(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996
|_| Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ______ to ______
Commission file number 333-7727
Allegiant Technologies Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Washington 98-0138706
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
9740 Scranton Place, Suite 300, San Diego, California, 92121
(Address of Principal Executive Offices)
(619) 587 - 0500, Extension 105
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common stock, par value, $0.01
per share, 8,107,295 shares of common stock outstanding as of September 30, 1996
Transitional Small Business Disclosure Format (check one):
Yes No X
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
FORM 10 - QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
-- September 30, 1996 and September 30, 1995.........................
Statements of Income
-- Three Months Ended September 30, 1996 and 1995....................
-- Nine Months Ended September 30, 1996 and 1995.....................
Statements of Cash Flows
-- Three Months Ended September 30, 1996 and 1995....................
-- Nine Months Ended September 30, 1996 and 1995.....................
Notes to Financial Statements...........................................
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................
PART II: OTHER INFORMATION
Item 6. Reports on Form 8-K.............................................
SIGNATURES..............................................................
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
FINANCIAL STATEMENTS
(Expressed in United States Dollars)
(Unaudited - Prepared by Management)
SEPTEMBER 30, 1996
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
BALANCE SHEET
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
September 30
------------------------------
1995 1996
-------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 465,115 $ 480,722
Accounts receivable, net of allowance for doubtful accounts
of $5,914 in 1995 and $25,000 in 1996 172,363 93,271
Inventories 105,314 72,266
Prepaid expenses and deposits 49,449 36,789
-------------- -------------
792,241 683,048
Deposits - 17,709
Property and equipment, net (Note 3) 222,897 257,120
Intangible assets, net (Note 4) 415,336 290,740
Deferred costs - 63,523
-------------- -------------
Total assets $ 1,430,474 $ 1,312,140
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 130,123 $ 186,765
Accrued liabilities and reserves 2,980 104,175
Deferred revenues 36,377 43,570
Current portion of notes payable 50,319 22,335
-------------- -------------
Total current liabilities 219,799 356,845
Deferred Rent - 36,502
Notes payable, net of current portion (Note 5) 22,335 -
Debentures payable (note 6) - 495,775
-------------- -------------
Total liabilities 242,134 889,122
-------------- -------------
Commitments (Note 7)
Shareholders' equity Capital stock (Note 9)
Authorized:
50,000,000 preferred shares, par value $0.01 per share
100,000,000 common shares, par value $0.01 per share
Issued and outstanding:
8,107,295 common shares (1995 -7,009,795) 70,098 81,073
Additional paid-in capital 2,316,056 3,965,092
Accumulated deficit (1,197,814) (3,623,147)
-------------- -------------
Total shareholders' equity 1,188,340 423,018
-------------- -------------
Total liabilities and shareholders' equity $ 1,430,474 $ 1,312,140
============== =============
</TABLE>
Unaudited - Prepared by Management
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
STATEMENT OF EARNINGS AND DEFICIT
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- ------------------------------
1995 1996 1995 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
NET REVENUE $ 572,717 $ 243,629 $ 1,817,068 $ 1,153,425
COST OF REVENUE 126,427 55,827 452,784 249,037
-------------- ------------- -------------- -------------
GROSS PROFIT 446,290 187,802 1,364,284 904,388
-------------- ------------- -------------- -------------
EXPENSES
Sales and marketing 345,241 293,027 874,407 1,248,711
Research and development 187,705 249,754 420,723 732,770
General and administrative 223,690 223,658 556,277 735,786
Amortization of purchase of intangibles 31,149 31,149 91,364 99,697
-------------- ------------- -------------- -------------
Total operating expenses 787,785 797,588 1,942,771 2,816,964
-------------- ------------- -------------- -------------
Loss from operations (341,495) (609,786) (578,487) (1,912,576)
Interest Income 8,283 12,741 12,001 21,220
Interest Expense (852) (10,341) (4,630) (47,727)
-------------- ------------- -------------- -------------
Net Loss (334,064) (607,386) (571,116) (1,939,083)
Deficit, beginning of period (863,750) (3,015,761) (626,698) (1,684,064)
-------------- ------------- -------------- -------------
Deficit, end of period $ (1,197,814) $ (3,623,147) $ (1,197,814) $ (3,623,147)
============== ============= ============== =============
</TABLE>
Unaudited - Prepared by Management
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Amount Paid
Number in Excess of
of Shares Par Value par Value Deficit Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 5,634,000 $ 56,340 $ 1,205,660 $ (626,698) $ 635,302
Shares issued - cash 875,000 8,750 866,250 - 875,000
- corporate finance fee 64,545 645 63,900 - 64,545
- exercise of warrants 186,250 1,863 189,865 - 191,728
- conversion of note
payable 250,000 2,500 247,500 - 250,000
Offering costs - - (257,119) - (257,119)
Loss for the period - - - (571,116) (571,116)
------------- -------------- ------------- -------------- -------------
Balance at September 30, 1995 7,009,795 70,098 2,316,056 (1,197,814) 1,188,340
Shares issued - exercise of warrants 32,500 325 26,697 - 27,022
- issuance of warrants - - 39,000 - 39,000
Offering costs - adjustment - - 22,645 - 22,645
Net loss - - - (486,250) (486,250)
------------- -------------- ------------- -------------- -------------
Balance at December 31, 1995 7,042,295 70,423 2,404,398 (1,684,064) 790,757
Shares issued - cash 815,000 8,150 1,621,850 -
1,630,000
- exercise of warrants 250,000 2,500 247,500 - 250,000
Offering Costs - - (308,656) - (308,656)
Net loss - - - (1,939,083) (1,939,083)
------------- -------------- ------------- -------------- -------------
Balance at September 30, 1996 8,107,295 $ 81,073 $ 3,965,092 $ (3,623,147) $ 423,018
============= ============== ============= ============== =============
</TABLE>
Unaudited - Prepared by Management
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
STATEMENT OF CHANGES IN FINANCIAL POSITION
(Expressed in United States Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
1995 1996 1995 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (334,064) $ (607,386) $ (571,116) $ (1,939,083)
Adjustments to reconcile net loss to
net cash used in operating activities - - - -
Amortization and depreciation 42,749 50,468 115,064 151,137
Changes in operating assets and liabilities
Accounts receivable 44,351 32,344 25,262 41,005
Inventories (15,536) 6,767 (54,364) 27,101
Prepaid expenses and deposits 59,266 22,880 (20,202) 19,316
Accounts payable and accrued liabilities 6,333 93,740 (48,614) 45,001
Deferred revenues (5,913) (8,946) 16,577 (10,228)
-------------- ------------- -------------- -------------
Net cash used for operating activities (202,814) (410,133) (537,393) (1,665,751)
-------------- ------------- -------------- -------------
INVESTING ACTIVITIES
Purchase of property and equipment (94,152) (1,136) (150,413) (61,181)
Purchase of intangible assets 52,895 - (47,105) -
-------------- ------------- -------------- -------------
Net cash used for investing activities (41,257) (1,136) (197,518) (61,181)
-------------- ------------- -------------- -------------
FINANCING ACTIVITIES
Proceeds from issuance of capital stock 441,728 - 1,381,273 1,880,000
Share offering cost - - (257,119) (308,656)
Proceeds from notes payable - - 100,000 -
Payments on notes payable (261,891) (13,006) (277,346) (38,159)
Deferred costs (52,895) (33,523) - 12,727
Deferred rent - 14,500 - 10,099
Amortization of debt discount - 2,977 - 34,775
-------------- ------------- -------------- -------------
Net cash provided by financing activities 126,942 (29,052) 946,808 1,590,786
-------------- ------------- -------------- -------------
Increase/(decrease) in cash and cash equivalents (117,129) (440,321) 211,897 (136,146)
Cash and cash equivalents, beginning of period 582,244 921,043 253,218 616,868
-------------- ------------- -------------- -------------
Cash and cash equivalents, end of period $ 465,115 $ 480,722 $ 465,115 $ 480,722
============== ============= ============== =============
</TABLE>
Unaudited - Prepared by Management
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
SEPTEMBER 30, 1996
1. NATURE OF OPERATIONS
Allegiant Technologies Inc. was incorporated in the State of Washington on
December 28, 1993 and was registered to carry on business in the State of
California on March 23, 1994.
The Company's principal line of business is developing, marketing and
supporting interactive multimedia development software.
2. SIGNIFICANT ACCOUNTING POLICIES
Inventories
Inventories consists primarily of software media, manuals and related
packing materials. Inventories are valued at standard cost, which
approximates the lower of cost, determined on a first-in, first-out
basis, or market.
Capital assets
Capital assets are recorded at cost. Depreciation is provided over the
estimated useful lives ranging from three to seven years using the
straight-line method.
Intangible assets
Intangible assets are recorded at cost. Amortization is provided over
the estimated useful lives of five years using the straight-line method.
Management evaluates the future realization of intangible assets
quarterly and writes down any amounts that management deems unlikely to
be recorded through future product sales. To date no write downs have
been recorded to intangible assets.
Deferred costs
Deferred costs will be offset against the proceeds of equity financing
or amortized over the period of debt financing.
Capitalized software costs
Financial accounting standards provide for capitalization of certain
software development costs after technical feasibility of the software
is attained. No such costs were capitalized in the first or second
quarter of 1995 or 1996 because the impact on the financial statements
would not be material.
Revenue Recognition
Revenue is derived from product sales and licenses, maintenance
contracts and consulting, training and other services. Revenues from
product sales and licenses are recognized upon shipment of the products.
Revenue from software maintenance contracts is recognized on a
straight-line basis over the term of the contract, generally one year.
Revenue from consulting, training and other services are recognized in
the period in which services are performed. To the extent that an
engagement is projected to be completed at a loss, a provision for the
full amount of the loss is provided at that time.
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
SEPTEMBER 30, 1996
2. SIGNIFICANT ACCOUNTING PRINCIPLES (cont'd.....)
Revenue Recognition (cont'd.....)
The Company may enter into agreements whereby it licenses products or
provides customers the right to multiple copies. Such agreements
generally provide for non-refundable fixed fees which are recognized at
delivery of the product master or the first copy. Per copy royalties in
excess of the fixed minimum amounts and refundable license fees are
recognized as revenue when such amounts are reported to the Company and
no longer refundable.
The Company will sell its products throughout the world, however the
most significant geographical area is the United States. The Company
performs ongoing credit evaluations of its customers and generally does
not require collateral on domestic sales. The Company maintains an
allowance for potential credit losses. Additionally, the Company
maintains an allowance for anticipated returns on products sold to
distributors and direct customers.
Foreign currency translation
The Company translates foreign currency transactions and balances using
the temporal method. Under this method, monetary assets and liabilities
are translated at period-end rates whereas non-monetary assets and
liabilities are recorded at rates prevailing at the transaction dates.
Revenue and expenses are translated at the average monthly rate
throughout the period. Currency gains and losses are reflected in the
results of operations for the periods and were not significant.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified
to conform with the 1996 presentation.
Income taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. ("SFAS") 109, "Accounting for Income Taxes".
New accounting standards
In March 1995, the Financial Accounting Standards Board issued SFAS 121,
"Accounting for Impairment of Long- Lived Assets and for Long-Lived
Assets to be Disposed Of", effective for fiscal years beginning after
December 15, 1995. SFAS 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. SFAS 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company does not believe, based on current
circumstances, the effect of adoption of SFAS 121 will be material.
There was no impact from the adoption of SFAS 121 in 1996.
In October 1995, the Financial Accounting Standards Board issued SFAS
123, "Accounting for Stock-Based Compensation", effective for fiscal
years beginning after December 15, 1995. SFAS 123 establishes the fair
value based method of accounting for stock-based compensation
arrangements, under which compensation cost is determined using the fair
value of the stock option at the grant date and is recognized over the
periods in which the related services are rendered. If the Company were
to retain its current intrinsic value based method, as allowed by SFAS
123, it will be required to disclose the pro forma effect of adopting
the fair value based method in its December 31, 1996 financial
statements. The Company does not plan to adopt the fair value based
method.
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
SEPTEMBER 30, 1996
2. SIGNIFICANT ACCOUNTING PRINCIPLES (cont'd.....)
United States Generally Accepted Accounting Principles
Accounting under United States and Canadian generally accepted
accounting principles is substantially the same with respect to the
accounting principles used by the Company in the preparation of these
financial statements.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
September 30
------------------------------
1995 1996
-------------- -------------
<S> <C> <C>
Capital assets consist of:
Furniture and fixtures $ 114,933 $ 154,240
Office equipment 24,091 22,290
Computer equipment 122,170 189,700
-------------- -------------
261,194 366,230
Accumulated depreciation (38,297) (109,110)
-------------- -------------
$ 222,897 $ 257,120
============== =============
</TABLE>
4. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
September 30
------------------------------
1995 1996
-------------- -------------
<S> <C> <C>
Intangible assets consist of:
Acquisition costs of software $ 498,000 $ 498,000
Royalty buyout 100,000 100,000
-------------- -------------
598,000 598,000
Accumulated amortization (182,664) (307,260)
-------------- -------------
$ 415,336 $ 290,740
============== =============
</TABLE>
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
SEPTEMBER 30, 1996
5. NOTES PAYABLE
<TABLE>
<CAPTION>
September 30
------------------------------
1995 1996
-------------- -------------
<S> <C> <C>
Note payable on buyout of royalty, payable over two years in equal
monthly installments commencing March 1, 1995 with
interest at 9% per annum. $ 72,654 $ 22,335
Less: current portion (50,319) (22,335)
-------------- -------------
Notes payable less current portion $ 22,335 $ -
============== ==========
</TABLE>
6. DEBENTURES PAYABLE
<TABLE>
<CAPTION>
September 30
------------------------------
1995 1996
-------------- -------------
<S> <C> <C>
The Company has issued debentures in the aggregate amount of $500,000
which may be converted into Units of the Issuer at a price of $1.70
per Unit until December 18, 1996 and thereafter at $1.96 until
December 18, 1997, at the option of the holder. Each Unit consists of
one common share and one share purchase warrant entitling the holder
to purchase an additional common share at $1.70 until December 18,
1996 and thereafter at $1.96 until December 18, 1997. The debentures,
if not converted into Units, are due on December 18, 1997. The
debentures are secured by a
general charge over the assets of the Company. $ - $ 500,000
Less unamortized discount - (4,225)
-------------- -------------
$ - $ 495,775
============== =============
</TABLE>
7. COMMITMENTS
Lease
The Company leases office space. Minimum lease payments are as follows:
1996 $ 47,808
1997 147,630
1998 123,377
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
SEPTEMBER 30, 1996
8. INCOME TAXES
A valuation allowance has been recognized to offset the deferred tax
assets resulting from net operating loss carry forwards and research tax
credits as realization of such assets is uncertain.
9. CAPITAL STOCK
Authorized
50,000,000 preferred stock, par value $0.01 per share. The Board of
Directors has the authority to divide the shares into
one or more series and to determine their attributes at
the time of issuance.
100,000,000 common stock, par value $0.01 per share
Included in issued and outstanding shares are 2,000,000 performance
shares to be released from escrow on the basis of 1 share for every
$0.52 Cdn of pre-tax cash earned by the Company. Of the performance
shares, 675,000 shares have further vesting provisions attached to them
in addition to the earn-out provisions. The value of these performance
shares will be charged to expense at the time of their release from
escrow.
The Company granted directors and employees stock options to purchase
1,610,000 common shares of the Company.
The option price varies from $1.40 Cdn to $3.66 Cdn and the option
expiry dates range from May 24, 2000 to December 8, 2000.
The Company has outstanding share purchase warrants entitling the
holders to purchase common shares of the Company as follows:
<TABLE>
<CAPTION>
Number Exercise Price Expiry Date
<S> <C> <C>
88,235 $1.70 - $1.96 December 18, 1997
81,500 $2.30 April 25, 1998
150,000 Cdn $3.15 - $3.62 April 25, 1998
407,500 $2.30 Apriil 25, 1998
=============================================================================================
</TABLE>
10. RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 1996, the Company paid
$22,500 (1995 - $22,500) in management fees to a company controlled by
certain directors of the Company.
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in United States Dollars)
SEPTEMBER 30, 1996
11. SEGMENTED INFORMATION
Substantially all the Company's operations, employees and assets are
located in the United States.
A significant portion of the Company's sales are to customers in foreign
countries. Sales for the three months and nine months ended September
30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- -----------------------------
1995 1996 1995 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Sales by geographical region:
Japan $ 1,765 $ 24,618 $ 85,116 $ 129,287
Europe 79,034 27,390 204,353 183,336
Other 49,155 - 109,842 73,433
------------ ------------ ------------- ------------
Total export sales 129,954 52,008 399,311 386,056
United States 442,763 191,621 1,417,757 767,369
------------ ------------ ------------- ------------
Net sales $ 572,717 $ 243,629 $ 1,817,068 $ 1,153,425
============ ============ ============= ============
</TABLE>
Unaudited.
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
Overview
This section contains forward-looking statements regarding the Company's
business and financial condition. No assurance can be given that actual results
of operations will not differ materially from the forward-looking statements
contained herein.
The Company has a limited history of operations. It was incorporated on December
28, 1993, acquired SuperCard together with its customer franchise, from Aldus
Corporation ("Aldus") on February 4, 1994, and released its first product
upgrade in June 1994. The Company has incurred substantial start-up expenses and
planned development and infrastructure expenditures necessary to position the
company for future growth, which has resulted in cumulative net losses to
September 30, 1996 of $3,623,147. The Company's revenues to date have been
substantially derived from the sale of SuperCard. The sale of Marionet, the
Company's Internet scripting tool and its second product offering, commenced in
January 1996. There can be no assurance that product sales will either continue
at historical rates or increase or achieve market acceptance. The company's
historical rate of growth should not be taken as indicative of growth rates that
can be expected in the future.
Substantially all of the revenues of the Company from its inception to date are
from the sale or license of SuperCard. The Company expects that its revenues
will continue to be dependent upon SuperCard and that competition for SuperCard
will intensify in the future. A decline in the sales of SuperCard, as a result
of competition, technological change or other factors, would have a material
adverse effect on the Company's results of operation. Currently, SuperCard is
only fully functional on the Macintosh computer. Although the Company plans to
release a version of SuperCard for the Windows operating system, a decline in
the sales rate of a multimedia-capable Macintosh computers could have a material
adverse effect on the Company's results of operations. Until the Company
releases a version of SuperCard for the Windows operating system, the future of
SuperCard and its economic viability will be tied to the perception of software
developers regarding the utility of developing software for Macintosh and other
Apple computers.
The Company expects to continue to increase expenses primarily in the areas of
marketing and software engineering as part of a strategy to increase market
share, expand the number of markets in which the Company's products are sold and
facilitate new product development. There can be no assurance that the Company's
business strategies will be successful.
To date, the Company expensed all of its software development costs and
amortized purchased intangibles over five years on a straight-line basis. See
Notes to the Financial Statements for a complete description of the Company's
accounting policies.
- continued -
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
continued.....
Results of Operations
The following table sets forth, for the periods indicated, certain operating
data as a percentage of net revenue.
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
September 30, September 30,
1995 1996 1995 1996
------------ ------------ ------------- --------
<S> <C> <C> <C> <C>
Revenue:
Net product sales 99% 98% 90% 98%
Service fees and royalty income 1 2 10 2
------------ ------------ ------------- ------------
Net revenue 100 100 100 100
Cost of revenue 22 23 25 22
------------ ------------ ------------- ------------
Gross profit 78 77 75 78
------------ ------------ ------------- ------------
Expenses:
Sales and marketing 62 120 48 108
Research and development 33 102 23 63
General and administrative 39 92 31 64
Amortization 4 13 5 9
------------ ------------ ------------- ------------
Total operating expenses 138 327 107 244
------------ ------------ ------------- ------------
Loss from operations (60) (250) (32) (166)
Net interest income (expense) 2 1 1 (2)
------------ ------------ ------------- ------------
Net loss (58)% (249)% (47)% (168)%
============ ============ ============== ============
</TABLE>
- continued -
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
continued.....
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net revenue includes revenues from sales of software products and services,
less reserves for anticipated product returns and future vendor support
services. Total net revenues decreased by 36.5% from $1,817,068 for the nine
months ended September 30, 1995 to $1,153,425 for the nine months ended
September 30, 1996. The decrease is due to the following factors: (1) revenues
for the first nine months of 1995 include a non recurring non-refundable advance
royalty of $100,000, (2) net product sales during the first nine months of 1995
were from the sale of SuperCard version 2.0 which was at the beginning of a
product upgrade cycle whereas sales for 1996 were substantially from the sale of
version 2.5 which was at the end of a product upgrade cycle, (3) the announced
changes at Apple Computer negatively affected purchasing decisions because the
Company's products are currently dependent on the Macintosh operating platform,
and (4) the Company increased its reserves in 1996 for anticipated products
returns and future vendor support services to 10% of gross product revenues from
less than 5%, based on its recent historical product return experience. The
initial sales of Marionet, which was introduced in the first quarter of 1996,
were slower than expected. Financing delays prevented the Company from
undertaking its planned marketing program to increase market awareness. The
Company is reviewing its current business model and market emphasis to determine
the most expeditious means to maximize revenues from the sale or license of
Marionet technology.
Cost of revenue includes the cost of manuals, diskettes and their duplication,
packaging materials, assembly, paper goods, bundled products, and shipping as
well as royalties and reserves for inventory obsolescence. Cost of revenue
decreased from $452,784 to $349,037 (25% of net revenues to 22%) for the first
nine months of 1996 as compared to 1995. The decrease is primarily due to the
change in costs associated with other vendor products that were bundled with
SuperCard from time to time.
Sales and marketing expenses include the costs of advertising, promotion, trade
shows and printed collateral materials, salaries and the costs of contracted
services. Total sales and marketing costs increased from $874,407 to $1,248,711
(48% of net revenues to 10%) for the first nine months of 1996 as compared to
1995. The increase is due to the following factors: (1) the Company
substantially increased its presence at the MacWorld conferences and other trade
shows to properly position the Company within the industry; (2) it increased its
staff levels from 19 employees at the end of the first quarter of 1995 to 29
employees to facilitate planned growth; (3) it commenced a roll out program for
its first Windows product which was delayed as a result of financing delays and
technology changes; (4) it incurred approximately $150,000 in introductory
marketing costs associated with the introduction of Marionet. The Company is
reviewing its marketing plans and infrastructure costs in relation to its
current product development plans and its available working capital.
- continued -
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
continued.....
Research and development expenditures consisted of personnel expenses, costs of
independent contractors and supplies required to conduct the Company's
development efforts. Research and development expenditures increased from
$420,723 to $735,786 (from 23% of net revenues to 63%) for the first nine months
of 1996 as compared to 1995. The increase in research and development costs is
directly attributable to the increase in engineering staff necessary to complete
the Company's current product development plan.
General and administrative expenses consist primarily of the costs of the
Company's finance and administrative personnel, including the chief executive
officer. General and administrative expenses increased from $556,277 to $732,770
(31% of net revenues to 64%) for the first nine months of 1996 as compared to
1995. The increase in general and administrative expenses is not attributable to
any particular factor. The Company increased staffing and required larger
premises. The percentage change is primarily the result of a decrease in net
revenues.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Total net revenues decreased by 57% from $572,717 for the three months ended
September 30, 1995 to $243,629 for the three months ended September 30, 1996.
The decrease is due to the fact that net product sales during the third quarter
of 1995 were from the sale of SuperCard version 2.0, which was at the beginning
of a product upgrade cycle, whereas sales for 1996 were substantially from the
sale of version 2.5 which was at the end of a product upgrade cycle.
Cost of revenue, as a percentage of net revenues, remained constant for the
third quarter of 1996 as compared to 1995.
Total sales and marketing costs decreased minimally from $345,241 to $293,027
for the third quarter of 1996 as compared to 1995. The costs are substantially
represented by fixed costs associated with the sales and marketing department.
Research and development expenditures increased from $187,705 to $249,754 for
the third quarter of 1996 as compared to 1995. The increase in research and
development costs is directly attributable to the increase in engineering staff
necessary to complete the Company's current product development plan.
General and administrative expenses, substantially represented by fixed costs,
were approximately the same for the third quarter of 1996 as compared to 1995.
The Company increased staffing and required larger premises. The percentage
change is primarily the result of a decrease in net revenues.
- continued -
<PAGE>
ALLEGIANT TECHNOLOGIES INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1996
continued.....
Liquidity and Capital Resources
Since inception, the Company has financed its operations through a combination
of equity and convertible debt placements. As of September 30, 1996 the Company
had cash equivalents of $465,115 and working capital of $572,442. Based on its
current staffing levels and product developments schedule, the Company believes
that its existing working capital and funds anticipated to be derived from
operations will satisfy the Company's projected working capital and capital
expenditure requirements through December 31, 1996. The Company's primary future
needs for capital are for expanded product development, marketing and selling
expenses and working capital to finance inventories and accounts receivable for
sales growth. The Company's working capital requirements may vary depending upon
numerous factors including the progress of the Company's product development,
competitive and technological advances, marketing acceptance of the Company's
products and other factors.
The Company is seeking additional funding through public or private sales of
securities, including equity securities and is negotiating for the conversion of
outstanding debentures into common shares of the Company. There are no
assurances the Company will be successful in securing additional funding or in
its negotiations with the holders of the debentures.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None filed during the period ended September 30, 1996.
Items 1, 2, 3, 4, AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on November 6, 1996.
ALLEGIANT TECHNOLOGIES INC.
By: /s/ Joel Staadecker
Joel Staddecker President and
Chief Executive Officer
DATE: November 6, 1996
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