UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to________
Commission file number: 1-14076
VIZACOM INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-3270045
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
Glenpointe Centre East, 300 Frank W. Burr Blvd., 7th Floor,
Teaneck, New Jersey 07666
(Address of principal executive offices)
(201) 928-1001
(Issuer's telephone number)
3A Oak Road, Fairfield, New Jersey 07004
(former address if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,138,502 shares of Common Stock, as
of October 31, 1999.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
VIZACOM INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item Pages
- ---- -----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
1999 (Unaudited) and December 31, 1998 . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months Ended September 30 ,1999
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited) . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . 7 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 12 - 19
Part II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 20
2
<PAGE>
VIZACOM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 933,684 $ 2,377,648
Marketable securities 1,418,874 1,020,000
Receivables
Trade accounts, net 631,138 1,169,233
Other 157,825 390,429
Notes, current portion 129,187 13,026
Inventories 670,096 607,181
Prepaid expenses and other current assets 948,907 684,268
------------ -------------
Total current assets $ 4,889,711 $ 6,261,785
Property and equipment, net 693,833 445,447
Acquired software, net 480,833 2,144,417
Goodwill, net 137,402 193,611
Restricted cash 259,838 200,000
Notes receivable, long term portion 64,681 28,078
Other assets 1,760,297 724,972
------------ -------------
Total assets $ 8,286,595 $ 9,998,310
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,024,246 $ 3,484,275
Accrued liabilities 1,327,385 1,730,999
Value-added taxes payable 376,033 416,395
Current portion of long-term debt 75,033 195,044
------------ -------------
Total current liabilities 4,802,697 5,826,713
Long-term debt, less current maturities 159,408 99,554
------------ -------------
Total liabilities 4,962,105 5,926,267
------------ -------------
Commitments and Contingencies
Stockholders' equity:
Preferred Stock
Class B, Series A, 60,520 shares
authorized, none issued - -
Junior Participating, Series A,
100,000 shares authorized; none issued - -
Serial Preferred Stock, $.001 par value,
1,939,480 shares authorized;
Class A, 1,500 shares authorized,
0 and 930 shares issued, respectively - 930,000
Class C, 1,000 shares authorized, none issued - -
Common stock, $.001 par value, 60,000,000 shares
authorized; issued 6,704,443 and
5,083,653 shares, respectively 6,704 5,084
Additional paid-in capital 48,607,239 45,385,487
Accumulated deficit (45,274,922) (42,238,133)
Accumulated other comprehensive loss (4,136) -
Treasury stock, at cost, 3,095 shares (10,395) (10,395)
------------ -------------
Total stockholders' equity 3,324,490 4,072,043
------------ -------------
Total liabilities and stockholders'
equity $ 8,286,595 $ 9,998,310
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
VIZACOM INC.
CONDENSED CONSOLITATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,370,236 $ 4,223,325 $ 13,667,951 $ 12,226,304
Cost of goods sold 1,295,437 1,103,873 4,353,056 2,807,174
----------- ----------- ------------ ------------
Gross profit 3,074,799 3,119,452 9,314,896 9,419,130
Selling, general and administrative expenses 3,865,672 2,977,014 11,852,315 8,535,311
Product development 213,230 154,780 479,574 927,356
Amortization of goodwill and purchased technology 499,570 594,320 1,672,418 1,782,959
Unrealized holding gain on marketable securities (155,931) - (1,576,077) -
Other expense (income), net 192,330 (50,648) (76,545) (72,436)
----------- ----------- ------------ ------------
4,614,871 3,675,466 12,351,685 11,173,190
Net Loss (1,540,072) (556,014) (3,036,789) (1,754,060)
Dividends on Series A and Series C Preferred Stock (5,325) - (56,641) -
----------- ----------- ------------ ------------
Net loss attributable to common stockholders $(1,545,397) $ (556,014) $ (3,093,430) $ (1,754,060)
=========== =========== ============ ============
Net loss per common share:
Net loss per common share-basis and diluted $ (.26) $ (.14) $ (.55) $ (.50)
=========== =========== ============ ============
Weighted average number of common shares
outstanding - basic and diluted 5,859,197 3,940,357 5,635,086 3,513,780
=========== =========== ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
VIZACOM INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------
Class A Class C Common Stock Additional
------------------ ------------------- --------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 930 $930,000 - - 5,083,653 $5,084 $45,385,487
Comprehensive income (loss):
Net Loss - - - - - - -
Currency translation adjustment - - - - - - -
Total comprehensive loss - - - - - - -
Exchange of Class A Preferred Stock
for Class C Preferred Stock and
warrants, less related costs (930) (930,000) 930 930,000 - - (33,905)
Common stock issued on exercise
of warrants - - - - 183,333 183 5,317
Common stock issued for payment of
legal services - - - - 50,000 50 181,200
Sale of common stock in private
placements, net - - - - 1,370,007 1,370 2,377,526
Issuance of options and warrants for
current and future services - - - - - - 726,977
Issuance of common stock pursuant to
Company stock option plans - - - - 17,450 17 21,278
Redemption of preferred stock - - (930) (930,000) - - -
Dividends paid on preferred stock - - - - - - (56,641)
---------------------------------------------------------------------------------------
Balance at September 30, 1999 - $ - - $ - 6,704,443 $6,704 $48,607,239
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Accumulated Comprehensive Treasury Stockholders'
Deficit Loss Stock Equity
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $(42,238,133) $ - $(10,395) $4,072,043
Comprehensive income (loss):
Net Loss (3,036,789) - -
Currency translation adjustment - (4,136) -
Total comprehensive loss - - - (3,040,925)
Exchange of Class A Preferred Stock
for Class C Preferred Stock and
warrants, less related costs - - - (33,905)
Common stock issued on exercise
of warrants - - - 5,500
Common stock issued for payment of
legal services - - - 181,250
Sale of common stock in private
placements, net - - - 2,378,896
Issuance of options and warrants for
current and future services - - - 726,977
Issuance of common stock pursuant to
Company stock option plans - - - 21,295
Redemption of preferred stock - - - (930,000)
Dividends paid on preferred stock - - - (56,641)
---------------------------------------------------------------------------------------
Balance at September 30, 1999 $(45,274,922) $(4,136) $(10,395) $3,324,490
=======================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
VIZACOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (3,036,789) $ (1,754,060)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,093,164 2,003,761
Unrealized holding gain on marketable securities (1,576,077) -
Realized loss on sale of marketable securities 184,855 -
Provision for bad debts 80,000 -
Common stock and stock options issued for legal services 101,712 -
Sale of marketable securities - 173,600
Changes in assets and liabilities:
Receivables 479,693 (37,631)
Inventories (62,915) 81,863
Prepaid expenses and other currents assets (329,608) (187,723)
Other assets (518,877) (32,499)
Accounts payable (460,029) 467,408
Accrued liabilities (297,907) (2,657,859)
Value-added taxes payable (40,362) -
------------ ------------
Net cash used in operating activities (3,383,140) (1,943,140)
============ ============
Investment activities:
Purchase of property and equipment (414,096) (45,157)
Increase in restricted cash (59,838) -
Collection of notes receivable 105,617 -
------------ ------------
Net cash used in investing activities (368,317) (45,157)
------------ ------------
Financing activities:
Payment of long-term debt (159,185) (121,559)
Proceeds from long-term debt 99,028 -
Acquisition of treasury shares - (10,395)
Proceeds from sale of common stock, net 2,378,896 1,038,247
Proceeds from option and warrant exercises 26,795 -
Costs of issuance of preferred stock (33,905) -
------------ ------------
Net cash provided by financing activities 2,311,629 906,293
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (4,136) -
Net decrease in cash and cash equivalents $ (1,439,828) (1,082,004)
Cash and cash equivalents, at beginning of period 2,377,648 2,586,753
------------ ------------
Cash and cash equivalents at end of period $ 933,684 $ 1,504,749
------------ ------------
Supplemental disclosure of cash flow information:
Interest $ 32,578 $ -
============ ============
Income taxes $ - $ -
============ ============
Supplemental disclosure of non-cash financing and investing activities:
Redemption of preferred stock with marketable securities $ 930,000 $ -
============ ============
Dividends on preferred stock paid in marketable securities $ 62,348 $ -
============ ============
Warrants issued for other assets $ 706,515 $ -
============ ============
Common stock issued in payment of liabilities $ 100,000 $ 107,107
============ ============
Common stock issued for services $ - $ 174,250
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Vizacom Inc. (formerly known as Software Publishing Corporation Holdings,
Inc.) and its wholly owned subsidiaries, have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine and three
month periods ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1998.
The condensed consolidated balance sheet as of December 31, 1998 has been
derived from the Company's audited consolidated balance sheet as of that
date. See Note 2 with respect to reclassifications.
2. Significant Accounting Policies
Software Development Costs
Product enhancement costs for products which have established
technological feasibility are capitalized and capitalization is discontinued
when the product is available for sale. Approximately $281,000 was
capitalized at September 30, 1999. Software development costs incurred prior
to establishment of technological feasibility are charged to product
development expense.
Direct-Response Advertising
Advertising costs associated with direct-response advertising, whose
primary purpose is to elicit sales to customers who could be shown to have
responded specifically to that advertising, are capitalized and recognized
ratably in the future as a percentage of actual period to total revenues
anticipated from such advertising. Costs associated with direct-response
advertising include mailing list rental, postage, production, and other
associated promotional activities.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards
of reporting and displaying comprehensive income and its components of net
income and "other comprehensive income" in financial statements. "Other
Comprehensive Income" refers to revenues, expenses, gains and losses that
are not included in net income but rather are recorded directly in
stockholders' equity.
Web Site Development Costs
Certain internal and external costs of web site development incurred
during the application development stage are being capitalized and amortized
over a three-year period. At September 30, 1999, $235,000 of these costs are
included in other assets.
7
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reclassifications
Certain reclassifications have been made to the 1998 amounts to conform
with the 1999 presentation.
3. Loss per Share
Basic loss per share is computed based upon the weighted average number of
common shares outstanding during each period presented. Stock options and
warrants did not have an effect on the computation of diluted earnings per
share in the nine month periods ended September 30, 1999 and 1998 since they
were anti-dilutive.
4. Marketable Securities
The Company accounts for its investment in marketable securities
consisting of shares of X-Ceed, Inc. common stock ("Xceed Shares"), as a
trading security, and therefore records an unrealized holding gain or loss
each period determined by the market value of Xceed Shares at the end of each
period. On July 14, 1999, the Board of Directors of the Company called for
redemption all outstanding shares of the Class C 11 % Cumulative
NonConvertible Redeemable Preferred Stock ("Class C Preferred") of the
Company with a record date for such redemption of July 19, 1999. On July 1,
1999, the Company agreed with the holder of such shares of Class C Preferred
(the "Holder") that in the event the Company called for redemption any of its
shares of Class C Preferred within 45 days, the Company would sell to the
Holder 53,815 Xceed Shares owned by the Company at a price of $18.44 per
Xceed Share, or $992,349 in the aggregate. Such transaction was consummated
on July 19, 1999 resulting in a realized loss of $184,855 on the exchange of
the Xceed shares (representing the difference between the market price and
the agreed upon exchange value of $18.44, which is reflected in other income
(expense)).
On August 10, 1999, the Company entered into an agreement pursuant to which
should the other party provide assistance to the Company in finding or
advising with respect to an acquisition or acquisitions, the Company shall
pay a fee payable in shares of common stock of Xceed Inc. valued at
$13.375 per share (the closing price thereof on the date of the agreement),
equivalent to 10% of the purchase price of the acquisition(s), up to a
maximum of $800,000.
5. Stockholders' Equity
In January 1999, the holder of all 930 shares of the Class A 14%
Cumulative Non-Convertible Redeemable Preferred Stock ("Class A Preferred")
of the Company exchanged such Class A Preferred shares for (i) the issuance
of 930 shares of the Class C Preferred of the Company, (ii) the issuance of
warrants to purchase 260,000 shares of Common Stock, at an exercise price of
$1.0625 per share, exercisable immediately and expiring in January 2006, and
(iii) a payment of $7,134 representing all accrued dividends on the Class A
Preferred through the effective date of such exchange. The Certificate of
Designations with respect to the Class C Preferred authorizes a class of
1,000 shares of Class C Preferred. Holders of shares of Class C Preferred are
entitled to (a) cumulative dividends of $110 per share per annum, payable
semi-annually on June 30 and December 31, of each calendar year, commencing
on June 30, 1999, (b) a liquidation preference of $1,000 per share and (c)
the right to elect one director in the event the Corporation fails to tender
in full three consecutive semi-annual dividend payments. In addition, the
Company has the right to redeem the Class C Preferred, in part or whole, at
any time, upon payment of $1,000 per share of Class C Preferred. See Note 4
above.
8
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In February 1999, the Company issued 183,333 shares of its common stock
pursuant to the exercise of warrants to purchase such shares at $.03 per
share, for aggregate consideration of $5,500.
On April 6, 1999, the Company entered into certain financial advisory and
investment banking agreements whereby the Company issued warrants to
purchase 100,000 and 45,000 shares, respectively, of common stock of the
Company at an exercise price of $1.125. The warrants are exercisable for
the period from April 6, 2000 through April 6, 2004. The warrants were
valued at $69,742 and $31,523, respectively, and the related deferred charges
are included in other assets. The Company also issued options to purchase
25,000 shares of its common stock to employees of its legal counsel, at an
exercise price of $1.03125. These options were valued at $20,462. Options to
purchase 13,625 shares of these 25,000 shares of common stock were
subsequently cancelled.
On June 9, 1999, the Company sold an aggregate of 525,000 shares of Common
Stock for aggregate gross proceeds of $1,050,000, before associated
transaction costs of $61,644, to twenty-two accredited investors.
On July 1, 1999, the Company sold an aggregate of 762,653 shares of common
stock for aggregate gross proceeds of $1,510,000 to 45 investors, before
associated transaction costs of $294,460, in a private placement in which
Joseph Stevens & Company, Inc. acted as placement agent.
In July 1999, the Company issued 50,000 shares of common stock to the
members of its corporate counsel in payment of certain legal fees due to such
law firm. See Note 8.
On July 14, 1999, the Board of Directors of the Company called for
redemption all outstanding shares of Class C Preferred of the Company with a
record date for such redemption of July 19, 1999. See Note 4.
On July 20, 1999 the Company issued warrants to purchase an aggregate
of 225,000 shares of its common stock at an exercise price of $2.00,
through July 20, 2004, in connection with a five-year consulting agreement.
Such warrants were valued at $605,250 and are being amortized over the term
of the related consulting agreement.
During the period September through October 1999, the Company sold
units in a private placement, each unit consisting of one share of common
stock plus one-quarter of a warrant. Each warrant will allow the subscriber
to purchase one share of common stock at $2.75 per share for a three year
period from date of sale. In the quarter ended September 30, 1999, the
Company sold 82,354 units for aggregate gross proceeds of $175,000 to 6
accredited investors. In October 1999, the Company sold 434,059 units for
aggregate gross proceeds of $922,375 to 11 accredited investors.
6. License of Technology
On June 14, 1999 the Company entered into an agreement to license
certain of its proprietary technology to an unrelated entity in return for
certain future payments totaling $275,000. The Company has recorded the
present value of the payments as a note receivable and included a $211,006
gain on the licensing of the technology in other income.
7. Litigation
On January 30, 1998, an action was commenced against the Company and
certain current and former officers, in which plaintiffs allege that, in
October 1997, the plaintiffs purchased an aggregate of 296,333 shares of
the
9
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Company's common stock (adjusted for the May 28, 1998 three-for-one
reverse stock split) for gross proceeds of $919,495 based upon certain
allegedly misleading statements made to one of the plaintiffs which were
allegedly designed to deceive plaintiffs as to the Company's true financial
state. Plaintiffs seek recision of their investment, a return of their
purchase price and certain other relief. The Company believes that these
claims are without merit and is vigorously defending itself in this action.
The Company has denied the plaintiffs' allegations and asserted affirmative
defenses, including that the plaintiffs' subscription agreements bar
plaintiffs' claims, and has asserted counterclaims that, among other
things, plaintiffs breached certain of the representations contained in
their subscription agreements, that one of the plaintiffs breached his
fiduciary duties to the Company and that plaintiffs' violated Section 13(d)
of the Exchange Act by filing a materially false and misleading Schedule
13D with respect to the Common Stock. This case is awaiting dipositive
motions and/or a trial date.
In the fourth quarter of 1998, an action was commenced against the
Company in California in which plaintiff is seeking $300,000 in damages for
the Company's alleged violation of a lease for office space located in San
Jose, California. The Company believes that plaintiff's claims in this
action are without merit and intends to vigorously defend itself in this
action. The Company has filed an answer in this action denying the
plaintiff's allegations. This action is currently in the discovery stage
and is scheduled for non-binding mediation.
The Company has other litigation matters in progress in the ordinary
course of business. In the opinion of management, all of such other pending
litigation of the Company is expected to be resolved without a material
adverse effect on the Company's financial position, results of operations
or cash flow.
8. Related Party Transactions
During the nine months ended September 30, 1999, the Company incurred
approximately $300,000 of legal fees to a law firm of which a director of
the Company is a member. Approximately $57,000 owed to such law firm is
included in accounts payable at September 30, 1999. In July 1999, 50,000
shares of common stock (valued at $181,250 on the date of issue) were
issued to the members of this law firm in payment of legal fees. In
addition, in June and July 1999, options to purchase an aggregate of
100,000 shares of common stock were granted to the members of this law firm
at exercise prices of $2.75 and $3.08 per share. Options to purchase 75,000
of these shares were granted under the Company's 1994 Long Term Incentive
Plan.
9. Foreign and Domestic Operations
The Company conducts its business within the computer software
industry. Foreign and domestic operations for the nine months ended
September 30, 1999 and 1998, were as
<TABLE>
<CAPTION>
United States International Consolidated
------------- ------------- ------------
September 30,1999:
<S> <C> <C> <C>
Net $ 5,073,298 $8,594,653 $13,667,951
=========== ========== ===========
Loss before income taxes $(2,393,393) $ (643,396) $(3,036,789)
=========== ========== ===========
September 30,1998:
Net sales $ 5,844,355 $6,381,949 $12,226,304
=========== ========== ===========
Income (loss) before income taxes $(3,383,947) $1,629,887 $(1,754,060)
=========== ========== ===========
</TABLE>
10
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Commitments and Contingencies
In September 1997, the Company applied for a closing agreement with
the IRS pursuant to which we would become jointly and severally liable for
the tax obligations of Software Publishing Corporation ("SPC'), a
subsidiary of the Company, upon occurrence of a "triggering event"
requiring recapture of dual consolidated losses previously utilized by SPC.
The Company 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. The Company received notification from the IRS that the IRS has
determined not to act on its application until such time as SPC submits
certain filings pertaining to pre-acquisition consolidated tax year return
filings made by SPC. The Company intends to submit these filings in an
application for relief shortly. The Company believes 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 the Company 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.
The Company has entered into a five-year consulting agreement pursuant
to which the Company is required to pay .30% of its net revenue (subject to
an annual minimum fee of $125,000, and an annual maximum fee of $250,000)
to the consultant. The term of the agreement may be extended an additional
eighteen months if the Company reports annual net revenues of $40,000,000,
and an additional eighteen months should net revenues exceed $60,000,000.
At September 30, 1999 the Company has accrued $93,750 in connection with
this agreement.
On July 14, 1999, the Company entered into a three year employment
agreement with the Company's President and Chief Executive Officer, Mark E.
Leininger. Under the terms of the agreement, Mr. Leininger will receive
$162,500 base pay with minimum $10,000 annual increases during the term of
the agreement. Such annual increases may be revised upward at the
discretion of the Compensation Committee of the Board of Directors. Mr.
Leininger will receive a $25,000 bonus upon the Company's attainment of its
first profitable fiscal quarter. Mr. Leininger will also receive a
quarterly bonus of 3% of the Company's income before extraordinary items.
In the event of a change of control, the agreement provides that Mr.
Leininger shall have the right to terminate the employment agreement within
six months thereafter, and receive payment of three times the average
annual cash compensation paid by the Company to Mr. Leininger over the
previous five years, less $1.00. The agreement further contains
restrictions on the employee engaging in competition with the Company for
the term thereof and for up to one year thereafter, and provisions
protecting the Company's proprietary rights and information.
On July 14, 1999 the Company entered into a sublease agreement for its
corporate headquarters. Under the sublease agreement the Company leases
4,787 square feet of commercial office space commencing September 1, 1999
for a fixed annual rental of $119,675. The lease runs through January 31,
2003.
On July 27, 1999 the Company entered into a minimum annual purchase
commitment of approximately $230,000 with a distributor of certain software
the Company intends to sell in its direct mail operation.
11. Subsequent Events
On October 29, 1999 the Company entered into a letter of intent to
acquire Renaissance Multimedia, a New York City based digital communication
company focused on building internet web sites and businesses through use
of new media, in a cash and stock transaction.
11
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statements contained in this Quarterly Report on Form 10-QSB, that are not based
on historical facts, include "forward- looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements included
in this Form 10-QSB involve known and unknown risks, uncertainties and other
factors which could cause the actual results, performance (financial or
operating) or achievements expressed or implied by such forward-looking
statements not to occur or be realized. Such forward-looking statements
generally are based upon the Company's best estimates of future results,
performance or achievement, current conditions and the most recent results of
operations. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "believe,"
"estimate," "anticipate," "continue" or similar terms, variations of those terms
or the negative of those terms. Potential risks and uncertainties include, among
other things, such factors as:
- the overall level of business and consumer spending for computer
software,
- the market acceptance and amount of sales of the Company's products,
- the extent that the Company's direct marketing programs achieve
satisfactory response rates,
- the ability of the Company to obtain sufficient supplies of successful
products,
- the efficiency of the Company's telemarketing operations,
- the competitive environment within the computer software and direct
marketing industries,
- the Company's ability to raise additional capital,
- unforeseen operational difficulties and financial losses due to year
2000 computer problems,
- the cost-effectiveness of the Company's product development
activities,
- the extent to which the Company is successful in developing, acquiring
or licensing products which are accepted by the market,
- the success of the Company's VisualCities.com Internet commerce
network and other Internet programs,
- the success of the Company's expansion into Internet service
offerings,
- the ability to obtain from the Internal Revenue Service (the "IRS")
relief to make the appropriate election under the Internal Revenue
Code of 1986, as amended ( the "Code"), which would permit
reporting dual consolidated losses by SPC; approval by the IRS of our
application for a closing agreement, and approval by the IRS of a
similar application for a closing agreement in the event the Company
chooses to sell SPC in the future, and
- the other factors and information disclosed and discussed
elsewhere in this Quarterly Report on Form 10-QSB.
Investors should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Business
The Company makes and sells computer software products for both the United
States domestic and international markets and has entered into the e-commerce
and internet services business initially through its Internet web site
VisualCities.com. Most of the Company's products are visual communication tools
comprised of desktop publishing, presentation graphics and graphics/drawing
software for the corporate, SOHO and consumer markets. The Company's web site,
VisualCities.com, focuses on content and e-commerce associated with these visual
communication tools. Our 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 the Company's 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 the Windows(R) 98, Windows 95, Windows NT(R) , Windows
3.1 and DOS operating systems
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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 and OEM sales
channels and also disseminate some of our software programs over the Internet.
The Company currently derives substantially all of its net sales from products
sold directly to end-users by its direct mail and telemarketing centers, and to
retailers, distributors and corporate purchasers by its internal sales force and
independent sales representatives. We estimate that approximately 91% of our net
sales for the nine months ended September 30, 1999 (the "1999 Nine Month
Period") were generated through the Company's direct sales and telemarketing
efforts, compared to 83% of our net sales for the period ended September 30,
1998 (the "1998 Nine Month Period").
North America and International net sales for the three and nine months
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 2,786,187 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 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. The Company currently does not offer a
suite of general purpose office 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.
The Company recently has launched a new web site entitled VisualCities.com. The
web site is a niche internet commerce network which provides targeted
information, content, goods and services to visual communication users. The
Company intends to utilize this web site to sell its products and create a
gathering place for individuals with interest in visual communication products.
The Company expects the web site to achieve full functionality by January 2001.
We believe that in order to increase net revenues, we must continue to develop
and introduce new technologies and products internally, 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. We intend to utilize our core competencies
in direct marketing, telemarketing, sales, customer and technical service, and
fulfillment capabilities to provide these services to the e-commerce community.
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. The Company's 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, sales and marketing expenses, and general and
administrative expenses.
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Strategy
The Company has begun implementing a strategy that includes becoming a fully
integrated provider of e-services by capitalizing on its core competencies and
complementary acquisitions. The strategy is summarized below:
E-Services
The Company believes there is an accelerating trend to provide e-services to
Internet business owners. These e-services include the ability to cure the
customer service frustrations that presently exist on the Internet. The Company
believes that it can become a major back office customer and technical service
provider as well as provide other necessary services to Internet e-commerce
businesses by leveraging its 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 customer services to our customers and
third parties.
- - Provider of Call Center Technology Services: The Company is
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.
- - Direct Marketing Services: Our core software and direct marketing
business utilizes in-house expertise to elicit responses to our
international call centers from our mail programs of direct marketing
advertisements.
VisualCities.Com
The Company recently launched its VisualCities.com internet commerce
network. The Company hopes to leverage its large installed base of customers,
direct marketing capabilities, and international brand recognition to draw users
to this web site. The Company intends to ultimately offer the VisualCities.com
user focused content within a studio-based format reflecting seven visual
communications markets: 1) digital imaging; 2) animation; 3) art gallery; 4)
drawing; 5) presentation graphics; 6) desktop publishing; and 7) web publishing.
Four of these studios are currently included in the web site. We envision that
the Company will generate revenue from a number of sources including links to
other web sites, sale of Company and third party products, brokerage of clip-art
and other content, advertising and other ancillary services related to the
visual communication toolset.
Acquisitions
The Company believes that by providing a greater spectrum of web capabilities it
will broaden its appeal to become a leading web service provider. In connection
with that strategy, the Company has entered into a letter of intent to acquire
Renaissance Multimedia, a New York City based digital communication company
focused on building internet web sites and businesses through use of new media.
The Company is also exploring other strategic acquisitions both domestically
and internationally, including the acquisition of one or more companies
engaged in the business of designing and implementing internet backbones,
all of which we expect to strengthen our e-service capabilities.
On a combined basis, we expect to be able to provide a fully integrated range of
e-business services, including web site design, e-business building, internet
backbone design and implementation, direct marketing services, customer and
technical support services, and fulfillment.
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<PAGE>
Results of Operations
Comparison of the Three and Nine Month Periods Ended September 30, 1999 and 1998
Net Sales: Net sales for the quarter ended September 30, 1999 (the "1999 Third
Quarter") increased $146,911, or 3%, to $4,370,236 from $4,223,325 in the
quarter ended September 30, 1998 (the "1998 Third Quarter"). Net sales for the
1999 Nine Month Period increased $1,441,647, or 11%, to $13,667,951 from
$12,226,304 in the 1998 Nine Month Period. The increase in net sales in the 1999
Third Quarter and 1999 Nine Month Period resulted primarily from sales of the
Company's Go Digital Camera Pak direct response promotion, which was not
available for sale in the 1998 Nine Month Period. The Company provided for
returns and allowances at 14% and 10% of gross sales in the 1999 Third Quarter
and 1999 Nine Month Period, respectively, as compared to 10% and 8%,
respectively, of gross sales in the 1998 Third Quarter and 1998 Nine Month
Period, primarily as a result of a shift to increased hardware sales which has a
greater rate of returns and allowances.
Cost of Goods Sold and Gross Profit: Cost of goods sold increased $191,564, or
17%, to $1,295,437 in the 1999 Third Quarter from $1,103,873 in the 1998 Third
Quarter. Cost of goods sold increased $1,545,881, or 55%, to $4,353,055 in the
1999 Nine Month Period from $2,807,174 in the 1998 Nine Month Period. The higher
costs are due to the increase in sales volume and a change in the product mix to
a greater proportion of hardware compared to software sales. The Company's cost
of goods sold consists primarily of product costs, royalties and inventory
allowances for damaged and obsolete products. Product costs consist of the costs
to purchase the underlying materials and print both boxes and manuals, media
costs (CD-ROMs and other media), assembly costs, and hardware costs. Gross
profit for the 1999 Third Quarter was 70% compared to 74% in the 1998 Third
Quarter. Gross profit for the 1999 Nine Month Period was 68% compared to 77% for
the 1998 Nine Month Period. The decline in gross margins for the 1999 Third
Quarter and 1999 Nine Month Period reflects a change in product mix resulting
primarily from higher proportion of hardware versus software sales in the
comparative periods due to the Company's Go Digital Camera Pak promotion, and
the delay in the introduction of additional software products originally
expected during the 1999 Nine Month Period.
Gross profit may be affected from time to time by the mix of distribution
channels used, mix of products sold and the timing of product introductions, the
mix of international versus domestic revenues, promotional pricing and rebate
offers, as well as by return privileges and marketing promotions in connection
with new product introductions and upgrades. These promotions may have a
negative influence on average selling prices and gross margins. In addition,
gross margin is expected to fluctuate on a quarterly basis as the Company
utilizes alternative direct response promotions. Gross margins have also been,
and may continue to be, adversely affected by competitive pricing strategies in
the industry as a whole, including competitive upgrade pricing, the OEM business
and alternative licensing arrangements.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the 1999 Third Quarter increased $888,658, or 23%,
to $4,130,971 from $2,977,014 in the 1998 Third Quarter. Selling, general and
administrative expenses for the 1999 Nine Month Period increased $3,317,004, or
28%, to $11,852,316 from $8,535,311 in the 1998 Nine Month Period. Selling,
general and administrative expenses increased primarily as a result of increased
catalog and direct mail costs, including the cost of developing an expanded
direct-response list in the United States and the introduction of a direct mail
program in Germany. During the 1999 Third Quarter, the Company experienced,
primarily in its European operations, what the Company believes was a slower
return to normal seasonal business levels as well as a seasonally induced lower
response rate, which, together with a higher than expected return rate for its
digital cameras, contributed to a significant increase in its direct mailing
costs, which were disproportionate to revenue generated. The Company also
incurred increased costs associated with the Company's expansion into Germany.
Additional charges of approximately $229,000 and $397,000 were incurred
relating to consulting agreements, for the 1999 Third Quarter and 1999 Nine
Month Period, respectively, as compared to $133,000 and $145,000 in the
comparable 1998 periods. The Company also incurred additional costs of
approximately $18,000 and $79,000 for outside public relations services during
the 1999 Third Quarter and 1999 Nine Month Period, respectively, which it had
not incurred during the comparable 1998 periods.
15
<PAGE>
The Company establishes several of its marketing expenditure levels based on
expected net revenues. The Company periodically reviews and adjusts its variable
expenditure levels based on actual sales volumes. In the future, the Company's
cash flows, net revenues and operating results could be adversely affected by
these and other factors, such as delays in new product introductions, delays in
receiving single sourced (e.g., digital cameras) or other manufactured products,
the mix of product sales or distribution channels and customer choices regarding
operating systems.
Amortization of Acquired Software and Goodwill: This represents the Company's
amortization of acquired software and goodwill associated with its acquisitions
of Serif and SPC.
Unrealized Holding Gain on Marketable Securities: The unrealized holding gain of
$155,931 in the 1999 Third Quarter and $1,576,077 in the 1999 Nine Month Period,
represents the increase in value of the Company's investment in marketable
securities for the 1999 Third Quarter and 1999 Nine Month Period, respectively.
On July 14, 1999, the Board of Directors of the Company called for redemption
all outstanding shares of Class C Preferred Stock of the Company with a record
date for such redemption of July 19, 1999. In a July 1, 1999 agreement, the
Company agreed with the holder of all outstanding shares of Class C Preferred
Stock that in the event the Company called for redemption any of its shares of
Class C Preferred Stock within 45 days, the Company would sell to the Holder
53,815 Xceed Shares, owned by the Company, at a price of $18.44 per Xceed Share,
or $992,349 in the aggregate. Such transaction was consummated on July 19, 1999,
leaving the Company with 66,185 shares of Xceed common stock. The Company
realized a loss of $184,855 on the transaction.
Product Development: Product development expenses for the 1999 Third Quarter
increased $58,450, or 27%, to $212,230 from $154,780 in the 1998 Third Quarter.
Product development expenses for the 1999 Nine Month Period declined $447,782,
or 93%, to $479,574 from $927,356 in the 1998 Nine Month Period. Product
development costs as a percentage of net sales were 4.8% and 3.5% for the 1999
Third Quarter and 1999 Nine Month Period, respectively, compared to 3.6% and
7.6% in the 1998 Third Quarter and 1998 Nine Month Period, respectively. The
Company capitalized approximately $281,000 of its product enhancement costs
associated with product designs where technological feasibility has been
established. All other development costs have been expensed in the period
incurred. The Company intends to continue to acquire externally developed
technology, explore strategic alliances and other methods of acquiring or
licensing technology, and invest in certain internal development projects,
including the updating of existing products. The Company believes that product
development expenses may increase in dollar amount in the future, although the
Company's long-term goal is to continue to reduce product development costs as a
percentage of sales. Because of the inherent uncertainties associated with
software development projects, there can be no assurance that the Company's
research and development efforts will result in successful product introductions
or increased revenues or profitability.
Other expense (income): Other expense (income) for the 1999 Third Quarter
decreased $242,978, or 126%, to $192,330 from $(50,648) in the 1998 Third
Quarter. For the 1999 Nine Month Period, other income (expense) increased
$4,109, or 5%, to $76,545 from $72,436 in the comparable 1998 Nine Month Period.
The decline in the quarter was primarily related to a realized loss of $184,855
on the exchange of 53,815 shares of Xceed stock to redeem the Class C Preferred
Stock and pay associated cumulative dividends. The realized loss of $184,855 in
the 1999 Third Quarter and 1999 Nine Month Period was more than offset by income
from the licensing of certain software technology of approximately $211,000
which occurred in the second quarter of 1999.
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased by $1,439,828 to $933,684 at
September 30, 1999 from $2,377,648 at December 31,1998, primarily as a result of
using $3,383,140 of cash for operations and $368,317 for investing activities.
The Company received net proceeds of $2,378,896 from the sale of its common
stock and warrants in the 1999 Nine Month Period. The Company had working
capital of $87,014 at September 30, 1999, a decrease of $348,058 from the
Company's working capital at December 31, 1998 of $435,072, which decrease was
attributable to the losses incurred in the Company's business operations.
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<PAGE>
The Company believes that its existing cash and cash equivalents and cash
generated from operations, if any, should be sufficient to meet its currently
anticipated liquidity and capital expenditure requirements for the next twelve
months. The Company is pursuing an offering of the Company's common stock or
other securities to raise approximately $10,000,000; however, there can be no
assurance that the Company will be successful in completing such an offering, or
that the terms of such offering will be beneficial to the Company or its
stockholders. The Company would utilize proceeds of such an offering to pursue
acquisition targets, expand its VisualCities.com Internet commerce network,
including promotional activities, develop its Internet services capabilities and
its application service provider status, expand its European operations, develop
additional software products, and fund its other working capital requirements.
There can be no assurance, however, that the Company will be successful in
attaining its sales or strategic goals, or that attaining such goals will have
the desired effect on the Company's cash resources. The Company has letter of
credit facilities of approximately $260,000 relating to certain lease
obligations. Serif (Europe) Limited has a letter of credit facility of
approximately $200,000, which was fully drawn upon as of September 30, 1999,
with its primary bank in the United Kingdom, and which is secured by
substantially all of the assets of Serif (Europe) Limited. There can be no
assurance that the Company will be able to obtain additional financing, if at
all, or that such financing will be on terms acceptable to the Company.
The Company's operating activities for the 1999 Nine Month Period used cash of
$3,383,140, primarily related to increased direct marketing expenditures, the
development of its Internet e-commerce network VisualCities.com, European
expansion, and the costs associated with the development of future software
products. The Company intends to continue to utilize its working capital in 1999
for Internet web site development, European expansion, securing additional
digital camera supplies, product development, marketing and advertising, to
finance the higher level of inventory and accounts receivable necessary to
support an anticipated increase in sales, for capital expenditures, including
the purchase of computer and internet services equipment, and for internal and
external software development. However, the Company's cash requirements may
change depending upon numerous factors, including, without limitation, the need
to finance the licensing or acquisition of third party software as well as
increased inventory and accounts receivable arising from the sale and shipment
of new products.
On October 29, 1999 the Company entered into a letter of intent to acquire
Renaissance Multimedia, a New York City based digital communication company
focused on building internet web sites and businesses through use of new media,
in a cash and stock transaction. The Company contemplates that this will be
the first of several intended acquisitions in connection with the fulfillment
of its business strategy.
In the 1999 Nine Month Period, approximately 63% of the Company's net sales were
generated outside the United States as compared to 52% in the 1998 Nine Month
Period. The Company expects that the percentage of net sales derived from
international net sales may continue to increase as it continues to expand its
foreign sales operations. The Company's exposure to foreign currency gains and
losses is partially mitigated as the Company incurs operating expenses in the
principal foreign currency in which it invoices foreign customers. As of
September 30, 1999, the Company had no foreign exchange contracts outstanding.
The Company's foreign exchange gains and losses may be expected to fluctuate
from period to period depending upon the movement in exchange rates.
The Company has entered into a five-year consulting agreement pursuant to which
the Company is required to pay .30% of its net revenue (subject to an annual
minimum fee of $125,000, and an annual maximum fee of $250,000) to the
consultant. The term of the agreement may be extended an additional eighteen
months if the Company reports annual net revenues of $40,000,000, and an
additional eighteen months should net revenues exceed $60,000,000. At September
30, 1999 the Company has accrued $93,750 in connection with this agreement.
On July 27, 1999 the Company entered into a minimum annual purchase commitment
of approximately $230,000 with a distributor of certain software the Company
intends to sell in its direct mail operation. The Company anticipates that it
will fulfill such commitment from its operational resources.
The Company has a backlog of approximately $450,000 as of September 30, 1999,
relating to digital cameras and software.
17
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Net Operating Loss Carryforwards; Possible Tax Obligation
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 Internal
Revenue Code of 1986, as amended (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 the Company and SPC, and the use by the Company of these net
operating loss carryforwards will be limited. Utilization of the net operating
loss carry forwards of SPC may be further limited by reason of the consolidated
return/separate return limitation year rules. In addition, the SPC net operating
loss carryforwards 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.
In September 1997, we applied for a closing agreement with the Internal
Revenue Service (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. The Company 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. The Company intends to submit these filings
in an application for relief shortly. The Company believes 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. 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 the Company 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.
Year 2000 Compliance Issues
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. As a result, in less than two months, computer
systems and software used by some companies may need to be upgraded to comply
with such "Year 2000" requirements.
We have been in the process of conducting a review of issues related to our Year
2000 compliance. This review was intended to determine the effect of the turn of
the century on the operability of our products, internal and external
information technology ("IT") systems, non-IT systems we utilize to conduct our
business and other internal and external processes which may impact our
operations. In connection with this evaluation, we have reviewed our vendors and
suppliers for Year 2000 compliance and to effect changes where necessary.
This review has been conducted in three phases. The first phase encompassed a
review of all of our products, internal and external systems/processes and
vendors and suppliers for Year 2000 compliance. The second phase corrected all
items identified as non-compliant and essential to our operations. The third
phase is contemplated to be a second review to ensure year 2000 compliance and
interoperability of all systems/processes. The Company is currently in the third
phase of its review process.
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<PAGE>
We have been conducting our review with our current resources and believe that
we have sufficient resources to complete the review process in a timely manner.
We identified one IT system that was replaced. The Company expended a total of
approximately $80,000 in its year 2000 compliance review and implementation
efforts through September 30, 1999, and anticipates additional expenditures of
approximately $20,000 to complete such review and implementation efforts. The
Company has not determined, at this time, however, what costs and efforts we
would incur to implement any necessary corrections should any additional
deficiencies be found.
We produce computer application software. We believe the products that we have
developed within the last several years are Year 2000 compliant and we are in
the process of comprehensively re-testing such products. We are currently
reviewing products sold by the Company prior to 1994 for Year 2000 compliance,
some of which we have determined are not Year 2000 compliant. We currently
believe that we have no material liability concerning any of our products with
respect to Year 2000 requirements.
The Company has evaluated and determined that its direct mail telemarketing
operation systems would have a significant impact on the Company if it failed to
operate properly in the year 2000. Based on a cost-benefit analysis, management
has instituted a contingency plan whereby either its 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.
Seasonality
The computer software and digital camera markets are 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 and digital cameras during the year-end holiday
buying season and reduced demand for software and digital cameras during the
European Easter and summer vacation period. The Company expects its net sales
and operating results to continue to reflect this seasonality. The Company's
revenues may also experience substantial variations as a result of a number of
factors, such as consumer and business preferences and introduction of competing
titles by competitors, as well as limited time promotional pricing offers. There
can be no assurance that the Company will achieve consistent growth or
profitability on a quarterly or annual basis.
Inflation
The Company believes that inflation has generally not had a material impact on
its operations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is hereby made to Item 3 of the Company's Annual Report on
Form 10-KSB, for the fiscal year ended December 31, 1998, filed April 15,
1999 (Commission File No.: 1-14076), and to the references therein, for a
discussion of all material pending legal proceedings to which the Company
or any of its subsidiaries are parties. See Note 7 to condensed
consolidated financial statements.
Item 2. Changes in Securities and Use of Proceeds.
On September 15, 1999, the Company sold 35,295 units (each unit
consisting of one share of common stock plus one-quarter of a warrant (the
"Units")) to three accredited investors for aggregate gross proceeds of
$75,000 in a self-offering private placement. Each warrant will allow the
subscriber to purchase one share of common stock at $2.75 per share for a
three-year period from date of sale. The issuance of these units was a
private transaction exempt from registration under Section 4(2) of the
Securities Act.
On September 24, 1999, the Company sold 47,059 Units to three
accredited investors for aggregate gross proceeds of $105,000 in a
self-offering private placement. The issuance of these units was a private
transaction exempt from registration under Section 4(2) of the Securities
Act.
On October 13, 1999, the Company sold 434,059 Units to eleven
accredited investors for aggregate gross proceeds of $922,375 in a
self-offering private placement. The issuance of these units was a private
transaction exempt from registration under Section 4(2) of the Securities
Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holder.
None
Item 5. Other Information.
On October 29, 1999 the Company entered into a letter of intent to
acquire Renaissance Multimedia, a New York City based digital communication
company focused on building internet web sites and businesses through use
of new media in a cash and stock transaction.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Set forth below are all exhibits to this Quarterly Report on Form
10-QSB
Number Description
------ -----------
27 Financial Data Schedule
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIZACOM INC.
Dated: November 15, 1999 By: /s/ Mark E. Leininger
-------------------------------
Mark E. Leininger
President and Chief Executive
Officer (Principal Executive
Officer)
Dated: November 15, 1999 By: /s/ Alan W. Schoenbart
-------------------------------
Alan W. Schoenbart
Vice President - Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
21
<PAGE>
VIZACOM INC.
INDEX TO EXHIBITS
Exhibit No. Description
27 Financial Data Schedule.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
condensed financial statements for the period ended September 30, 1999 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 933,684
<SECURITIES> 1,418,874
<RECEIVABLES> 1,861,285
<ALLOWANCES> (878,454)
<INVENTORY> 670,096
<CURRENT-ASSETS> 4,889,711
<PP&E> 1,530,335
<DEPRECIATION> (836,502)
<TOTAL-ASSETS> 8,286,595
<CURRENT-LIABILITIES> 4,802,697
<BONDS> 159,408
0
0
<COMMON> 6,704
<OTHER-SE> 3,317,786
<TOTAL-LIABILITY-AND-EQUITY> 8,286,595
<SALES> 13,667,951
<TOTAL-REVENUES> 13,667,951
<CGS> 4,353,056
<TOTAL-COSTS> 4,353,056
<OTHER-EXPENSES> 479,574
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,298
<INCOME-PRETAX> (3,036,789)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,036,789)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,036,789)
<EPS-BASIC> (.55)
<EPS-DILUTED> (.55)
</TABLE>
