SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 23, 1999
VIZACOM INC.
(Exact name of registrant as specified in its charter)
Delaware 1-14076 22-3270045
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
Glenpointe Center East
300 Frank W. Burr Boulevard
Teaneck, New Jersey 07666
(Address of principal executive offices) (Zip Code)
(201) 928-1001
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events.
We, Vizacom Inc., file this Current Report on Form 8-K to update and
supplement the description of our company and risk factors contained in our:
- Annual Report on Form 10-KSB, for the year ended December
31, 1998,
- Quarterly Report on Form 10-QSB, for the quarter ended March 31, 1999,
- Quarterly Report on Form 10-QSB, for the quarter ended June 30, 1999,
and
- Quarterly Report on Form 10-QSB, for the quarter ended September 30,
1999.
THE COMPANY
We make and sell computer software products for both the United States
domestic and international markets and have entered into the e-commerce and
Internet services business initially through our Internet web site
VisualCities.com. and by offering e-commerce services through our call centers.
Most of our software products are visual communication tools, comprised of:
- desktop publishing,
- presentation graphics, and
- graphics/drawing
software for the corporate, SOHO and consumer markets. Our web site,
VisualCities.com, focuses on content and e-commerce associated with these visual
communication tools.
Our software products are intended to allow the user to improve the visual
and graphical appeal as well as the overall effectiveness of documents and
digital images produced by either our or third parties' desktop publishing, web
publishing, presentation graphics, e-mail, word processing and other similar
applications and products. We currently offer twenty-eight products that operate
on:
- Windows(R) 98,
- Windows 95,
- Windows NT(R),
- Windows 3.1, and
- DOS
operating systems for IBM personal computers and compatibles.
We also sell software products together with certain computer hardware,
such as:
- "mouse pens,"
- new personal computers, and
- digital cameras.
We have established a multi-channel distribution system utilizing:
- direct mail,
- telemarketing,
- retail,
- corporate,
- original equipment manufacturer (OEM), and
- the Internet
sales channels.
We currently derive substantially all of our sales from software and
hardware products sold directly to end-users by our direct mail and
telemarketing centers, and to retailers, distributors and corporate purchasers
by our internal sales force and independent sales representatives. We estimate
that approximately 91% of our net sales for the nine months ended September 30,
1999 were generated through our direct sales and telemarketing efforts, compared
to 83% of our net sales for the period ended September 30, 1998.
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North America and international net sales for the three and nine months
ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- ---------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America. . . . . $ 1,584,050 36 $ 2,013,761 48 $ 5,073,298 37 $ 5,844,355 48
International. . . . . 2,786,186 64 2,209,564 52 8,594,653 63 6,381,949 52
----------- --- ----------- --- ----------- --- ----------- ---
Net sales. . . . . . . $ 4,370,236 100 $ 4,223,325 100 $13,667,951 100 $12,226,304 100
=========== === =========== === =========== === =========== ===
</TABLE>
We believe that end users are continuing to migrate from the Windows 3.1
and Windows 95 environments to the Windows NT and Windows 98 platforms and to
Internet computing. We expect increased competition, including price
competition, in the computer software and hardware markets in the future.
Several of our competitors sell suites of products which include products that
directly compete with our software products. We believe that these offerings of
product suites have and will continue to adversely affect sales of our products
as the individual products within the suites continue to gain increased levels
of inter-operability and functionality. We currently do not offer a suite of
general purpose office software products; however, we currently offer one
product suite, Serif Publishing Power Suite, as well as products that complement
competitive suite products.
We are currently substantially dependent upon sales of our Serif line of
software programs. Microsoft Corporation, Corel Corporation, Adobe Systems and
others sell products targeted for substantially the same market as the Serif
product line, some of which are included in product suites.
Our VisualCities.com web site is a niche Internet commerce network which
provides targeted information, content, goods and services to visual
communication users. We intend to utilize this web site to sell our products and
create a gathering place or community for individuals with interest in visual
communication products.
We believe that in order to increase net revenues, we must:
- continue to internally develop and introduce new technologies and
products,
- obtain additional technologies and products through strategic
alliances and acquisitions, and
- introduce new marketing strategies, to include strengthening our
marketing through e-commerce and the Internet.
Any inability or delay in executing these strategies, difficulties
encountered in introducing new products or marketing programs, or failures of
our current and future products to compete successfully with products offered by
other vendors, could adversely affect our performance.
Our growth is expected to require:
- increases in the number of employees,
- expansion of our e-commerce and Internet sites,
- expenditures for new product development,
- the acquisition of product rights,
- the acquisition of e-commerce service providers,
- sales and marketing expenses, and
- increased general and administrative expenses.
Business Strategy
We have begun implementing a strategy that includes becoming a fully
integrated provider of e-commerce services by capitalizing on our core
competencies, as well as through complementary acquisitions. This strategy is
summarized below.
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VisualCities.com
We recently launched our VisualCities.com Internet commerce network. We
hope to leverage our:
- large installed base of customers,
- direct marketing capabilities, and
- international brand recognition
to draw users to this web site and to promote commercial transactions.
We intend to ultimately offer the VisualCities.com user focused content
within a studio-based format reflecting seven visual communications markets:
- digital imaging,
- animation,
- art gallery,
- drawing,
- presentation graphics,
- desktop publishing, and
- web publishing.
Four of these studios are currently included in the web site. We expect this web
site to achieve full functionality by January 2001.
We envision that our VisualCities.com web site will generate revenue from
a number of sources, including:
- links to other web sites,
- sale of our own and third party products,
- brokerage of images, including photos, digital art, clip-art
and traditional media art, as well as other content,
- advertising, and
- other ancillary services related to the visual communication toolset.
E-Commerce Services
We believe there is an accelerating need for companies to provide
e-commerce services to Internet business owners. These services include the
ability to cure the customer service frustrations that presently exist on the
Internet by providing a human interface between the Internet business and its
customers. We further believe that we can become a major back office customer
and technical service provider, as well as a provider of other necessary
services, to Internet e-commerce businesses by leveraging our international
brand recognition and core competencies, which include:
- International Call Centers and Warehouse Fulfillment Capabilities: We
have call centers and fulfillment operations in the United States and
Europe which can be used to provide multi-lingual customer services
to our customers and third parties;
- Provider of Call Center Technology Services: We are becoming
a provider of click-through technology services that provides a web
user access to a live person for assistance on the web through on-line
chat or real time audio and/or video; and
- Direct Marketing Services: Our core software and direct
marketing business utilizes in-house expertise to elicit responses
to our international call centers from our direct marketing
advertisements.
In addition to the above, we intend to market our core competencies in:
- direct marketing,
- telemarketing,
- sales,
- customer and technical service, and
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- fulfillment capabilities
to the e-commerce community.
We believe that, by providing a greater spectrum of web capabilities, we
will broaden our appeal to become a leading web service provider. In connection
with that strategy, we have expanded our multi-lingual call center in Aachen,
Germany and intend to make strategic acquisitions, both domestically and
internationally, including the acquisition of one or more companies engaged in
the businesses of:
- building Internet web sites and digital businesses through the use of
new media,
- designing and integrating of Internet, intranet and extranet systems
and networks, and
- designing and implementing Internet backbones.
On a combined basis, we expect to be able to provide a fully integrated
range of e-commerce services, including:
- web site design,
- e-business building and incubation,
- Internet backbone design and implementation,
- direct marketing services,
- customer and technical support services, and
- fulfillment.
Proposed Acquisitions
We have entered into a letter of intent, dated October 29, 1999, to acquire
Renaissance Computer Art Center Inc., d/b/a Renaissance Multimedia, a New York
City-based digital communication company focusing on building Internet web sites
and digital businesses through the use of new media. We expect to engage in a
merger transaction with Renaissance Multimedia, pursuant to which the current
stockholders of Renaissance Multimedia will receive an aggregate of $250,000 in
cash and a number of shares of our common stock equal in value to $1,750,000,
based on the value of our common stock for the twenty trading days immediately
prior to the closing of such transaction. The closing of this proposed merger
transaction is subject to the completion of due diligence by each of the parties
to the transaction, the negotiation and execution of a definitive merger
agreement (and all ancillary documents, instruments and agreements contemplated
thereby), and the parties' compliance with customary conditions to the closing.
We also have signed a non-binding letter of intent to acquire a designer
and integrator of Internet, intranet and extranet systems and networks. This
letter of intent constitutes a statement of intention only, and is not a binding
commitment. The closing of this proposed merger is subject to the completion of
due diligence by each of the parties to the transaction, the negotiation and
execution of a definitive merger agreement (and all ancillary documents,
instruments and agreements contemplated thereby), and the parties' compliance
with customary conditions to the closing. During the period of due diligence and
prior to the execution and delivery of such a merger agreement, either party may
unilaterally terminate the negotiations for any reason whatsoever, or without
reason.
Formation; Historical Background
Our company was incorporated in Delaware on December 23, 1993, and
succeeded to the business of our predecessor New Jersey corporation, which was
formed on July 20, 1992. In July 1996, we acquired Serif Inc. and Serif (Europe)
Limited, which significantly expanded our product line to include desktop
publishing and drawing titles Serif PagePlus and Serif DrawPlus, among others.
In December 1996, we acquired all of the outstanding capital stock of Software
Publishing Corporation, as a result of which our product line expanded further
to include SPC's presentation graphics and other visual communications and
business productivity software products, including Harvard Graphics. We continue
to operate the Serif companies and SPC as wholly-owned subsidiaries.
Since January 1998, the operations of SPC have been significantly reduced.
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Principal Offices
Our principal executive offices are located at Glenpointe Centre East, 300
Frank W. Burr Boulevard, 7th Floor, Teaneck, New Jersey 07666; telephone (201)
928-1001. The Company maintains websites at www.vizacom.com, www.serif.com,
www.harvardgraphics.com and www.visualcities.com.
RISK FACTORS
Our securities are speculative and involve a high degree of risk. Only
those persons able to lose their entire investment should purchase any of our
securities. Prior to making an investment decision, you should carefully
consider, along with other matters referred to herein, the following risk
factors.
We have incurred losses to date and there is no assurance that we will become
profitable.
We have been unprofitable since inception in July 1992 and may continue to
incur operating losses in the future. For the year ended December 31, 1998, we
had a net loss of approximately $2,407,000 and, for the nine months ended
September 30, 1999, we had a net loss attributable to common stockholders of
$3,093,000. Our operating losses may increase as we:
- develop our e-commerce services business,
- develop, produce and distribute additional products and services,
- de-emphasize other products and services,
- implement our growth strategy, which will include the investment
required to accelerate the growth of acquired companies,
- develop our Internet commerce network, and
- continue to develop our business.
We may not be able to become profitable or, if we obtain profitability, we
may thereafter not be able to maintain profitability.
We have limited experience in e-commerce which could adversely affect our
ability to compete.
We have a limited operating history in e-commerce. We have only recently
focused our resources on competing in the e-commerce market. Accordingly, there
is little information on which you can base an evaluation of our new businesses
and prospects. As an online commerce company, we face increased risks,
uncertainties, expenses and difficulties. You should consider an investment in
our company in light of these risks, uncertainties, expenses and difficulties.
To address these risks and uncertainties, we must do the following:
- maintain and increase our number of users,
- maintain and grow our web sites and customer operations,
- continue to make transacting business through our web sites
and services safer for users,
- maintain and enhance our brands,
- successfully execute our business and marketing strategy,
- continue to develop and upgrade our technology and information
processing systems,
- continue to enhance our web sites and services to meet the needs of
a changing market,
- provide superior customer service,
- respond to competitive developments,
- attract, integrate, retain and motivate qualified personnel, and
- raise working capital to be able to compete effectively in the
e-commerce market with well-funded competition.
We may be unable to accomplish one or more of these things, which could
cause our business to suffer. In addition, accomplishing one or more of these
things might be very expensive, which could adversely affect our ability to
obtain profitability and thereafter operate profitably.
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Our failure to manage growth could harm us.
We may experience a period of significant expansion in our headcount,
facilities and infrastructure to address potential growth in our business
operations and market opportunities and executing our strategies. We expect this
expansion will continue to place a significant strain on our management,
operational and financial resources. The areas that are put under severe strain
by our rate of growth include the following:
- VisualCities.com. and our other web sites. We may need to
add new hardware, update software and add new engineering personnel
to accommodate the anticipated increased use of our web sites. If
we are unable to increase the capacity of our systems at least as
fast as the growth in demand for this capacity, our web site may
become unstable and may cease to operate for periods of time. Any
unscheduled downtime could harm our business and also could anger
users of our web site and reduce future revenues.
- Customer Support. We must expand our customer support
operations to accommodate the anticipated increased number of
users and transactions on our web sites and to support our
e-services products. If we are unable to hire and successfully
train sufficient employees or contractors in this area, users of our
web sites may have negative experiences and current and future
revenues could suffer.
- Customer Accounts. Our revenues are dependent on prompt and
accurate billing processes. If we are unable to grow our
transaction processing abilities to accommodate the anticipated
increasing number of transactions that must be billed, our ability
to collect revenue will be harmed.
Competition for Internet professional services is intense with low barriers to
entry which may affect our business operations.
The market for Internet professional services is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change. While
relatively new, the market is already highly competitive and characterized by an
increasing number of entrants who have introduced or developed products and
services similar to those presently and anticipated to be offered by us. We
expect competition not only to persist, but to increase. Increased competition
may result in price reductions, reduced margins and loss of market share. The
barriers to entry into certain of the fields in which we presently and intend to
operate are also relatively low. As a result, we expect to face additional
competition from new market entrants in the future. The market for our goods and
services is rapidly evolving and is subject to continuous technological change.
As a result, our competitors may be better positioned to address these
developments or may react more favorably to these changes. Existing or future
competitors may develop or offer strategic Internet services that provide
significant technological, creative, performance, price or other advantages over
the services offered by us.
The inability to expand our systems may limit our growth.
We seek to generate a high volume of traffic and transactions on our web
sites and through our e- commerce service centers. The satisfactory performance,
reliability and availability of our web sites, processing systems and network
infrastructure are critical to our reputation and our ability to attract and
retain large numbers of users and to service our consumers. If the volume of
traffic on our web sites increases, we will need to expand and upgrade our
technology, transaction processing systems and network infrastructure. We may be
unable to accurately project the rate or timing of increases, if any, in the use
of our web sites or service centers or to timely expand and upgrade our systems
and infrastructure to accommodate any increases. We must continually improve
these systems in order to accommodate the anticipated level of use of our web
sites or service centers. In addition, we may add new features and functionality
to our web sites or service centers that would result in the need to develop or
license additional technologies. Our inability to add additional software and
hardware or to upgrade our technology, transaction processing systems or network
infrastructure to accommodate increased traffic or transaction volume could have
adverse consequences. These consequences include:
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- unanticipated systems disruptions,
- slower response times,
- degradation in levels of customer support,
- impaired quality of the users' experience and delays in reporting
accurate transaction information.
Our failure to provide new features or functionality also could result in
these consequences. We may be unable to effectively upgrade and expand our
systems in a timely manner or to integrate smoothly any newly developed or
purchased technologies with our existing systems. These difficulties could harm
or limit our ability to expand our business.
We are dependent on the continued growth of the Internet and e-commerce market.
The market for the sale of goods over the Internet and e-commerce services
are new and emerging markets. Our future revenues and growth will be
substantially dependent upon the widespread acceptance of the Internet as a
medium for commerce by consumers and e-commerce services. Rapid growth in the
use of and interest in the World Wide Web, the Internet and online services is a
recent phenomenon. This acceptance and use may not continue. Even if the
Internet is accepted, concerns about fraud, privacy and other problems may mean
that a sufficiently broad base of consumers will not adopt the Internet as a
medium of commerce. These concerns may increase as additional publicity over
privacy issues over the Internet increases. Market acceptance for recently
introduced services and products over the Internet is highly uncertain, and
there are few proven services and products. In order to expand our user base, we
must appeal to and acquire consumers who historically have used traditional
means of commerce to purchase goods.
Our business is dependent on the development and maintenance of the World Wide
Web and service center infrastructures.
The success of our Internet-related businesses will depend largely on the
development and maintenance of the World Wide Web and service center
infrastructures. This includes maintenance of a reliable network backbone with
the necessary speed, data capacity and security, as well timely development of
complementary products such as high speed modems, for providing reliable Web
access and services. Because global commerce and the online exchange of
information is new and evolving, we cannot predict whether the Web will prove to
be a viable commercial marketplace in the long term. The Web has experienced,
and is likely to continue to experience, significant growth in the numbers of
users and amount of traffic. If the Web continues to experience increased
numbers of users, increased frequency of use or increased bandwidth
requirements, the Web infrastructure may be unable to support the demands placed
on it. In addition, the performance of the Web may be harmed by increased users'
or bandwidth requirements. The Web has experienced a variety of outages and
other delays as a result of damage to portions of its infrastructure, and it
could face outages and delays in the future. These outages and delays could
reduce the level of Web usage as well as the level of traffic and the processing
of transactions on our web sites and through our service centers. In addition,
the Web could lose its viability due to delays in the development or adoption of
new standards and protocols to handle increased levels of activity or due to
increased governmental regulation. The infrastructure and complementary products
or services necessary to make the Web a viable commercial marketplace for the
long term may not be developed successfully or in a timely manner. Even if these
products or services are developed, the Web may not become a viable commercial
marketplace for the goods and services such as those that we offer.
Our business is subject to e-commerce security risks.
A significant barrier to e-commerce and communications over the Internet is
the secure transmission of confidential information over public networks. Our
security measures may not be able to prevent all types of security breaches. Our
failure to prevent security breaches could harm our business. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication technology to effect secure transmission of
confidential information, including customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of cryptography or other
developments may result in a compromise or breach of the technology used by us
to protect customer transaction data. Any such compromise of our security
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could harm our reputation and, therefore, our business. In addition, a
party who is able to circumvent our security measures could misappropriate
proprietary information or cause interruptions in our operations. We may need to
expend significant resources to protect against security breaches or to address
problems caused by breaches. Security breaches could damage our reputation and
expose us to a risk of loss or litigation and possible liability. Our insurance
policies carry low coverage limits, which may not be adequate to reimburse us
for losses caused by security breaches.
Competition within the market for software products may adversely affect our
results of operations.
The market for our software products is characterized by:
- ongoing technological developments,
- evolving industry standards,
- licensing of technology between companies,
- cross and collateral marketing of products by two or more
companies,
- alliances between companies,
- joint marketing campaigns,
- rapid changes in customer requirements and increasing customer
demands, and
- changes in operating systems.
We believe that the principal competitive factors in the corporate, SOHO
and consumer software markets include:
- pricing (which includes individual product pricing, standard and
competitive upgrade pricing, licensing and volume discounting),
- product functionality,
- ease-of-use,
- bundling in suites of related products which could render competitive
products to be considered "free,"
- distribution through existing and new channels, and
- brand name recognition.
As a result, we believe that our success in this market depends upon our
ability to continue to:
- provide continued enhancement of our existing and future products,
- correctly identify and enter new markets,
- effectively market and sell our current and future products,
- expand our existing distribution channels while also developing new
distribution channels, including e-commerce,
- timely and efficiently acquire, license or develop and introduce new
products that take advantage of technological advances, and
- respond to new requirements and demands of the market.
To the extent one or more of our competitors introduce products that better
address market requirements, our business could be adversely affected. We may
not be successful in developing and marketing enhancements to our existing
products or new products incorporating new technology on a timely basis. Also,
our existing and new products may not adequately address the changing needs of
the marketplace. If we are unable to timely develop and introduce new products
or enhance existing products, our business and results of operations could be
materially and adversely affected.
The dominant position of Microsoft in the personal computer operating
system and application program marketplace provides Microsoft with a range of
competitive advantages, including its ability to determine the direction of
future operating systems and to leverage its strength in one or more product
areas to achieve a dominant position in new markets. This position may enable
Microsoft to increase its market position even with respect to products having
superior performance, price and ease-of-use features. Microsoft's ability to:
- offer corporate and SOHO operating systems combined with its own
productivity software,
- bundle software,
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- provide incentives to customers to purchase certain products
in order to obtain favorable sales terms or necessary compatibility or
information with respect to other products,
- pre-load such bundled software on new computers, and
- purchase advantageous product positioning and presentations
in various distribution channels,
may significantly inhibit our ability to maintain or expand our business.
In addition, as Microsoft or other companies create new operating systems
and applications, we may not be able to re-work our products in order for the
products to remain compatible with these new systems and applications on a
timely or economical basis. The introduction of upgrades to operating systems or
the introduction of new operating systems and standardized software by Microsoft
and others, over which we have no control, may adversely affect our ability to
upgrade our own products and may cause a reduction in sales of our products.
We believe that competition will continue to intensify in the future and
that new product introductions, as well as potential price reductions, strategic
alliances and other actions by competitors could materially and adversely affect
our competitive position.
The shortened product life cycles of competitive software products may adversely
affect our product life cycles and development costs, as well as our revenues.
From time to time we or our competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of our existing products. Such announcements of currently planned or
other new products may cause customers to defer purchasing our existing
products.
Seasonality is expected to cause fluctuations in our revenues and operating
results.
The computer software market is characterized by significant seasonal
swings in demand, which typically peak in the fourth quarter of each calendar
year. The seasonal pattern is due primarily to the increased demand for software
during the year-end holiday buying season and reduced retail and corporate
demand for our software principally during the Easter and summer vacation
periods. We expect our net sales and operating results to reflect this
seasonality.
Fluctuations in quarterly results and the uncertainty of future operating
results may cause significant fluctuations in our stock price.
Our quarterly operating results have and, in the future, may fluctuate
significantly, depending on a variety of factors, many of which are outside of
our control. Factors that may affect our quarterly results include:
- demand for our products,
- the size, timing and timely fulfilment of orders,
- the number, timing and significance of new product announcements
by us and our competitors,
- our ability to develop, introduce and market new products, as
well as enhanced versions of our current products on a timely basis,
- the level of product and price competition,
- changes in operating expenses,
- changes in average selling prices and product mix, which could
also affect our profit margins,
- changes in our sales incentive strategy, as well as sales personnel
changes,
- the mix of direct and indirect sales, product returns and
rebates,
- changes in technology,
- our ability to retain an active user base, attract new users and
maintain customer satisfaction for our VisualCities.com and other
web sites,
- our ability to keep our web sites operational,
- federal, state or local government regulation,
- the introduction of new sites, services and products by us or our
competitors,
- volume, size, timing and completion of transactions on
our web sites,
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- consumer confidence in the security of transactions on our web sites,
- our ability to upgrade and develop our systems and infrastructure to
accommodate growth,
- technical difficulties or service interruptions,
- the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure,
- our ability to attract new personnel in a timely and effective manner,
- our ability to retain key employees in both our software, services
and online businesses and our new acquisitions,
- the timing, cost and availability of advertising in traditional
media and on other web sites and online services,
- the timing of marketing expenses,
- consumer trends,
- the success of our brand building and marketing campaigns,
- the level of use of the Internet and online services,
- increasing consumer acceptance of the Internet and other
online services for commerce,
- increasing corporate acceptance of Internet services and other
services for e-commerce,
- general economic conditions and economic conditions specific to
the Internet and e-commerce industries, and
- seasonality.
Our expense levels, however, are expected to be based in large part on our
expectations of future revenues and the expected costs associated with growing
our new e-services business and acquired companies. Therefore, if revenue levels
are below expectations, operating results are likely to be adversely affected.
Net income may be disproportionately affected by an unanticipated decline in
revenue for a particular quarter because a relatively small amount of our
expenses will vary with our revenue in the short term. As a result, we believe
that period-to-period comparisons of our results of operations are not and will
not necessarily be meaningful and should not be relied upon as any indication of
future performance. Due to all of the foregoing factors, it is likely that in
some future quarter our operating results will be below expectations. In such
event, the market price of our common stock could be materially adversely
affected.
There is significant volatility of in our stock prices.
The market for our common stock is highly volatile. The trading price of
our common stock could be subject to wide fluctuations in response to, among
other things:
- quarterly variations in operating and financial results,
- announcements of technological innovations or new products
by us or our competitors,
- changes in prices of our products or our competitors' products
and services,
- changes in product mix,
- changes in our revenue and revenue growth rates as a whole or for
individual geographic areas,
- business units, products or product categories,
- responses to our strategies concerning e-commerce and the
Internet,
- unscheduled web site downtime,
- additions or departures of key personnel,
- announcements of technological innovations or new services by us
or our competitors,
- changes in financial estimates by securities analysts,
- conditions or trends in the Internet and online commerce
industries,
- the emergence of online securities trading,
- changes in the market valuations of other Internet or online
service companies,
- developments in Internet regulations,
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments,
- sales of our common stock or other securities in the open
market, and
- other events or factors that may be beyond our control.
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Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the market in which we do
business or relating to us could result in an immediate and adverse effect on
the market price of the Common Stock. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations which have
particularly affected the market price for the securities of many software and
Internet companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Common Stock.
Rapid technological changes could cause delay in new product introductions and
these delays may cause reduced revenues.
The software market is characterized by:
- ongoing technological developments,
- evolving industry standards,
- frequent new product introductions, and
- rapid changes in customer requirements and preferences.
The introduction of products embodying new technologies and the emergence
of new industry standards and practices can rapidly render existing products
obsolete and unmarketable. In the past, we have experienced delays in software
development and may experience delays in connection with current product
developments or future development activities. Such delays may prevent the
successful introduction or marketing of these products. Further, our new
products and product enhancements may not adequately meet the requirements of
the marketplace and achieve market acceptance. Delays in the commencement of
commercial shipments of new products or enhancements may also result in customer
dissatisfaction and delay or loss of product revenues.
Product defects could delay or prevent market acceptance of new or upgraded
products.
Software products as complex as those offered by us may contain undetected
errors or failures when first introduced or as new versions are released.
Despite testing internally or by current or potential customers, errors may be
found in new products after commencement of commercial shipments, resulting in
loss of or delay in market acceptance.
Although we have a number of ongoing development projects, the
following risks still exist:
- development may not be completed successfully on time or within our
projected cost,
- projects may not include the features required to achieve market
acceptance, and
- enhancements to our products may not keep pace with broadening market
requirements.
Product returns and difficulties in the collection of accounts receivable could
result in reductions in our cash flows.
Some of our sales are made on credit terms which may vary substantially. We
do not hold collateral to secure payment. Therefore, a default in payment on a
significant scale could materially adversely affect our business, results of
operations and financial condition. In addition, it is difficult for us to
ascertain future demand for our existing products and anticipated demand for
newly introduced products. Consistent with industry practices, we may accept
product returns or provide other credits in the event that a retailer or
distributor holds excess inventory of our products, even when we are not legally
required to do so. Accordingly, we are exposed to the risk of product returns
from retailers, distributors and direct sales customers. While we believe that
we have established appropriate allowances for collection problems and
anticipated returns based on our historical experience and industry norms,
actual returns and uncollectible receivables may exceed such allowances.
Defective products also may result in higher customer support costs and product
returns.
We are dependent on key personnel.
Significant historical growth from acquisitions and operational
restructurings have placed strain upon our personnel, management systems and
resources. In the future, we expect to continue to improve our financial and
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management controls, reporting systems and procedures on a timely basis and
train and manage our employee work force. An inability to do so may inhibit our
ability to grow. Competition for qualified sales, technical and other personnel,
including expert Windows-environment programmers, is intense, and we may not be
able to attract or retain highly qualified employees in the future. Our future
success depends in significant part upon the continued service of our current
key technical, sales and senior management personnel. The loss of the services
of one or more of these key employees could have a material adverse effect on
our business, operating results and financial condition. Additions of new and
departures of existing personnel, particularly in key positions, can be
disruptive, which could have a material adverse effect upon us.
International sales and operations and currency fluctuations could have an
adverse effect on our business, financial condition and results of operations.
International sales are a significant source of our revenue. International
sales represented approximately 63% of our net sales for the nine months ended
September 30, 1999 and 52% of our net sales for the year ended December 31,
1998. We believe that achieving profitability will require, among other matters,
additional expansion of sales in foreign markets. In order to increase
international sales, we may be required to establish additional foreign
operations, hire additional personnel and recruit additional international
resellers. Currently, our international sales are denominated in either U.S.
dollars, the Euro or local currency and we do not anticipate engaging in any
hedging activities. The Euro may have an impact on currency fluctuations.
Although exposure to currency fluctuations to date has not been significant,
fluctuations in currency exchange rates in the future could have a material
adverse impact on us. Additional risks inherent in our international business
activities include:
- unexpected changes in regulatory requirements,
- tariffs and other trade barriers,
- costs of localizing products for foreign countries,
- lack of acceptance of localized products in foreign countries,
- longer accounts receivable payment cycles,
- difficulties in collecting payment,
- difficulties in managing international operations,
- potentially adverse tax consequences including limitations
on the repatriation of earnings,
- reduced protection for intellectual property,
- the burdens of complying with a wide variety of foreign laws, and
- the effects of potentially high local wage scales, employment customs
and other expenses.
Any of these factors or others not presently contemplated by us could have
a material adverse effect on our future international operations.
We are dependent on manufacturers and suppliers of hardware.
In the third quarter of 1998, we began selling our Go Digital Camera Pak,
which consists of a digital camera and digital imaging software licensed from a
third party, as well as certain accessories. In the current fiscal year, we
began to experience delays in shipments of digital cameras from the cameras'
respective manufacturers and suppliers, which delays have continued. As of
September 30, 1999, we had a backlog of approximately $300,000 relating to this
product. While we believe that these delays are only temporary, we are presently
investigating alternative manufacturer/suppliers for hardware similar in quality
to the digital cameras presently included in the Go Digital Camera Pak and those
offered as upgrade cameras. No assurance can be given that we will, in the
future, not experience delays in receipt of these digital cameras or other
hardware sold by us from our manufacturers/suppliers, or identify alternative
suppliers and acquire the alternative hardware on terms as beneficial
to us as our present hardware purchase terms.
Changes in our product mix may cause lower gross margins, which could have a
material adverse effect on our operating results.
Since our introduction of our Go Digital Photo Pak, our hardware sales,
which generally have lower gross margins than software sales, have increased as
a percentage of our total net sales. We anticipate that this trend may
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continue. In addition, competition within the hardware market may cause a
further erosion of margins for hardware sales. These trends could have a
material adverse effect on us. Accordingly, any further increase in hardware
sales as a percentage of our total sales or lower margins for hardware sales may
result in reduced margins, which could have a material adverse effect on our
operating results.
We expect to need to continue to hire, train and manage new employees to support
future growth.
Our current and planned personnel, systems, procedures and controls may not
be adequate to support our future operations. If our new hires are not good
employees, or if we are unsuccessful in training and integrating these new
employees, our business may be harmed. To manage the expected growth of our
operations and personnel, we will need to improve our transaction processing,
operational and financial systems, procedures and controls. We may be unable to
hire, train, retain and manage required personnel or to identify and take
advantage of existing and potential strategic relationships and market
opportunities.
We may not obtain or, thereafter, maintain profitability.
We believe that our ability to become profitable, and thereafter maintain
profitability and grow, will depend in large part on our success in the
following:
- managing the costs of our business, including the costs
associated with maintaining and developing our web sites, customer
support and international operations,
- increasing our brand name awareness,
- providing our customers with superior service, and
- successfully integrating the operations of acquired companies into a
unified operation.
We may be unable to implement our acquisition growth strategy, which could harm
our business and competitive position in the industry.
Our business strategy includes making strategic acquisitions of other
companies or businesses, including visual communications solutions providers and
web site design or other firms. Our continued growth will depend on our ability
to identify and acquire, on acceptable terms, companies that complement or
enhance our business. We may not be able to complete or identify future
acquisitions or realize the anticipated results of future acquisitions. Some of
the risks that we may encounter in implementing our acquisition growth strategy
include:
- expenses and difficulties in identifying potential targets and the
costs associated with incomplete acquisitions,
- higher prices for acquired companies because of greater competition
for attractive acquisition targets,
- expenses, delays and difficulties of integrating the acquired
companies into our existing organization,
- greater impact of the goodwill of acquired companies on our statement
of income when pooling accounting for acquisitions is not used,
- dilution of the interest of existing stockholders if we sell stock to
the public to raise cash for acquisitions,
- diversion of management's attention,
- expenses of amortizing the acquired companies' intangible assets,
- increase in our expenses in order to advertise and promote the
acquired companies,
- impact on our financial condition due to the timing of the
acquisition, and
- expense of any undisclosed or potential legal liabilities of the
acquired company.
If realized, any of these risks could have a material adverse effect on our
business, results of operations and financial condition.
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Acquisitions could result in dilution, operating difficulties and other harmful
consequences.
If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe are strategic. We
recently entered into a letter of intent to acquire Renaissance Multimedia and
intend to make further acquisitions. The process of integrating any acquisition
may create unforeseen operating difficulties and expenditures and is itself
risky. The areas where we may face difficulties include:
- diversion of management time (both ours and at the acquired
companies) during the period of negotiation through closing and
further diversion of such time after closing from focus on operating
the businesses to issues of integration and future products,
- decline in employee morale and retention issues resulting
from changes in compensation, reporting relationships, future
prospects, or the direction of the business,
- the need to integrate each company's accounting, management
information, human resource and other administrative systems to permit
effective management and the lack of control if such integration is
delayed or not implemented, and
- the need to implement controls, procedures and policies
appropriate for a larger public company at companies that prior to
acquisition had been smaller, private companies.
Moreover, the anticipated benefits of any or all of these acquisitions may
not be realized. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt, contingent liabilities
or amortization expenses related to goodwill and other intangible assets, any of
which could harm our business. Future acquisitions may require us to obtain
additional equity or debt financing, which may not be available on favorable
terms or at all. Even if available, this financing may be dilutive.
Our continued growth may further strain our resources, which could hurt our
business and results of operations.
A key part of our strategy is to grow, both by acquiring companies and by
hiring more personnel, which may continue to strain our managerial and
operational resources. We cannot assure you that our management will be able to
manage our growth effectively. To manage future growth, our management must
continue to improve our operational and financial systems, procedures and
controls, as well as expand, train, retain and manage our employees. If our
systems, procedures and controls are inadequate to support our operations, our
expansion could falter and we could lose our opportunity to gain significant
market share. Any inability to manage growth effectively could materially harm
our business, results of operations and financial condition.
We may have difficulty managing our international operations and expansion,
which could adversely affect our business and results of operations.
We anticipate expansion outside of the United States, initially in the
United Kingdom and elsewhere in Europe. While we presently have operations in
the United Kingdom and Germany, our management may have difficulty managing and
expanding our international operations because of distance, as well as language
and cultural differences.
Other risks related to our international operations include:
- difficulties arising from staffing and managing foreign operations,
- foreign currency exchange fluctuations,
- legal and regulatory requirements of different countries, such as
differing tax or labor laws, and
- potential political and economic instability.
If any of these risks materialize, our international businesses, results of
operations and financial condition could be materially and adversely affected.
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Our acquisition strategy may not produce the desired results.
A key component of our growth strategy is to acquire Internet-related
businesses that complement or enhance our business, on acceptable terms. The
competition for acquisition candidates is intense and we expect this competition
to increase. There is no assurance that we will identify and successfully
compete for attractive acquisition candidates or complete acquisitions at
reasonable purchase prices, in a timely manner or at all.
To the extent we have to use cash consideration for acquisitions in the
future, we may need to obtain additional financing. To the extent our management
must devote significant time and attention to the integration of technology,
operations, businesses and personnel as a result of these acquisitions, our
ability to service current customers and win new customers may suffer. In
addition, our senior management faces the difficult and potentially time
consuming challenge of implementing uniform standards, controls, procedures and
policies throughout our current and future acquisitions. We could also
experience financial or other setbacks if any of the acquired businesses
experience unanticipated problems. Further, we may experience disputes with the
sellers of acquired businesses and may fail to retain key acquired personnel.
System failures could harm our business.
We have experienced system failures from time to time. In addition to
placing increased burdens on our engineering staff, these outages could create a
flood of user questions and complaints that must be responded to by our customer
support personnel. Any unscheduled interruption in our systems could result in
an immediate loss of revenues that can be substantial and may cause some users
to switch to our competitors. If we experience frequent or persistent system
failures, our reputation and brand could be permanently harmed. We are currently
taking steps to increase the reliability and redundancy of our system. These
steps are expensive and may not be successful in reducing the frequency or
duration of unscheduled downtime. Substantially all of our computer hardware for
operating our web sites and service centers currently is located at our Nashua,
New Hampshire, Nottingham, England, and Aachen, Germany facilities and at the
offices of one of our vendors. These systems and operations may be vulnerable to
damage or interruption from floods, fires, power loss, telecommunication
failures and similar events. They are also subject to break-ins, sabotage,
intentional acts of vandalism and similar misconduct. Although we have fully
redundant systems, we do not have, at this time, a formal disaster recovery plan
or alternative providers of hosting services, and we do not carry business
interruption insurance to compensate us for losses that may occur. Despite any
precautions we may take, the occurrence of a natural disaster or other
unanticipated problems at these facilities could result in interruptions in our
web sites or service centers. Any damage to or failure of our systems could
result in interruptions in our web sites or service centers. Interruptions in
our web sites would reduce our revenues, and our future revenues will be harmed
if our users believe that our systems are unreliable.
Fixed-price contracts involve financial risks.
We anticipate that certain of our e-business contracts may be on a
fixed-price basis, rather than on a time and materials basis. Further, as the
average size of our e-business contracts increases, our exposure to the
financial risks of fixed price contracts could increase. We may assume greater
financial risk on fixed-price contracts than on time and materials engagements.
We do not have a history of estimating costs for our engagements, particularly
for larger projects. We may have to commit unanticipated resources to complete
some of our projects, resulting in lower gross margins on such contracts. In
addition, we may assume the fixed-price contracts of the companies we acquire.
If we or our acquired businesses fail to estimate accurately the resources and
time required for an engagement, to manage client expectations effectively or to
complete fixed-price engagements within budget, on time and to our clients'
satisfaction, we would be exposed to cost overruns, potentially leading to
losses on these engagements.
In addition, we expect to be required to recognize revenues from fixed-fee
contracts based on our estimate of the percentage of each project completed in a
reporting period. To the extent our estimates are inaccurate, the revenues and
operating profits, if any, we report for periods during which we are working on
a project may not accurately reflect the final results of the project and we
would be required to make adjustments to such estimates in a subsequent period.
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We generally do not expect to have long-term contracts and the need to establish
relationships with new clients creates an uncertain revenue stream.
We anticipate that our e-business clients generally will retain us on a
project by project basis, rather than under long-term contracts, although our
e-commerce support services may be rendered under one-year or other long-term
service contracts. As a result, a client may or may not engage us for further
services once a project is completed. We expect that establishment and
development of relationships with additional companies and other corporate users
of information technology will be an important component of our business
operations. The absence of long-term contracts and the need for new clients
create an uncertain revenue stream. A client which accounts for a significant
portion of our revenues in a given period may not generate a similar amount of
revenues, if any, in subsequent periods. There is no assurance that we will be
able to add new major clients or to secure new engagements with existing
clients. In addition, some of our existing clients may unilaterally reduce the
scope of, or terminate, existing projects.
Unauthorized break-ins to our systems could harm our business.
Our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays,
loss of data or the inability to complete user transactions. In addition,
unauthorized persons may improperly access our data. We may experience an
unauthorized break-in by a "hacker" who could cause damage to or change our
system or take confidential information. Any actions like these could harm us.
Actions like these may be very expensive to remedy and could damage our
reputation and discourage new and existing users from visiting our web sites.
The law relating to the liability of web site operators for the activities of
their users on their web sites is currently unsettled.
We may be unable to prevent unlawful activities by users of our web sites,
and we may be subject to civil or criminal liability for unlawful activities
carried out by users through our web sites. In order to reduce our exposure to
this liability, we may prohibit certain activities. We may in the future
implement other protective measures that could require us to spend substantial
resources and/or to reduce revenues by discontinuing certain service offerings.
Any costs incurred as a result of liability or asserted liability relating to
unlawful activities could harm our business.
We are subject to risks associated with information disseminated through our web
sites.
The law relating to the liability of web site operators for information
carried on or disseminated through their services is currently unsettled. Claims
could be made against web site providers under both United States and foreign
law for defamation, libel, invasion of privacy, negligence, copyright or
trademark infringement, or other theories based on the nature and content of the
materials disseminated through their web sites. Several private lawsuits seeking
to impose liability upon other web site providers currently are pending. In
addition, federal, state and foreign legislation has been proposed that imposes
liability for or prohibits the transmission over the Internet of certain types
of information. Our web sites feature chat rooms/forums, which include
information from users regarding other users and other persons and entities.
Although all such discussions are generated by users and not by us, it is
possible that a claim of defamation or other injury could be made against us for
content posted on our web sites. Claims like these become more likely and have a
higher probability of success as we continue to expand internationally. If we
become liable for information provided by our users and carried on our web
sites, we could be directly harmed and we may be forced to implement new
measures to reduce our exposure to this liability. This may require us to expend
substantial resources and/or to discontinue certain service offerings. In
addition, the increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals could harm our reputation or otherwise
impact the growth of our business. We carry liability insurance, but it may not
be adequate to fully compensate us if we become liable for information carried
on or through our web sites. Any costs incurred as a result of this liability or
asserted liability could harm our business.
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We may be subject to legal liability to our clients.
Many of our e-business engagements will involve the development and
implementation of Internet solutions that are important to our clients'
businesses. Our failure or inability to meet a client's expectations in the
performance of services could injure our business reputation or result in a
claim for substantial damages against us regardless of our responsibility for
such failure. In addition, the services we provide for our clients may include
confidential or proprietary client information. Although we have implemented
policies to prevent such client information from being disclosed to unauthorized
parties or used inappropriately, any such unauthorized disclosure or use could
result in a claim against us for substantial damages. Our contractual provisions
attempting to limit such damages may not be enforceable in all instances or may
otherwise fail to protect us from liability for damages.
New and existing regulations could harm our business.
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards web site providers. However, due to the increasing
popularity and use of the Internet, it is possible that laws and regulations
will be adopted with respect to the Internet and web site providers. These laws
and regulations could cover issues such as:
- user privacy,
- freedom of expression,
- pricing,
- fraud,
- content,
- quality of products and services,
- taxation,
- advertising,
- intellectual property rights, and
- information security.
Applicability to the Internet of existing laws governing issues such as:
- property ownership,
- copyrights and other intellectual property issues,
- taxation,
- libel,
- obscenity, and
- personal privacy
is uncertain. The vast majority of these laws were adopted prior to the advent
of the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Those laws
that do reference the Internet, such as the Digital Millennium Copyright Act,
have not yet been interpreted by the courts and their applicability and reach
are therefore uncertain.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require web site providers to
establish privacy policies. The Federal Trade Commission also has recently
settled a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues could directly affect the way we do business or could create uncertainty
in the marketplace. This could reduce demand for our services, increase the cost
of doing business as a result of litigation costs or increased service delivery
costs, or otherwise harm our business. In addition, because our web sites are
accessible worldwide, foreign jurisdictions may claim that we are required to
comply with their laws. As we continue to expand our international activities,
we will become obligated to comply with these laws. Compliance may be more
costly or may require us to change our business practices or restrict our
service offerings relative to those in the United States. Our failure to comply
with foreign laws could subject us to penalties ranging from fines to bans on
our ability to conduct business on our web sites.
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In the United States, companies are required to qualify as foreign
corporations in states where they are conducting business. As an Internet
company, it is unclear in which states we are actually conducting business. Our
failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties for the failure to
qualify and could result in our inability to enforce contracts in those
jurisdictions. Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could harm our business.
Our growth will depend on our ability to continue to develop our brands.
We believe that strengthening our brands will be critical to achieving
widespread acceptance of our goods and services. Promoting and positioning our
brands will depend largely on the success of our marketing efforts and our
ability to provide high quality content, goods and services. In order to promote
our brands, we will need to increase our marketing budget and otherwise increase
our financial commitment to creating and maintaining brand loyalty among users.
Brand promotion activities may not yield increased revenues and, even if they
do, any increased revenues may not offset the expenses we incurred in building
our brands. If we do attract new users to our web sites or services, they may
not conduct transactions over our web sites or utilize our services service on a
regular basis. If we fail to promote and maintain our brands or incur
substantial expenses in an unsuccessful attempt to promote and maintain our
brands, our business would be harmed.
If we are unable to successfully implement our growth strategy, it could have a
material adverse effect on our business, financial condition and results of
operations.
The success of our growth strategy will depend in large part on whether
we are able to:
- expand through strategic acquisitions of companies in new
and complementary businesses,
- obtain adequate financing on favorable terms to fund this growth
strategy,
- develop and expand our customer base,
- hire, train and retain skilled employees,
- strengthen brand identity and successfully implement marketing
campaigns, and
- continue to expand in the face of increasing competition.
Our inability to implement any or all of these strategies could have a
material adverse effect on our results of operations and financial condition.
Our growth strategy includes acquisitions and, if we are unable to make
acquisitions or if those acquisitions are not successful, it could have a
material adverse effect on our business, financial condition and results of
operations.
As part of our growth strategy, we plan to make acquisitions of other
companies. We may not be able to make acquisitions in the future. In addition,
any acquisition that we make could have a material adverse effect on our
business, financial condition and results of operations. Future acquisitions are
subject to many risks, including the risks that:
- we may not be able to identify suitable companies to buy,
- we may not be able to purchase companies at favorable prices,
or at all,
- we may not be able to obtain financing on favorable terms, or at all,
to pay for future acquisitions, and
- we may not be able to effectively integrate the acquired businesses
or technologies into our operations.
In addition, in order to consummate future acquisitions, we may be required
to borrow money or incur other liabilities, which could have a material adverse
effect on our liquidity and capital resources. We may also be required to issue
additional shares of stock, which could result in dilution to our stockholders.
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Litigation and potential litigation may be costly and/or time-consuming.
Our competitors and potential competitors may resort to litigation as a
means of competition. Any litigation involving us, whether as plaintiff or
defendant, regardless of the outcome, may result in substantial costs and
expenses to us and significant diversion of effort by our management and
technical personnel. In the event of an adverse result in any such litigation,
we could be required to:
- expend significant resources to develop non-infringing technology,
- obtain licenses to the technology which is the subject of the
litigation on terms not advantageous to us,
- pay damages, and/or
- cease the use of any infringing technology.
There can be no assurance that we would be successful in such development,
that any such licenses would be available and/or that we would have available
funds sufficient to satisfy any cash awards.
In the first quarter of 1998, we and certain of our current and former
executive officers and directors were named as defendants in an action claiming
that such defendants made intentional misrepresentations of material facts in
connection with such plaintiffs' purchases of an aggregate 296,333 shares of
Common Stock for $919,495. While we believe this action to be without merit, the
ultimate outcome of such lawsuit is unknown at this time. We believe that any
adverse decision resulting from this action will not have a materially adverse
effect on us; however, no assurance can be given in this regard.
We are also a defendant in a litigation involving a dispute with a landlord
and, in the past, have been involved in other legal actions with certain of our
vendors. These types of litigation generally arise out of our ordinary course of
business, and we believe that any adverse decision resulting from any of such
types of litigations will not have a material adverse effect on us; however, no
assurance can be given in this regard.
Software piracy and intellectual property infringement may adversely affect our
revenues.
We believe that our success depends significantly upon our proprietary
technology. We currently rely on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions and other
written materials under trade secret, patent and copyright laws to protect our
proprietary technology; however, these methods generally afford only limited
protection. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or services or to obtain and
use information that we regard as proprietary. In addition, the laws of some
foreign countries do not protect proprietary rights to as great an extent as do
the laws of the United States. Monitoring and identifying unauthorized use of
personal computer software is difficult. We expect software piracy to be a
continuing problem resulting in a reduction of our potential revenues.
Our dependence on third party licenses could have adverse affects.
We rely on certain software, technology and content that we license or have
licensed from third parties, including software, technology and content that is
integrated with internally developed software and used in our products to
perform key functions. These third-party software licenses may not continue to
be available to us on commercially reasonable terms. Also, such software may not
be appropriately supported, maintained or enhanced by the licensors such that
the licensed software would not continue to provide the necessary commercial
benefits to our products. In addition, we may not be able to license such
software, technology and content on terms advantageous to us. The loss of or
inability to obtain or replace licenses to, or inability to support, maintain
and enhance, any of such licensed software, could result in increased costs,
including the expense of internally developing the required software, technology
and/or content, as well as delays or reductions in product shipments.
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Our dependence on retailers, distributors and sales representatives may
adversely affect sales and cash flows.
Our customers are not contractually required to make future purchases of
our products and could discontinue carrying or purchasing our products, at any
time and for any reason. Retailers and distributors generally are in a strong
position to negotiate favorable terms of sale, including price discounts and
product return policies. Retailers also often require software publishers to pay
fees in exchange for preferred shelf space. Further, resellers may give higher
priority to products other than ours, thus reducing their efforts to sell our
products. We may not be able to increase or sustain the current amount of our
retail shelf space and, as a result, our operating results could be adversely
affected.
Our use of net operating loss carryforwards is limited.
We estimate our consolidated tax net operating loss carryforwards to be
approximately $84 million at December 31, 1998, which expire in years 2002
through 2018, and our general business credit carryover to be approximately $1.5
million, which expires in years 2005 and 2006. These carryforwards are subject
to certain limitations described below. Under Section 382 of the Code, changes
in the ownership or the business of a corporation that has net operating loss
carryforwards can result in the inability to use or the imposition of
significant restrictions on the use of such net operating loss carryforwards to
offset future income and tax liability of such corporation. An "ownership
change" may be deemed to have occurred under Section 382 of the Code and the
regulations thereunder with respect to both us and our wholly-owned subsidiary,
SPC, which we acquired in December 1996, and our use of these net operating loss
carryforwards will be limited. Utilization of the net operating loss
carryforwards of SPC may be further limited by reason of the consolidated
return/separate return limitation year rules. In addition, the SPC net operating
loss carry forwards are also subject to the additional limitation that such
losses can only be utilized to offset the separate taxable income of SPC. We
estimate the maximum utilization of such net operating loss carryforwards to be
approximately $1,200,000 per year for losses through December 31, 1996; losses
incurred thereafter can be fully utilized until expired under present
circumstances. There can be no assurance that we will be able to utilize all of
our net operating loss carryforwards. In addition, the foreign losses incurred
by SPC may decrease or otherwise restrict our ability to claim U.S. tax credits
for foreign income taxes.
Failure to obtain IRS closing agreement could result in large tax payment.
In September 1997, we applied for a closing agreement with the IRS pursuant
to which we would become jointly and severally liable for SPC's tax obligations
upon occurrence of a "triggering event" requiring recapture of dual consolidated
losses previously utilized by SPC. We acquired SPC in December 1996. Such
closing agreement would avoid SPC's being required to recognize a tax of
approximately $8 million on approximately $24.5 million of SPC's pre-acquisition
dual consolidated losses. We received notification from the IRS that the IRS has
determined not to act on our application until such time as SPC submits certain
filings pertaining to pre-acquisition filings made by SPC. Such additional
filings require SPC to obtain IRS relief so as to permit SPC to appropriately
make the election allowing SPC to utilize the dual consolidated losses. We have
recently submitted these filings in an application for relief. We believe that,
should the IRS accept the application for relief, and once the re-application
for a closing agreement is made, the IRS should agree to such a closing
agreement. However, no assurance can be given that the IRS will do so, and any
failure to do so could result in the recognition of this tax liability. Should
such a closing agreement be obtained, in certain circumstances, a future
acquirer of us may also be required to agree to a similar closing agreement in
order to avoid the same tax liability, to the extent it is able to do so. This
could have a material adverse effect on our future ability to sell SPC. The
report of our auditors covering the December 31, 1998 consolidated financial
statements contains a paragraph emphasizing these dual consolidated losses.
We have Year 2000 compliance issues
We are in the process of completing a re-review of issues related to our
Year 2000 compliance. In connection with this evaluation, we have reviewed, and
currently are re-reviewing for Year 2000 compliance, all of our products which
are currently being sold and we have also reviewed our vendors and suppliers for
Year 2000
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compliance. We expect to be able to conduct our review within our
current resources and anticipate that this review will be completed prior to
December 31, 1999. We estimate that the total costs we will incur to conduct the
review process and to implement any necessary corrections is approximately
$100,000, including costs incurred through the date of filing of this Current
Report on Form 8-K. At this time, we do not know of any of our products or
processes, which, if found to be non-Year 2000 compliant, would have any
significant impact on us. We believe that all of our current products are Year
2000 compliant. We are currently finalizing our contingency plans to address the
failure of our products, vendors or information technology systems to be Year
2000 compliant.
We have evaluated and determined that our direct mail telemarketing
operation systems would have a significant impact on us if it failed to operate
properly in the year 2000. Based on a cost-benefit analysis, management has
instituted a contingency plan whereby either our Europe or United States
telemarketing operations would support the other operation in the event that it
failed. Management believes that it is unlikely that both systems would fail
simultaneously, and has no contingency plans for such an event.
A change in product strategy may not be successful.
We acquired Software Publishing Corporation in December 1996. In SPC's
fiscal year ended September 30, 1996, approximately 70% of SPC's net revenue was
derived from the Harvard Graphics line of products. However, net revenues for
that line of products declined substantially over the previous few years and has
continued to decline. While we believe that the market for the Harvard Graphics
product line has matured, we also believe that our Harvard and Serif brands have
attracted significant customer bases. Accordingly, we intend to utilize these
brand strengths for our current and certain anticipated new products, including
our VisualCities.com Internet commerce network. This product line and brand
transition, and the development of the VisualCities.com Internet commerce
network, may not be accomplished in a timely or efficient manner and may not be
successful.
Potential anti-takeover effects of Delaware law, our certificate of
incorporation, our stockholder rights plan and possible issuances of our
preferred stock could impede a takeover of our company.
Certain provisions of Delaware law and our Certificate of Incorporation
could make it more difficult to complete a merger, tender offer or proxy contest
involving us, even if such events could be beneficial to the interests of our
stockholders. These provisions include:
- Section 203 of the Delaware General Corporation Law,
- the classification of our Board of Directors into three classes,
- the requirement that 66-2/3% of our stockholders are needed
to request a special meeting of stockholders (other than a special
meeting called by the Board of Directors or the President),
- the "golden parachute" provisions of our agreement with our President,
- the requirement that 66-2/3% of our stockholders entitled to
vote thereon approve transactions such as a merger, consolidation or
sale of assets with or to an entity controlling 15% or more of the
voting power of our capital stock, unless approved by the Board of
Directors prior to such entity's acquisition of 15% or more of such
voting power,
- the existence of "blank check" preferred stock that may be
issued by our Board of Directors without stockholder approval on such
terms as the Board may determine, and
- the existence of a "poison pill."
Under the poison pill, we have declared a dividend of one Preferred Share
Purchase Right on each outstanding share of our common stock. Each Right becomes
exercisable only if a person or group acquires 20% or more of our outstanding
common stock or announces a tender offer the consummation of which would result
in ownership by a person or group of 20% or more of our common stock. If we are
acquired in a merger or other business combination transaction after a person or
group has acquired 20% or more of our outstanding common stock, each Right will
entitle its holder to purchase, at the Right's then current exercise price
(currently, $1,000), a number of the acquiring company's common shares having a
market value of twice such price. In addition, if a person or group acquires 20%
or more of our outstanding common stock, each Right will entitle its holder
(other than such person or members of such group) to purchase, at the Right's
then current exercise price, a number of shares of our common stock having a
market value of twice such price.
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The rights of the holders of our common stock also will be subject to, and
may be adversely affected by, the rights of the holders of additional or other
classes of preferred stock that may be issued in the future, including the blank
check preferred stock. Such issuance may make it more difficult for a third
party to acquire, or may discourage a third party from acquiring, a majority of
our voting stock. These provisions could limit the price that certain investors
might be willing to pay in the future for shares of our common stock.
Limited directors' liability could prevent stockholders from holding directors
responsible for a lack of care.
Our Certificate of Incorporation provides that our directors (but not our
officers) will not be held liable to us or our stockholders for monetary damages
upon breach of a director's fiduciary duty, except to the extent otherwise
required by law.
We have no history of paying dividends.
We have never paid any cash dividends on our common stock and we do
not anticipate paying any dividends in the foreseeable future.
The possible issuance of substantial amounts of additional shares without
stockholder approval could dilute stockholders.
As of the date of filing of this Current Report on Form 8-K, we have an
aggregate of 7,215,431 shares of our common stock outstanding. In addition, as
of the date of filing of this Current Report on Form 8-K, we have 1,939,480
shares of Serial Preferred Stock authorized but unissued, of which, 1,836,980
shares are not reserved for specific purposes, and an additional (a) aggregate
of 6,302,450 shares of our common stock issuable upon the exercise of stock
options granted or available for grant under our various stock plans and (b)
aggregate of approximately 3,100,000 shares of our common stock issuable upon
exercise of other stock options or warrants previously granted and outstanding.
All of such shares may be issued without any action or approval by our
stockholders. Any issuance of additional shares of our common stock or
securities convertible into any such shares would further dilute the percentage
ownership of us held by our current stockholders.
Any delisting of securities from Nasdaq system could precipitate risks
associated with low-priced stocks.
Our common stock is listed on the Nasdaq SmallCap Market and the Boston
Stock Exchange. To remain eligible for listing on the Nasdaq SmallCap Market, we
must comply with the following:
- Our common stock must have a minimum bid price of $1.00,
- we must have either minimum tangible net assets of
$2,000,000, a market capitalization of $35,000,000 or net income of
$500,000 in two of the three prior fiscal years and
- we must have a public float of at least 500,000 shares with
a market value of at least $1,000,000, at least 300 stockholders must
hold shares of our common stock and at least two market makers must
make a market in our common stock.
These maintenance standards may be changed by Nasdaq. While we presently
comply with the Nasdaq listing maintenance requirements, the failure to maintain
these requirements or other requirements of Nasdaq could result in de-listing of
our securities from Nasdaq. In the event our securities are de-listed from
Nasdaq, you may be affected in any one or more of the following ways:
- our securities will have to trade on a non-NASDAQ, and possibly less
efficient, "over-the-counter" market,
- fewer brokerage firms and dealers may make a market in our securities
which may cause a decline in the trading price of our securities,
- you may also find it more difficult to dispose of, or obtain accurate
quotations, as to the market value of our securities,
- our securities may no longer be eligible for sale in certain
jurisdictions without additional compliance with such jurisdictions'
laws and regulations, and
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- the market for our securities may become illiquid.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
Not applicable.
(b) Pro forma financial information.
Not applicable.
(c) Exhibits.
None.
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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.
Dated: December 29, 1999
VIZACOM INC.
By: /s/ Mark E. Leininger
-------------------------------
Mark E. Leininger, President and
Chief Executive Officer
(Principal Executive Officer)
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