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, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 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 Boulevard, 7th Floor
Teaneck, New Jersey 07666
(Address of principal executive offices)
(201) 928-1001
(Issuer's telephone number)
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: 13,929,274 shares of Common Stock, as
of October 31, 2000.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
<PAGE>
VIZACOM INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item Pages
---- -----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2000 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-21
PART II. OTHER INFORMATION 22-23
</TABLE>
<PAGE>
VIZACOM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- --------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 497,319 $ 1,730,495
Marketable securities 15,930 2,746,678
Receivables
Trade, less allowances of $795,832 and $434,290 4,856,056 558,550
Other 60,843 88,842
Notes 64,681 86,018
Inventories 1,401,346 1,457,604
Prepaid expenses and other current assets 291,582 526,552
------------ ------------
Total current assets 7,187,757 7,194,739
Property and equipment, net 905,764 828,108
Goodwill, net of accumulated amortization of $1,013,139 and $256,066 7,190,588 118,665
Business processes and methodologies, workforce, and customer lists,
net of accumulated amortization of $710,647 4,871,353 --
Restricted cash 352,583 259,838
Deferred consulting costs 1,267,623 1,269,859
Other assets 1,240,323 803,762
------------ ------------
Total assets $ 23,015,991 $ 10,474,971
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit $ 1,582,944 $ --
Related party notes payable 830,432 --
Current portion of capital lease obligations 83,932 63,792
Current portion of long-term debt 60,869 155,554
Accounts payable 4,836,049 4,111,748
Accrued liabilities 2,073,691 1,816,744
Subscription liability 92,745 --
Sales and value-added taxes payable 478,663 393,927
------------ ------------
Total current liabilities 10,039,325 6,541,765
Capital lease obligations, less current portion 68,955 98,265
Long-term debt, less current maturities 85,956 100,410
------------ ------------
Total liabilities 10,194,236 6,740,440
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.001 per share,
60,000,000 shares authorized, 12,372,352 and 7,235,578 shares issued 12,373 7,236
Additional paid-in capital 67,802,813 49,851,699
Accumulated deficit (54,579,272) (47,864,635)
Accumulated other comprehensive income (loss) (403,764) 1,750,626
Treasury stock, 3,095 shares, at cost (10,395) (10,395)
------------ ------------
Total stockholders' equity 12,821,755 3,734,531
------------ ------------
Total liabilities and stockholders' equity $ 23,015,991 $ 10,474,971
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
VIZACOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 7,800,710 $ 4,628,618 $ 20,014,152 $ 13,926,333
Cost of sales 4,638,570 1,295,437 10,935,585 4,353,055
------------ ------------ ------------ ------------
Gross profit 3,162,140 3,333,181 9,078,567 9,573,278
Selling, general and administrative expenses 4,900,132 3,865,672 14,845,433 11,852,315
Product development 57,431 213,230 335,314 479,574
Amortization of goodwill, business processes and
methodologies, workforce, and customer lists 659,067 546,946 1,461,841 1,719,794
Realized gain on marketable securities -- -- (1,095,348) --
Unrealized holding loss (gain) on marketable securities -- 28,924 -- (1,391,222)
Other expenses (income), net 121,601 218,481 245,964 (50,394)
------------ ------------ ------------ ------------
5,738,231 4,873,253 15,793,204 12,610,067
Net loss (2,576,091) (1,540,072) (6,714,637) (3,036,789)
Dividends on Series A and Series C Preferred Stock -- (5,325) -- (56,641)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (2,576,091) $ (1,545,397) $ (6,714,637) $ (3,093,430)
============ ============ ============ ============
Net loss per common share:
Net loss per common share - basic and diluted $ (0.21) $ (0.26) $ (0.63) $ (0.55)
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic and diluted 12,182,732 5,859,197 10,709,351 5,635,086
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
VIZACOM INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated
Shares Amount Capital Deficit
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 7,235,578 $ 7,236 $ 49,851,699 $(47,864,635)
Net loss -- -- -- (6,714,637)
Decline in market value of marketable securities -- -- -- --
Realization of gain on transfer of marketable securities -- -- -- --
Currency translation adjustment -- -- -- --
Total comprehensive loss (6,714,637) (2,154,390) -- (8,869,027)
Sale of common stock in private placements, net 2,010,943 2,011 7,624,569 --
Common stock issued on exercise of warrants and stock options 480,107 480 838,680 --
Common stock issued in connection with acquisitions 2,645,724 2,646 8,597,361 --
Issuance of options to consultants in connection with an acquisition -- -- 186,500 --
Issuance of warrants in connection with line of credit -- -- 382,500 --
Issuance of options and warrants for consulting services -- -- 321,504 --
---------- ------------ ------------ ------------
Balance at September 30, 2000 12,372,352 $ 12,373 $ 67,802,813 $(54,579,272)
========== ============ ============ ============
<CAPTION>
Accumulated
Other Total
Comprehensive Treasury Stockholders'
Income (Loss) Stock Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1999 $ 1,750,626 $ (10,395) $ 3,734,531
Net loss -- -- --
Decline in market value of marketable securities (727,877) -- --
Realization of gain on transfer of marketable securities (1,095,348) -- --
Currency translation adjustment (331,165) -- --
------------ ------------
Total comprehensive loss
------------ ------------
Sale of common stock in private placements, net -- -- 7,626,580
Common stock issued on exercise of warrants and stock options -- -- 839,160
Common stock issued in connection with acquisitions -- -- 8,600,007
Issuance of options to consultants in connection with an acquisition -- -- 186,500
Issuance of warrants in connection with line of credit -- -- 382,500
Issuance of options and warrants for consulting services -- -- 321,504
------------ ------------ ------------
Balance at September 30, 2000 $ (403,764) $ (10,395) $ 12,821,755
============ ============ ============
</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,
2000 1999
<S> <C> <C>
Operating activities:
Net loss $ (6,714,637) $ (3,036,789)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,209,335 2,093,164
Provision for doubtful accounts 157,060 80,000
Realized / unrealized gain on marketable securities (1,095,348) (1,391,222)
Warrants and stock options issued for services 321,504 101,712
Changes in assets and liabilities, net of effects of acquisitions:
Receivables (384,971) 479,693
Inventories 441,126 (62,915)
Prepaid expenses and other current assets 289,983 (329,608)
Other assets (446,388) (518,877)
Accounts payable (1,132,677) (460,029)
Accrued liabilities (49,897) (297,907)
Sales and value-added taxes payable (69,162) (40,362)
Net cash used in operating activities (6,474,072) (3,383,140)
Investing activities:
Purchase of property and equipment (122,715) (414,096)
Increase in restricted cash -- (59,838)
Investment in website (62,482) --
Collection of note receivable 79,192 105,617
Payment for acquisitions, net of cash acquired (1,446,530) --
Net cash used in investing activities (1,552,535) (368,317)
Financing activities:
Proceeds from sale of common stock - net 7,626,580 2,378,896
Proceeds from exercise of warrants and options 839,160 26,795
Proceeds from long-term debt -- 99,028
Borrowings under revolving line of credit, net (709,465) --
Payment of related party notes (432,313) --
Payment of long-term debt and capital lease obligations (295,106) (159,185)
Costs related to issuance of equity instruments -- (33,905)
Net cash provided by financing activities 7,028,856 2,311,629
Effect of exchange rate changes on cash and cash equivalents (235,425) (4,136)
Decrease in cash and cash equivalents (1,233,176) (1,443,964)
Cash and cash equivalents at beginning of period 1,730,495 2,377,648
Cash and cash equivalents at end of period $ 497,319 $ 933,684
Supplemental disclosure of cash flow information:
Interest $ 158,195 $ 32,578
Income taxes $ -- $ --
Supplemental disclosure of non-cash financing and investing activities:
Fixed assets acquired with capital lease obligations $ 28,725 $ --
Fair value of net assets acquired for common stock,
stock options, and notes payable (see Note 4) $ 10,049,252 $ --
Issuance of common stock in payment of liabilities $ -- $ 100,000
Payment of preferred stcck dividends with marketable securities $ -- $ 56,641
Redemption of Class C Preferred Stock with marketable securities $ -- $ 930,000
Warrants issued for other assets $ 382,500 $ 706,515
Restricted cash recorded as subscription liability $ 92,745 $ --
Comprehensive loss on decline in marketable securities $ 727,877 $ --
</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. 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-month period ended September 30, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000.
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, 1999.
The condensed consolidated balance sheet as of December 31, 1999 has been
derived from the Company's audited consolidated balance sheet as of that
date.
2. Significant Accounting Policies
Business Combinations
The Company has accounted for all business combinations under the purchase
method of accounting. Under this method the purchase price is allocated to
the assets and liabilities of the acquired enterprise as of the acquisition
date based on their estimated respective fair values, which are subject to
revision for a period not to exceed one year from the date of acquisition.
The results of operations of the acquired enterprises are included in the
Company's consolidated financial statements for the period subsequent to
their acquisition.
Goodwill
Goodwill represents the excess of the purchase price over the estimated
fair values of net assets acquired in the purchases of businesses. Goodwill
is amortized on a straight-line basis over a period of 5 to 7 years. The
Company periodically evaluates the recoverability of the carrying amounts
of this asset as current events or circumstances so warrant such
determination.
Business Processes and Methodologies, Workforce, and Customer Lists
The values of business processes and methodologies, workforce, and customer
lists represent the fair values of these assets acquired in the purchases
of businesses, as determined by independent appraisals. Business processes
and methodologies, workforce, and customer lists are being amortized on a
straight-line basis over periods of 3 to 7 years. The Company periodically
evaluates the recoverability of the carrying amounts of these assets as
current events or circumstances so warrant such determination.
Product Development Costs
Costs incurred in the development of new software products are expensed as
incurred until technological feasibility has been established. Product
enhancement costs for products which have established technological
feasibility are capitalized, and capitalization is discontinued when the
product is available for sale. Approximately $930,000 of product
enhancement costs had been capitalized through September 30, 2000, and are
included in other assets. Amortization, which commences when the products
are available for general release to customers, is computed at the greater
of the straight-line rate over the estimated life of each product, or an
amount based on the ratio of current revenues to the total of current and
anticipated revenues.
7
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Significant Accounting Policies (cont.)
Web Site Development Costs
Certain direct 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, 2000, $226,000 of
these development costs, net of $105,000 of accumulated amortization, are
included in other assets.
Reclassifications
Certain reclassifications have been made to prior periods to conform with
the current period and year end presentation.
3. Liquidity and Business Risks
The Company had a working capital deficiency of ($2,851,568) at September
30, 2000. The Company believes that over the next twelve months it will
need to raise at least $2,000,000 to meet its currently anticipated
liquidity and capital expenditure requirements. Management intends to seek
additional financing through one or more debt, equity, or convertible
securities offerings, through the sale of assets or through a merger or
acquisition. Since June 2000, the Company has attempted to conduct several
private offerings of common stock. Each of these offerings has been
cancelled due to adverse market conditions. There can be no assurance that
the Company will be successful in completing any such offering or
offerings, sale of assets or merger or acquisition, or any other offerings
or transactions, or that the terms of any such offering or offerings,
transaction or transactions, will be beneficial to the Company or its
stockholders. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
4. Acquisitions
On February 15, 2000, the Company acquired Renaissance Computer Art Center,
Inc., d/b/a Renaissance Multimedia, a New York City based interactive web
site design firm. The aggregate purchase price, including all direct costs,
was $2,706,429 and was paid through the issuance of 449,870 shares of the
Company's common stock and a $250,000 cash payment to the Renaissance
stockholders. The Company entered into a three-year employment contract
with the President of Renaissance Multimedia at an annual salary of
$175,000, with certain performance bonus targets. Additionally, the Company
granted options to purchase an aggregate of 600,000 shares of its common
stock under its 1994 Long Term Incentive Plan to certain employees of
Renaissance Multimedia. The $2,482,996 cost in excess of net tangible
assets acquired of $223,433 is reflected as goodwill, business processes
and methodologies, workforce, and customer lists.
On March 9, 2000, the Company acquired all of the outstanding shares of
Junction 15 Limited, a London based interactive web site design firm. The
aggregate purchase price, including all direct costs, was $2,729,593 and
was paid through the issuance of 681,818 shares of the Company's common
stock and a $250,000 cash payment. The Company entered into three-year
employment agreements with two directors and stockholders of Junction 15,
with annual salaries of approximately $150,000 and $80,000, respectively,
with various provisions for pensions, commissions, and bonuses.
Additionally, the Company granted options to purchase an aggregate of
250,000 shares of its common stock under its 1994 Long Term Incentive Plan
to certain employees of Junction 15. The $2,724,422 cost in excess of net
tangible assets acquired of $5,171 is reflected as goodwill, business
processes and methodologies, workforce, and customer lists.
8
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Acquisitions (cont.)
On March 27, 2000, the Company acquired PWR Systems, a Long Island, New
York based interactive integrator and value-added reseller of computer and
digital information equipment, for $8,553,445. The purchase price was paid
in the form of a $1,000,000 cash payment, one-year promissory notes in the
aggregate principal amount of $500,000, convertible into the Company's
common stock at $3 per share, and payable in equal monthly installments
with interest of 6.3% per annum, and 1,500,000 shares of the Company's
common stock, valued at $3 per share, issued to the two selling
stockholders of PWR. The acquisition agreement also calls for additional
contingent consideration of up to $350,000 per annum for the three-year
period following the acquisition based upon increases in PWR's earnings
before interest, taxes, depreciation, and amortization. The Company is
further obligated to issue additional common stock if, during the twelve
months following the acquisition, the market price of the Company's common
stock falls below $1 per share for any thirty consecutive trading-day
period. The closing price of the Company's common stock has been below $1
per common share since October 16, 2000. The Company entered into
three-year employment agreements with PWR's selling stockholders providing
for annual salaries of $200,000 each, and provisions for bonuses upon
attaining specified performance thresholds. Additionally, the Company
granted options to purchase an aggregate of 750,000 shares of its common
stock under its 1994 Long Term Incentive Plan to officers, employees and
independent contractors of PWR. Furthermore, the Company agreed to prepay,
upon receipt of gross proceeds, commencing as of November 12, 1999, of
$15,000,000 from equity offerings, 6.3% notes payable in the aggregate
principal amount of $762,745 to the PWR selling stockholders, equivalent to
the retained earnings of PWR at the closing date. Otherwise, these 6.3%
notes will be paid in quarterly installments through March 2001. The
$8,203,577 cost in excess of net tangible assets acquired of $349,868 is
reflected as goodwill, business processes and methodologies, workforce, and
customer lists.
The following table summarizes the net assets of such acquired businesses:
<TABLE>
<CAPTION>
Renaissance
Category Multimedia Junction 15 PWR Systems Total
====================================================================================================================================
<S> <C> <C> <C> <C>
Current assets $ 365,983 $ 163,614 $ 3,916,528 $ 4,446,125
Noncurrent assets 97,990 42,728 21,467 162,185
----------- ----------- ----------- -----------
Total assets 463,973 206,342 3,937,995 4,608,310
----------- ----------- ----------- -----------
Current liabilities 209,997 167,997 3,588,127 3,966,121
Noncurrent liabilities 30,543 33,174 -- 63,717
----------- ----------- ----------- -----------
Total liabilities 240,540 201,171 3,588,127 4,029,838
----------- ----------- ----------- -----------
Net assets acquired 223,433 5,171 349,868 578,472
Goodwill 1,003,996 1,680,422 5,144,577 7,828,995
Business processes and methodologies 656,000 484,000 496,000 1,636,000
Workforce 413,000 180,000 413,000 1,006,000
Customer lists 410,000 380,000 2,150,000 2,940,000
----------- ----------- ----------- -----------
Purchase price $ 2,706,429 $ 2,729,593 $ 8,553,445 $13,989,467
=========== =========== =========== ===========
</TABLE>
Under an August 1999 agreement with a third party, the Company agreed to
transfer certain of its marketable securities, consisting of shares of
common stock of Xceed Inc., based upon the consideration paid for
acquisitions of any company identified by this third party. The Company
recorded a realized gain of $1,095,348 during the nine month period ended
September 30, 2000 related to 59,813 Xceed shares transferred to this third
party in connection with the Company's acquisitions of Renaissance
Multimedia and PWR. The gain represents the realization of the appreciation
in market value at the dates of these acquisitions. The third party
received 14,953 Xceed shares for the Renaissance Multimedia acquisition and
44,860 Xceed shares for the PWR acquisition, resulting in respective gains
of $371,962 and $723,386.
9
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Acquisitions (cont.)
In connection with the purchase of SPC in December 1996, the Company
applied for a closing agreement with the Internal Revenue Service (the
"IRS") in September 1997 pursuant to which the Company 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. 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 IRS
has, to date, refused to grant the Company's application for such a closing
agreement because of alleged deficiencies in SPC's pre-acquisition dual
consolidated loss certifications. The Company received notification from
the IRS that it determined not to act on its application until SPC
submitted certain filings pertaining to pre-acquisition consolidated tax
year return filings made by SPC. The Company submitted these filings in an
application for relief from these deficiencies. On August 23, 2000 the
Company received notification from the IRS that it had accepted its
application for relief. In connection therewith, theCompany filed amended
tax returns for the pre-acquisition consolidated tax years to resolve the
deficiencies in SPC's pre-acquisition dual loss certifications. The Company
is now in the process of reapplying for a closing agreement. The Company
believes that 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 the Company's future
ability to sell SPC.
5. 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 did
not have an effect on the computation of diluted earnings per share in the
three and nine month periods ended September 30, 2000 and 1999 since they
were anti-dilutive.
6. Debt
The revolving lines of credit consist of the following:
Notes payable to bank $1,414,172
Inventory financing facility note payable 168,772
----------
$1,582,944
==========
The notes payable to bank are secured by the assets of PWR and are
guaranteed by the Company. The notes bear interest at prime plus one-half
percent (10% at September 30, 2000).
On July 21, 2000, PWR terminated its relationship with its inventory
financing lender and repaid the outstanding inventory loan balance of
approximately $925,000 with existing working capital. On August 25, 2000
the Company entered into a temporary $500,000 inventory financing security
agreement with a finance company. The temporary financing facility provides
for 21 to 30 day financing without interest as long as payment is made
within the allowable terms. The line is presently collateralized by a
second lien on all of the assets of PWR and is guaranteed by the Company.
10
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Debt (cont.)
The revolving lines of credit consist of the following:
The related party notes consist of two notes payable to the two PWR selling
stockholders and consist of the following:
Notes payable to stockholders, 6.3%:
Convertible notes, payable in monthly installments $253,927
Retained earnings notes, payable in quarterly installments 576,505
--------
$830,432
========
On January 8, 2000, the Company entered into an agreement, which was
amended as of March 15, 2000, for a maximum $1,000,000 unsecured line of
credit note arrangement with a foreign company. Advances under the
arrangement bear interest at 8%. The Company borrowed $1,000,000 on
February 17, 2000. This borrowing was paid in full with accrued interest on
March 20, 2000. All future advances are payable within 180 days of the
receipt of the advance, and the credit facility has a two-year term. In
connection with this credit facility, the Company issued seven-year
warrants to purchase an aggregate of 250,000 shares of its common stock
exercisable at $3 per share. The warrants were valued at $382,500 and are
being charged to interest expense over the two-year agreement period.
7. Stockholders' Equity
On January 8, 2000, the Company entered into a three-year agreement for
consulting services primarily related to acquisition and financing
assistance under which the Company issued 650,000 three-year warrants
exercisable at $3 per share. One hundred thousand of these warrants are
exercisable immediately, and 400,000 warrants are exercisable upon the
attainment of specified performance targets. In addition, 150,000 warrants
are being held in escrow and are to be released on January 7, 2003, or
earlier with the Company's approval. The Company has recorded a charge of
$172,404 related to the currently exercisable 100,000 warrants, as well as
a $16,500 pro-rata variable charge for the 150,000 warrants subject to
escrow.
In March and July 2000, the Company completed two private placements under
which it sold 2,010,943 shares of its common stock for gross proceeds of
$8,995,545. Under one of these private placements, the Company sold 936,954
shares of its common stock and received gross proceeds of $4,216,294 from
primarily U.S. investors. In the other private placement, the Company sold
762,471 shares of common stock in March and 311,518 shares of common stock
in July and received gross proceeds of $3,392,996 and $1,386,255,
respectively, primarily from European investors.
The Company is awaiting a final determination by the Nasdaq Stock Market
relating to the non-integration of the two private placements under the
Nasdaq Marketplace Rules, or alternatively, that notwithstanding any such
integration of the two private placements that the number of shares of
common stock issued does not exceed 20% of the Company's outstanding common
stock for purposes of such Marketplace Rules.
11
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Litigation
In the fourth quarter of 1998, an action was commenced against Software
Publishing Corporation ("SPC") in California in which plaintiff is seeking
$300,000 in damages for SPC's alleged violation of a lease for office space
located in San Jose, California. This is the location at which SPC had its
principal place of business and at which the Company had its principal
executive offices during the period of January 1997 through January 1998.
Neither the Company nor SPC currently has any offices at this location. SPC
has filed an answer in this action denying the plaintiffs' claims. This
action currently is in the discovery stage. In October 2000, the plaintiff
amended its complaint to name Neil M. Kaufman, one of the Company's
directors, as a defendant. The Company believes this action, including the
claim against Mr. Kaufman, is without merit and intends to vigorously
defend this action.
In February 2000, the Company received a demand for arbitration with
respect to certain fees payable in connection with an investment banking
agreement which it terminated. The claim calls for payment of $45,000 and
reinstatement of warrants to purchase 150,000 shares of common stock
cancelled upon termination of the investment banking agreement or payment
of the value of such warrants, and legal and other expenses in connection
with the arbitration. The Company believes that this action is without
merit and intends to vigorously defend this action.
The Company has other litigation matters in progress in the ordinary course
of business. In the opinion of management, all such other pending
litigation of the Company will be resolved without a material adverse
effect on the Company's financial position, results of operations or cash
flows.
9. Segment Information
During the quarter ended March 31, 2000, the Company completed three
acquisitions described in Note 4. Collectively, the three acquisitions form
the foundation for the Company's international interactive e-commerce
solutions business, which is referred to as Vizy Interactive. Revenues from
this business segment consist primarily of e-commerce consulting, web site
design, web and systems integration services and computer hardware sales.
The Company's historical business consists primarily of its direct sale of
software and digital cameras, collectively referred to as visual
communications products, utilizing the Company's direct mail marketing and
telemarketing operations at its Nashua, New Hampshire, Nottingham, England
and Aachen, Germany call center locations. The results of the Company's
VisualCities.com business are included in "Visual Communications Products."
During the first quarter of 2000, the Company began to market its
web-enabled call center capabilities to third party customers. During the
second quarter of 2000, the Company reorganized its historical business
into two segments: visual communications products and web-enabled call
center operations. The Company's web-enabled call center business is
referred to as Dialog24. For purposes of the segment table the Company has
allocated overhead costs relating to its web-enabled call centers to its
visual communications business, and has included only costs such as trade
shows, selling expenses, agent salaries, and other direct costs in its
Dialog24 segment. In addition, in the second quarter of 2000, the Company's
visual communications segment discontinued the sale of digital cameras,
except for promotional activities and the liquidation of existing
inventories.
12
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VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Segment Information (cont.)
Information concerning the Company's quarter and nine-month segment
operations is set forth below:
<TABLE>
<CAPTION>
Visual
Communications Vizy
Products Dialog24 Interactive Corporate Consolidated
=====================================================================================
<S> <C> <C> <C> <C> <C>
Quarter ended September 30, 2000:
Net sales $ 2,987,521 $ 68,834 $ 4,744,355 $ -- $ 7,800,710
EBITDA (327,334) (128,914) (558,839) (674,834) (1,689,921)
Depreciation and amortization 128,499 648,991 108,680 886,170
Segment profit (loss) (455,833) (128,914) (1,207,830) (783,514) (2,576,091)
Nine months ended September 30, 2000:
Net sales $ 9,035,404 $ 78,808 $ 10,899,940 $ -- $ 20,014,152
Investment gains -- -- -- 1,095,348 1,095,348
EBITDA (2,264,609) (426,232) (453,505) (1,039,452) (4,183,798)
Depreciation and amortization 364,985 -- 1,422,759 421,591 2,209,335
Warrants and stock options for consulting services -- -- -- 321,504 321,504
Segment profit (loss) (2,629,594) (426,232) (1,876,264) (1,782,547) (6,714,637)
Total assets 3,298,924 332,870 17,473,341 1,910,856 23,015,991
Quarter ended September 30, 1999:
Net sales $ 4,628,618 $ -- $ -- $ -- $ 4,628,618
Investment gains -- -- -- (28,924) (28,924)
EBITDA 53,387 -- -- (831,082) (777,695)
Depreciation and amortization 595,020 -- -- 86,107 681,127
Warrants and stock options for consulting services -- -- -- 81,250 81,250
Segment profit (loss) (541,633) -- -- (998,439) (1,540,072)
Nine months ended September 30, 1999:
Net sales $ 13,926,333 $ -- $ -- $ -- $ 13,926,333
Investment gains -- -- -- 1,391,222 1,391,222
EBITDA (190,427) -- -- (651,486) (841,913)
Depreciation and amortization 1,842,297 -- -- 250,867 2,093,164
Warrants and stock options for consulting services -- -- -- 101,712 101,712
Segment profit (loss) (2,032,724) -- -- (1,004,065) (3,036,789)
Total assets 4,421,165 -- -- 3,865,430 8,286,595
</TABLE>
10. Related Party Transactions
During the first nine months of 2000, the Company incurred approximately
$979,000 of legal fees and disbursements, primarily in connection with the
Company's acquisition and financing transactions, to a law firm of which a
director of the Company is a member. Approximately $607,000 owed to this
law firm is included in accounts payable at September 30, 2000. In
addition, the Company compensates its Chairman of the Board for his
services at the rate of $60,000 per annum. Further, the Company has certain
note obligations to the PWR selling stockholders, who are also two
directors and officers of the Company and its PWR subsidiary. See Note 6.
13
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Commitments
On June 1, 2000, PWR entered into a five year, three month lease for 3,817
square feet in Long Island, New York. The Company utilizes this space to
provide data center services to its clientele as well as for internal use.
Rental commitments under this lease for the five years ending August 31,
2005 are as follows:
Year Amount
-------- -----------
2001 $ 75,227
2002 $ 77,135
2003 $ 88,109
2004 $ 89,700
2005 $ 59,800
12. Subsequent Events
On October 11, 2000, the Company acquired all of the outstanding shares of
interMETHODS Limited, a London based web systems integrator. The aggregate
purchase price, including all direct costs, was approximately $2,400,000
and was paid primarily through the issuance of 1,560,017 shares of the
Company's common stock and an obligation to make a $104,000 deferred
payment, which bears interest at 8% per annum and is due upon the earlier
of ten business days after the receipt by the Company of $1 million in
funding, or January 11, 2001. The Company entered into three-year
employment agreements with the three former stockholders of interMETHODS
Limited, with annual salaries of approximately $120,000 per individual,
with various provisions for pensions and bonuses. Additionally, the Company
granted options to purchase an aggregate of 250,000 shares of its common
stock under its 2000 Equity Incentive Plan to certain employees of
interMETHODS. The approximate $2,300,000 cost in excess of net tangible
assets acquired of $100,000 will be reflected as goodwill, business
processes and methodologies, workforce, and customer lists.
In October 2000, the Company began restructuring its visual communications
and Dialog24 businesses. The Company has also begun to consolidate
operations and reduce overhead. In this connection, the Company expects to
relocate its continental European facilities to its United Kingdom
facilities and anticipates closing its Aachen, Germany facilities December
1, 2000. Management initially estimates restructuring costs of
approximately $250,000 and expects these actions to result in savings of
approximately $600,000 in 2001.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements contained in this Quarterly Report on Form 10-QSB include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Forward-looking statements involve
known and unknown risks, uncertainties and other factors which could cause our
actual results, performance and achievements, whether 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, based upon 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:
o the market acceptance and amount of sales of our products and services,
o the success of our internet and other interactive e-commerce solutions
businesses, such as web site design, web-enabled customer service and
systems integration,
o our success in integrating the operations of acquired companies, including
Renaissance Multimedia, Junction 15, PWR and interMETHODS, into a
coordinated and complementary operation,
o our ability to retain an active user base, attract new users and maintain
customer satisfaction for our software products,
o the extent that our direct marketing operations achieve satisfactory
response rates,
o the competitive environment within the industries in which we operate,
o our ability to raise additional capital,
o the extent to which we are successful in developing, acquiring or licensing
products which are accepted by the market,
o our ability to attract and retain qualified personnel,
o business and consumer trends,
o the cost-effectiveness of our product development activities, and
o the other factors and information disclosed and discussed in other sections
of 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. We undertake
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Results of Operations
General. Our operations for the quarter ended September 30, 2000 ("2000 Third
Quarter") and the nine month period ended September 30, 2000 ("2000 Nine Month
Period") reflect the acquisition of Renaissance Multimedia on February 15, 2000,
Junction 15 on March 9, 2000, and PWR on March 27, 2000. Collectively, these
three companies form the foundation of our international professional internet
solutions business, which we refer to as Vizy Interactive. The results of
operations of our 2000 visual communications business includes our direct
marketing activities at our Aachen, Germany call center which began its
operations in January 2000. In addition, our three and nine month 2000 periods
include the results of operations of (a) VisualCities.com Inc, expenses relating
to which began to be recognized in October 1999 (costs relating thereto,
consisting of web-site development, prior to such time were capitalized) and (b)
Dialog24, which began in January 2000. These operations were not reflected in
the corresponding 1999 periods. The 2000 Third Quarter results of operations
reflect our reduction of direct marketing lead generation activities and
associated costs, as well as the refocusing of our direct sales activities in
the visual communications area on our core software products and away from
digital cameras.
The result of such 2000 changes were increased revenues from our newly acquired
companies, increased costs associated with integrating and marketing our Vizy
Interactive business, and a decline in revenues in our historical visual
communications business. The decline in revenues in our historical visual
communications business was due to the elimination of digital cameras from the
product mix and a reduction in software sales. The Vizy Interactive businesses
carried lower gross margins than our historical visual communications business.
Selling, general and administrative expenses and amortization of goodwill,
business processes and methodologies, workforce, and customer lists increased
due to the costs associated with our acquisitions, while marketing expenses in
our visual communications business decreased as a result of our reduction in
lead generation activities implemented as a result of declines in response rates
to promotional software mailings and reduced sales of software. We were not able
to reduce our more expensive lead
15
<PAGE>
generation activities as fast as the decline in revenues. We experienced a
slight increase in our response rates to lead generating activities near the end
of the 2000 Second Quarter and experienced continued improvement in the 2000
Third Quarter.
In October 2000, the Company began restructuring its visual communications and
Dialog24 businesses. The Company has also begun to consolidate operations and
reduce overhead. In this connection, the Company expects to relocate its
continental European facilities to its United Kingdom facilities and anticipates
closing its Aachen, Germany facilities December 1, 2000. Management initially
estimates restructuring costs of approximately $250,000 and expects these
actions to result in savings of approximately $600,000 in 2001.
Comparison of the Three Month Periods Ended September 30, 2000 and 1999
Net Sales. Net sales increased by $3,172,092, or 69%, to $7,800,710 in the 2000
Third Quarter from $4,628,618 in the quarter ended September 30, 1999 (the "1999
Third Quarter"). The increase was primarily attributable to our newly acquired
Vizy Interactive business, which generated $4,744,356 in revenues in the 2000
Third Quarter. We had no Vizy Interactive revenues in the 1999 Third Quarter.
This was partially offset by a decline of $1,641,097, or 55%, in the revenues of
our historical visual communications business from $4,628,618 in the 1999 Third
Quarter to $2,987,521 in the 2000 Third Quarter. Approximately $1,250,000 of the
decline was attributable to the termination of the digital camera programs. As
of September 30, 2000 we had approximately $440,000 in confirmed back orders.
North America and International net sales for the third quarter of 2000 and 1999
were as follows:
Three Months Ended September 30,
------------------------------------------
2000 % 1999 %
---------------------------------------
North America $4,958,090 63.6 $1,842,432 39.8
International 2,842,620 36.4 2,786,186 60.2
---------- ----- ---------- -----
Total $7,800,710 100.0 $4,628,618 100.0
========== ===== ========== =====
In the 2000 Third Quarter, approximately 36% of our net sales were generated
outside the United States as compared to approximately 60% in the 1999 Third
Quarter. While most of our visual communications revenues are derived
internationally, primarily in the United Kingdom, most of our Vizy Interactive
revenues are generated in the United States.
Gross Profit. Gross profit decreased by $171,041, or 5.1%, to $3,162,140 for the
2000 Third Quarter compared to $3,333,181 in the 1999 Third Quarter. Our gross
profit margin was 41% of net sales for the 2000 Third Quarter compared to 72% of
net sales in the 1999 Third Quarter. Cost of sales was $4,638,570 for the 2000
Third Quarter as compared to $1,295,437 for the 1999 Third Quarter. The decline
in gross profit margins was attributable to lower gross profit margins for our
Vizy Interactive operations as compared to our historical visual communications
business. $3,863,561, or 81.4%, of Vizy Interactive's revenue in the 2000 Third
Quarter was derived from our PWR subsidiary, where margins historically have
been in the 12% to 18% range. The increase in the amount of cost of sales is
attributable to the change in the mix of our sales revenues from lower cost
software and digital cameras to higher cost items such as web design services
and hardware components. Our cost of sales consisted primarily of product costs,
royalties and inventory allowances for damaged and obsolete products, payroll
for production personnel as well as the costs of hardware and hardware related
components. Product costs historically consisted 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.
Our gross margins and operating income have been affected in particular periods
by the mix of distribution channels used, the mix of international and domestic
revenues, the mix of products or services sold and the timing of product
introductions, promotional pricing and rebate offers, return privileges and
marketing promotions in connection with new product introductions and upgrades.
These promotions have had a negative influence on average selling prices and
gross margins. In addition, in our historical visual communications business,
gross margins have fluctuated on a quarterly basis as we utilized alternative
direct response promotions. Gross margins in this business have also been, and
may continue to be, adversely affected by competitive pricing strategies in the
software industry as a whole, including competitive upgrade pricing, the OEM
business and alternative licensing arrangements. We expect additional gross
margin fluctuations for the balance of 2000 as we continue to expand our Vizy
Interactive business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased by $1,034,460 or 27%, to $4,900,132
in the 2000 Third Quarter from $3,865,672 in the 1999 Third Quarter.
Approximately
16
<PAGE>
$1,130,000 of such increase was related to our Vizy Interactive business;
approximately $45,000 was associated with the operations of VisualCities.com;
and approximately $350,000 was associated with our Dialog24, operations all of
which were not reflected in the results of operations for the Company during the
corresponding 1999 Third Quarter. These increases were offset by a decrease in
our direct mail expenditures of approximately $500,000, which resulted from the
termination of our digital camera programs and most of the U.S. sales lead
generation activities associated with our historical software business.
Product Development. Product development expenses in the 2000 Third Quarter
decreased by $155,799, or 73%, to $57,431 from $213,230 in the 1999 Third
Quarter. Product development costs, which were primarily related to our
historical visual communications software business, as a percentage of net sales
were .7% for the 2000 Third Quarter compared to 4.6% in the 1999 Third Quarter.
We capitalized approximately $143,000 in the 2000 Third Quarter and $115,000 in
the 1999 Third Quarter of product development costs associated with product
designs where technological feasibility had been established. All other
development costs have been expensed in the period incurred. We intend to
continue to decrease product development costs in our historical visual
communications software business as well as to continue to reduce product
development costs as a percentage of sales. Because of the inherent
uncertainties associated with software and internet technology and e-commerce
projects, there can be no assurance that our research and development efforts
will result in successful product introductions or increased revenues or
profitability.
Amortization of Goodwill, Business Processes and Methodologies, Workforce, and
Customer Lists. In the 2000 Third Quarter, $640,331, or 97.2%, of our $659,067
of amortization charges represent the amortization of goodwill, business
processes and methodologies, workforce, and customer lists for our newly
acquired Vizy Interactive businesses. The remaining amortization relates to our
historical visual communications software business. The 1999 Third Quarter
amount represents our amortization of purchased technology and goodwill
associated with our acquisitions of Serif and SPC.
Realized and Unrealized Gains on Marketable Securities. The unrealized loss of
$28,924 in the 1999 Third Quarter represented the Company's net loss as a result
of holding Xceed stock during the period. We had no similar amount in the 2000
Third Quarter.
Other (income) expense. Other expense, net for the 2000 Third Quarter amounted
to $121,601, a decrease of $96,880, or 44.3%, from $218,481 in the 1999 Third
Quarter. The 2000 Third Quarter amount consisted primarily of $48,000 of
amortization charges relating to warrants issued in connection with the
Company's $1,000,000 line of credit facility and $36,000 of interest charges at
our PWR subsidiary. The 1999 Third Quarter amount reflected the reclassification
of $211,000 related to the licensing of certain software technology to net sales
previously reported as other income.
Comparison of the Nine Month Periods Ended September 30, 2000 and 1999
Net Sales. Net sales for the 2000 Nine Month Period increased $6,087,819, or
43.7%, to $20,014,152 from $13,926,333 in the nine months ended September 30,
1999 (the "1999 Nine Month Period"). The increase was primarily attributable to
our newly acquired Vizy Interactive business, which generated $10,899,940 in
revenues in the 2000 Nine Month Period. We had no Vizy Interactive business in
the 1999 Nine Month Period. This was partially offset by a decline of
$4,890,929, or 54%, in the revenues of our historical visual communications
business from $13,926,333 in the 1999 Nine Month Period to $9,035,404 in the
2000 Nine Month Period. Approximately $2,525,000 of the decline was attributable
to the termination of our digital camera programs.
North America and International net sales for the first nine months of 2000 and
1999 were as follows:
Nine Months Ended September 30,
----------------------------------------------
2000 % 1999 %
---------- ----- ---------- -----
North America 12,298,926 61.5 5,331,680 38.3
International 7,715,226 38.5 8,594,653 61.7
---------- ----- ---------- -----
Total 20,014,152 100.0 13,926,333 100.0
========== ===== ========== =====
In the 2000 Nine Month Period, approximately 39% of our net sales were generated
outside the United States as compared to approximately 62% in the 1999 Nine
Month Period. While most of the visual communications revenues are derived
internationally, primarily in the United Kingdom, most of our Vizy Interactive
revenues are generated in the United States.
Gross Profit. Gross profit declined by $494,711, or 5.2%, to $9,078,567 for the
2000 Nine Month Period compared to $9,573,278 in the 1999 Nine Month Period. Our
gross profit margin was 45% of net sales for the 2000 Nine Month Period
17
<PAGE>
compared to 69% in the 1999 Nine Month Period. Cost of sales was $10,935,585 for
the 2000 Nine Month Period as compared to $4,353,055 for the 1999 Nine Month
Period. The decrease in gross profit and gross profit margins was due to a
decline in higher margin historical visual communications software revenues,
which more than offset higher revenues with lower margins from Vizy Interactive.
$8,590,746, or 78.8%, of Vizy Interactive's revenues for the 2000 Nine Month
Period derived from our PWR subsidiary, where margins historically have been in
the 12% to 18% range. The increase in the amount of cost of sales is
attributable to the change in the mix of our sales revenues from lower cost
software and digital cameras to higher cost items such as web design services
and hardware components.
Selling, General and Administrative Expenses. SG&A for the 2000 Nine Month
Period increased $2,993,118, or 25%, to $14,845,433 from $11,852,315 in the 1999
Nine Month Period. Approximately $2,608,000 of such increase was related to our
Vizy Interactive business; approximately $202,000 was associated with the
operations of VisualCities.com; and approximately $350,000 was associated with
our Dialog24 operations, all of which were not reflected in the results of
operations for the Company during the corresponding 1999 Nine Month Period.
Approximately $524,000 was related to various increases in consulting fees
primarily associated with financial, investment banking, and other consulting
agreements. These increases were offset by a decrease in our direct mail
expenditures of approximately $1,100,000, which resulted from the termination of
our digital camera programs and most of the U. S. sales lead generation
activities associated with our historical visual communications software
business.
Product Development. Product development expenses for the 2000 Nine Month Period
decreased $144,260, or 30.1%, to $335,314 from $479,574 in the 1999 Nine Month
Period. Product development costs as a percentage of net sales was 1.7% for the
2000 Nine Month Period, compared to 3.4% in the 1999 Nine Month Period. We
capitalized approximately $452,000 in the 2000 Nine Month Period and $281,000 in
the 1999 Nine Month Period of our product development costs associated with
product designs where technological feasibility had been established. All other
development costs have been expensed in the period incurred.
Amortization of Goodwill, Business Processes and Methodologies, Workforce, and
Customer Lists. In the 2000 Nine Month Period, $1,405,632, or 96%, of $1,461,841
of amortization charges represented the amortization of goodwill, business
processes and methodologies, workforce, and customer lists for our newly
acquired Vizy Interactive businesses. The remaining amortization relates to
purchased technology and goodwill associated with our acquisitions of Serif and
SPC.
Realized and Unrealized Gains on Marketable Securities. The realized gain of
$1,095,348 in the 2000 Nine Month Period represents the gain recognized upon the
transfer of 59,813 shares of Xceed stock to a finder in connection with an
August 1999 agreement, based upon the appreciation in the market value of such
shares. The agreement set forth a formula to determine the number of shares to
be paid the finder upon the closing of an acquisition target identified by such
finder. The finder received 14,953 Xceed shares for the Renaissance acquisition
and 44,860 Xceed shares for the PWR acquisition, resulting in respective gains
of $371,962 and $723,386. The unrealized gain of $1,391,222, in the 1999 Nine
Month Period represented the Company's gain as a result of holding Xceed stock
during that period.
Other (income) expense. Other expense, net for the 2000 Nine Month Period was
$245,964, a decrease of $296,358, or 588% from $(50,394) in the 1999 Nine Month
Period. This amount consisted primarily of $144,000 of amortization charges
relating to warrants issued in connection with the Company's $1,000,000 line of
credit facility and $101,000 of interest charges at our PWR subsidiary. The 1999
Nine Month Period amount of $50,394 represented net interest income.
Liquidity and Capital Resources
Our cash and cash equivalents decreased by $1,233,176 to $497,319 at September
30, 2000 from $1,730,495 at December 31, 1999. In addition, marketable
securities decreased by $2,730,748 to $15,930 at September 30, 2000 from
$2,746,678 at December 31, 1999. The Company received $7,028,856 in net proceeds
from financing activities, used $6,474,072 of cash for operations, and used
$1,552,535 primarily for investments relating to the cash portion of the
purchase price of three companies included in our Vizy Interactive business.
18
<PAGE>
We had a working capital deficiency of ($2,851,568) at September 30, 2000, a
decline of $3,504,542 from our working capital at December 31, 1999 of $652,974,
primarily as a result of operating losses and investments in new businesses. We
believe that over the next twelve months we will need to raise at least
$2,000,000 to meet our currently anticipated liquidity and capital expenditure
requirements. We intend to seek additional financing through one or more debt,
equity, or convertible securities offerings, through the sale of assets or
through a merger or acquisition. Since June 2000, the Company has attempted to
conduct several private offerings of common stock. Each of these offerings has
been cancelled due to adverse market conditions. There can be no assurance that
we will be successful in completing any such offering or offerings, sale of
assets or merger or acquisition, or any other offerings or transactions, or that
the terms of any such offering or offerings, transaction or transactions, will
be beneficial to the Company or its stockholders.
We intend to utilize our available funds in 2000 to finance the costs of
building our Vizy Interactive business, and for capital expenditures, including
the purchase of computer, accounting and internet services equipment and
software. Our cash requirements, however, may change depending upon numerous
factors, including, without limitation, the cost of integrating our businesses,
as well as increased personnel costs, inventory and accounts receivable arising
from the sale and shipment of new or additional products, and other expansion of
our Vizy Interactive business. There can be no assurance that we will be
successful in attaining our sales or strategic goals, or that attaining such
goals will have the desired effect on our cash resources.
In the 2000 Nine Month Period we utilized $6,474,072 for operating activities.
In the 2000 Nine Month Period we utilized $1,552,535 of cash for investment
activities, primarily related to our Vizy Interactive subsidiary acquisitions.
Our 2000 Nine Month Period financing activities consisted of the receipt of net
proceeds of $7,626,580 from the sale of our common stock, $839,160 from option
and warrant exercises, net payments of $709,465 under our revolving lines of
credit, the repayment of $295,106 of debt and lease obligations and the
repayment of $432,313 of related party notes to the selling stockholders of PWR.
In March and July 2000, we completed private placements of our common stock for
an aggregate of 2,010,943 shares raising aggregate gross proceeds of $8,955,545,
before associated placement costs. We utilized approximately $5,000,000 of these
proceeds to fund our acquisitions and associated legal and other costs thereof;
as well as for the working capital needs of Renaissance Multimedia, Junction 15,
PWR and our historical business; and for repayment of our $1,000,000 line of
credit loan. We plan to utilize the proceeds of any additional financings to
develop our interactive e-commerce solutions business, and to fund our other
working capital requirements.
We are awaiting a final determination by The Nasdaq Stock Market relating to the
non-integration of our 2000 European private placement of 1,073,989 shares with
aggregate gross proceeds of $4,779,251, with our United States first quarter
2000 private placement of 936,954 shares with aggregate gross proceeds of
$4,216,293, under the Nasdaq Marketplace Rules, or alternatively, that,
notwithstanding any such integration of these two private placements, the number
of shares of our common stock issued and issuable in these two private
placements does not exceed 20% of our outstanding common stock for purposes of
such Marketplace Rules. We have responded to all of Nasdaq's requests for
information relating to this determination.
In the first quarter of 2000 we entered into a two-year unsecured line of credit
agreement for maximum borrowings of $1,000,000, at an 8% interest rate, with a
foreign company. We borrowed $1,000,000 under this agreement in February 2000.
This loan was repaid in full with accrued interest on March 20, 2000.We have
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, 2000,
with its primary bank in the United Kingdom, and which is secured by Serif
(Europe) Limited cash reserves of a similar amount. Serif (Europe) Limited has
outstanding bank loans of approximately $86,000 at September 30, 2000, which are
secured by substantially all of its assets. Our PWR subsidiary has a $1,400,000
bank credit facility, which we have guaranteed and which is secured by PWR's
assets. On July 21, 2000, PWR terminated its relationship with its inventory
finance lender and repaid its outstanding inventory loan balance of
approximately $925,000 with existing working capital. PWR is currently
negotiating with another financing company for an inventory facility and has
obtained an interim inventory financing facility for up to $500,000 in purchases
until a larger inventory financing facility can be negotiated. The line is
presently collateralized by a second lien on all of the assets of PWR and is
guaranteed by the Company.
Our exposure to foreign currency gains and losses is partially mitigated as we
incur operating expenses in the principal foreign currencies in which we invoice
foreign customers. As of September 30, 2000, 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.
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In 1999, we entered into a five-year consulting agreement pursuant to which we
are required to pay 0.3% of our 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 automatically by an additional eighteen months if
we report annual net revenues of $40,000,000, and an additional eighteen months
should net revenues exceed $60,000,000. At September 30, 2000, we have accrued
$239,000 of consulting fees in connection with this agreement.
Net Operating Loss Carryforwards
We estimate our consolidated tax net operating loss carryforwards to be
approximately $35 million at December 31, 1999, after consideration for
limitations on the use thereof, which expire in years 2002 through 2019. 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 carryforwards of SPC may be limited
further by reason of the consolidated return/separate return limitation year
rules. 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. 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.
Possible Tax Obligation
We have 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. 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 IRS has, to date, refused to
grant the Company's application for such a closing agreement because of alleged
deficiencies in SPC's pre-acquisition dual loss certifications. The Company
received notification from the IRS that it determined not to act on its
application until SPC submitted certain filings pertaining to pre-acquisition
consolidated tax year return filings made by SPC. The Company submitted these
filings in an application for relief. On August 23, 2000 the Company received
notification from the IRS that it had accepted its application for relief from
these deficiencies. In connection therewith, the Company filed amended tax
returns for the pre-acquisition consolidated tax years to resolve the
deficiencies in SPC's pre-acquisition dual consolidated loss certifications. The
Company is now in the process of reapplying for a closing agreement. The Company
believes that 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 the Company's future ability to sell SPC. The report of our
auditors covering the December 31, 1999 consolidated financial statements
contains a paragraph emphasizing these dual consolidated losses.
Reserves
We provided for allowances on trade receivables of approximately 14.1% at
September 30, 2000 compared to 43.7% at December 31, 1999. The decline in this
allowance as a percentage of outstanding accounts receivable is attributable to
lower historical bad debt exposure experienced by our Vizy Interactive business,
which comprised 84.1% of our gross receivables at September 30, 2000, as
compared to our historical visual communications business.
Seasonality
The Company's 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 during
the year-end holiday buying season and reduced retail and corporate demand for
business software during the European Easter and summer vacation period. We
expect our net sales and operating results from our historical visual
communications software operations to continue to reflect this seasonality. Our
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 we will achieve consistent growth or profitability on a
quarterly or annual basis.
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We are hopeful that we can mitigate the seasonal nature of the software market
with the typically less seasonal pattern of our professional internet solutions
business.
Inflation
We believe that inflation has generally not had a material impact on our
operations.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is hereby made to Item 3 of our Annual Report on Form 10-KSB, for
the fiscal year ended December 31, 1999, filed April 15, 2000 (Commission
File No.:1-14076), and to the references therein, for a discussion of all
material pending legal proceedings to which we or any of our subsidiaries
are parties.
In the fourth quarter of 1998, an action, Community Towers, LLC v. Software
Publishing Corporation and Does 1 through 10, was commenced in the Superior
Court of California, County of Santa Clara, in which plaintiff is seeking
$300,000 in damages for SPC's alleged violation of a lease for office space
located in San Jose, California. This is the location at which SPC had its
principal place of business and at which the Company had its principal
executive offices during the period of January 1997 through January 1998.
Neither SPC nor the Company currently has any offices at this location. SPC
has filed an answer in this action denying the plaintiffs' claims. This
action currently is in the discovery phase. In October 2000, the plaintiff
amended its complaint to name Neil M. Kaufman, one of the Company's
directors, as a defendant. The Company believes this action, including the
claim against Mr. Kaufman, is without merit and intends to vigorously
defend this action.
Item 2. Changes in Securities and Use of Proceeds
On July 31, 2000, we accepted subscriptions from three investors for a
total of 311,518 shares of common stock for gross proceeds of $1,386,255.
The issuance of these shares were private transactions exempt from
registration under Section 4(2) and Regulation S of the Securities Act.
In connection with the Company's acquisition of interMETHODS Limited in
October 2000 we issued an aggregate of 1,560,017 shares of our common stock
to the former shareholders of interMETHODS. The issuance of such shares 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 Holders.
At the Annual Meeting of Vizacom Inc. held on August 10, 2000, the
following matters were voted upon and adopted by the votes indicated:
<TABLE>
<CAPTION>
For Withheld Against Abstain
<S> <C> <C>
To re-elect two directors in Class I to serve until
the annual meeting
in 2003, Marc E. Jaffe and Werner G.
Haase. 7,852,020 49,168 -- --
To adopt the Company's 2000 Equity Incentive Plan 3,035,851 -- 384,870 45,240
</TABLE>
The other directors whose terms continued after the meeting were: Mark E.
Leininger (Class III), Vincent DiSpigno (Class II), David N. Salav (Class
III), Norman W. Alexander (Class II), and Neil M. Kaufman, Esq. (Class II).
However, Werner G. Haase resigned as a director in Class I shortly after
the annual meeting and was replaced in August by Francis X. Murphy (Class
I).
There were no broker non-votes with respect to the matters listed above.
22
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Item 5. Other Information.
We have received a number of requests for information and documentation
from The Nasdaq Stock Market's Listing Investigations unit. While we have
responded to these requests, we may receive further requests to which we
may be unable to respond, particularly with respect to information about
certain third parties with whom we transacted business. In addition, Nasdaq
has advised us that upon review of our responses, its staff may take any
action that may be appropriate under Nasdaq's Marketplace Rules, including
the removal of our common stock from listing on The Nasdaq Stock Market. In
such event, we expect that our common stock will continue to trade on the
Boston Stock Exchange and would be eligible to trade on the OTC Electronic
Bulletin Board. A delisting of our common stock could have an adverse
effect on the market price of our common stock and the ability of persons
wishing to acquire or sell shares of our common stock to do so.
In October 2000, the Company began restructuring its visual communications
and Dialog24 businesses. The Company has begun to consolidate operations
and reduce overhead. In this connection, the Company expects to relocate
its continental European facilities to its United Kingdom facilities and
anticipates closing its Aachen, Germany facilities December 1, 2000.
Management initially estimates restructuring costs of approximately
$250,000 and expects these actions to result in savings of approximately
$600,000 in 2001.
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
10.1 Company 2000 Equity Incentive Plan (incorporated by
reference to Exhibit 4 to the Company's Registration
Statement on Form S-8 (Registration No.: 333-46994)
filed with the Commission on September 29, 2000).
10.2 Agreement dated October 11, 2000, among Vizacom Inc.
and the former stockholders of interMethods Limited.
10.3 Form of Lock-Up Agreement executed by former
shareholders of interMethods Limited.
10.4 Registration Rights Agreement, dated as of October
11, 2000, among Vizacom Inc., and each of the former
shareholders of interMethods Limited.
10.5 Promissory Note issued by PWR to The Chase Manhattan
Bank dated August 3, 2000.
10.6 Promissory Note issued by PWR to The Chase Manhattan
Bank dated August 24, 2000.
10.7 Security Agreement between PWR and The Chase
Manhattan Bank dated March 31, 1999.
10.8 Company guaranty of Chase notes dated April 3, 2000.
10.9 Agreement for Wholesale Financing (Security
Agreement) dated August 25, 2000 between IBM Credit
Corporation and PWR Systems, Inc.
10.10 Guaranty, dated August 23, 2000, by Vizacom of
Security Agreement dated August 25, 2000 between IBM
Credit Corporation and PWR Systems, Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On September 1, 2000, the Company filed a Current Report on Form 8-K
(Date of Report: August 17, 2000) with the SEC reporting, as an item 5
disclosure: (a) the appointment of Francis X. Murphy as a director and
(b) the resignation of Werner G. Haase as a director.
23
<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 14, 2000 By: /s/ Mark E. Leininger
----------------------------------------
Mark E. Leininger
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 14, 2000 By: /s/ Alan W. Schoenbart
----------------------------------------
Alan W. Schoenbart
Vice President - Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
24
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VIZACOM INC.
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Company 2000 Equity Incentive Plan (incorporated by reference to
Exhibit 4 to the Company's Registration Statement on Form S-8
(Registration No.: 333-46994) filed with the Commission on September
29, 2000).
10.2 Agreement, dated October 11, 2000, among Vizacom Inc. and the former
stockholders of interMethods Limited.
10.3 Form of Lock-Up Agreement executed by former shareholders of
interMethods Limited.
10.4 Registration Rights Agreement, dated as of October 11, 2000, among
Vizacom Inc., and each of the former shareholders of interMethods
Limited.
10.5 Promissory Note issued by PWR to The Chase Manhattan Bank dated August
3, 2000.
10.6 Promissory Note issued by PWR to The Chase Manhattan Bank dated August
24, 2000.
10.7 Security Agreement between PWR and The Chase Manhattan Bank dated
March 31, 1999.
10.8 Company guaranty of Chase notes dated April 3, 2000.
10.9 Agreement for Wholesale Financing (Security Agreement) dated August
25, 2000 between IBM Credit Corporation and PWR Systems, Inc.
10.10 Guaranty, dated August 23, 2000, by Vizacom of Security Agreement,
dated August 25, 2000 between IBM Credit Corporation and PWR Systems,
Inc.
27 Financial Data Schedule.
25
