<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the Quarterly Period Ended
September 30, 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.
---------------------------------------------------------------
Delaware 16-0962874
------------------------------- -----------------------------------
(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 October 31, 1997
------------------------------- -----------------------------------
Common Stock ($0.001 par value) 14,960,137
<PAGE> 2
NUKO Information Systems, Inc.
Index to Quarterly Report on Form 10-Q
For the Period Ended September 30, 1997
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
- ------ ----------------------------------------------------------------- --------
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996. 3
Condensed Consolidated Statement of Operations
Three Months Ended September 30, 1997 and 1996. 5
Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 1997 and 1996 6
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1997 and 1996. 7
Notes to Condensed Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II OTHER INFORMATION
- ------- ----------------------------------------------------------------
Item 1 Legal proceedings 14
Item 2 Changes in Securities and Use of Proceeds 15
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 24
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NUKO Information Systems, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(unaudited)
---------- -----------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 722,647 $ 2,270,423
Restricted cash -- 200,000
Accounts receivable, trade 191,483 6,864,479
Inventories, net 2,225,894 4,828,632
Other current assets 436,616 564,729
---------- -----------
Total Current Assets 3,576,640 14,728,263
Property and Equipment, net 3,262,856 3,445,868
Equity Investment 1,000,000 --
Other Assets 266,735 6,127
---------- -----------
TOTAL ASSETS $8,106,231 $18,180,258
========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
NUKO Information Systems, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (Cont'd.)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(unaudited)
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 5,879,226 $ 7,216,513
Accrued liabilities 1,429,754 1,052,553
Notes payable 50,000 --
Line of credit -- 2,160,255
Current portion -- capital lease obligation 151,263 225,105
------------ ------------
Total current liabilities 7,510,243 10,654,426
Capital lease obligation, less current portion 113,860 39,128
------------ ------------
Total liabilities 7,624,103 10,693,554
------------ ------------
REDEEMABLE PREFERRED STOCK 4,866,596 --
Issued and outstanding: 4,251 shares
at September 30, 1997 and 5,000 shares
at December 31, 1996.
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value; 5,000,000 shares
authorized; issued and outstanding: 0 shares
at September 30, 1997 and 5,000 at December 31, 1996 -- 5
Common stock, $0.001 par value, 40,000,000 shares
authorized; shares issued and outstanding: 14,960,137
shares at September 30, 1997 and 10,491,101 shares
shares at December 31, 1996 14,960 10,491
Additional paid-in capital 35,791,466 27,293,448
Deferred compensation expense (522,852) (710,596)
Accumulated deficit (39,668,042) (19,106,644)
------------ ------------
Total stockholders' equity (deficit) (4,384,468) 7,486,704
------------ ------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,106,231 $ 18,180,258
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
NUKO Information Systems, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 186,115 $ 4,298,744
------------ ------------
Cost and Expenses:
Cost of sales 5,345,580 2,919,178
Research and development 1,749,164 1,547,971
Selling, general and administrative expenses 2,686,935 2,640,519
------------ ------------
9,781,679 7,107,668
------------ ------------
Loss from operations (9,595,564) (2,808,924)
Other income (expense), net (57,782) 108,720
------------ ------------
Net loss (9,653,346) (2,700,204)
------------ ------------
Accretion of dividends on preferred stock (165,328) --
------------ ------------
Net loss available to common shareholders $ (9,818,674) $ (2,700,204)
============ ============
Net loss available to common shareholders per share $ (0.72) $ (0.26)
============ ============
Weighted average shares outstanding 13,628,338 10,424,015
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
NUKO Information Systems, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 4,337,795 $ 6,936,024
------------ ------------
Cost and Expenses:
Cost of sales 9,274,671 4,451,408
Research and development 5,449,806 5,260,161
Selling, general and administrative expenses 7,413,290 6,495,607
------------ ------------
22,137,767 16,207,176
------------ ------------
Loss from operations (17,799,972) (9,271,152)
Other income (expense), net (180,757) 317,545
------------ ------------
Net loss (17,980,729) (8,953,607)
------------ ------------
Accretion of dividends on preferred stock (2,580,668) --
------------ ------------
Net loss available to common shareholders $(20,561,397) $ (8,953,607)
============ ============
Net loss available to common shareholders per share $ (1.75) $ (0.95)
============ ============
Weighted average shares outstanding 11,738,756 9,455,315
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
NUKO Information Systems, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Sept 30, 1997 Sept 30, 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(17,980,729) $ (8,953,607)
Adjustments to reconcile net loss to
net cash used in operating activities:
Compensation expense 294,445 976,437
Allowance for excess and obsolete inventory 4,493,674 876,561
Allowance for doubtful accounts 1,121,405 --
Depreciation and amortization 1,234,326 374,471
Changes in operating assets and liabilities:
Restricted cash 200,000 --
Accounts receivable 5,551,591 (4,736,438)
Interest on stock subscriptions -- 30,567
Inventories (1,890,936) (2,513,726)
Prepaid expenses 128,113 (416,368)
Other assets (264,621) 241,035
Accounts payable (1,337,287) 2,641,807
Accrued liabilities 377,201 595,947
------------ ------------
Net cash used in operating activities (8,072,818) (10,883,314)
------------ ------------
Cash flows from investing activities:
Equity investment (587,463) --
Purchases of property and equipment (1,047,301) (2,322,082)
------------ ------------
Net cash used in investing activities (1,634,764) (2,322,082)
Cash flows from financing activities
Repayments of borrowings (2,160,255) --
Notes payable 50,000
Sale and leaseback under capital lease 371,467 89,475
Payments on capital lease obligations (370,578) (90,907)
Proceeds from exercise of common stock options and
warrants 2,102,502 705,709
Proceeds from share subscriptions -- 311,400
Proceeds from issuance of common stock 3,369,570 3,834,754
Proceeds from issuance of preferred stock 4,797,100 --
------------ ------------
Net cash provided by financing activities 8,159,806 4,850,431
------------ ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (1,547,776) (8,354,965)
Cash and cash equivalents at beginning of period 2,270,423 11,255,820
------------ ------------
Cash and cash equivalents at end of period $ 722,647 $ 2,900,855
============ ============
Noncash investing activities:
Acquisition of equity investment by issuance of common
stock $ 412,537 --
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<PAGE> 8
NUKO Information Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and nine months ended September
30, 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. Since 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>
Sept 30, 1997 December 31,
(unaudited) 1996
---------- ----------
<S> <C> <C>
Raw material $ 352,146 $1,445,748
Work in progress 710,279 1,253,617
Finished Goods 1,163,469 2,129,267
---------- ----------
Net Inventory $2,225,894 $4,828,632
========== ==========
</TABLE>
3. INCOME TAXES
The Company's tax rate differs from the federal tax rate primarily
because net operating losses have not been benefited.
8
<PAGE> 9
NUKO Information Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
4. REDEEMABLE PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, as amended, the
holder of Preferred Stock may only convert its outstanding Preferred
Stock to a maximum aggregate common stock ownership percentage of 19.99%
calculated as of date of issuance of the Preferred Stock. Any excess
shares over 19.99% that are issuable upon conversion of outstanding
Preferred Stock are subject to mandatory redemption unless, within sixty
days, the Company either obtains stockholder approval of the additional
conversions over 20%, or the Company obtains permission to allow such
issuances from the NASDAQ Stock Market.
As of September 30, 1997, based on the common stock price at that date,
the balance of the outstanding Preferred Stock is subject to mandatory
redemption. The holder of the Preferred Stock has agreed to waive the
mandatory redemption, under certain conditions as described in an
agreement, through January 1, 1998. A proxy filing has been made to
obtain stockholder approval for conversions in excess of 20%. The
Company has reclassified $4,866,596, which represents the portion that
may be subject to mandatory redemption, from Preferred Stock to
Redeemable Preferred Stock.
5. RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, "Earnings per Share" (SFAS No. 128) which
establishes standards for computing and presenting earnings per share
(EPS) more comparable to international standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. The Company is studying the impact of the adoption of SFAS
No. 128, which is effective for the financial statements issued for
periods ending after December 15, 1997, will have on its EPS
calculation.
On July 1, 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This
statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. This
statement is effective for fiscal years beginning after December 15,
1997, with earlier application permitted.
The FASB has issued Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
(SFAS 131), which supersedes SFAS 14 "Financial Reporting for Segments
of a Business Enterprise". SFAS 131 changes current practice under SFAS
14 by establishing a new framework on which to base segment reporting
and also requires interim reporting of segment information. SFAS 131 is
effective for fiscal years beginning after December 31, 1997, with
earlier application encouraged. The Statement's interim reporting
disclosures would not be required in the first year of adoption, but
would commence in the first
9
<PAGE> 10
quarter immediately subsequent to the first year in which the company
provides year end disclosure.
6. CONTINGENCIES
On March 18, 1997, Manufacturers' Services Limited ("MSL") commenced
litigation against the Company in the United States District Court for
the Northern District of California. In its complaint, MSL alleges that
the Company breached certain express and implied contractual obligations
to MSL by failing to pay for products manufactured by MSL and for
inventory MSL acquired on behalf of the Company. The relief sought by
MSL includes damages estimated at approximately $3.2 million. The
Company intends to vigorously defend against MSL's claims in this
lawsuit.
On April 29, 1997, Bruce Young and John Glass, former employees of the
Company, filed lawsuits in Superior Court of California, County of Santa
Clara, against the Company. The complaints, subsequently combined, were
filed alleging breach of contract and violation of certain labor codes.
The Company intends to vigorously defend the action.
On May 23, 1997, Lillian Levine filed a lawsuit in the Unites States
District Court for the Northern District of California against the
Company and its former Chief Financial Officer. On June 24, 1997, Bruce
and Carol Wolitarsky filed a lawsuit in the Unites States District Court
for the Northern District of California against the Company, its
President/Chief Executive Officer/Chairman of the Board and its former
Chief Financial Officer. Both actions were filed as class actions on
behalf of all persons who purchased the Company's Common Stock from
April 24, 1997 through May 20, 1997 or their successors in interest.
These suits have consolidated and the name plaintiffs have been selected
as the lead plaintiffs. The plaintiffs have filed a consolidated amended
complaint alleging that during the class period the defendants issued
incorrect financial and business information about the Company, its
finances, performance and reporting of its revenues and financial
results for its first quarter of 1997. The plaintiffs allege that this
caused the market price of the Company's Common Stock to be artificially
inflated and caused them and other purchasers to pay too much for their
Common Stock. The plaintiffs allege claims under the federal securities
laws and seek damages for all members of the class. The Company intends
to vigorously defend the action.
7. SUBSEQUENT EVENTS
The Company announced on November 12, 1997 that ongoing efforts to
obtain equity financing in order to meet the equity requirements for
National Market System quotation of its common stock on NASDAQ had not
been consummated and that if the Company were delisted from The National
Market System, trading of the Company's stock would be conducted on the
OTC Bulletin Board or the "pink sheets" maintained by The National
Quotation Bureau. The Company presented its case for continued listing
on the National Market System on November 13, 1997, and is awaiting
NASDAQ's decision.
10
<PAGE> 11
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 third quarter are $0.2 million compared to $4.3
million for the same period in 1996. The decline in sales results from a
substantial change in the marketplace away from those originally
anticipated by the Company, and the relatively long delay in re-focusing
it on more promising markets. Sales for the nine month period ended
September 30, 1997 are $4.3 million compared to $6.9 million for the
same period in the prior year. Sales for the quarter included shipment
of the Company's Highlander products. The net loss for the quarter is
$9.8 million or $0.72 per share, compared to a net loss of $2.7 million
or $0.26 per share for the same period in 1996. The net loss for the
nine month period ended September 30, 1997 is $20.6 million or $1.75 per
share compared to a loss of $9.0 million or $0.95 per share for the same
period in 1996. Net losses reflect the Company's write-down of
inventory, increased bad debt reserve, as well as its continued
investment in research and development and operations.
COST OF SALES
Cost of sales for the third quarter of 1997 was $5.3 million compared to
$2.9 million for the same period in 1996. Cost of sales for the nine
month period ended September 30, 1997 was $9.3 million compared to $4.5
million for the same period in the prior year. Cost of sales for the
third quarter reflects a $4.2 million write down of inventory, due to
lower anticipated sales volumes over the near term and a reserve against
possible obsolescence, plus unabsorbed manufacturing overhead.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses for the third quarter of 1997 were
$1.7 million compared to $1.5 million for the same period in 1996.
Research and development expenses for the nine months ended September
30, 1997 were $5.4 million, compared to $5.3 million for the same period
in the prior year. 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the third quarter of
1997 were $2.7 million compared to $2.6 million for the same period in
1996. Expenses for the nine month period ended September 30, 1997 were
$7.4 million compared to $6.5 million for the same period in the prior
year. The increase in expenses was primarily related to an increase in
bad debt reserves and legal expenses, partially offset by on-going cost
reduction efforts.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation (Cont'd.)
RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128, "Earnings per Share" (SFAS No. 128) which
establishes standards for computing and presenting earnings per share
(EPS) more comparable to international standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. The Company is studying the impact of the adoption of SFAS
No. 128, which is effective for the financial statements issued for
periods ending after December 15, 1997, will have on its EPS
calculation.
On July 1, 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This
statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. This
statement is effective for fiscal years beginning after December 15,
1997, with earlier application permitted.
The FASB has issued Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
(SFAS 131), which supersedes SFAS 14 "Financial Reporting for Segments
of a Business Enterprise". SFAS 131 changes current practice under SFAS
14 by establishing a new framework on which to base segment reporting
and also requires interim reporting of segment information. SFAS 131 is
effective for fiscal years beginning after December 31, 1997, with
earlier application encouraged. The Statement's interim reporting
disclosures would not be required in the first year of adoption, but
would commence in the first quarter immediately subsequent to the first
year in which the company provides year end disclosure.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through debt and
equity financing. At September 30, 1997, the Company's ending balance of
cash and cash equivalents was $0.7 million which reflects a decrease of
$1.5 million from the December 31, 1996 balance. The Company had working
capital of approximately $(3.9) million, representing a decrease of $8.0
million from the Company's working capital at December 31, 1996. During
the quarter, the Company used cash to funds its operating requirements.
In October 1996, the Company obtained a $6.0 million line of credit with
Silicon Valley Bank. The line of credit was renewed on June 10, 1997 for
a period of one year. At September 30, 1997, the Company was in breach
of the net worth covenant, there were no amounts outstanding under the
Silicon Valley Bank Line of Credit.
The Company has long term debt consisting of lease agreements for the
purpose of financing the acquisition of general furnishings, computers
and manufacturing equipment. The unpaid long term balance of these
obligations was approximately $0.1 million and $0.03 million at
September 30, 1997 and December 31, 1996, respectively.
12
<PAGE> 13
While the Company completed private placements in the third quarter of
fiscal 1997 of $3.4 million, and had warrants exercised for $1.8
million, the Company believes that it needs to raise additional
financing during the fourth quarter in order to meet its requirements
for the quarter. In addition, the Company believes that it will need to
raise financing beyond its fourth quarter of fiscal 1997 requirements in
order to implement its 1998 Operating Plan. The Company intends to
actively pursue additional debt or equity financing from institutional
or corporate investors, funding opportunities from strategic partners
and through additional private placements. There can be no assurance
that the Company will be able to obtain such financing on acceptable
terms or at all. Failure to obtain such additional capital could have a
materially adverse effect on the Company. See "Item 5. Other Information
- RISK FACTORS - Indispensable Need for Capital/ Report of Independent
Accountants Regarding Ability to Continue as a Going Concern" and " -
Additional Capital Requirements".
13
<PAGE> 14
NUKO Information Systems, Inc.
PART II OTHER INFORMATION
Item 1. Litigation
On March 18, 1997, Manufacturers' Services Limited ("MSL") commenced
litigation against the Company in the United States District Court for
the Northern District of California. In its complaint, MSL alleges that
the Company breached certain express and implied contractual obligations
to MSL by failing to pay for products manufactured by MSL and for
inventory MSL acquired on behalf of the Company. The relief sought by
MSL includes damages estimated at approximately $3.2 million. The
Company intends to vigorously defend against MSL's claims in this
lawsuit.
On April 29, 1997, Bruce Young and John Glass, former employees of the
Company, filed lawsuits in Superior Court of California, County of Santa
Clara, against the Company. The complaints,subsequently consolidated,
were filed alleging breach of contract and violation of certain labor
codes. The Company intends to vigorously defend the action.
In addition, the Company and certain of its present and former executive
officers have been named as defendants to two lawsuits, since
consolidated, styled as class actions:
On May 23, 1997, Lillian Levine filed a lawsuit in the Unites States
District Court for the Northern District of California against the
Company and its former Chief Financial Officer. The action was filed as
a class action on behalf of all persons who purchased the Company's
Common Stock from April 24, 1997 through May 20, 1997 or their
successors in interest. The plaintiff alleges that during this period,
the defendants disseminated materially false and misleading press
releases and public statements concerning the financial results for the
fiscal quarter ended March 31, 1997. The plaintiff alleges claims under
the federal securities laws and seeks damages for all members of the
class. The Company intends to vigorously defend the action.
On June 24, 1997, Bruce and Carol Wolitarsky filed a lawsuit in the
Unites States District Court for the Northern District of California
against the Company, its President/Chief Executive Officer/Chairman of
the Board and its former Chief Financial Officer. The action was filed
as a class action on behalf of all persons who purchased the Company's
Common Stock from April 24, 1997 through May 20, 1997. The plaintiffs
allege that during this period, the defendants issued incorrect
financial and business information about the Company, its finances,
performance and reporting of its revenues and financial results for its
first quarter of 1997. The plaintiffs allege that this caused the market
price of the Company's Common Stock to be artificially inflated and
caused them and other purchasers to pay too much for their Common Stock.
The plaintiff's allege claims under the federal securities laws and seek
damages for all members of the class. The Company intends to vigorously
defend the action.
14
<PAGE> 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 15, 1997, the Company sold 49,980 shares of Common Stock and
warrants to purchase another 18,000 shares of Common Stock to Pirco Investment
Co. for aggregate consideration of $120,000. On August 19, 1997, the Company
sold an additional 32,653 shares of Common Stock and warrants to purchase
another 12,000 shares of Common Stock to [Pirco] for aggregate consideration of
$80,000. All of such warrants have an exercise price of $2.45 and are
exercisable for a period of five years from the date of issuance.
On August 18, 1997, the Company sold 81,633 shares of Common Stock and
warrants to purchase another 30,000 shares of Common Stock to Nutley Investment,
SA for aggregate consideration of $200,000. On September 8, 1997, the Company
sold an additional 18,367 shares of Common Stock and warrants to purchase
another 6,750 shares of Common Stock to [Nutley] for aggregate consideration of
$45,000. All of such warrants have an exercise price of $2.45 and are
exercisable for a period of five years from the date of issuance.
On August 29, 1997, the Company sold 90,000 shares of Common Stock and
warrants to purchase another 18,000 shares of Common Stock to Banque Prevee
Edmund de Rothschild Suecursale for aggregate consideration of $252,000. All of
such warrants have an exercise price of $2.80 and are exercisable for a period
of five years from the date of issuance.
On September 8, 1997, the Company sold 80,000 shares of Common Stock and
warrants to purchase another 16,000 shares of Common Stock to Preston Assets
Management, Inc. for aggregate consideration of $224,000. All of such warrants
have an exercise price of $2.80 and are exercisable for a period of five years
from the date of issuance.
On September 15, 1997, the Company sold 12,000 shares of Common Stock
and warrants to purchase another 2,400 shares of Common Stock to Lawrence R.
Turel for aggregate consideration of $33,600. All of such warrants have an
exercise price of $2.80 and are exercisable for a period of five years from the
date of issuance.
On September 19, 1997, the Company sold 50,000 shares of Common Stock
and warrants to purchase another 10,000 shares of Common Stock to Xavier Roland
for aggregate consideration of $140,000. All of such warrants have an exercise
price of $2.80 and are exercisable for a period of five years from the date of
issuance.
On September 26, 1997, the Company completed a private financing with
RGC International Investors, LDC (the "Investor"), which resulted in the
issuance of 374,532 shares of Common Stock to the Investor for gross proceeds of
$1,000,000. The shares issued to the Investor were issued upon exercise of
374,532 outstanding upon exercise of warrants issued upon conversion of shares
of the Company's Series A Preferred Stock (the "Series A Warrants"), immediately
following repricing of such warrants to $2.67 (equal to 100% of the average
closing prices of the Company's Common Stock during the three trading days
preceding the date of exercise). In addition, the exercise price of an
additional 150,000 Series A Warrants issued in connection with prior conversions
of the Series A Preferred was reduced from $15 to $2.80 per share (equal to 105%
of the average closing prices of the Company's Common Stock during the three
trading days preceding the date of exercise).
15
<PAGE> 16
The Investor also agreed, in connection with the September 26, financing,
not to exercise its right under the terms of the Series A Preferred to require
the Company to redeem the remaining shares of Series A Preferred held by the
Investor until after a special meeting of stockholders (the "Meeting") relating
to the approval by such stockholders of the issuance of shares of Common Stock
issuable upon conversion of 10,000 shares of the Company's Series A Convertible
Preferred Stock issued to the Investor in December 1996/February 1997 private
placement (the "Proposal"). (Substantially all of the shares of Series A
Preferred currently held by the Investor currently are subject to the 19.99%
limitation and may not be converted unless and until stockholder approval is
obtained at the Meeting.) The Company agreed to file proxy materials with the
Securities and Exchange Commission relating to the Proposal, to call and hold
the Meeting and to solicit proxies in favor of the proposal. In addition, Pratap
Kesav Kondamoori and the other members of the Company's Board of Directors
agreed to vote in favor of the proposal. If stockholder approval of the proposal
is not obtained by December 10, 1997, the exercise price of an additional
200,000 Series A Warrants issued upon conversion of Series A Preferred will be
reduced from $15 to 100% of the closing bid price for Company Common Stock on
December 1, 1997.
The Investor also agreed as part of the September 26 financing that
following stockholder approval of the proposal and until 60 days thereafter
(but not later than January 30, 1998), the Investor will not convert any of the
remaining shares of Series A Preferred held by it at conversion prices less
than the lesser of (i) $3.50 and (ii) 100% of the average closing bid price of
the Common Stock during the ten trading days prior to stockholder approval. The
Investor agreed to convert no more than 50% of the remaining shares of Series A
Preferred held by it within the first 90 days after stockholder approval. The
limitations described in this paragraph will not apply on any conversion date
on which the Company's Common Stock trades at more than $4.25 per share.
Underwriters were not retained in connection with the sale of any of the
securities described above. All sales were made in private placements to
directors of the Company (or their affiliates) or to accredited individual
investors or accredited institutional investors. The Company relied upon an
exemption from registration under Section 4(2) of the Securities Act in
connection with each of these transactions.
16
<PAGE> 17
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.
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. 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 $20.6 million for the nine months ending September
30, 1997. The Company's accumulated deficit at September 30, 1997 is
approximately $39.7 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 currently
does not have any arrangements to obtain additional financing. If the
Company is unable to secure sufficient 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. The Company believes that it will need
additional funding during the fourth quarter. 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. An institutional investor has a right of
first refusal until February 23, 1998 to purchase securities on the same
terms offered by potential investors during such period, 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 alliance.
Such right of first refusal could impair the Company's ability to obtain
needed financing on acceptable terms or could prevent the Company from
obtaining such financing on any terms. 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 may be required to delay, scale
back
17
<PAGE> 18
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.
UNCERTAIN ACCEPTANCE OF THE COMPANY'S PRODUCTS. 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 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 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
18
<PAGE> 19
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., Harmonic Lightware, 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. Such growth 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"), other major customers in the telecommunications industry, and
major customers in the cable television carrier marketplace. 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' future requirements, and such customers
fail to
19
<PAGE> 20
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.
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 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
20
<PAGE> 21
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 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
21
<PAGE> 22
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 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.
22
<PAGE> 23
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 October 31, 1997, the officers
and directors of the Company control, directly or indirectly,
approximately 23.5% of the voting power of the 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.
23
<PAGE> 24
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
The Company Filed one Report on Form 8-K
during the quarterly period ended September 30,
1997. Such Report on Form 8-K, filed on July 11,
1997, described certain private placements of
the Company's Common Stock to two institutional
investors.
24
<PAGE> 25
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: November 13, 1997 By: /s/ Ramesh Sekar
----------------- --------------------------
NAME: Ramesh Sekar
TITLE: Chief Financial Officer
25
<PAGE> 26
INDEX TO EXHIBITS
Exhibits
Number Description
- ------ -----------
11.1 Calculation of Net Loss Per Share
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF NET LOSS PER SHARE FOR THREE MONTH PERIOD ENDED SEPTEMBER 30
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>
1997 1996
------------ ------------
<S> <C> <C>
PRIMARY LOSS PER SHARE
Net loss for period $ (9,653,346) $ (2,700,204)
Accretion of dividends on preferred stock (165,328) --
------------ ------------
Net loss available to common $ (9,818,674) $ (2,700,204)
============ ============
shareholders
Shares outstanding at the beginning
of the period 11,574,535 10,409,096
Weighted average effect of shares
issued during period 1,772,250 --
Weighted average effect of warrants 281,553 14,919
and options exercised in the period
Weighted average effect of share
subscriptions paid in the period -- --
------------ ------------
Weighted average shares outstanding 13,628,338 10,424,015
============ ============
Net loss available to common
shareholders per share $ (0.72) $ (0.26)
</TABLE>
There is no difference in the per share amounts computed under the primary and
the fully diluted basis.
26
<PAGE> 2
EXHIBIT 11.1
(continued)
CALCULATION OF NET LOSS PER SHARE FOR NINE MONTH PERIOD ENDED SEPTEMBER 30
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>
1997 1996
------------ -----------
<S> <C> <C>
PRIMARY LOSS PER SHARE
Net loss for period $(17,980,729) $(8,953,607)
Accretion of dividends on preferred stock (2,580,668) --
------------ -----------
Net loss available to common
shareholders $(20,561,397) $(8,953,607)
============ ===========
Shares outstanding at the beginning
of the period 10,491,101 9,128,418
Weighted average effect of shares
issued during period 1,069,255 701,987
Weighted average effect of warrants
and options exercised in the period 178,400 218,978
Weighted average effect of share
subscriptions paid in the period -- (594,068)
------------ -----------
Weighted average shares outstanding 11,738,756 9,455,315
============ ===========
Net loss available to common
shareholders per share $ (1.75) $ (0.95)
============ ===========
</TABLE>
There is no difference in the per share amounts computed under the primary and
the fully diluted basis.
27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 722,647
<SECURITIES> 0
<RECEIVABLES> 1,272,577
<ALLOWANCES> 1,081,094
<INVENTORY> 2,225,894
<CURRENT-ASSETS> 3,576,640
<PP&E> 5,261,213
<DEPRECIATION> 1,998,357
<TOTAL-ASSETS> 8,106,231
<CURRENT-LIABILITIES> 7,510,243
<BONDS> 0
4,866,596
0
<COMMON> 14,960
<OTHER-SE> (4,399,428)
<TOTAL-LIABILITY-AND-EQUITY> 8,106,231
<SALES> 186,115
<TOTAL-REVENUES> 186,115
<CGS> 5,345,580
<TOTAL-COSTS> 5,345,580
<OTHER-EXPENSES> 3,695,788
<LOSS-PROVISION> 740,311
<INTEREST-EXPENSE> 57,782
<INCOME-PRETAX> (9,653,346)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,653,346)
<DISCONTINUED> 0
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</TABLE>
