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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q/A
(Mark One)
(X) Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the Quarterly Period Ended March 31,
1997.
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the Transition Period to
Commission File Number 2-31438
NUKO Information Systems, Inc.
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Delaware 16-0962874
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(State of Other Jurisdiction or (I.R.S. Employer Identification No.)
Incorporation or Organization)
2391 Qume Drive, San Jose, California 95131
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(Address of Principal Executive Offices) (Zip Code)
(408) 526-0288
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES ( X ) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest feasible date:
CLASSES Outstanding as of April 30, 1997
- ------------------------------- --------------------------------
Common Stock ($0.001 par value) 11,000,947
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NUKO Information Systems, Inc.
Index to Quarterly Report on Form 10-Q
For the Period Ended March 31, 1997
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
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<S> <C> <C>
Item 1 Financial Statements 3
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996. 3
Condensed Consolidated Statement of Operations
Three Months Ended March 31, 1997 and 1996. 5
Condensed Consolidated Statement of Cash Flows
Three Months Ended March 31, 1997 and 1996. 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
PART II OTHER INFORMATION
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Item 2 Change in Securities 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 21
</TABLE>
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated financial statements have been restated to
reflect an allocation of the proceeds from the issuance of convertible
preferred stock to the intrinsic value of the beneficial conversion
feature. This amount has been recognized as a dividend to the preferred
stockholders ratably over the 90 day period from issuance, which is the
minimum period in which the benefit can be realized.
NUKO Information Systems, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Restated
March 31, December 31,
1997 1996
(unaudited)
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<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,223,614 $ 2,270,423
Restricted Cash 200,000 200,000
Accounts receivable, trade 5,605,982 6,864,479
Inventories, net 6,620,957 4,828,632
Other current assets 560,522 564,729
----------- -----------
Total Current Assets 15,211,075 14,728,263
Property and Equipment, net 3,822,777 3,445,868
Other Assets 492,129 6,127
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TOTAL ASSETS $19,525,981 $18,180,258
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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NUKO Information Systems, Inc.
CONSOLIDATED BALANCE SHEETS (Cont'd.)
<TABLE>
<CAPTION>
Restated
March 31, December 31,
1997 1996
(unaudited)
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,710,605 $ 7,216,513
Accrued liabilities 1,230,510 1,052,553
Line of credit 2,177,072 2,160,255
Current portion -- capital lease obligation 346,500 225,105
------------ ------------
Total current liabilities 8,464,687 10,654,426
Deferred revenue 2,161,996 --
Capital lease obligation, less current portion 158,123 39,128
------------ ------------
Total liabilities 10,784,806 10,693,554
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; issued and outstanding: 10,000 shares
at March 31, 1997 and 5,000 at December 31, 1996 10 5
Common stock, $0.001 par value, 20,000,000 shares
authorized; shares issued and outstanding: 10,604,435
shares at March 31, 1997 and 10,491,101 shares
shares at December 31, 1996 10,604 10,491
Additional paid-in capital 33,672,945 27,293,448
Deferred compensation expense (648,015) (710,596)
Accumulated deficit (24,294,369) (19,106,644)
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Total stockholders' equity 8,741,175 7,486,704
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,525,981 $ 18,180,258
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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NUKO Information Systems, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
Restated
MARCH 31, MARCH 31,
1997 1996
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<S> <C> <C>
Net sales $ 2,246,240 $ 474,413
Cost and Expenses:
Cost of sales 1,951,924 142,321
Research and development 1,929,515 2,188,047
Selling, general and administrative expenses 2,181,205 1,680,330
------------ -----------
6,062,644 4,010,698
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Loss from operations (3,816,404) (3,536,285)
Other income (expense), net (57,974) 96,860
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Net loss $ (3,874,378) $(3,439,625)
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Accretion of dividends on preferred stock (1,313,346) --
------------ -----------
Net loss available to common shareholders $ (5,187,724) $(3,439,625)
============ ===========
Net loss available to common shareholders
per share ($0.49) ($0.42)
============ ===========
Weighted average shares outstanding 10,502,482 8,180,602
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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NUKO Information Systems, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996
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<S> <C> <C>
Cash flows from operating activities
Net loss $(3,874,378) $ (3,439,625)
Adjustments to reconcile net loss to
net cash used in operating activities:
Compensation expense 62,581 374,850
Allowance for excess and obsolete inventory 150,000 166,857
Depreciation and amortization 405,548 56,485
Changes in operating assets and liabilities:
Accounts receivable 1,258,497 57,563
Interest on stock subscriptions -- 30,567
Inventories (1,942,325) (164,234)
Prepaid expenses 4,207 (146,154)
Other assets (487,673) (78,079)
Accounts payable (2,505,908) 330,356
Accrued liabilities 177,957 315,295
Deferred revenue 2,161,996 --
----------- ------------
Net cash used in operating activities (4,589,498) (2,496,119)
----------- ------------
Cash flows from investing activities:
Short term investments -- (1,668,634)
Purchases of property and equipment (780,786) (314,124)
----------- ------------
Net cash used in investing activities (780,786) (1,982,758)
Cash flows from financing activities
Proceeds from borrowings 16,817 --
Sale and leaseback under capital lease 371,467 --
Payments on capital lease obligations (131,077) (22,418)
Proceeds from exercise of common stock options and warrants 269,168 540,000
Proceeds from share subscriptions -- 311,400
Proceeds from issuance of common stock -- 3,843,983
Proceeds from issuance of preferred stock 4,797,100 --
----------- ------------
Net cash provided by financing activities 5,323,475 4,672,965
----------- ------------
NET INCREASE (DECREASE) IN CASH (46,809) 194,088
AND CASH EQUIVALENTS
Cash and cash equivalents at beginning of quarter 2,270,423 11,255,820
----------- ------------
Cash and cash equivalents at end of quarter $ 2,223,614 $ 11,449,908
=========== ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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NUKO Information Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentation have been included.
Operating results for the three months ended March 31, 1997 and 1996 are
not necessarily indicative of the results that may be expected for a
full fiscal year. The December 31, 1996 balance sheet data was derived
from the audited financial statements, but does not include the
disclosure required by generally accepted accounting principles. The
Company has sustained recurring losses from operations. Management has
developed a fiscal 1997 operating plan in which the Company has placed
significant reliance on obtaining outside financing. Management is
actively pursuing additional debt and equity financing from both
institutional and corporate investors and funding opportunities from
strategic corporate partners. Sincere there is no assurance that
management will complete their plans, there is substantial doubt about
the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty. For further information, refer to the
financial statements and accompanying footnotes for the year ended
December 31, 1996, included in the Company's Annual Report on Form 10-K
for such period.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
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<S> <C> <C>
Raw material $1,899,320 $1,445,748
Work in progress 644,355 1,253,617
Finished Goods 2,170,097 2,129,267
---------- ----------
Net Inventory $4,713,772 $4,828,632
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</TABLE>
3. INCOME TAXES
The Company's tax rate differs from the federal tax rate because net
operating losses have not been benefited.
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NUKO Information Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
4. ACCOUNTING FOR STOCK-BASED COMPENSATION
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123). This accounting standard
permits the use of either a fair value based method or the current
Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB No. 25) when accounting for stock-based compensation
arrangements. Companies that do not follow the new fair value based
method will be required to disclose pro forma net income and earnings
per share computed as if the fair value based method has been applied.
The disclosure provisions of SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995. Management has elected the alternate
disclosure method provided by SFAS No. 123.
5. RESTATEMENT
The condensed consolidated financial statements have been restated to
reflect an allocation of the proceeds from the issuance of convertible
preferred stock to the intrinsic value of the beneficial conversion
feature. This amount has been recognized as a dividend to the preferred
stockholders ratably over the 90 day period from issuance, which is the
minimum period in which the benefit can be realized.
The restatement has resulted in an increase in the previously reported
net loss available to common stockholders for the three month period
ended March 31, 1997 of $1,313,346 to $5,187,724 and an increase in net
loss available to common stockholders per share for the three month
period ended March 31, 1997 of $(0.12) to $(0.49).
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NUKO Information Systems, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated as a result of certain factors, including those set forth in Item 5
of this report and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
NET SALES AND NET LOSS
Net sales for the first quarter are $2.2 million compared to $0.4
million for the same period in 1996. Sales for the quarter included
shipment of the Company's Highlander products and the Company's OEM
products plus a $0.6 million license fee from one of the Company's
customers. The net loss for the quarter is $5.2 million or $0.49 per
share, compared to a net loss of $3.4 million or $0.42 per share for the
same period in 1996. Net losses reflect the Company's continued
investment in research and development as well as adding personnel to
enable the Company to support the customer requirements.
COST OF SALES
Cost of sales for the first quarter of 1997 was $2.0 million compared to
$0.1 million for the same period in 1996. The gross margin resulting
from the cost of sales as a percentage of net sales was 13% for the
quarter.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses for the first quarter of 1997 were
$1.9 million compared to $2.1 million for the same period in 1996. The
research and development expenses reflect the Company's commitment to
invest in the development and enhancement of the Company's family of
product lines. The Company is allocating a higher percentage of its
resources to focus on enhancing its software products that support its
hardware products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first quarter of
1997 were $2.1 million compared to $1.7 million for the same period in
1996. The increase in expenses was primarily related to adding
marketing, technical support and other sales personnel to support the
Company's customers and marketing partners.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation (Cont'd.)
RECENT ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" (SFAS No. 121), which requires the Company to review for impairment
of long-lived assets, certain identifiable intangibles and goodwill
related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS No. 121
is effective for the Company's fiscal year 1996. The Company has studied
the implications of the statement and does not expect it to have a
material impact on the Company's financial condition or results of
operations.
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123). This accounting standard
permits the use of either a fair value based method or the current
Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB No. 25) when accounting for stock-based compensation
arrangements. Companies that do not follow the new fair value based
method will be required to disclose pro forma net income and earnings
per share computed as if the fair value based method has been applied.
The disclosure provisions of SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995. Management has elected to use the
alternate disclosure method provided by SFAS No. 123.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through debt and
equity financing. At March 31, 1997, the Company's ending balance of
cash and cash equivalents, which consist of investments in demand
deposits, commercial paper and U.S. Treasury obligations with maturities
of less than 90 days was $2.2 million which reflects no change from the
December 31, 1996 balance. The Company had working capital of
approximately $6.7 million, representing an increase of $2.7 million
from the Company's working capital at December 31, 1996. In February
1997, the Company completed a private placement (the "Private
Placement") and received net proceeds of $4.8 million from issuances of
5,000 shares of the Company's Series A Convertible Preferred Stock to a
single institutional investor (the "Investor"). The Company previously
sold 5,000 shares of Series A Convertible Preferred Stock to the
Investor on December 16, 1996 and received net proceeds of $4.8 million.
During the quarter, the Company used cash to funds its operating
requirements and to increase its working capital.
In October 1996, the Company obtained a $6.0 million line of credit with
Silicon Valley Bank. The line of credit was due to expire on March 31,
1997 but has been extended to May 31, 1997. The Company has received an
oral commitment from Silicon Valley Bank to extend the line of credit
for an additional twelve months, subject to final documentation. The
extended line of credit would have a borrowing base of $6.0 million. At
March 31, 1996, the Company has borrowed $2.2 million under the Silicon
Valley Bank line of credit.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation (Cont'd.)
The Company has no long term debt with the exception of a lease
agreement for the purpose of financing the acquisition of general
furnishings, computers and manufacturing equipment. The unpaid long term
balance of this obligation was approximately $0.1 million and $0.03
million at March 31, 1997 and December 31, 1996, respectively.
Management believes that in order to implement the Company's 1997
Operating Plan the Company will need additional financing. The Company
does not have any arrangements to obtain additional sources of
financing. The Company intends to actively pursue additional debt or
equity financing from institutional or corporate investors or funding
opportunities from strategic partners. There can be no assurance that
the Company will be able to obtain such financing on acceptable terms or
at all. In such event, the Company would consider appropriate financing
alternatives and revising its 1997 Operating Plan.
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NUKO Information Systems, Inc.
PART II OTHER INFORMATION
Item 2 Change in Securities
On February 28, 1997, the Company issued to the Investor pursuant to
Rule 506 under the Securities Act of 1933, as amended (the "Act"), 5,000
shares of Series A Convertible Preferred Stock, $0.001 par value per
share ("Convertible Preferred"), for an aggregate purchase price of
$5,000,000, upon the second closing under a Securities Purchase
Agreement, dated as of December 13, 1996, by and between the Company and
the Investor (the "Purchase Agreement"). The Investor is an "accredited
investor" within the meaning of Rule 501(a) under the Act. The
Convertible Preferred, together with a premium thereon accruing at the
rate of 7% per annum, is convertible into Common Stock at a conversion
price equal to the lesser of (i) $16 per share and (ii) a discount to
the per share market price of the Company's Common Stock (based on a ten
day average thereof) on the conversion date. The discount ranges from 0%
currently to 15% beginning 90 days after the first closing. For every
two shares of Common Stock issued upon conversion of the Convertible
Preferred, the holder will receive one five-year warrant to acquire one
share of Common Stock at an exercise price of $18 per share.
The Company also issued to the investor a Stock Purchase Warrant (the
"Warrant") to purchase 625,000 shares of its Common Stock. The Warrant
has an exercise price equal to 110% of the average closing bid price for
the Company's Common Stock on The Nasdaq Stock Market's National Market
System for the thirty trading days beginning June 1, 1997 and may be
exercised at any time after the end of such thirty-day trading period
and before March 1, 2002. In connection with its issuance of the
Warrant, the Company has granted registration rights with respect to the
shares of Common Stock underlying the Warrant pursuant to a Warrant
Share Registration Rights Agreement dated as of February 28, 1997 by and
between the Company and the Investor.
As consideration for the issuance of the Warrant, the Investor agreed to
defer from March 17, 1997 to April 30, 1997 its right to increase
Convertible Preferred purchased at the second closing into shares of
Common Stock.
Item 5. Other Information
RISK FACTORS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document, and
any document referenced herein, are advised that this document and
documents referenced herein contain both statements of historical facts
and forward looking statements. Forward looking statements are subject
to certain risks and uncertainties, which could cause actual results to
differ materially from those indicated by the forward looking
statements.
In addition to the other information contained in the Quarterly report,
the following risk factors should be carefully considered in evaluating
the Company.
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HISTORY OF LOSSES. Since its decision to enter the video networking
market, the Company has operated at a loss because the Company's
revenues have been insufficient to support the comparatively substantial
expenses incurred by the Company, primarily for research and
development. The Company recorded net losses of approximately $.7
million in fiscal 1994, $1.7 million is fiscal 1995, $2.0 million for
the eight months ended December 31, 1995, $14.7 million in fiscal 1996
and $1.8 million for the three months ending March 31, 1997. The
Company's accumulated deficit at March 31, 1997 is approximately $20.9
million. There can be no assurance that the Company's products will be
widely accepted in the marketplace or to the extent sales are made, that
the volume, pricing and timing will be sufficient to permit the Company
to achieve profitability in the future.
INDISPENSABLE NEED FOR CAPITAL/REPORT OF INDEPENDENT ACCOUNTANTS
REGARDING ABILITY TO CONTINUE AS A GOING CONCERN. Primarily because of
the Company's history of operating losses, there is substantial doubt
about the Company's ability to continue as a going concern unless the
Company is able to obtain additional financing. The Company anticipates
that without additional equity financing it would likely run out of cash
to fund its operations during the second fiscal quarter of 1997. The
Company currently does not have any arrangements to obtain other sources
of financing. If the Company were unable to secure such financing, the
Company would at a minimum be forced to revise its 1997 Operating Plan.
The report of independent accountants on the Company's financial
statements included in the Company's Annual Report includes an
explanatory paragraph to this effect.
ADDITIONAL CAPITAL REQUIREMENTS. Although the Company believes that its
existing cash resources and the proceeds of the Private Placement will
provide adequate funding for its capital requirements through the second
quarter of 1997, the Company expects it will need additional funds to
support is operating plan at some time during 1997. The Company's
capital requirements will depend on many factors, including the progress
of its research and development efforts, its timely receipt of revenue
from sales of its products to large customers, the need to devote
resources to manufacturing operations, and the demand for the Company's
products. Additional future financing may occur through the sale of
unregistered stock or convertible debt. Pursuant to the Securities
Purchase Agreement dated as of December 31, 1996 between the Company and
the Investor, however, the Company may not, without the prior written
consent of the Investor, negotiate or contract with any party to obtain
any additional equity financing (including debt financing with an equity
component) until June 28, 1997 unless such financing is by way of a firm
commitment underwriting, the issuance of securities in connection with a
merger, consolidation or sale of assets or the issuance of securities in
connection with a strategic investment or joint venture. The Investor
will also have a right of first refusal during the 240 days beginning
June 28, 1997 to purchase securities on the same terms offered by
potential investors during such period, subject to the same exceptions
applicable during the period ending June 28, 1997. The Company's line of
credit with Silicon Valley Bank (the "Line of Credit") is due to expire
on May 31, 1997. The Company currently has borrowed $2.2 million under
the Line of Credit. The Company has received an oral commitment to
extend the Line of Credit for an additional twelve months, subject to
final documentation. There can be no assurance that new financing will
be available when needed by the Company or that the terms, if available,
will be satisfactory to the Company. If adequate funds are not
available, the Company
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may be required to delay, scale back or eliminate one or more of its
research and development or manufacturing programs or to obtain funds
through arrangements that may require the Company to relinquish rights
to certain of its technologies or potential products or other assets
that the Company would not otherwise relinquish. The inability of the
Company to raise needed funds would have a material adverse effect on
the Company's business, financial condition and results of operations.
SHORT OPERATING HISTORY. The Company's operations are subject to all of
the risks inherent in a new business enterprise, including the absence
of a substantial operating history and the expense of new product
development. Various problems, expenses, complications and delays may be
encountered in connection with the development of the Company's products
and business. Future growth beyond present capacity will require
significant expenditures for expansion, marketing, research and
development. These expenses must be paid out of future equity or debt
financings or out of generated revenues and Company profits. The
availability of funds from any of these sources cannot be assured.
The Company was incorporated in the State of New York in 1968 under the
name Yondata Corporation and, in October 1992, changed its name to
Growers Express Corporation. In May 1994, Growers Express Corporation
merged with NUKO Technologies, Inc., a California corporation, and
following the merger, Growers Express changed its name to NUKO
Information Systems, Inc. and commenced operations through NUKO
Technologies, Inc., which survived the merger as the Company's wholly
owned subsidiary. In January 1997, the Company effected a
reincorporation from New York to Delaware by merging itself into its
wholly-owned Delaware subsidiary. From 1970 to 1994, the Company had no
operations and no revenues. The Company's management, which had no
affiliation with Growers Express prior to the merger with NUKO
Technologies in May 1994, has almost no knowledge of the Company's
activities between its incorporation in 1968 and the merger, and very
few corporate records relating to the period between 1970 and 1994 are
available. As a result, while management believes that there are no
material liabilities relating to the predecessor company, there can be
no assurance that there are no potential liabilities relating to such
period or that the Company always conducted its corporate activities
during this period in accordance with the New York Business Corporations
Law.
EARLY STAGE OF PRODUCT DEVELOPMENT. Since early 1994, the Company has
been primarily engaged in research and development of its technologies,
product design and establishment of strategic alliances on which the
Company expects to depend for manufacturing, sales and distribution of
its potential products. The Company has only recently begun to generate
significant revenues from the commercialization of products. The Company
has to date sold its initial products only in limited quantities,
primarily for use in development, demonstration and testing of
prototypes. Certain contracts may relate to new technologies that may
not have been previously deployed on a large-scale commercial basis. The
Company's products are based on technologies that have not been widely
deployed, and there can be no assurance that the Company will be able
successfully to market its initial products to generate the increased
revenues necessary to sustain full scale commercial production or that
the Company's products will be well received when introduced into the
marketplace on a full commercial scale. The Company's products also must
interoperate effectively among a wide variety of different equipment,
different protocols and different transmission speeds. While the Company
believes its products interoperate effectively among the principal
configurations of equipment, protocols and transmission speeds that are
currently commercially deployed, there can be no assurances that the
Company's products will continue to interoperate effectively among other
configurations of equipment, protocols and
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transmission speeds which may be developed or utilized in the future.
Moreover, management of the Company has limited experience with the
distribution of technologically complex products in commercial
quantities and there can be no assurance that the Company will be able
to make necessary adaptations to successfully move from the research and
development stage to full commercial production and distribution.
COMPETITION. The segments of the telecommunications industry in which
the Company competes are intensely competitive and are characterized by
declining average selling prices and rapid technological change. The
Company competes with major domestic and international companies,
virtually all of which have substantial greater financial, technical,
production and marketing resources than the Company with which to pursue
engineering, manufacturing, sales, marketing and distribution of their
products. For example, in its compression and networking business, the
Company competes with vertically integrated system suppliers including
General Instrument Corporation, Scientific-Atlanta, Inc., and Philips,
as well as more specialized suppliers including DMV division of News
Corp., C-Cube Microsystems' DiviCom Inc. subsidiary, and the TV/COM
subsidiary of Hyundai. In addition, some of the Company's customers are
actual or potential competitors of the Company, competing against the
Company with its own products. The Company believes that the principal
criteria for competition in its market include cost competitiveness,
flexibility, revenue generation capability, compatibility with existing
networks and upgradeability, as well as customer support. There can be
no assurance that the Company will be able to compete successfully with
other companies on these factors or otherwise.
MANAGEMENT OF GROWTH. During 1996, the Company began to experience
significant growth which the Company expects will continue at a rapid
pace for the foreseeable future. Such growth has placed, and will
continue to place, significant strain on the Company's limited personnel
and other resources. The Company's ability to manage any further growth,
should it occur, will require it to implement and continually expand
operational and financial systems, recruit additional employees and
train and manage both current and new employees. There can be no
assurance that the Company will be able to find qualified personnel to
fill needed positions or be able to successfully manage a broader
organization. The failure of the Company to effectively expand or manage
these functions consistent with any growth that may occur could have a
material adverse effect on the Company's business and results of
operations.
DEPENDENCE ON CUSTOMER CAPITAL SPENDING REQUIREMENTS AND PURCHASING
TRENDS. The Company's business is directly impacted by capital spending
requirements and funding of the Regional Bell Operating Companies
("RBOCs") and other major customers in the telecommunications industry.
The capital budgets of these customers or potential customers is beyond
the control of the Company and can be affected by numerous factors
completely unrelated to the performance, quality and price of the
Company's products. Should the Company's customers or potential
customers suffer budgeting cutbacks affecting their capital purchasing
plans, the Company's results of operations could be adversely affected.
In addition, in recent years, the purchasing behavior of the Company's
customers has increasingly been characterized by the use of large
contracts with few suppliers. This trend is expected to intensify and
will contribute to the variability of the Company's results. Such larger
purchase contracts typically involve longer negotiating cycles, require
dedication of substantial amounts of working capital and other resources
and, in general, require investments that may substantially precede
recognition of associated revenues. Moreover, in return for larger,
longer-term purchase agreements, customers often demand more stringent
acceptance criteria, which may also cause revenue recognition delays.
For example, if customers ask the Company to price its products based on
estimates of such customers'
15
<PAGE> 16
future requirements, and such customers fail to take delivery of an
amount comparable to the estimated amount on which the Company bases its
prices, the Company may recognize lower margins on product revenue.
RELIANCE ON TELCOS. Before purchasing products such as those of the
Company, telephone companies ("telcos") subject such products to lengthy
approval processes, which can take several years or more for complex
products based on new technologies. The Company expects to be required
to submit each successive generation of its products as well as new
products to its telco customers for approval. The length of the approval
process will depend upon a number of factors, including the complexity
of the product involved, development priorities of telcos, telcos'
budgets and regulatory issues affecting telcos. Moreover, the need for
regulatory approval from the Federal Communications Commission (the
"FCC") for certain new telco services prior to their implementation may
delay the approval process. Any such delay would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Historically, telcos have been cautious in implementing new
technologies. Telcos' deployment of the Company's compression and
networking technologies may be prevented or delayed by a number of
factors, including telcos' lengthy product approval and purchase
processes; cost; regulatory barriers that may prevent or restrict telcos
from providing interactive multimedia services; the lack of demand for
Internet access and other interactive multimedia services; the lack of
sufficient programming content for interactive multimedia services; the
availability of alternative technologies; and telcos' policies that
favor the use of such alternative technologies. In addition, telcos are
generally reluctant to deploy new technologies available only from a
single source, especially when the supplier is as small as the Company,
and often require alternative sources before deploying a new technology.
This reluctance may put the Company at a competitive disadvantage
relative to some of its competitors. Even if the telcos adopt policies
favoring full-scale implementation of the Company's compression and
networking technologies, there can be no assurance that sales of the
Company's products will become significant or that the Company will be
able successfully to introduce its products on a timely basis or to sell
those products in material quantities. The failure of telcos to deploy
the Company's technologies would have a material adverse effect on the
Company's business, financial condition and results of operations. Even
if demand for the Company's products is high, telcos may have sufficient
bargaining power to demand low prices and other terms and conditions
which may have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON SUPPLIERS. The Company purchases certain of the chips and
chip sets needed in its products from single source suppliers. The
Company is dependent upon such suppliers to deliver parts and components
as needed for the manufacture of the Company's products, and there can
be no assurance that such suppliers will continue to be able to serve
the Company's needs. While there are alternative sources of supply for
each of the components outsourced by the Company, the Company would
incur delays if required to switch to another supplier. Any disruption
of the Company's relationships with any of its key single source
suppliers or manufacturers or other limitations on the availability of
these products provided by such suppliers could have an adverse effect
on the Company's business and operating results.
PRICING PRESSURES. The markets into which the Company sells or will sell
its products are characterized by extreme price competition, and the
Company expects the average selling prices of its products will decrease
over the life of each product. In order to partially offset declines in
the selling price of its products, the Company will need to reduce the
cost of its products by
16
<PAGE> 17
implementing cost reduction design changes, obtaining cost reductions as
and if volumes increase and successfully managing manufacturing and
subcontracting relationships. Since the Company does not operate its own
manufacturing facilities and must make binding commitments to purchase
products, it may not be able to reduce its costs as rapidly as companies
that operate their own manufacturing facilities. The failure of the
Company to design and introduce lower cost versions of its products in a
timely manner or to successfully manage its manufacturing relationships
would have a material adverse effect on its business and results of
operations.
DEPENDENCE ON SUBCONTRACTORS. The Company's reliance on subcontractors
to manufacture and assemble certain products involves significant risks,
including reduced control over delivery schedules, quality assurance,
manufacturing yields and cost, the potential lack of adequate capacity
and potential misappropriation of its intellectual property. Although
the Company has not experienced material disruptions in supply to date,
there can be no assurance that manufacturing or assembly problems will
not occur in the future or that any such disruptions will not have a
material adverse effect upon the Company's results of operations.
Further, there can be no assurance that suppliers who have committed to
provide product will do so, or that the Company will meet all conditions
imposed by such suppliers. Failure to obtain an adequate supply of
products on a timely basis would delay product delivery to the Company's
customers, which would have a material adverse effect on the Company's
business and results of operations. In addition, the Company's business
could also be materially and adversely affected if the operations of any
supplier are interrupted for a substantial period of time, or if the
Company is required, as a result of capacity constraints in its industry
or otherwise, to increase the proportion of goods purchased from higher
cost suppliers in order to obtain adequate product volumes.
FLUCTUATIONS IN QUARTERLY RESULTS; LACK OF BACKLOG. The Company has
experienced, and expects to continue to experience, significant
fluctuations in its quarterly results of operations. Factors that have
contributed or may contribute to future fluctuations in the Company's
quarterly results of operations include the size and timing of customer
orders and subsequent shipments, customer order deferrals in
anticipation of new products, timing of product introductions or
enhancements by the Company or its competitors, market acceptance of new
products, technological changes in the telecommunications industry,
competitive pricing pressures, accuracy of customer forecasts of
end-user demand, changes in the Company's operating expenses, personnel
changes, changes in the mix of product sales and contract and consulting
fees, quality control of products sold, disruption in sources of supply,
regulatory changes, capital spending, delays of payments by customers
and general economic conditions. The timing and volume of customer
orders are difficult to forecast. The Company does not have a material
backlog of orders for its products.
The Company intends to continue to make significant ongoing research and
development expenditures for new products and technologies, which may
have a material adverse effect on the Company's quarterly results of
operations. The Company's expense levels are based in part on
expectations of future revenues and are relatively fixed in the short
term. The Company intends to increase operating expenditures as the
Company expands its operations to develop and market its compression and
networking products. Consequently, a shortfall in quarterly revenues due
to a lack of sales of the Company's products or otherwise would
adversely impact the Company's business, financial condition and results
of operations in a given quarter due to the Company's inability to
adjust expenses or inventory to match revenues for that quarter. In
addition, there can be no assurance that, as the Company increases sales
of its products, warranty returns will not
17
<PAGE> 18
become significant or that warranty returns, if significant, will not
have a material adverse effect on the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION. Although the extensive regulation of telcos by
Federal, state and foreign regulatory agencies, including the FCC and
various state public utility and service commissions, does not directly
affect the Company, the effects of such regulation on the Company's
customers may have a material adverse effect on the Company's business,
financial condition and results of operations. For example, FCC
regulatory policies affecting the availability of telco services, and
other terms on which telcos conduct their business, may impede the
Company's penetration of certain markets. Although the
Telecommunications Act of 1996 eliminated or modified many FCC
restrictions on telcos' ability to provide interactive multimedia
services, the remaining or any future restrictions may have a material
adverse effect on telcos' demand for the Company's products. Cable
operators, which may become another market for the Company's products,
are also subject to extensive governmental regulations that may
discourage them from deploying the Company's compression and networking
technology. In addition, rates for telecommunications services are
generally governed by tariffs of licensed carriers that are subject to
regulatory approval. These tariffs could have a material adverse effect
on the demand for the Company's products. The imposition of certain
tariffs, duties and other import restrictions on components which the
Company intends to obtain from non-domestic suppliers, the imposition of
export restrictions on products which the Company intends to sell
internationally or other changes in laws or regulations in the United
States or elsewhere could also have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL PRODUCT LIABILITIES. One or more of the Company's products may
contain undetected component, hardware, software or mechanical defects
or failures when first introduced or may develop defects or failures
after commencement of commercial production or shipments. Any such
defects or failures could cause loss of goodwill, if any, with
distributors and with customers, prevent or delay market acceptance of
the Company's products, result in cancellations or rescheduling of
orders or shipments or product recalls or returns and expose the Company
to claims from customers. The Company also could incur unexpected and
significant costs, including product redesign costs and costs associated
with customer support. The Company expects to sell its products with a
limited warranty against defects in materials and workmanship. If any of
the Company's products are found within the warranty period to contain
such defects, the Company could be required to repair or replace the
defective products or refund the purchase price. The occurrence of any
such defect or failure could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company does not maintain insurance to protect against claims associated
with the use of its products and there can be no assurance that the
Company will be able to satisfy claims that may be asserted against the
Company.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The Company attempts to
protect its technology through a combination of patents, copyrights,
trade secrets, confidentiality procedures and licensing arrangements.
While the Company currently has no patents, the Company has applied for
certain patents and intends to continue to seek patents on its
technology, when appropriate. There can be no assurance that patents
will issue from any of the pending applications or that any claims
allowed from pending patents will be sufficiently broad to protect the
Company's technology. While the Company intends to protect its
intellectual property rights vigorously, there can be no assurance that
any patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. The Company will endeavor to keep
the results of its research and development program
18
<PAGE> 19
proprietary, but may not be able to prevent others from using some or
all of such information or technology with or without compensation. The
Company's ultimate success will depend to some extent on its ability to
avoid infringement of patent or other proprietary rights of others. The
Company is not aware that it is infringing any such rights, nor is it
aware of proprietary rights of others for which it will be required to
obtain a license in order to market its initial products. However, there
is no assurance that the Company is not infringing proprietary rights of
others or that it will be able to obtain any technology licenses it may
require in the future.
DEPENDENCE ON EMERGING MARKETS. The markets into which the Company is
targeting its products are newly developing. The potential size of the
market opportunities and the timing of their development is uncertain.
In addition, the emergence of markets for certain digital video
applications will be affected by a variety of factors beyond the
Company's control. In particular, certain sectors of the communications
market will require the development and deployment of an extensive and
costly communications infrastructure. There can be no assurance that the
communications providers will make the necessary investment in such
infrastructure or that the creation of this infrastructure will occur in
a timely manner. In addition, the deployment of such infrastructure will
be subject to governmental regulatory policies, taxes and tariffs. The
development of such markets could be delayed or otherwise adversely
affected by new governmental regulations or changes in taxes or tariffs,
or by the failure of government agencies to adopt changes to existing
regulations necessary to permit new technologies to enter the market.
POSSIBLE TECHNOLOGICAL ADVANCES. The market for the Company's initial
products is expected to be characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. The
Company's future success will depend in part upon its ability to
successfully bring to market and then enhance its existing products and
to introduce new products and features to meet changing customer
requirements and emerging industry standards. There can be no assurance
that the Company will successfully complete the development of its
future products or that the Company's initial or future products will
achieve market acceptance. Any delay or failure of these products to
achieve market acceptance would adversely affect the Company's business.
In addition, there can be no assurance that products or technologies
developed by others will not render the Company's initial or future
products or technologies non-competitive or obsolete.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS. Certain provisions
of the Company's Amended and Restated Certificate of Incorporation and
Bylaws could discourage potential acquisition proposals, could delay or
prevent a change in control of the Company and could make removal of
management more difficult. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers,
including tender offers that are priced above the then current market
value of the Common Stock. Additionally, the Board of Directors of the
Company, without further shareholder approval, may issue up to 4,990,000
shares of Preferred Stock, in one or more series, with such terms as the
Board of Directors may determine, including rights such as voting,
dividend and conversion rights which could adversely affect the voting
power and other rights of the holders of Common Stock. Preferred Stock
may be issued quickly with terms which delay or prevent the change in
control of the Company or make removal of management more difficult.
Also, the issuance of Preferred Stock may have the effect of decreasing
the market price of the Common Stock.
CONTROL BY OFFICERS AND DIRECTORS. As of April 30, 1997, the officers
and directors of the Company control, directly or indirectly,
approximately 32.2% of the voting power of the
19
<PAGE> 20
Company's voting stock, including options and warrants immediately
exercisable or exercisable within 60 days. Although management does not
control a majority of the outstanding voting stock, it holds a
sufficient amount to make it more difficult for an independent third
party to effect a change in control of the Company than would be the
case if the stock ownership were less concentrated among members of
management.
STOCK MARKET VOLATILITY; VOLATILITY OF THE COMPANY'S COMMON STOCK. There
have been periods of extreme volatility in the stock market that, in
many cases, were unrelated to the operating performance of, or
announcements concerning, the issuers of the affected securities.
General market price declines or volatility in the future could
adversely affect the price of the Common Stock. There can be no
assurance that the Common Stock will maintain its current market price.
Short-term trading strategies of certain investors can have a
significant effect on the price of specific securities. The price of the
Company's Common Stock, in particular, has been extremely volatile.
ABSENCE OF DIVIDENDS. The Company does not expect to declare or pay any
cash or stock dividends in the foreseeable future, but instead intends
to retain all earnings, if any, to invest in the Company's operations.
The payment of future dividends is within the discretion of the Board of
Directors and will depend upon the Company's future earnings, if any,
its capital requirements, financial condition and other relevant
factors.
20
<PAGE> 21
NUKO Information Systems, Inc.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
11.1 Calculation of Net Loss Per Share
27.1 Financial Data Schedule
b) Reports on Form 8-K
1. Form 8-K was filed on February 14, 1997 to
announce preliminary unaudited results for the
year ended December 31, 1996.
2. Form 8-K was filed on March 5, 1997 to
announce that the Company completed on
February 28, 1997 the second phase of a
private placement of Series A Convertible
Preferred Stock to a single institutional
investor.
21
<PAGE> 22
NUKO Information Systems, Inc.
SIGNATURE
Pursuant to the requirement 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.
NUKO INFORMATION SYSTEMS, INC.
DATE: September 19, 1997 By: /s/ Ramesh Sekar
------------------ ------------------------------
NAME: Ramesh Sekar
TITLE: Chief Financial Officer
22
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF NET LOSS PER SHARE FOR THREE MONTH PERIOD ENDED MARCH 31
Earnings per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent shares
result from the assumed exercise of outstanding stock options that have a
dilutive effect when applying the treasury stock method.
<TABLE>
<CAPTION>
Restated
1997 1996
------------ ------------
<S> <C> <C>
PRIMARY LOSS PER SHARE
Net loss for period $ (3,874,378) $(3,439,425)
Accretion of dividends on preferred
stock (1,313,346) --
Net loss available to common
shareholders $ (5,187,724) $(3,439,425)
============ ===========
Shares outstanding at the beginning 10,491,101 9,128,418
of the period
Weighted average effect of shares - 433,846
issued during period
Weighted average effect of warrants 11,381 75,824
and options exercised in the period
Weighted average effect of share - (1,457,486)
subscriptions paid in the period
------------ ------------
Weighted average shares outstanding 10,502,482 8,180,602
============ ===========
Net loss available to common
shareholders per share $ (0.49) $ (0.42)
============ ===========
</TABLE>
There is no difference in the per share amounts computed under the
primary and the fully diluted basis.
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,223,614
<SECURITIES> 0
<RECEIVABLES> 5,687,076
<ALLOWANCES> 81,094
<INVENTORY> 6,620,957
<CURRENT-ASSETS> 15,211,075
<PP&E> 4,994,698
<DEPRECIATION> 1,171,921
<TOTAL-ASSETS> 19,525,981
<CURRENT-LIABILITIES> 8,464,687
<BONDS> 0
<COMMON> 10,604
0
10
<OTHER-SE> 8,730,561
<TOTAL-LIABILITY-AND-EQUITY> 19,525,981
<SALES> 2,246,240
<TOTAL-REVENUES> 2,246,240
<CGS> 1,951,924
<TOTAL-COSTS> 1,951,924
<OTHER-EXPENSES> 4,029,626
<LOSS-PROVISION> 81,094
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,816,404)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,816,404)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,874,378)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
</TABLE>
