading TEAM Internet product line of Internet
server products. The Company has pursued acquisitions such as
Technologic where it believes it can extend the product line
features and functions and appeal to a broader group of end user
customers. Most importantly for the SMB market, the Company's TEAM
Internet system is a complete, plug-and-play solution that can be
installed and maintained by non-technical personnel and at a
fraction of the cost of the typical large system solution. The TEAM
Internet product family enables a SMB business to connect their
Local Area Network (LAN) to the Internet supporting from 5 to over
300 users. It provides all of the components an organization needs
to develop, manage, and monitor its Intranet or external web
presence. In the United States, the Company has focused its
distribution strategy for the TEAM Internet on Value Added Resellers
(VARs) who offer Local Area Network solutions to the SMB. The
Company markets directly to these VARs and also enters into
agreements with leading distributors to support selected VARs
ordering requirements. The Company has deployed Territory Sales
Managers (TSMs) in a handfull of selected markets in the United
States. The purpose of the TSMs is to assist VARs with lead
generation and market pull-through of products to end-users.
Internationally, the Company is pursuing relationships with
telecommunication and distribution companies in the European, Latin
American, and Asian markets. The Company continues to make a
concerted and aggressive effort to market eSoft and educate the
market as to the Internet server alternatives for the SMB.
The Company announced earlier in 1999 its intention to license
the TEAM Internet software through a program known as "redphish".
The objective of the redphish program is to expand the Company's
distribution capabilities through third party OEM agreements with
leading hardware manufacturers. The Company believes that these
types of licensing relationships will be critical to the Company's
future success, redphish combines licensing of the TEAM Internet
software with professional engineering services in order to create
highly specialized or customized offerings for third parties. The
Company believes that the redphish program is highly complementary
to its Internet Server Products activities, and enables the Company
to gain time to market advantages in developing new software
features, as well as building out its distribution network. Linux is
the operating system of the new product strategy focusing all new
product development on Red Hat-Registered Trademark- Linux, with
whom the Company recently entered into a development partners
program. The Company has unveiled a product architecture roadmap,
which is a modular design that utilizes a gateway providing small-to
medium-sized businesses with basic Internet connectivity and e-mail
capabilities. The architecture provides for modular applications
that provide functions such as web server, firewall, enhanced
e-mail, virtual private networks (VPN), and web screening. This
architecture is designed to enable the Company to quickly create a
bundled offering specific to a third party manufacturer's
requirements. The Company also intends to introduce this type of
bundling to its TEAM Internet distribution network in order to
provide incremental revenue-generating opportunities for its
distributors and VARs.
The Company's Internet Services are under development and are
intended to provide a range of remote, managed service offerings for
end users, many of which will be offered as monthly,
subscription-based services, creating a recurring revenue stream for
both the Company and its VARs. The Company believes that the
installed based of TEAM Internet, and possibly redphish, users will
be prospects for these offerings.
Management believes its aggressive pursuit of this strategy
will have both short-term and long-term effects on its operations.
Long-term, the Company believes that the Internet Services
activities will generate the greatest value for shareholders as the
industry will likely continue to move towards a monthly-fee based
subscription model for delivery of Internet-related software and
services. However, in the near-term, the Internet Server Products
and redphish activities will generate the bulk of the Company's
revenues.
The Company expects to use outside financing for the continued
expansion of its sales and marketing efforts, as well as support of
its extended receivable terms to its distributors. Personnel additions
have been made in the technical support and engineering departments.
The Company also expects to expand its customer support organization.
With the increase in headquarters staff, the Company relocated to a
larger facility in early 1999. In addition to these near-term effects,
the Company expects that the use of e-commerce and the online
community to complement eSoft's traditional reseller and distribution
17
<PAGE>
channels will enable the Company to develop a larger marketplace more
rapidly and efficiently. However, with the aggressive market
expansion, the Company anticipates consuming working capital to meet
this continued growth curve for the near term. As a result of expenses
incurred in support of the expansion, the Company anticipates future
losses. The Company expects to turn profitable in 2000 through the
increase in sales while keeping Selling, General and Administrative
expenses fairly constant.
The Company completed a merger with Technologic, Inc.
("Technologic") of Norcross, Georgia on September 10, 1999. As a result
of the transaction, the Company issued 1,244,436 shares of the
Company's common stock for all of the issued and outstanding shares of
Technologic. The Company also issued 75,000 shares of the Company's
common stock to the investment bankers of Technologic in connection
with the merger. eSoft will use its best efforts to register the shares
issued for resale under an S-3 registration statement. The Company
believes that Technologic's InstaGate Internet and Interceptor Firewall
Appliances are well positioned to enhance the TEAM Internet product
line. Through this acquisition, eSoft plans to leverage Technologic's
strengths in advanced firewall security applications and Virtual
Private Network ("VPN") technology to accelerate eSoft's goal of
becoming a worldwide market leader in Internet Appliances and allow
eSoft to provide further value to the growing number of small
businesses exploiting the Internet. eSoft will market the Technologic
products through its more than 600 domestic and international
resellers, online and telemarketing channels.
The Company hopes to establish strategic alliance relationships
with synergistic companies such as computer or network product
manufacturers, large system integration companies or telecommunications
companies that will permit the TEAM Internet products to be sold in
conjunction with other products and telecommunications services. No
such relationships have been established to date and there is no
assurance that the negotiations of such a relationship will be
successfully completed. If the Company establishes such relationships
it may become heavily dependent upon such strategic alliance partners
to maintain and expand its presence in the marketplace and the greater
economic resources of the other parties to such relationships may force
significant reductions in prices at which the Company can sell its
products and thus adversely affect its margins and potential for
profits.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position on September 30, 1999 was $1,965,000
an increase of $1,233,000 from year end primarily due to the maturation
of investments and the proceeds from the issuance of convertible debt
in the amount of $4,950,000. The Company's working capital at September
30, 1999 was $2,708,000 a decrease of $1,748,000 from December 31,
1998. Investments of $1,992,000 matured during the first quarter, from
which the proceeds were utilized to support operations. Management
anticipates continuing losses in support of the growth curve, and thus
its cash position will continue to decrease. Additionally, in the near
term, with new distributors being added to continue market development,
the Company anticipates its accounts receivable to increase. The
Company is increasing efforts to reduce the present accounts
18
<PAGE>
receivable balance through more stringent collection efforts of the
current customer base in an attempt to reduce days outstanding. The
Company has analyzed its accounts receivable and adjusted its
allowance for doubtful accounts to $465,000 at September 30, 1999. The
Company will continue to analyze the allowance and adjust as
appropriate based on uncollectible accounts and sales activity. The
decrease in inventories from year end resulted from improved inventory
management with respect to sales volume. TEAM Internet 2500 accounted
for $294,000 or 34% of the total inventory at September 30, 1999. The
Company has expended $142,000 in capital expenditures, of which
$30,000 was related to furniture for the new headquarters. Management
believes that its current cash position, the anticipated cash receipts
from receivables, and available sources of additional capital will be
sufficient to meet its working capital needs for the foreseeable
future.
On May 14, 1999, eSoft received $500,000 from a stockholder in
exchange for 156,250 common shares at a price of $3.20.
On June 10, 1999, eSoft received $3,000,000 from a placement of 5%
convertible subordinated debentures due in 2002. Interest is payable in
cash or, at the Company's option, in shares of common stock. The
debentures are convertible at any time at the investor's option into a
fixed number of shares of eSoft common stock at $3.9125 per share,
subject to certain antidilution provisions and adjustments. The
investor also received warrants to purchase 766,773 shares of common
stock with an exercise price of $4.4994 per common share. The warrants
have a three year term. A discount in relation to the warrants was
recorded in the amount of $1,299,663, which is being amortized over
three years. The Company has the ability, under certain circumstances,
to obligate the investor to convert the debentures into common stock
and to exercise the warrants.
On September 15, 1999, eSoft received $1,950,000, net of a 2.5%
discount, from a placement of $2,000,000 of 5% convertible subordinated
debentures due in 2002. Interest is payable in cash or, at the
Company's option, in shares of common stock. The debentures are
convertible at any time at the investor's option into a fixed number of
shares of eSoft common stock at $3.9125 per share, subject to certain
anti-dilution provisions and adjustments. The investor also received
warrants to purchase 511,182 shares of common stock with an exercise
price of $4.4994 per common share and are exercisable until June 10,
2002. The total discount including the discount related to the warrants
was recorded in the amount of $846,607, which is being amortized
through June 10, 2002. The Company has the ability, under certain
circumstances, to obligate the investor to convert the debentures into
common stock and to exercise the warrants.
As part of the debenture financing described above, the investor
has the option to purchase an additional $3 million of 5% convertible
subordinated debentures, together with associated warrants, in one
subsequent tranche. The $3 million of debentures would be convertible
at the lower of (i) the Company's then current market price or (ii)
$5.50, but in no event less than $3.9125 per share. The debentures
would be accompanied by warrants with an exercise price of 115% of the
debenture conversion price.
19
<PAGE>
Net proceeds from the placement of $5,000,000 of 5% convertible
subordinated debentures were approximately $4,410,000 after offering
expenses. A.G. Edwards & Sons, Inc. acted as the placement agent for
the debentures and received warrants to purchase 127,795 shares of
common stock in connection with its services as placement agent. These
warrants were valued $300,000 and are included in deferred financing
costs at September 30, 1999, to be amortized over the life of the
debentures. In addition, under the terms of the private placement, the
Company has agreed to pay the agent a placement fee of 6% of the gross
proceeds. The Company intends to use the proceeds of the offering for
working capital.
CASH FLOW
Net cash used in operating activities for the nine months ended
September 30, 1999 was $6,531,000 compared with $3,779,000 for the nine
months ended September 30, 1998. The increase of $2,752,000 for the
1999 period compared to the 1998 period was primarily due to an
increase in the Company's net loss. This increase in net loss was
primarily the result of additional employees hired in the sales
department for the expansion of domestic and foreign territories. Also,
the intensive marketing efforts of the newly formed marketing
department regarding the rebranding campaign of the IPAD products
contributed to the loss. There were also merger related costs of about
$1,600,000 incurred during 1999 for legal, accounting, banking,
consulting fees, relocation costs and integration of the companies
related to the two mergers.
Net cash provided by investing activities for the nine months
ended September 30, 1999 was $1,977,000 compared with $508,000 used by
investing activities for the nine months ended September 30, 1998. The
increase of $1,453,000 for the 1999 period compared to the 1998 period
was primarily due to $2,000,000 of investments maturing during the
year. In addition, purchases of property and equipment decreased about
$310,000 due to operations being more established at that point in
time.
Net cash provided by financing activities for the nine months
ended September 30, 1999 was $5,786,000 compared with $8,054,000 for
the nine months ended September 30, 1998. The decrease of $2,270,000
for the 1999 period compared to the 1998 period was primarily due to
$5,531,000 for the net proceeds from the June 1998 private placement of
1,468,941 shares of common stock, and the $1,400,000 received from the
net proceeds of the 1998 public offering of 1,550,000 shares.
Additional financing activities during the nine months ended September
30, 1998 included private transactions with officers, directors, and
consultants, the exercise of 250,000 warrants and 60,000 employee
options, proceeds from the line of credit, conversion of promissory
notes, and deferred offering costs. In June 1999, net proceeds of
approximately $2,675,000 were received as a result of the issuance of
convertible subordinated debentures. In September 1999, net proceeds of
approximately $1,770,000 were received as a result of the issuance of
convertible subordinated debentures. Additional financing activities
during the nine months ended September 30, 1999 included the exercise
of options and warrants, proceeds from subscriptions receivable, and
payments and proceeds from the line of credit and short term debt.
20
<PAGE>
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Quarterly revenues totaled $2,234,000 versus revenue of $2,932,000
for the comparable quarter in 1998. This represents a decrease of
$698,000 or 24 % over the comparable quarter in 1998. The decrease is
partly associated with a price decrease of the TEAM Internet 2500,
which was necessary in order to remain competitive in the market place.
In addition, most of the distributors in place during 1998 signed
agreements in mid-to-late 1998 containing termination clauses, which
preclude the Company from recognizing revenue until the product has
been sold through to resellers. In addition, during the first quarter,
in connection with the proposed Apexx merger the Company de-emphasized
the sales of the IPAD 1200 and replaced it with Apexx's TEAM Internet
100. For the quarter ending September 30, 1999, the Company experienced
sales growth of $141,000 or 7% revenue growth over the 1999 second
quarter results.
Gross profit margin in the current quarter was $1,375,000, which
is 62% of revenue compared to $1,792,000, which is 61% of revenue for
the three months ended September 30, 1998. The increase is partially
due to $300,000 of software revenue included in the quarter ending
September 30, 1999, which only had about $73,000 of costs associated
with it. In addition, there was a higher concentration of sales to
resellers, which have better margins, than sales to distributors. Sales
to distributors accounted for 22% of sales in the three months ending
September 30, 1999. The Company expects to continue with this trend.
Selling, General and Administrative, Engineering, and Research and
Development Expenses increased $166,000 or 6% from $2,895,000 for the
quarter ending September 30, 1998 to $3,061,000 for the quarter ending
September 30, 1999. Sales and marketing expenses decreased $270,000
from $1,304,000 in 1998 to $1,034,000 in 1999. The decreases in
expenditures are attributed to the careful monitoring of how marketing
dollars are best put to use. Offsetting the decrease was the cost of
additional sales people hired to expand sales efforts domestically and
internationally. General and administrative expense increased $446,000
from $1,070,000 in 1998 compared to $1,516,000 for the current quarter.
This increase can be attributed to the costs relating to the Apexx and
Technologic mergers of about $725,000, which include bankers fees,
audit fees, legal fees, and printing fees. The Company will continue to
closely monitor the Selling, General and Administrative expenses.
Amortized software development costs total $42,000 for the quarter.
Interest expense increased $216,000 in the three months ended
September 30, 1999 from $7,000 in 1998 to $223,000 in 1999. The
additional interest is due to the interest and discount amortization on
the convertible subordinated debentures and amortization of deferred
offering costs. Interest income decreased $88,000 in the quarter. This
decrease is associated with funds received from the completion of the
private placement at the end of the second quarter in 1998.
Net loss from operations was ($1,687,000) for the three months
ended September 30, 1999, compared to ($1,103,000) for the same period
in 1998, an increase in the loss of ($584,000) over
21
<PAGE>
the same period. The net losses are associated with the increased
Selling, General and Administrative expense necessary to support its
current business strategy. Merger costs also contributed to the
increase. Losses are anticipated to continue through the current
fiscal year due to expenditures in support of continued growth and
additions of new hires.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues for nine months of operations totaled $6,041,000 compared
to revenues of $7,372,000 for the same period in 1998. This represents
a decrease of $1,331,000 or 18 % over the comparable nine month period
in 1998. The decrease is partly associated with a price decrease of the
TEAM Internet 2500, which was necessary in order to remain competitive
in the market place. In addition, most of the distributors in place
during 1998 signed agreements in mid-to-late 1998 containing
termination clauses, which preclude the Company from recognizing
revenue until the product has been sold through to resellers.
Gross profit margin was $3,279,000, which is 54% of revenue in
1999 compared to $4,422,000, which is 60% of revenue for the nine
months ended September 30, 1998. The decrease is associated with the
price decrease of the TEAM Internet 2500 with no corresponding decrease
in the Company's cost. In addition, the replacement of the IPAD 1200
with Apexx's TEAM Internet 100 caused margins to decrease. Once the
TEAM Internet 100 inventory is replenished, margins are expected to
increase. Furthermore, approximately 36% of the first quarter sales of
1999 were comprised of network interface cards, in which the gross
profit margin was 36%.
Selling, General and Administrative, Engineering, and R & D
Expenses increased $4,680,000 or 69% from $6,829,000 for the first nine
months in 1998 to $11,509,000 for the same nine months in the 1999
period. Sales and marketing expenses increased $1,906,000 from
$2,930,000 in 1998 to $4,836,000 in 1999. The significant increases in
expenditures are attributed to the addition of sales people in order to
expand sales efforts domestically and internationally. In addition, an
extensive marketing campaign was launched to rebrand the products in
connection with the merger with Apexx. General and administrative
expense increased $2,424,000 from $2,582,000 in the 1998 period
compared to total expenses of $5,006,000 in 1999. The majority of the
increase in the amount of approximately $1,625,000 can be attributed to
costs associated with the Apexx and Technologic mergers. Additional
increases related to salaries, consultants, and printing fees for
Securities Exchange Commission filings. Engineering and technical
support expenses increased $353,000 from $694,000 for the nine months
ending September 1998 to $1,047,000 for the same period in 1999. The
increase is associated with salaries and moving expenses related to the
mergers. Amortized software development costs total $125,000 for the
period.
Interest expense increased $265,000 during the nine months ended
September 30, 1999 from $18,000 in 1998 to $283,000 in 1999. The
additional interest is due to the interest and discount
22
<PAGE>
amortization on the convertible subordinated debentures and
amortization of deferred offering costs. Interest income decreased
$72,000 for the nine month period. This increase is associated with
funds received from the completion of the private placement at the end
of the second quarter in 1998.
Net losses from operations totaled ($8,230,000) for the nine
months ended September 30, 1999, compared to the ($2,407,000) loss for
the same period in 1998, an increase in the loss of ($5,823,000) over
the same period. The net loss is associated with the increased Selling,
General and Administrative expenses necessary to ramp quarterly sales
growth rates and the costs associated with the Apexx and Technologic
mergers. Losses are anticipated to continue through the current fiscal
year due to expenditures leading sales growth rates.
Income Taxes
At September 30, 1999, a valuation allowance of 100% of the
deferred tax asset has been recorded, as management of the Company is
not able to determine that it is more likely than not that its deferred
tax assets will be realized. The Company's operating loss carryforwards
may be limited under Section 382 of the Internal Revenue Code.
Year 2000 Effect
The TEAM Internet, IPAD, Interceptor, and Instagate product lines
have no known susceptibility to year 2000 (Y2K) issues. The testing
completed on the product lines to date has lead the Company to believe
that the products will not be affected by a connection to a
non-compliant Y2K system. However the Company's testing does not cover
every possible computing environment. Accordingly, some customers may
have Y2K problems with products that the Company believes are Y2K
compliant. All new products and upgrades introduced by the Company will
be Y2K compliant. The Company has reviewed its internal systems,
including its accounting system, and has found them to be Y2K
compliant. The Company's internal operations and business are also
dependent upon the computer-controlled systems of third parties such as
suppliers, customers and service providers. Management believes that
absent a systematic failure outside the control of the Company, such as
a prolonged loss of electrical or telephone service, Y2K problems at
such third parties will not have a material impact on the Company. The
Company has no contingency plan for systemic failures such as loss of
electrical or telephone service. The Company's contingency plan in the
event of a non-systemic failure is to establish relationships with
alternative suppliers or vendors to replace failed suppliers or
vendors. Spending by the Company on compliance to date has not been
material. Other year 2000 items are not anticipated to be material.
23
<PAGE>
Impact of Recently Issued Accounting Standards
None.
24
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not currently involved in any litigation other
than routine litigation arising in the ordinary course of
business.
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedules.
b) Reports on Form 8-K.
On August 9, 1999, the Company filed an amendment to its
Current Report on Form 8-K dated June 9, 1999 that included historical
financial statements of Apexx Technology, Inc. and pro forma financial
statements giving effect to the Company's merger with Apexx Technology,
Inc.
On August 9, 1999, the Company filed a Current Report on
Form 8-K that included historical financial statements of the Company
as restated to reflect the Company's merger with Apexx Technology, Inc.
On September 25, 1999, the Company filed a Current Report on
Form 8-K, dated September 10, 1999, to report, under Item 2, the
merger with Technologic, Inc.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
eSoft, Inc.
(Registrant)
Date: November 15, 1999 /s/ Jeffrey Finn
----------------- -----------------
Jeffrey Finn
President, Chief Operating
Officer
Date: Date: November 15, 1999 /s/ Amy Beth Hansman
----------------- ---------------------
Amy Beth Hansman
Chief Accounting Officer
26
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 Financial Data Schedule
27.2 Financial Data Schedule -Restated
27.3 Financial Data Schedule -Restated
</TABLE>
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,965,284
<SECURITIES> 0
<RECEIVABLES> 3,465,900
<ALLOWANCES> (464,780)
<INVENTORY> 834,210
<CURRENT-ASSETS> 6,266,674
<PP&E> 1,182,417
<DEPRECIATION> (575,410)
<TOTAL-ASSETS> 8,431,799
<CURRENT-LIABILITIES> 3,558,837
<BONDS> 2,949,455
0
0
<COMMON> 109,580
<OTHER-SE> 1,813,927
<TOTAL-LIABILITY-AND-EQUITY> 8,431,799
<SALES> 6,040,710
<TOTAL-REVENUES> 6,040,710
<CGS> 2,761,927
<TOTAL-COSTS> 11,508,624
<OTHER-EXPENSES> (163,954)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 283,297
<INCOME-PRETAX> (8,349,185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,349,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,349,185)
<EPS-BASIC> (0.81)
<EPS-DILUTED> (0.81)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,994,739
<SECURITIES> 191,702
<RECEIVABLES> 3,488,736
<ALLOWANCES> (257,424)
<INVENTORY> 806,678
<CURRENT-ASSETS> 9,695,928
<PP&E> 1,101,860
<DEPRECIATION> (416,377)
<TOTAL-ASSETS> 10,964,176
<CURRENT-LIABILITIES> 2,763,297
<BONDS> 151,924
0
0
<COMMON> 1,174,064
<OTHER-SE> 6,874,891
<TOTAL-LIABILITY-AND-EQUITY> 10,964,176
<SALES> 7,371,531
<TOTAL-REVENUES> 7,371,531
<CGS> 2,949,809
<TOTAL-COSTS> 6,829,204
<OTHER-EXPENSES> (382,984)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,449
<INCOME-PRETAX> (2,042,947)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,042,947)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,042,947)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 732,384
<SECURITIES> 2,174,730
<RECEIVABLES> 3,144,222
<ALLOWANCES> (313,241)
<INVENTORY> 1,617,889
<CURRENT-ASSETS> 7,615,680
<PP&E> 1,077,391
<DEPRECIATION> (483,495)
<TOTAL-ASSETS> 9,168,687
<CURRENT-LIABILITIES> 3,153,078
<BONDS> 0
0
0
<COMMON> 96,947
<OTHER-SE> 5,912,151
<TOTAL-LIABILITY-AND-EQUITY> 9,168,687
<SALES> 9,609,964
<TOTAL-REVENUES> 9,609,964
<CGS> 3,796,175
<TOTAL-COSTS> 10,688,137
<OTHER-EXPENSES> (332,539)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139,611
<INCOME-PRETAX> (4,240,198)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,240,198)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,240,198)
<EPS-BASIC> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
