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 June 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: 12,057,739 shares of Common Stock, as
of July 31, 2000.
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 June 30, 2000
(Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the Six Months Ended June 30, 2000 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-21
2
<PAGE>
VIZACOM INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 491,636 $ 1,730,495
Marketable securities 58,145 2,746,678
Receivables
Trade, less allowances of $911,575 and $434,290 5,498,878 558,550
Other 65,723 88,842
Notes 73,289 86,018
Inventories 1,478,042 1,457,604
Prepaid expenses and other current assets 327,454 526,552
------------ ------------
Total current assets 7,993,167 7,194,739
Property and equipment, net 947,091 828,108
Goodwill, net of accumulated amortization of $659,297 and $256,066 7,180,965 118,665
Business processes and methodologies, workforce, and customer lists,
net of accumulated amortization of $398,999 5,183,001 --
Restricted cash 1,735,093 259,838
Deferred consulting costs 1,387,430 1,269,859
Other assets 1,127,274 803,762
------------ ------------
Total assets $ 25,554,021 $ 10,474,971
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit $ 2,432,622 $ --
Related party notes payable 685,048 --
Current portion of capital lease obligations 89,195 63,792
Current portion of long-term debt 80,296 155,554
Accounts payable 3,971,253 4,111,748
Accrued liabilities 1,945,114 1,816,744
Subscription liability 1,475,255 --
Sales and value-added taxes payable 300,203 393,927
------------ ------------
Total current liabilities 10,978,986 6,541,765
Capital lease obligations, less current portion 93,562 98,265
Long-term debt, less current maturities 104,634 100,410
------------ ------------
Total liabilities 11,177,182 6,740,440
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.001 per share,
60,000,000 shares authorized, 12,060,834 and 7,235,578 shares issued 12,061 7,236
Additional paid-in capital 66,537,808 49,851,699
Accumulated deficit (52,003,181) (47,864,635)
Accumulated other comprehensive income (loss) (159,454) 1,750,626
Treasury stock, 3,095 shares, at cost (10,395) (10,395)
------------ ------------
Total stockholders' equity 14,376,839 3,734,531
------------ ------------
Total liabilities and stockholders' equity $ 25,554,021 $ 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 June 30, Six Months Ended June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 8,270,977 $ 4,362,187 $ 12,213,442 $ 9,297,715
Cost of sales 4,980,991 1,524,653 6,297,015 3,057,618
------------ ------------ ------------ ------------
Gross profit 3,289,986 2,837,534 5,916,427 6,240,097
Selling, general and administrative expenses 5,204,820 3,972,003 9,945,301 7,976,399
Product development 115,308 112,975 277,883 266,344
Amortization of goodwill, business processes and
methodologies, workforce, and customer lists 657,419 578,528 802,774 1,172,848
Realized gain on marketable securities -- -- (1,095,348) --
Unrealized holding gain on marketable securities -- (760,146) -- (1,420,146)
Other expenses (income), net 59,464 (241,051) 124,363 (258,631)
------------ ------------ ------------ ------------
6,037,011 3,662,309 10,054,973 7,736,814
Net loss (2,747,025) (824,775) (4,138,546) (1,496,717)
Dividends on Series A and Series C Preferred Stock -- (25,155) -- (51,316)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (2,747,025) $ (849,930) $ (4,138,546) $ (1,548,033)
============ ============ ============ ============
Net loss per common share:
Net loss per common share - basic and diluted $ (0.23) $ (0.16) $ (0.42) $ (0.30)
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic and diluted 12,010,815 5,278,524 9,964,566 5,229,233
============ ============ ============ ============
</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 -- -- -- (4,138,546)
Decline in market value of marketable securities -- -- -- --
Realization of gain on transfer of marketable securities -- -- -- --
Currency translation adjustment -- -- -- --
------------
Total comprehensive loss (4,138,546)
------------
Sale of common stock in private placements, net 1,699,425 1,699 6,359,565 --
Common stock issued on exercise of warrants and stock options 480,107 480 838,679 --
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 June 30, 2000 12,060,834 $ 12,061 $ 66,537,808 $(52,003,181)
=========== ============ ============ ============
<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 (696,013) -- --
Realization of gain on transfer of marketable securities (1,095,348) -- --
Currency translation adjustment (118,719) -- --
------------
Total comprehensive loss (1,910,080) -- (6,048,626)
------------
Sale of common stock in private placements, net -- -- 6,361,264
Common stock issued on exercise of warrants and stock options -- -- 839,159
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 June 30, 2000 $ (159,454) $ (10,395) $ 14,376,839
============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
VIZACOM INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(4,138,546) $(1,496,717)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,323,164 1,412,037
Provision for doubtful accounts 51,518 --
Unrealized holding gain on trading securities -- (1,420,146)
Realized gain on marketable securities (1,095,348) --
Gain on licensing of technology -- (211,006)
Warrants and stock options issued for consulting services 321,504 20,462
Changes in assets and liabilities, net of effects of acquisitions:
Receivables (1,073,862) 519,451
Inventories 420,584 17,909
Prepaid expenses and other current assets 230,954 (550,927)
Other assets (304,492) (5,479)
Accounts payable (1,545,403) 61,366
Accrued liabilities (339,250) (550,467)
Sales and value-added taxes payable (95,812) --
----------- -----------
Net cash used in operating activities (6,244,989) (2,203,517)
----------- -----------
Investing activities:
Purchase of property and equipment (103,596) (219,001)
Investment in website (62,482) --
Collection of note receivable 70,584 4,709
Payment for acquisitions, net of cash acquired (1,662,898) --
----------- -----------
Net cash used in investing activities (1,758,392) (214,292)
----------- -----------
Financing activities:
Proceeds from sale of common stock - net 6,361,264 988,356
Proceeds from exercise of warrants and options 839,159 5,500
Borrowings under revolving line of credit 140,385 --
Payment of related party notes (308,310) --
Payment of long-term debt and capital lease obligations (217,080) (144,292)
Costs related to issuance of equity instruments -- (33,905)
----------- -----------
Net cash provided by financing activities 6,815,418 815,659
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (50,896) (12,756)
----------- -----------
Decrease in cash and cash equivalents (1,238,859) (1,614,906)
Cash and cash equivalents at beginning of period 1,730,495 2,377,648
----------- -----------
Cash and cash equivalents at end of period $ 491,636 $ 762,742
=========== ===========
Supplemental disclosure of cash flow information:
Interest $ 104,324 $ 10,744
=========== ===========
Income taxes $ -- $ --
=========== ===========
Supplemental disclosure of non-cash financing and investing activities:
Fixed assets acquired with capital lease obligations $ 28,725 $ --
=========== ===========
Dividends accrued on preferred stock $ -- $ 51,316
=========== ===========
Fair value of net assets acquired for common stock,
stock options, and notes payable (see Note 3) $ 9,890,469 $ --
=========== ===========
Capital stock subscriptions reflected as a liability and restricted cash 1,475,255 $ --
=========== ===========
Increase in provision for doubtful accounts for pre-acquisition receivables
reflected as a reduction in related party notes payable $ 210,611 $ --
=========== ===========
Warrants issued for other assets $ 382,500 $ 101,265
=========== ===========
</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
six-month period ended June 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, Business Processes and Methodologies, Workforce, and Customer
Lists
Goodwill, business processes and methodologies, workforce, and customer
lists represent the excess of the purchase price over the estimated fair
values of tangible assets acquired in the purchases of businesses. The
values of these items have been determined by independent appraisals.
Goodwill is amortized on a straight-line basis over a period of 5 to 7
years. 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 $787,000 of product
enhancement costs had been capitalized through June 30, 2000. 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.
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 June 30, 2000, $254,000 of these
development costs, net of $77,000 of accumulated amortization, are included
in other assets.
Reclassifications
Certain reclassifications have been made to prior periods to conform with
the current period presentation.
7
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Liquidity and Business Risks
The Company had a working capital deficiency of ($2,985,819) at June 30,
2000. The Company believes that over the next twelve months it will need to
raise at least $4,500,000 to meet its currently anticipated liquidity and
capital expenditure requirements and implement its business plan
objectives. Management intends to seek additional financing through one or
more debt, equity, or convertible securities offerings. In June 2000, the
Company commenced an offering of up to 1,200,000 shares of common stock at
a price of $2.47 per share, to existing European investors who invested in
March 2000. In July 2000, the Company commenced an offering of up to
2,500,000 shares of common stock at a price of $2.63 per share to new
investors. There can be no assurance that the Company will be successful in
completing any such offering or offerings, or any other offerings, or that
the terms of any such offering or offerings 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 $2,691,920 and was paid through the issuance of 449,870 shares of the
Company's common stock and a $250,000 cash payment. The Company entered
into a three-year employment contract with the President of Renaissance
Multimedia at an annual salary of $175,000, with certain predetermined
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 $2,468,487 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.
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 $8,546,112. 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 quarterly 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 day period. 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 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 $7,854,621 cost in excess of net
tangible assets acquired of $691,491 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.)
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 $ 4,086,805 $ 4,616,402
Noncurrent assets 97,990 42,728 21,467 162,185
----------- ----------- ----------- -----------
Total assets 463,973 206,342 4,108,272 4,778,587
----------- ----------- ----------- -----------
Current liabilities 209,997 167,997 3,416,781 3,794,775
Noncurrent liabilities 30,543 33,174 -- 63,717
----------- ----------- ----------- -----------
Total liabilities 240,540 201,171 3,416,781 3,858,492
----------- ----------- ----------- -----------
Net assets acquired 223,433 5,171 691,491 920,095
Goodwill 989,487 1,680,422 4,795,621 7,465,530
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 $ 2,691,920 $ 2,729,593 $ 8,546,112 $13,967,625
=========== =========== =========== ===========
</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 six month period ended
June 30, 2000 related to 59,813 Xceed shares transferred to this third
party in the 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.
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 six month periods ended June 30, 2000 and 1999 since they were
anti-dilutive.
6. Debt
The revolving lines of credit consist of the following:
Notes payable to bank $1,514,172
Inventory financing facility note payable 918,450
----------
$2,432,622
==========
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 June 30, 2000).
9
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Debt (cont.)
The inventory financing facility note payable may be repaid within 40 days
without interest. On the 41st day, interest begins accruing at a rate of
1.25% per month. The line is collateralized by PWR's inventory and
personally guaranteed by the PWR selling stockholders. On July 21, 2000,
PWR terminated its relationship with this lender and repaid the outstanding
inventory loan balance of approximately $925,000 with existing cash funds.
PWR is currently negotiating with another financing company for an
inventory financing facility.
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 $377,930
Retained earnings notes, payable in quarterly installments 307,118
--------
$685,048
========
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 the first advance under 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 $34,507 pro-rata variable charge for the 150,000 warrants subject to
escrow.
In March 2000, the Company completed two private placements under which it
sold 1,699,425 shares of its common stock for gross proceeds of $7,609,290.
Under the first of these private placements, the Company sold 936,954
shares of its common stock and received gross proceeds of $4,216,294. In
the second private placement, conducted in Europe, the Company sold 762,471
shares of its common stock for gross proceeds of $3,392,996.
The Company has received additional subscriptions in the second European
private placement for 331,518 shares with an aggregate gross subscription
price of $1,475,255. Accordingly, at June 30, 2000 the Company recorded the
$1,475,255 received from these investors as restricted cash as well as a
subscription liability in the same amount. The Company accepted
subscriptions for 311,518 of these shares, for gross proceeds of
$1,386,255, on July 31, 2000. The Company is awaiting a final determination
by the Nasdaq Stock Market relating to the non-integration of the two first
quarter 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 and issuable
does not exceed 20% of the Company's outstanding common stock for purposes
of such Marketplace Rules.
10
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Litigation
In the fourth quarter of 1998, an action was commenced against Vizacom 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. This is the location at which one of our subsidiaries,
Software Publishing Corporation, 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. The Company no longer has any offices at
this location. The Company has filed an answer in this action denying the
plaintiffs' claims and at the appropriate time, plans to file a summary
judgment motion seeking a determination in its favor on the claims. The
Company believes that the plaintiffs claims are without merit and intends
to vigorously defend itself in 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 the claims in this action
are without merit and intends to vigorously defend itself in this action.
On January 30, 1998, an action was commenced against the Company, its
current chief executive officer and its former chief executive officer. The
action alleged that the plaintiffs' investment in 296,333 shares of common
stock for $919,495 was made based upon certain information that was
intended to deceive the plaintiffs. The plaintiffs sought to rescind the
investment and certain other relief. In April 2000, this case was dismissed
with prejudice with no further cost to the Company.
The Company has other litigation matters in progress in the ordinary course
of business. In the opinion of management, all 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.
11
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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, and its internet-based
e-commerce network portal VisualCities.com. 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 included in visual
communications products, and is not shown separately as its operations are
as yet insignificant. In addition, the Company's visual communications
segment discontinued the sale of digital cameras, except for promotional
activities and the liquidation of existing inventories.
Information concerning our six-month segment operations is set forth below:
<TABLE>
<CAPTION>
Visual
Communication Vizy
Products Interactive Corporate Consolidated
===============================================================
<S> <C> <C> <C> <C>
Six months ended June 30, 2000:
Net sales $ 6,057,858 $ 6,155,584 $ -- $ 12,213,442
Investment gains -- -- 1,095,348 1,095,348
EBITDA (2,234,594) 105,333 (364,617) (2,493,878)
Depreciation and amortization 236,485 773,768 312,911 1,323,164
Warrants and stock options for consulting services -- -- 321,504 321,504
Segment profit (loss) (2,471,079) (668,435) (999,032) (4,138,546)
Total assets 3,458,239 19,393,001 2,702,782 25,554,021
Six months ended June 30, 1999:
Net sales $ 9,297,715 $ -- $ -- $ 9,297,715
Investment gains -- -- 1,420,146 1,420,146
EBITDA 1,080,589 -- (1,144,807) (64,218)
Depreciation and amortization 1,398,832 -- 13,205 1,412,037
Warrants and stock options for consulting services -- -- 20,462 20,462
Segment profit (loss) (318,243) -- (1,178,474) (1,496,717)
Total assets 4,054,856 -- 4,882,266 8,937,122
</TABLE>
10. Related Party Transactions
During the first six months of 2000, the Company incurred approximately
$734,000 of legal fees, 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 $452,000 owed to this law firm is
included in accounts payable at June 30, 2000.
12
<PAGE>
VIZACOM INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Commitments
In April 2000, the Company entered into a letter of intent to acquire
certain operating assets of Silkroad Interactive Inc. in a cash and stock
transaction. Silkroad Interactive Inc. is a New York City based web and
systems integration company focused on internet security systems, customer
relationship management software, and e-commerce systems development
activities. The consummation of this acquisition is subject to customary
closing conditions.
In May 2000, the Company entered into a letter of intent to acquire
interMETHODS Limited, a London-based web systems integrator. The
consummation of this acquisition is subject to customary closing
conditions.
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 intends to utilize 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 July 21, 2000, PWR terminated its relationship with its inventory
finance lender and repaid its outstanding loan balance of approximately
$925,000. See Note 6.
On July 31, 2000 the Company accepted subscriptions from certain European
investors for 311,518 shares for gross proceeds of $1,386,255. These
subscriptions were reflected as restricted cash and a corresponding
subscription liability as of June 30, 2000. See Note 7.
13
<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 expansion into internet and other interactive e-commerce
solutions offerings, 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 and PWR, 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.
Business Overview
Vizacom is a provider of interactive professional internet solutions that build
the strategy, design, processes and customer support systems for companies
seeking to benefit from the use of internet-based technologies. We currently
operate nine offices in the United States, United Kingdom, and Germany. Our
solutions consist of business strategy consulting, creative graphic design and
branding, e-commerce and interactive assistance, web and network infrastructure
design and integration, and data center services. We also provide web-based
customer relationship support solutions through our web-enabled call center
operations, and we believe that these solutions differentiate us from competing
Internet architect solutions providers. Additionally, we continue to operate our
historical software business, in which we develop and sell visual communications
computer software products and market third-party computer software products.
Our professional internet solutions are intended to assist our clients in
improving their business systems and efficiencies, enhancing their customer
relationships, promoting revenue-generating opportunities, and marketing and
branding their businesses, products and services. We gained our competencies in
business consulting, creative design and branding, and web and network
infrastructure design and integration through our recent acquisitions of
Renaissance Multimedia, Junction 15 and PWR. These three companies are
collectively referred to as Vizy Interactive. We also recently developed
web-based customer relationship support solutions, which are provided through
our multinational multilingual call center operation, known as Dialog24.
Dialog24 was developed from our established telemarketing operations utilizing
state of the art licensed technology which provides real-time chat, audio and
video over internet protocol.
14
<PAGE>
Our professional internet solutions consist of the following services:
o business consulting, in which we conceptualize, develop and guide the
strategy and implementation of a client's electronic business model and
objectives;
o web site creative graphic design and branding, in which we produce the
graphic design and interactivity of a web site and promote a client's
online brand and market presence;
o e-commerce and interactive assistance, in which we assist with the various
elements and scope of projects;
o web and network design and integration, in which we design and develop the
technology components of the client's network connectivity and its
internet, intranet or extranet, integrate a company's internet, intranet or
extranet to legacy systems, and provide authorized value-added reseller
services of network, internet, intranet and extranet technology products
and other digital communications equipment; and
o web-based customer relationship support solutions, to facilitate real-time
human interaction between an electronic business and its customers to
provide and enhance online customer satisfaction and promote e-commerce
revenues, by allowing customers interested in purchasing products or
navigating one of our clients' web sites to communicate with one of our
call center agents in a choice of five languages in real time through
text-based chat, voice and video over internet protocol.
Clients of our Vizy Interactive business primarily consist of small and
mid-sized companies, divisions and local offices of large, multi-national
corporations, and early stage internet ventures. Current Vizy Interactive
clients include Petrossian Paris, SoBe Beverage, MTV Networks, The Harbour Club,
Phillips Van-Heusen, Sony Music, and several additional domestic and
internationally recognized companies.
We believe that our professional internet solutions business possesses several
competitive advantages. We believe that as the professional internet solutions
industry and market matures, electronic businesses will increasingly demand the
broad spectrum of customer support solutions that we currently offer. We also
believe that our industry-specific knowledge and local implementation abilities
allow us to effectively service the business objectives of companies concerned
with presenting an online brand that is consistent with the values of their
locale. Additionally, we believe that our international operations and presence
will continue to facilitate relationships with interactive companies that we may
target for acquisition or strategic alliance.
We intend to continue to grow the geographic reach of our professional internet
solutions business through a disciplined acquisition strategy that focuses on
acquiring interactive companies with reputable and established clientele,
aggressive and innovative boutique cultures, and talented, experienced
management. Our acquisition strategy is to purchase companies or their
operations for a purchase price that will allow us to achieve positive earnings
before income taxes, depreciation and amortization, or EBITDA, with respect to
such entities, within a reasonable period of time.
We continue to develop and market visual communications consumer software
products that operate on Windows-based operating systems for personal and
networked computers. Our current flagship software products include Serif
PagePlus 6, Harvard Graphics Pro Presentations, Serif DrawPlus 4 and Serif
PhotoPlus 6. We expect to commence marketing of new upgrades of Serif PagePlus
and Harvard Graphics in September 2000. In connection with our software
business, we also operate VisualCities.com, a destination web site providing
information and products of interest to our software product users and other
visual communications computer users. We expect to defer continued development
of VisualCities.com at least until internet bandwidth increases sufficiently to
facilitate electronic delivery of our complex software programs. Additionally,
we market a number of hardware and software products manufactured by third
parties. As a result of declining demand and margins for digital cameras in the
first quarter of 2000, we discontinued the sale of third-party digital cameras
in the second quarter of 2000, except for promotional activities and the
liquidation of existing inventories.
Through our Serif subsidiaries, which we acquired in August 1996, we have over
ten years of experience in software development and multinational telemarketing.
We believe the Serif brand and product line is highly regarded and well-known
throughout the United Kingdom. Through our Software Publishing Corporation
subsidiaries, which we acquired in December 1996, we own the Harvard Graphics
brand and product line. We believe the Harvard Graphics brand is internationally
recognized as a pioneer in computer software applications, particularly
presentation graphics software. We believe our reputation as a developer of
pioneering software products and intellectual property gives us competitive
advantages that may allow us to penetrate other software markets, including
markets for software that promote e-commerce and support e-businesses.
15
<PAGE>
Results of Operations
General. Our operations for the quarter ended June 30, 2000 ("2000 Second
Quarter") and the six month period ended June 30, 2000 ("2000 Six 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 six month 2000 periods
included VisualCities.com Inc. operations which began in October 1999, and
therefore were not reflected in the comparative quarter and six month period
ended June 30, 1999. The 2000 Second 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 away from digital cameras, primarily focusing on our core
software products.
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 goodwill, business processes
and methodologies, workforce, and customer lists amortization increased due to
the costs associated with our acquisitions, while marketing expenses in our
visual communications business decreased as a result of changes in lead
generation activities implemented as a result of declines in response rates to
promotional software mailings. We were not able to reduce our more expensive
lead 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 second quarter.
Comparison of the Three Month Periods Ended June 30, 2000 and 1999
Net Sales. Net sales increased by $3,908,790, or 89.6%, to $8,270,977 in the
2000 Second Quarter from $4,362,187 in the quarter ended June 30, 1999 (the
"1999 Second Quarter"). The increase was primarily attributable to our newly
acquired Vizy Interactive business, which contributed $5,714,557 in revenues in
the 2000 Second Quarter. We had no Vizy Interactive revenues in the 1999 Second
Quarter. This was partially offset by a decline of $1,805,767 in the revenues of
our historical visual communications business from $4,362,187 in the 1999 Second
Quarter to $2,556,420 in the 2000 Second Quarter. Approximately $539,000 of the
decline was attributable to the termination of the digital camera programs. As
of June 30, 2000 we had approximately $1,270,000 in confirmed back orders.
North America and International net sales for the second quarter of 2000 and
1999 were as follows:
Three Months Ended June 30,
-------------------------------------------------
2000 % 1999 %
-------------------------------------------------
North America $ 6,063,325 73.3 $ 1,803,879 41.4
International 2,207,652 26.7 2,558,308 58.6
----------- ----- ----------- -----
Total $ 8,270,977 100.0 $ 4,362,187 100.0
=========== ===== =========== =====
In the 2000 Second Quarter, approximately 27% of our net sales were generated
outside the United States as compared to approximately 59% in the 1999 Second
Quarter. While most of the visual communications revenues are derived
internationally, most of our Vizy Interactive revenues are generated in the
United States.
Gross Profit. Gross profit increased by $452,452, or 15.9%, to $3,289,986 for
the 2000 Second Quarter compared to $2,837,534 in the 1999 Second Quarter. Our
gross profit margin was 40% of net sales for the 2000 Second Quarter compared to
65% of net sales in the 1999 Second Quarter. Cost of sales was $4,980,991 for
the 2000 Second Quarter as compared to $1,524,653 for the 1999 Second Quarter.
The increase in gross profit was primarily attributable to our newly acquired
Vizy Interactive business. 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. $4,726,785, or 82.7%, of Vizy
Interactive's revenue in the 2000 Second Quarter was derived from our PWR
subsidiary, where margins historically have been in the 15% 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 sales 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.
16
<PAGE>
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 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, gross margins have fluctuated on a quarterly basis as we
utilized alternative direct response promotions. Gross margins 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
professional internet solutions business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased by $1,232,817 or 31%, to $5,204,820
in the 2000 Second Quarter from $3,972,003 in the 1999 Second Quarter with the
increase attributable as follows: approximately $1,210,000 of was related to our
Vizy Interactive business; approximately $250,000 to operating our Aachen,
Germany call center; and approximately $428,000 is 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 $700,000 which resulted from the
termination of our digital camera programs and the most of the U. S. sales lead
generation activities associated with our historical software business.
Amortization of Goodwill, Business Processes and Methodologies, Workforce, and
Customer Lists. In the 2000 Second Quarter, $638,683, or 97.2%, of our $657,419
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 Second 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 gain of
$760,146 in the 1999 Second Quarter represented the Company's gain as a result
of holding Xceed stock during those periods. We had no similar gain in the 2000
Second Quarter.
Product Development. Product development expenses in the 2000 Second Quarter
increased by $2,333, or 2.0%, to $115,308 from $112,975 in the 1999 Second
Quarter. Product development costs, which were primarily related to our
historical visual communications software business, as a percentage of net sales
were 1.4% for the 2000 Second Quarter compared to 2.6% in the 1999 Second
Quarter. We capitalized approximately $153,000 in the 2000 Second Quarter and
$116,000 in the 1999 Second 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. As part of our
historical visual communications software business, we intend 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 updating existing products. As part of our Vizy
Interactive and Dialog24 operations, we intend to continue to acquire externally
developed technology, either through alliances or licensing arrangements, and
invest in certain internal development projects. We believe that development
expenses may increase in dollar amount in the future, although our long-term
goal is 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.
Other (income) expense. Other expense, net for the 2000 Second Quarter amounted
to $59,464. This amount consisted primarily of $49,000 of amortization charges
relating to warrants issued in connection with the Company's line of credit
facility. The 1999 Second Quarter amount reflected a gain of $241,051 related to
the licensing of certain software technology.
17
<PAGE>
Comparison of the Six Month Periods Ended June 30, 2000 and 1999
Net Sales. Net sales for the 2000 Six Month Period increased $2,915,727, or 31%,
to $12,213,442 from $9,297,715 in the six months ended June 30, 1999 (the "1999
Six Month Period"). The increase was mainly attributable to our newly acquired
Vizy Interactive business which contributed $6,158,150 in revenues in the 2000
Six Month Period. We had no Vizy Interactive business in the 1999 Six Month
Period. This was partially offset by a decline of $3,242,423 in the revenues of
our historical visual communications business from $9,297,715 in the 1999 Six
Month Period to $6,055,292 in the 2000 Six Month Period.
North America and International net sales for the first half of 2000 and 1999
were as follows:
Six Months Ended June 30,
---------------------------------------------
2000 % 1999 %
---------------------------------------------
North America 7,340,836 60.1 3,489,249 37.5
International 4,872,606 39.9 5,808,466 62.5
---------- ----- --------- -----
Total 12,213,442 100.0 9,297,715 100.0
========== ===== ========= =====
In the 2000 Six Month Period, approximately 40% of our net sales were generated
outside the United States as compared to approximately 63% in the 1999 Six Month
Period. While most of the visual communications revenues are derived
internationally, most of our Vizy Interactive revenues are generated in the
United States.
Gross Profit. Gross profit declined by $323,670, or 5.2%, to $5,916,426 for the
2000 Six Month Period compared to $6,240,097 in the 1999 Six Month Period. Our
gross profit margin was 48% of net sales for the 2000 Six Month Period compared
to 67% in the 1999 Six Month Period. Cost of sales was $6,297,015 for the 2000
Six Month Period as compared to $3,057,618 for the 1999 Six Month Period. The
decrease in gross profit 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. The decline in gross profit margins was
attributable to lower overall gross profit margins for Vizy Interactive
operations as compared to our historical visual communications business.
$4,726,785, or 76.8%, of Vizy Interactive's revenues for the 2000 Six Month
Period derived from our PWR subsidiary, where margins historically have been in
the 15% 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 sales 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 Six Month Period
increased $1,968,902, or 24.7%, to $9,945,301 from $7,976,399 in the 1999 Six
Month Period with the increase attributable as follows: approximately $1,477,000
was related to our Vizy Interactive business; approximately $536,000 to
operating our Aachen, Germany call center; approximately $525,000 is related to
various increases in consulting fees primarily associated with financial,
investment banking, and other consulting agreements; and approximately $157,000
was associated with the operations of VisualCities.com, which did not exist in
the corresponding 1999 Six Month period. A significant portion of the balance of
the increased SG&A was related to additional salaries for executive and other
positions created in 2000 in connection with our international internet
solutions business strategy. 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 software business.
Amortization of Goodwill, Business Processes and Methodologies, Workforce, and
Customer Lists. In the 2000 Six Month Period, $765,301, or 95.3%, of $802,774 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 Six 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 $1,420,146, in the 1999 Six Month Period represented the
Company's gain as a result of holding Xceed stock during that period.
18
<PAGE>
Product Development. Product development expenses for the 2000 Six Month Period
increased $11,539, or 4.3%, to $277,883 from $266,344 in the 1999 Six Month
Period. Product development costs as a percentage of net sales was 2.3% for the
2000 Six Month Period, compared to 2.9% in the 1999 Six Month Period. We
capitalized approximately $309,000 in the 2000 Six Month Period and $166,000 in
the 1999 Six 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.
Other (income) expense. Other expense, net for the 2000 Six Month Period was
$124,363. This amount consisted primarily of $96,000 of amortization charges
relating to warrants issued in connection with the Company's line of credit
facility. The 1999 Six Month Period amount reflected a gain of $258,631 related
to the licensing of certain software technology.
Liquidity and Capital Resources
Our cash and cash equivalents decreased by $1,238,859 to $491,636 at June 30,
2000 from $1,730,495 at December 31, 1999. The Company received $6,815,418 in
net proceeds from financing activities, used $6,244,989 of cash for operations,
and used $1,758,392 primarily for investments relating to the cash portion of
the purchase price of three companies comprising our Vizy Interactive business.
In addition, we received $1,475,255 of payments from certain foreign investors'
stock subscriptions which were reflected at June 30, 2000 as restricted cash and
a corresponding subscription liability pending acceptance of such subscriptions
by the Company. On July 31, 2000 we accepted subscriptions from these foreign
investors for 311,518 shares, for gross proceeds of $1,386,255.
Our operating and investing activities for the 2000 Six Month Period were
primarily related to the acquisition of three new companies, increased direct
marketing expenditures, our European expansion, and the costs associated with
the development of future software products. We intend to utilize our available
funds in 2000: to finance the costs of building our Vizy Interactive
professional internet solutions business, including the costs of acquisitions
and the respective working capital needs of acquired companies; for Internet web
site development; for European expansion, for product development, for marketing
and advertising, for capital expenditures, including the purchase of computer,
accounting and internet services equipment and software, and for internal and
external software development. Our cash requirements, however, may change
depending upon numerous factors, including, without limitation, the cost of
integrating our businesses, as well as increased inventory and accounts
receivable arising from the sale and shipment of new or additional products.
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.
Our 2000 Six Month Period financing activities consisted of the receipt of net
proceeds of $6,361,264 from the sale of our common stock, $839,159 from option
and warrant exercises, net proceeds of $140,385 from borrowings under our
revolving lines of credit, and the repayment of $217,080 of debt and lease
obligations and $308,310 of related party notes to the selling stockholders of
PWR.
We had a working capital deficiency of ($2,985,819) at June 30, 2000, a decline
of $3,638,793 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
$4,500,000 to meet our currently anticipated liquidity and capital expenditure
requirements and to implement our business plan objectives. We intend to seek
additional financing through one or more debt, equity, or convertible securities
offerings. In June 2000, we commenced an offering of up to 1,200,000 shares of
common stock at a price of $2.47 per share, to our existing European investors
who invested in March 2000. In July 2000, we also commenced an offering of up to
2,500,000 shares of common stock at a price of $2.63 per share to new investors.
There can be no assurance that we will be successful in completing any such
offering or offerings, or any other offerings, or that the terms of any such
offering or offerings 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.
In March 2000, we completed private placements of our common stock for an
aggregate of 1,699,425 shares raising aggregate gross proceeds of $7,609,290,
before associated placement costs. We utilized approximately $5,000,000 of these
proceeds to fund our acquisitions and associated legal and other costs thereof;
for 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 pursue additional
acquisition targets, develop our interactive e-commerce solutions business,
expand our European operations, and to fund our other working capital
requirements.
19
<PAGE>
We are awaiting a final determination by The Nasdaq Stock Market relating to the
non-integration of our foreign private placement 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. In June and July 2000, we responded to Nasdaq's request
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, and we now
have $1 million available under this line of credit. 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 June 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 $95,000 at June 30, 2000, which are secured by substantially
all of its assets. Our PWR subsidiary has a $1,500,000 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 which had
granted PWR a temporary $1,000,000 inventory flooring line, and repaid its
outstanding inventory loan balance of approximately $925,000 with existing cash
funds. PWR is currently negotiating with another financing company for an
inventory facility .
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 June 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.
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 June 30, 2000, we have accrued
$187,500 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 the requirement that SPC
recognize a tax of approximately $8 million on approximately $24.5 million of
SPC's previous dual consolidated losses. The IRS notified us that it determined
not to act on our application until SPC submitted certain filings pertaining to
pre-acquisition consolidated tax year return filings made by SPC. We have
submitted these filings in an application for relief. We believe that should the
IRS accept the application for relief, and once a 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 Vizacom 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
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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 16.6% at June
30, 2000 compared to 77.8% 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 newly acquired Vizy Interactive
business, which comprised 85.8% of our gross receivables at June 30, 2000, as
compared to our historical visual communications business.
Seasonality
The computer software market is characterized by significant seasonal swings in
demand, which typically peak in the fourth quarter of each calendar year. The
seasonal pattern is due primarily to the increased demand for software during
the year-end holiday buying season and reduced retail and corporate demand for
business software during the European Easter and summer vacation period. We
expect our net sales and operating results from our historical 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.
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.
Item 2. Changes in Securities and Use of Proceeds
In the second quarter of 2000, we issued an aggregate of 129,103 shares of
common stock to a total of eight individuals for gross proceeds of $149,933
upon the exercise of options and warrants held by these individuals. The
issuances of such shares were private transactions exempt from registration
under Section 4(2) of the Securities Act.
On May 27, 2000, we issued 14,036 shares of our common stock to Alberdale &
Co., valued at $46,320, in partial payment of a fee due Alberdale in
connection with our acquisition of Junction 15. 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.
None.
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.
Norman Alexander has informed us that he intends not to stand for
re-election as a director in class II at our annual meeting of stockholders
to be held 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 Lease dated June 1, 2000 between Spacely LLC and PWR
Systems, Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On June 21, 2000, we filed a Current Report on Form 8-K (Date of
Report: June 12, 2000) with the SEC reporting, as an item 5
disclosure: (a) the appointment of Edward Proctor as a Vice President
and chief technology officer and Vincent DiSpigno as our acting chief
operating officer; (b) the resignation of Rand Schulman as our
executive vice president and (c) the status of certain subscriptions
in our European private placement with an aggregate gross subscription
price of $1,475,255, which subscriptions were not yet then accepted.
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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: August 14, 2000 By: /s/ Mark E. Leininger
---------------------------------------
Mark E. Leininger
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 2000 By: /s/ Alan W. Schoenbart
---------------------------------------
Alan W. Schoenbart
Vice President - Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
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VIZACOM INC.
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Lease dated June 1, 2000 between Spacely, LLC and PWR
Systems, Inc.
27 Financial Data Schedule.
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