<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K/A
Amendment No. 1 to
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 29, 1997
WavePhore, Inc.
(Exact name of Registrant as specified in its Charter)
Indiana 0-24858 86-0491428
(State or other (Commission (I.R.S. Employer
Jurisdiction of File No.) Identification No.)
Incorporation)
3311 North 44th Street, Phoenix, Arizona 85018
(Address and Zip Code of Principal Executive Offices)
Registrant's telephone number, including area code: (602) 952-5500
N/A
(Former name or former address, if changed since last report.)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On May 29, 1997, WavePhore, Inc., an Indiana corporation (the "Company"),
through its wholly-owned subsidiary WavePhore Newscast, Inc., a Delaware
Corporation ("WavePhore Newscast"), purchased substantially all of the assets
and assumed certain of the liabilities (the "Acquired Business") of Paracel
Online Systems, Inc., a California corporation ("Paracel Online") of Dallas,
Texas, in consideration for cash and future consideration based on achieving
certain future financial performance, pursuant to an Agreement for the Purchase
and Sale of Assets among the Company, WavePhore Newscast, Paracel Online and
Paracel, Inc., dated May 29, 1997 (the "Asset Purchase Agreement").
Prior to this transaction, Paracel Online operated the Acquired Business
under the name "Paracel Online Systems, Inc.". The Acquired Business is engaged
in the delivery of customized and aggregated news and other information derived
from newspapers, newswires and news magazines to general business customers
worldwide utilizing proprietary and licensed technology. The Acquired Business
also provides industry specific, high performance text and data analysis
services to the pharmaceutical, biotechnology, and commercial online information
industries.
The Acquired Business receives information from a wide variety of national
and international sources continuously throughout the day via satellite and
other methods of electronic transmission. Through the use of proprietary
technology, the information is processed and then delivered to customers'
personal computers, principally via the Internet, and also via Lotus Notes
networks and e-mail servers. Each customer of the Newscast Today service has at
least one custom-defined profile, which pinpoints topics, competitors, industry
terms, and companies according to the customer's predefined profile. The
Acquired Business utilizes Fast Data Finder(TM) ("FDF(TM)") text filtering and
categorization technology licensed to the Acquired Business. The Fast Data
Finder uses the custom-built profiles as road maps for filtering the information
for each customer. The FDF is a massively-parallel hardware accelerator for
high-precision, large-scale text profiling that enables the filtering of raw
information and customization of information on a very large scale. The Acquired
Business delivers customized news to more than 30,000 users from more than 2,500
sources worldwide pursuant to information provider agreements with companies
such as Dow Jones, Information Access Company, Intell.X, Phillips Business News,
Ziff Davis and Speer Communications.
The Acquired Business and WavePhore Inc.'s existing Newscast business are
now operated within WavePhore Newscast, Inc. as a wholly-owned subsidiary of the
Company. The combination of the Acquired Business with WavePhore, Inc.'s
Newscast division enables WavePhore Newscast to provide customized, real-time
information to more than 125 corporate customers serving more than 100,000
knowledge workers. The Acquired Business adds Internet capability to WavePhore
Newscast's intranet distribution service, and brings the number of news and
information sources now available through WavePhore Newscast to more than 3,000.
The Company expects to retain the employees of Paracel Online as employees
of WavePhore Newscast and expects to continue the Acquired Business operations
and utilize the acquired assets in the same manner as they were operated and
utilized prior to this acquisition transaction. The acquired assets generally
consist of cash, accounts receivable, prepaid expenses, furniture and fixtures,
office and computer equipment, leasehold improvements and intangibles.
As of the closing date of the acquisition transaction, the Acquired
Business had approximately 26 employees. The Acquired Business is located in
leased facilities in Dallas, Texas. The Company intends to consolidate most of
the WavePhore Newscast operations in this facility.
<PAGE> 3
Pursuant to the Asset Purchase Agreement, the Company, through WavePhore
Newscast, Inc., paid $3,000,000 to Paracel Online at the closing, and agreed to
pay an additional $6,000,000 one hundred eighty (180) days after the May 29,
1997 closing date. The Asset Purchase Agreement also provides for the delivery
of additional consideration to Paracel Online if the Acquired Business and the
combined WavePhore Newscast business, respectively, achieve certain minimum
financial performance in 1997 and 1998, respectively. Fifty percent (50%) of any
such additional consideration may be paid in the Company's Common Shares based
upon the then current value of such shares.
The value of the assets purchased from Paracel Online and the amount and
type of consideration paid and to be paid by the Company for such assets were
determined by negotiations among the parties to the transaction.
The $3,000,000 cash payment made to Paracel Online at the closing date was
made from the Company's available funds.
<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The following historical financial statements together with the
report of independent auditors are filed herewith:
Paracel Online Systems, Inc.
Balance Sheets as of December 31, 1996 and 1995
Statement of Operations for the period from January 1, 1995 to
December 4, 1995, period from December 5, 1995 to December 31,
1995 and year ended December 31, 1996
Statement of Stockholder's Equity (Deficiency) for the period from
January 1, 1995 to December 4, 1995, period from December 5, 1995
to December 31, 1995 and year ended December 31, 1996
Statement of Cash Flows for the period from January 1, 1995 to
December 4, 1995, period from December 5, 1995 to December 31,
1995 and year ended December 31, 1996
Notes to Financial Statements
The following unaudited historical financial statements are filed
herewith:
Balance Sheet as of March 31, 1997
Statement of Operations for the three months ended March 31, 1997
Statement of Cash Flows for the three months ended March 31, 1997
Notes to Unaudited Financial Statements
<PAGE> 5
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc.)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE> 6
[KPMG PEAT MARWICK LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paracel Online Systems, Inc.:
We have audited the accompanying balance sheets of Paracel Online Systems, Inc.
(formerly Carthage International, Inc.) (a wholly owned subsidiary of Paracel,
Inc.) as of December 31, 1996 and 1995 and the related statements of operations,
stockholders' equity (deficiency) and cash flows for the period from January 1,
1995 to December 4, 1995 (Predecessor), period from December 5, 1995
(acquisition) to December 31, 1995 and year ended December 31, 1996 (Successor).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paracel Online Systems, Inc. as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for the period from January 1, 1995 to December 4, 1995 (Predecessor),
period from December 5, 1995 (acquisition) to December 31, 1995 and year ended
December 31, 1996 (Successor) in conformity with generally accepted accounting
principles.
As discussed in note 1 to the financial statements, effective December 5, 1995,
Paracel Online Systems, Inc. acquired 100% of the issued and outstanding capital
stock of Carthage International, Inc. (Predecessor) in a business combination
accounted for as a purchase. As a result of the acquisition, the financial
information for the period after the acquisition (Successor) has been prepared
to reflect the application of push-down accounting and is, therefore, presented
on a different cost basis than that for the period before the acquisition
(Predecessor) and is, therefore, not comparable.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
July 3, 1997
Member Firm of
[][][][] KPMG International
<PAGE> 7
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Balance Sheets
December 31, 1996 and 1995
(In thousands, except share information)
(Successor) (Note 1)
<TABLE>
<CAPTION>
ASSETS 1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 127 315
Accounts receivable 354 226
Other current assets 26 13
------- -------
Total current assets 507 554
------- -------
Property and equipment, at cost:
Furniture and office equipment 238 27
Computer equipment 372 48
Leasehold improvements 282 --
------- -------
892 75
Less accumulated depreciation and (149) (1)
amortization
------- -------
Net property and equipment 743 74
------- -------
Intangible assets:
Customer list 675 675
Goodwill 865 --
Covenant not to compete 250 250
------- -------
1,790 925
Less accumulated amortization (333) (25)
------- -------
Net intangible assets 1,457 900
------- -------
$ 2,707 1,528
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY) 1996 1995
------- -------
<S> <C> <C>
Current liabilities:
Current portion of acquisition $ 865 --
related liability
Accounts payable 221 105
Due to related party 4,548 849
Accrued payroll and payroll taxes 100 --
Other accrued liabilities 51 18
Deferred revenue 288 229
------- -------
Total current liabilities 6,073 1,201
------- -------
Stockholders' equity (deficiency):
Common stock, no par value
Authorized, issued and outstanding 625 625
1,000 shares
Accumulated deficit (3,991) (298)
------- -------
Net stockholders' equity (3,366) 327
(deficiency)
Commitments (notes 1 and 6)
Subsequent event (note 9)
------- -------
$ 2,707 1,528
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE> 8
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------------------------- ------------
PERIOD FROM
DECEMBER 5,
1995 PERIOD FROM
(ACQUISITION) JANUARY 1,
YEAR ENDED TO 1995 TO
DECEMBER DECEMBER 31, DECEMBER 4,
31, 1996 1995 1995
---------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Information service $ 518 32 104
Data center 217 27 108
------- ------- -------
Total revenues 735 59 212
------- ------- -------
Operating cost and expenses:
Cost of revenue 338 82 157
Sales and marketing 1,631 25 89
Research and development 1,366 16 126
General and administrative 1,097 198 109
------- ------- -------
Total operating cost and 4,432 321 481
expenses
------- ------- -------
Loss from operations (3,697) (262) (269)
Other income (expense), net 4 (36) 5
------- ------- -------
Loss before income tax (3,693) (298) (264)
Income tax -- -- --
------- ------- -------
Net loss $(3,693) (298) (264)
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE> 9
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc.)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Statements of Stockholders' Equity (Deficiency)
Year ended December 31, 1996, period from December 5, 1995 (acquisition)
to December 31, 1995 and period from January 1, 1995 to December 4, 1995
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK, $0.01 PAR VALUE COMMON STOCK, NO PAR VALUE
---------------------------------- --------------------------
ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL SHARES AMOUNT
------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (Predecessor) 9,480 $ -- 91 -- $ --
Issuance of common stock 936 -- 50 -- --
Net loss -- -- -- -- --
------- ------- ------- ------- -------
Balance at December 4, 1995 (Predecessor) 10,416 -- 141 -- --
Retirement of common stock (note 1) (10,416) -- (141) -- --
Issuance of common stock (note 1) -- -- -- 1,000 625
Net loss -- -- -- -- --
------- ------- ------- ------- -------
Balance at December 31, 1995 (Successor) -- -- -- 1,000 625
Net loss -- -- -- -- --
------- ------- ------- ------- -------
Balance at December 31, 1996 (Successor) -- $ -- -- 1,000 $ 625
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
RETAINED NET
EARNINGS STOCKHOLDERS'
(ACCUMULATED EQUITY
DEFICIT) (DEFICIENCY)
------------ -------------
<S> <C> <C>
Balance at January 1, 1995 (Predecessor) (175) (84)
Issuance of common stock -- 50
Net loss (264) (264)
------- -------
Balance at December 4, 1995 (Predecessor) (439) (298)
Retirement of common stock (note 1) 439 298
Issuance of common stock (note 1) -- 625
Net loss (298) (298)
------- -------
Balance at December 31, 1995 (Successor) (298) 327
Net loss (3,693) (3,693)
------- -------
Balance at December 31, 1996 (Successor) (3,991) (3,366)
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE> 10
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
-------------------------------- ---------------
PERIOD FROM
DECEMBER 5,
1995 PERIOD FROM
YEAR ENDED (ACQUISITION) TO JANUARY 1, 1995
DECEMBER 31, DECEMBER 31, TO DECEMBER 4,
1996 1995 1995
------------ ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,693) (298) (264)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 417 25 23
Changes in assets and liabilities, net of effects of acquisition
of Carthage International, Inc.:
Accounts receivable (128) (115) (100)
Other current assets (13) 45 (58)
Accounts payable 116 51 49
Accrued payroll and payroll expenses 100 (8) 8
Deferred revenue 59 55 173
Other accrued liabilities 33 6 12
Borrowings from officer -- -- 145
------- ------- -------
Net cash used in operating activities (3,109) (239) (12)
------- ------- -------
Cash flows from investing activities - purchase of property
and equipment (778) (23) --
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock -- -- 50
Due to related party 3,699 530 --
------- ------- -------
Net cash provided by financing activities 3,699 530 50
------- ------- -------
Net (decrease) increase in cash and cash
equivalents (188) 268 38
Cash and cash equivalents at beginning of period 315 47 9
------- ------- -------
Cash and cash equivalents at end of period $ 127 315 47
======= ======= =======
Supplemental schedule of cash flow information - cash paid during
the period for interest $ 17 -- 2
======= ======= =======
</TABLE>
Supplemental noncash investing activities:
During the period from December 5, 1995 (acquisition) to December 31, 1995
and in connection with the acquisition of Carthage (note 1), the
Company issued capital stock valued at $625,000.
During the year ended December 31, 1996, additional consideration of
$625,000 was earned by the shareholders of Carthage (note 1).
Accordingly, the Company recorded goodwill and related acquisition
related liability because the shares were not issued to the
shareholders until subsequent to year-end.
See accompanying notes to financial statements.
<PAGE> 11
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Notes to Financial Statements
December 31, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
BUSINESS
Paracel Online Systems, Inc. (the Company) is engaged in the delivery of
customized and aggregated news service derived from newspapers, news wires
and news magazines to business customers worldwide. The Company was formed
on November 9, 1995 as a California corporation.
The Company is a wholly owned subsidiary of Paracel, Inc., a California
corporation engaged in the research, development and distribution of
specialized data filters and related software for the government,
biotechnology and information processing fields.
ACQUISITION
Effective December 5, 1995, the Company, the Company's parent (Paracel,
Inc.) and Carthage International, Inc. (Carthage) entered into an Agreement
and Plan of Merger (Merger Agreement), whereby the Company acquired all of
the outstanding capital stock of Carthage. The acquisition was accounted
for as a purchase. Pursuant to the terms of the Merger Agreement, an
initial acquisition payment of $625,000 was paid through the issuance of
230,624 shares of Paracel, Inc. common stock to Carthage shareholders. The
remaining purchase consideration was to be paid through the future
issuances of 691,882 shares of Paracel, Inc. common stock in three equal
annual installments contingent upon the Company's ability to execute
contracts valued at not less than $840,000 each year from 1996 through
1998. In the opinion of Company management, as of December 31, 1995, it was
uncertain that such levels of contract awards would be met; accordingly,
the remaining amount of consideration was considered contingent. At such
time as the additional Paracel, Inc. common stock is distributable or the
outcome of the contingency is determinable beyond a reasonable doubt, the
contingent consideration will be recorded as a capital contribution.
Accordingly, goodwill will be increased by the value of capital stock
issued subsequent to the purchase date.
As of December 31, 1995, the initial payment of $625,000 was recorded by
the Company as a capital contribution through the issuance of 1,000 shares
of its common stock to Paracel, Inc.
As of December 31, 1996, an additional 230,624 shares of contingent
consideration was earned, and accordingly, goodwill was recorded at the
then fair market value of the shares of $3.75 per share or an aggregate of
approximately $865,000 with the offset to acquisition related liability as
the Paracel, Inc. shares were not issued until May 1997. The total purchase
consideration earned as of December 31, 1996 was $1,590,000.
In connection with the acquisition, the Company and the principal
shareholders of Carthage International, Inc. also entered into a four-year
employment contract and a four-year covenant not-to-compete agreement.
BASIS OF PRESENTATION
The Predecessor Company's financial statements for the period from January
1, 1995 to December 4, 1995 have been prepared based on the Predecessor
Company's historical cost basis.
1
<PAGE> 12
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Notes to Financial Statements, Continued
The Company's financial statements for the period from December 5, 1995
(acquisition) through December 31, 1995 and for the year ended December 31,
1996 have been prepared to reflect the application of push-down accounting
associated with the acquisition of Carthage. Accordingly, effective
December 5, 1995, the common stock and retained earnings of Carthage were
eliminated with an offsetting adjustment to the capital accounts
attributable to common shareholders. In connection with the acquisition,
the Company assumed liabilities in excess of assets of approximately
$300,000 (Net Deficit); accordingly, the initial acquisition payment of
$625,000 together with the Net Deficit was allocated to intangible assets
as of December 5, 1995, as follows (in thousands):
<TABLE>
<S> <C>
Customer lists $675
Covenant not to complete 250
----
$925
====
</TABLE>
At December 31, 1996, the contingent consideration earned of approximately
$865,000 was recorded as goodwill.
LIQUIDITY
The Company and the Predecessor to the Company have suffered recurring
losses from operations and the Company expects to incur losses in the near
future due to significant costs incurred in the development and marketing
of its services. The Company is subject to all of the risks inherent in new
business enterprises. The operations of the Company have been funded by the
ongoing financial support of the Company's parent, Paracel, Inc. The
Company's ongoing and future operations will be dependent upon the
continued financial support of its parent until it generates positive
operating cash flow.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and contingent assets
and contingent liabilities at the balance sheet dates and the reporting of
revenues and expenses during the reporting periods to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results may differ from those estimates.
LONG-LIVED ASSETS
Depreciation and amortization of property and equipment and intangible
assets are computed using straight-line methods over estimated useful lives
of the respective assets as follows:
Furniture and office equipment 7 years
Computer equipment 3 years
Leasehold improvements Life of lease (five years)
Capitalized license 3 years
Customer list 3 years
Covenant not to compete 3 years
Goodwill 3 years
2
<PAGE> 13
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Notes to Financial Statements, Continued
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," on January 1, 1996. This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows (undiscounted and without interest) expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Adoption of this statement did
not have a material impact on the Company's financial position, results of
operations or liquidity.
REVENUE RECOGNITION
Information service revenue is generated through the delivery of customized
and aggregated news services derived from newspapers, news wires and news
magazines to business customers worldwide and is recognized ratably over
the term of the subscription agreement, generally 12 months. The unearned
portion of revenue is shown as deferred revenue in the accompanying balance
sheets.
Data center revenue is generated by providing certain information service
customers usage of the Company's computer data center and is recognized
ratably over the term of data center usage agreement.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes." Under the asset and liability method of SFAS
No. 109, deferred income taxes reflect the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. Changes in tax rates and
laws are reflected in earnings in the period such changes are enacted.
CASH AND CASH EQUIVALENTS
Cash equivalents include certificates of deposit with maturities of three
months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of cash, accounts receivable, accounts payable,
accrued liabilities and due to related party approximate their carrying
values because of the short maturity of these instruments.
RESEARCH AND DEVELOPMENT
Research and development costs related to the design, development and
testing of new systems, applications and technologies are charged to
expense in the period incurred.
3
<PAGE> 14
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Notes to Financial Statements, Continued
ACCOUNTING FOR STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for stock options in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1996 and future years
as if the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(2) INCOME TAXES
No income tax expense (benefit) was provided for during the year ended
December 31, 1996, period from December 5, 1995 (acquisition) to December
31, 1995 and period from January 1, 1995 to December 4, 1995 due to the tax
losses incurred in the respective periods.
The Company's effective tax rate differs from the statutory Federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------------------- ------------
PERIOD FROM
DECEMBER 5,
1995 PERIOD FROM
(ACQUISITION) JANUARY 1,
YEAR ENDED TO 1995 TO
DECEMBER 31, DECEMBER 31, DECEMBER 4,
1996 1995 1995
------------ ------------- ------------
<S> <C> <C> <C>
Expected income tax benefit (34)% (34)% (34)%
Change in valuation allowance 29 12 37
Nondeductible goodwill,
intangible assets and other 5 22 (3)
-------- -------- --------
Effective tax rate --% --% --%
======== ======== ========
</TABLE>
4
<PAGE> 15
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Notes to Financial Statements, Continued
The components of the net deferred tax assets consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
------- -------
<S> <C> <C>
Net operating loss carryforwards $ 1,302 26
Accumulated depreciation 29 3
Accruals and other 111 84
------- -------
Gross deferred tax assets 1,442 113
Valuation allowance (1,442) (113)
------- -------
Net deferred tax asset $ -- --
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in
making this assessment. The Company has recorded a full valuation allowance
against the total gross deferred tax assets due to uncertainty surrounding
the realizability of this asset.
At December 31, 1996, the Company has approximately $3.5 million of net
operating loss carryforwards available for Federal and state tax reporting
purposes which expire in 2010 and 2000, respectively.
The ultimate realization of the net operating loss carryforwards will be
subject to certain limitations due to any changes in the Company's
ownership and will be dependent upon the Company attaining future taxable
earnings.
If certain substantial changes in the Company's ownership should occur,
there would be an annual limitation on the amount of the tax loss
carryforwards that can be utilized, which could result in a part of such
losses expiring before they are used.
(3) EMPLOYEE BENEFIT PLANS
The parent to the Company, Paracel, Inc., has an employee 401(k) retirement
and savings plan for certain eligible Company employees. Contributions to
the 401(k) are at the discretion of the Board of Directors of Paracel, Inc.
No contributions were made by Paracel, Inc. during 1996 and 1995.
(4) STOCKHOLDERS' EQUITY
During the period from January 1, 1995 to December 4, 1995, the Predecessor
to the Company issued 936 shares of its common stock for $50,000.
5
<PAGE> 16
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Notes to Financial Statements, Continued
Effective December 5, 1995, the Company issued 1,000 shares of its common
stock at a valuation of $625,000 and canceled 10,416 shares of common stock
of the Predecessor in connection with the accounting for the acquisition of
Carthage (note 1).
(5) STOCK OPTIONS
In connection with certain employment agreements among the officers of the
Company, the Company and the parent company, Paracel, Inc., the officers
were given options to purchase shares of Paracel, Inc. common stock. The
options granted during the year ended December 31, 1996 amounted to
200,000. No options were granted previous to the year ended December 31,
1996.
The per share weighted average fair value of stock options granted during
1996 was $2.71 on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Expected dividend yield --
Risk free interest rate 6.0%
Expected life (years) 7
==========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for any options, and
accordingly, no compensation cost has been recognized for stock options in
the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net loss:
As reported $ 3,693
Pro forma 3,700
==========
</TABLE>
Effective May 29, 1997, the options granted to officers of the Company were
canceled as part of the Asset Sale described in note 9.
(6) COMMITMENTS
The Company leases its offices and laboratory facilities under several
operating leases expiring at various dates through the year 2000. Under
these lease agreements, the Company is required to pay various expenses
including property taxes, insurance, utilities and maintenance.
6
<PAGE> 17
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Notes to Financial Statements, Continued
Future minimum commitments remaining under these agreements as of December
31, 1996 are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 129,972
1998 129,972
1999 129,972
2000 129,972
2001 86,648
----------
$ 606,536
==========
</TABLE>
The total rent expense for the period from January 1, 1995 to December 4,
1995 (Predecessor), period from December 5, 1995 to December 31, 1995 and
year ended December 31, 1996 (Successor) was $61,000, $6,000 and $91,000,
respectively.
(7) INFORMATION PROVIDER AGREEMENTS
The Company has agreements to purchase information from news wires,
newspapers and news magazines. The agreements are generally for a period of
one year and include a termination clause in which either party may
terminate without penalty by providing written notice to the other party
prior to 90 days of termination. As of December 31, 1996, the Company had
approximately $100,000 of commitments to purchase information during 1997.
No other commitments were outstanding.
The Company also has an agreement with one information provider whereby the
Company acts as an agent for the information provider. The information
provider bills the end-user directly for the usage of the information. The
Company collects a fee from the information provider based on a percentage
of the information provider revenues generated from the end-user.
(8) RELATED PARTY TRANSACTIONS
Amounts due to the Company's parent, Paracel, Inc., aggregated $4,548,000
and $849,000 as of December 31, 1996 and 1995, respectively, and relate
principally to the funding of the Company's operations.
During the year ended December 31, 1996, certain expenses for engineering
development, sales and marketing incurred on the Company's behalf by its
parent, Paracel, Inc., amounted to $987,000 and have been included in the
statement of operations. No such amounts were incurred on behalf of the
Company during the preceding periods.
7
<PAGE> 18
PARACEL ONLINE SYSTEMS, INC.
(Formerly Carthage International, Inc)
(A Wholly Owned Subsidiary of Paracel, Inc.)
Notes to Financial Statements, Continued
(9) SUBSEQUENT EVENT
Effective May 29, 1997, the Company sold all of its tangible and
identifiable intangible assets and transferred certain liabilities (herein
referred to as Asset Sale) to WavePhore, Inc. and WavePhore Newscast, Inc.
(collectively WavePhore). The terms of the Asset Sale provided that the
Company would receive:
- $3.0 million in cash upon closing;
- $6.0 million in cash approximately six months after closing; and
- Other contingent payments, based on the achievement of certain revenue
milestones, of which up to 50% can be paid in WavePhore common stock
and the remainder in cash.
Also in connection with the Asset Sale and the cancelation and termination
of certain employment contracts with the principals of the Company,
together with their personal performance commitments, Paracel, Inc.:
- Was released from making any future issuances of Paracel, Inc. common
stock to the former shareholders of Carthage (see note 1, Acquisition),
including the earned but unissued shares as of December 31, 1996, and
agreed to purchase the Paracel, Inc. common stock of such shareholders
for a contingent price of up to a maximum of $1,592,000. The contingent
payments are based on the achievement of certain revenue milestones of
WavePhore (as defined in the Asset Sale Agreement).
- Canceled and terminated the employment contracts with officers of the
Company and, pursuant to Employment Termination Agreements, agreed to
pay them an aggregate of $100,000, five days after execution of the
Asset Sale, $100,000 approximately six months after Closing and
contingent payments up to a maximum of approximately $1,600,000,
conditioned on the continued employment of such individuals with
WavePhore and the achievement of certain revenue milestones of
WavePhore.
- Entered into a consulting agreement with a shareholder of Paracel,
Inc., who was then a former officer and shareholder of Carthage, to pay
certain compensation up to a maximum of $200,000, conditioned on his
continued consulting services and the achievement of certain revenue
milestones of WavePhore.
8
<PAGE> 19
PARACEL ONLINE SYSTEMS, INC.
(A Wholly Owned Subsidiary of Paracel, Inc.)
Balance Sheet
March 31, 1997
(Unaudited)
(In Thousands)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ --
Accounts receivable 561
Other current assets 10
-------
Total current assets 571
Property and equipment, at cost:
Furniture and office equipment 238
Computer equipment 444
Leasehold improvements 282
-------
964
Less accumulated depreciation and amortization (252)
-------
Net property and equipment 712
Intangible assets:
Customer list 675
Goodwill 865
Covenant not to compete 250
-------
1,790
Less accumulated amortization (483)
-------
Net intangible assets 1,307
-------
Total Assets $ 2,590
=======
LIABILITIES AND
STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 111
Current portion of acquisition related liability 865
Deferred revenue 647
Due to related party 5,101
Accrued payroll and payroll taxes 86
Other accrued liabilities 32
-------
Total current liabilities 6,842
Stockholders' deficiency:
Common stock, no par value. Authorized issued
and outstanding 1,000 shares 625
Accumulated deficit (4,877)
-------
Net stockholders' deficiency (4,252)
-------
Total Liabilities and Stockholders' deficiency $ 2,590
=======
</TABLE>
See accompanying note.
<PAGE> 20
PARACEL ONLINE SYSTEMS, INC.
(A Wholly Owned Subsidiary of Paracel, Inc.)
Statement of Operations
Three Months Ended March 31, 1997
(Unaudited)
(In Thousands)
<TABLE>
<S> <C>
Revenues:
Information service $ 259
Data center 57
-------
Total revenues 316
Operating cost and expenses:
Cost of revenue 163
Sales and marketing 431
Research and development 228
General and administrative 381
-------
Total operating cost and expenses 1,203
-------
Loss from operations (887)
Other income (expense), net 1
-------
Loss before income tax (886)
Income tax --
-------
Net loss $ (886)
=======
</TABLE>
See accompanying note.
<PAGE> 21
PARACEL ONLINE SYSTEMS, INC.
(A Wholly Owned Subsidiary of Paracel, Inc.)
Statement of Cash Flows
Three Months Ended March 31, 1997
(Unaudited)
(In Thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(886)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 253
Changes in assets and liabilities:
Accounts receivable (207)
Other current assets 16
Accounts payable (110)
Accrued payroll and payroll expenses (14)
Deferred revenue 359
Other accrued liabilities (19)
-----
Net cash used in operating activities (608)
Cash flows from investing activities - purchase of property
and equipment (72)
Cash flows from financing activities - due to related party 553
-----
Net decrease in cash and cash equivalents (127)
Cash and cash equivalents at beginning of period 127
-----
Cash and cash equivalents at end of period $ --
=====
</TABLE>
See accompanying note.
<PAGE> 22
Paracel Online Systems, Inc.
(A Wholly Owned Subsidiary of Paracel, Inc.)
Note to Financial Statements
Three Months Ended March 31, 1997
(Unaudited)
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Certain information and
footnote disclosures normally included in financial statements have been omitted
pursuant to such rules and regulations. These financial statements should be
read in conjunction with the financial statements and the notes thereto included
elsewhere herein for the period from January 1, 1995 to December 4, 1995, period
December 5, 1995 to December 31, 1995 and year ended December 31, 1996. The
results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
<PAGE> 23
B) PRO FORMA FINANCIAL INFORMATION.
The following pro forma consolidated financial statements as of
March 31, 1997 and for the three months ended March 31, 1997 and the year
ended December 31, 1996 are filed herewith:
Pro Forma Consolidated Balance Sheet
Pro Forma Consolidated Statements of Operations
Notes to Pro Forma Consolidated Financial Statements
The following pro forma consolidated statements of operations for
the three months ended March 31, 1997 and the year ended December 31, 1996
give effect to the acquisition of substantially all of the assets and the
assumption of certain of the liabilities of Paracel Online Systems, Inc.
("Paracel Online") by the Registrant as if the transaction had occurred at
the beginning of each respective period rather than the actual date of May
29, 1997. The pro forma consolidated balance sheet has been presented as
if the transaction had occurred March 31, 1997 rather than the actual date
of May 29, 1997. The pro forma information is based on the historical
financial statements of Paracel Online and the Registrant giving effect to
the transaction under the purchase method of accounting and the
assumptions and adjustments set forth in the accompanying notes to the pro
forma consolidated financial statements.
The unaudited pro forma consolidated statements of operations do not
necessarily represent the results of operations of the Registrant as if
the acquisition had actually occurred on the date indicated or which may
be obtained in the future. The pro forma consolidated financial statements
presented should be read in conjunction with the financial statements and
related notes of the Registrant.
<PAGE> 24
Pro Forma Consolidated Balance Sheet (Unaudited)
March 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Parcel Online Pro Forma
Registrant Systems, Inc. Adjustments Pro Forma
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 9,181 $ -- $ (3,000) $ 6,181
Accounts receivable 2,638 561 -- 3,199
Inventories 4,153 -- -- 4,153
Other receivables 182 -- -- 182
Notes receivable from officers, including interest 621 -- -- 621
Prepaid expenses and other 1,325 10 -- 1,335
-------- -------- -------- --------
Total Current Assets 18,100 571 (3,000) 15,671
Notes and other receivables 48 -- -- 48
Property and equipment, net 2,711 712 -- 3,423
Intangible assets of businesses acquired, net 16,081 1,307 1,626 19,014
Deposits and other assets 1,747 -- -- 1,747
-------- -------- -------- --------
$ 38,687 $ 2,590 $ (1,374) $ 39,903
======== ======== ======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,500 $ 111 $ -- $ 2,611
Accrued expenses 1,574 118 -- 1,692
Bank loans 1,320 -- -- 1,320
Due to related party -- 5,101 (5,101) --
Payable related to business acquisition -- -- 6,000 6,000
Deferred revenue -- 647 -- 647
Current portion of long-term debt 537 865 (865) 537
-------- -------- -------- --------
Total Current Liabilities 5,931 6,842 34 12,807
Long-term debt, less current portion 87 -- -- 87
Other long-term liabilities 257 -- 200 457
Stockholders' equity 32,412 (4,252) (1,608) 26,552
-------- -------- -------- --------
$ 38,687 $ 2,590 $ (1,374) $ 39,903
======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE> 25
Pro Forma Consolidated Statement of Operations (Unaudited)
Year Ended December 31, 1996
(In thousands except loss per share)
<TABLE>
<CAPTION>
Parcel Online Pro Forma
Registrant Systems, Inc. Adjustments Pro Forma
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 19,020 $ 735 $ -- $ 19,755
Cost of revenues 11,226 338 -- 11,564
-------- -------- ------ --------
Gross margin 7,794 397 -- 8,191
Operating expenses:
Research and development 3,875 1,366 -- 5,241
Sales and marketing 5,758 1,631 -- 7,389
General and administrative 5,389 789 -- 6,178
Amortization 1,931 308 (112) 2,127
-------- -------- ------ --------
16,953 4,094 (112) 20,935
-------- -------- ------ --------
Loss from operations (9,159) (3,697) 112 (12,744)
Other (income) expense:
Interest expense 198 (4) -- 194
Interest income (742) -- -- (742)
Other --
-------- -------- ------ --------
(544) (4) -- (548)
-------- -------- ------ --------
Net loss $ (8,615) $ (3,693) $ 112 $(12,196)
======== ======== ====== ========
Less: Preferred stock dividends (1,693) (1,693)
-------- -------- ------ --------
Net loss after preferred stock dividends $(10,308) $ (3,693) $ 112 $(13,889)
======== ======== ====== ========
Net loss per common share $ (0.64) $ (0.90)
======== ======== ====== ========
Net loss per common share after
preferred stock dividends $ (0.76) $ (1.02)
======== ======== ====== ========
Number of shares used in per share
calculation 13,554 13,554
======== ======== ====== ========
</TABLE>
See accompanying notes.
<PAGE> 26
Pro Forma Consolidated Statement of Operations (Unaudited)
Three Months Ended March 31, 1997
(In thousands except loss per share)
<TABLE>
<CAPTION>
Parcel Online Pro Forma
Registrant Systems, Inc. Adjustments Pro Forma
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 3,685 $ 316 $ -- $ 4,001
Cost of revenues 1,988 163 -- 2,151
-------- -------- ------ --------
Gross margin 1,697 153 -- 1,850
Operating expenses:
Research and development 1,586 228 -- 1,814
Sales and marketing 2,131 431 -- 2,562
General and administrative 1,095 231 -- 1,326
Amortization 489 150 (101) 538
-------- -------- ------ --------
5,301 1,040 (101) 6,240
-------- -------- ------ --------
Loss from operations (3,604) (887) 101 (4,390)
Other (income) expense:
Interest expense 49 (1) -- 48
Interest income (163) -- -- (163)
-------- -------- ------ --------
(114) (1) -- (115)
-------- -------- ------ --------
Net loss $ (3,490) $ (886) $ 101 $ (4,275)
======== ======== ====== ========
Less: Preferred stock dividends (288) (288)
-------- -------- ------ --------
Net loss after preferred stock dividends $ (3,778) $ (886) $ 101 $ (4,563)
======== ======== ====== ========
Net loss per common share $ (0.21) $ (0.26)
======== ======== ====== ========
Net loss per common share after
preferred stock dividends $ (0.23) $ (0.28)
======== ======== ====== ========
Number of shares used in per share
calculation 16,260 16,260
======== ======== ====== ========
</TABLE>
See accompanying notes.
<PAGE> 27
Notes to Pro Forma Consolidated Financial Statements (Unaudited)
(Amounts in Thousands)
For purposes of determining the pro forma effects on the consolidated
statements of operations for the three months ended March 31, 1997 and the year
ended December 31, 1996, the pro forma adjustments have been made as if the
Paracel Online transaction had occurred at the beginning of each respective
period. With respect to the pro forma effects on the consolidated balance sheet,
the pro forma adjustments have been made as if the transaction had occurred on
March 31, 1997.
(1) Under the purchase method of accounting, Paracel Online's assets and
liabilities are required to be adjusted to their estimated fair values.
Adjustments have been determined based on available information set forth
in Paracel Online's financial statements included elsewhere herein. The
following are the preliminary pro-forma adjustments to reflect Paracel
Online's fair value at the date of the acquisition:
<TABLE>
<S> <C> <C>
Net tangible assets of Paracel $ 367
Additional assumed liabilities (200)
Increase in net assets for fair value adjustments:
Intangibles:
Developed technology 2,300
Assembled Workforce 470
Goodwill 163
-------
Sub-total 2,933
In-process research and development (i) 6,000
-------
$ 9,100
=======
Purchase price:
Cash $ 3,000
Payable to Paracel, Inc. 6,000
Acquisition costs 100
-------
$ 9,100
=======
</TABLE>
(i) The amount allocated to in-process research and development was based
on a valuation of Paracel Online's completed and in-process
technologies. The in-process research and development of $6,000 will
be charged to operations as required under generally accepted
accounting principles with the recording of the purchase price
allocation.
(2)For purposes of determining the pro forma effect of the Paracel acquisition
on the Registrant's consolidated statement of operations, the following pro
forma adjustments have been made:
<TABLE>
<CAPTION>
3 months 12 months
<S> <C> <C>
Amortization of intangibles acquired (i) $ 49 $ 196
Reduction of amortization of acquired
intangible (150) (308)
not assumed
----------------
$(101) $(112)
================
</TABLE>
(i)The in-process research and development charged to operations is not
reflected in the pro forma adjustments since it is recorded as a
one-time impact item with respect to the purchase transaction.
<PAGE> 28
(3)For purposes of determining the pro forma effect of the Paracel acquisition
on the Registrant's consolidated balance sheet, the following assets and
liabilities of Paracel Online were not assumed by the Registrant:
<TABLE>
<S> <C>
Intangible Assets of businesses acquired, net $(1,307)
Due to related party 5,101
Payable to related business acquisition 865
-------
Net liabilities not assumed $ 4,659
=======
</TABLE>
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WAVEPHORE, INC.
Date: August 12, 1997 By: /s/ David E. Deeds
--------------------------------------
David E. Deeds, Chairman,
Chief Executive Officer
and President
<PAGE> 30
7(C). EXHIBITS
The following exhibits are furnished as required by Item 7(c):
Exhibit
Number Description
- ------- -----------
2 * Agreement for the Purchase and Sale of Assets by and among
WavePhore, Inc., WavePhore Newscast, Inc., Paracel Online
Systems, Inc. and Paracel, Inc., dated May 29, 1997.
23.1 Consent of KPMG Peat Marwick LLP.
- -------------------------
* Previously Filed.
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
The Board of Directors
Paracel Online Systems, Inc.
We consent to the inclusion of our report dated July 3, 1997, with respect to
the balance sheets of Paracel Online Systems, Inc. (formerly Carthage
International, Inc.) (a wholly owned subsidiary of Paracel, Inc.) as of December
31, 1996 and 1995, and the related statements of operations, stockholders'
equity (deficiency) and cash flows for the period from January 1, 1995 to
December 4, 1995 (Predecessor), the period from December 5, 1995 (acquisition)
to December 31, 1995 and the year ended December 31, 1996 (Successor), which
report appears in Amendment No. 1 to Form 8-K/A of WavePhore, Inc. dated August
12, 1997.
KPMG PEAT MARWICK LLP
Los Angeles, California
August 12, 1997
