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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
__________________________________________________________________
For the Quarter ended: June 30, 1996 Commission File Number 0-25838
US ORDER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1551807
(State of incorporation) (I.R.S. Employer Identification Number)
13873 Park Center Road, Suite 353, Herndon, VA 20171
(Address of Principal Executive Offices)
(703) 834-9480
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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
The number of shares of the registrant's Common Stock outstanding on July 31,
1996 was 15,887,407.
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US ORDER, INC.
JUNE 1996 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Condensed Balance Sheets, June 30,
1996 and December 31, 1995.................................................................. 3
Condensed Statements of Operations
Three Months Ended June 30, 1996 and 1995 .................................................. 5
Condensed Statements of Operations
Six Months Ended June 30, 1996 and 1995..................................................... 6
Condensed Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995..................................................... 7
Notes to Condensed Financial Statements .................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................................. 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................ 22
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
US ORDER, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
<CAPTION>
(Unaudited)
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 17,119,594 $ 25,120,109
Short-term investments 2,500,000 --
Accounts receivable, net of allowance for doubtful accounts of $98,900
and $63,700 in 1996 and 1995, respectively 328,129 840,601
Prepaid expenses 292,475 99,863
Due from affiliates, net 73,567 206,074
Inventory 713,749 801,551
----------- -----------
Total current assets 21,027,514 27,068,198
----------- -----------
ASSETS HELD FOR SALE 23,510 74,460
----------- -----------
PROPERTY AND EQUIPMENT
Terminals 1,248,193 1,526,116
Computer equipment 1,936,210 1,336,236
Furniture and fixtures 645,489 397,710
Leasehold improvements 128,142 95,286
----------- -----------
Total property and equipment 3,958,034 3,355,348
Less accumulated depreciation and amortization (1,881,100) (1,907,010)
----------- -----------
Net property and equipment 2,076,934 1,448,338
----------- -----------
RESTRICTED CASH 4,309,000 3,309,000
LONG-TERM INVESTMENT 2,539,802 3,392,500
INVESTMENT IN AFFILIATE, NET 3,940,873 4,834,838
OTHER ASSETS 371,428 125,067
----------- -----------
TOTAL ASSETS $ 34,289,061 $ 40,252,401
============ ============
(continued)
</TABLE>
See accompanying notes to condensed financial statements.
3
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US ORDER, INC.
CONDENSED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,196,622 $ 1,694,871
Accrued wages and taxes payable 625,999 781,566
Deferred income -- 4,800
Obligations under capital leases -- current installments 11,864 19,019
------------ -----------
Total current liabilities 1,834,485 2,500,256
------------ ------------
LONG-TERM OBLIGATIONS
Obligations under capital leases, net of current installments 5,181 7,214
Other 9,375 11,607
------------ ------------
Total long-term obligations 14,556 18,821
------------ ------------
TOTAL LIABILITIES 1,849,041 2,519,077
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 5,000,000 shares authorized;
none issued or outstanding -- --
Common stock, $0.001 par value; authorized 30,000,000 shares;
15,887,007 and 15,529,818 shares issued and outstanding in
1996 and 1995, respectively 15,887 15,530
Additional paid-in capital 62,333,835 61,649,819
Receivable from sale of stock (2,488,240) (2,488,240)
Deferred compensation (191,481) (260,190)
Unrealized losses on investment (852,698) --
Accumulated deficit (26,377,283) (21,183,595)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 32,440,020 37,733,324
------------ ------------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,289,061 $ 40,252,401
=========== ============
</TABLE>
See accompanying notes to condensed financial statements.
4
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US ORDER, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the 3 months ended
June 30,
-----------------------
1996 1995
---- ----
<S> <C> <C>
REVENUE
Service fees $ 478,912 $ 412,114
Product sales 62,373 532,675
Miscellaneous 6,868 2,544
----------- -----------
Total revenue 548,153 947,333
----------- -----------
COST OF REVENUE
Service fees 261,013 266,917
Product sales 80,632 531,378
----------- -----------
Total cost of revenue 341,645 798,295
----------- -----------
Gross margin 206,508 149,038
OPERATING EXPENSES
Research and development 616,565 198,177
Selling, general and administrative 2,680,855 1,168,504
Advertising and promotion 53,966 1,916
----------- -----------
Total operating expenses 3,351,386 1,368,597
----------- -----------
Operating loss (3,144,878) (1,219,559)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 333,366 112,770
Interest expense (328) (123,854)
Other, net 73,599 --
Equity in loss of affiliate (467,629) --
----------- -----------
Total other income (expense) (60,992) (11,084)
----------- -----------
Net income (loss) (3,205,870) (1,230,643)
Preferred dividend requirement -- (293,048)
----------- -----------
Net income (loss) applicable to common shareholders $ (3,205,870) $ (1,523,691)
=========== ===========
Net income (loss) per common share $ (0.20) $ (0.20)
=========== ===========
Shares used for computation of net income (loss) per
common share 15,881,587 7,662,191
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
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US ORDER, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the 6 months ended
June 30,
1996 1995
---- ----
<S> <C> <C>
REVENUE
Service fees $ 1,027,853 $ 870,755
Product sales 837,063 812,977
Miscellaneous 9,344 8,293
------------ ------------
Total revenue 1,874,260 1,692,025
------------ ------------
COST OF REVENUE
Service fees 578,982 598,547
Product sales 692,449 798,071
------------ ------------
Total cost of revenue 1,271,431 1,396,618
------------ ------------
Gross margin 602,829 295,407
OPERATING EXPENSES
Research and development 1,175,876 507,076
Selling, general and administrative 4,522,081 2,232,039
Advertising and promotion 82,413 6,625
------------ ------------
Total operating expenses 5,780,370 2,745,740
------------ ------------
Operating loss (5,177,541) (2,450,333)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 693,103 127,254
Interest expense (717) (278,520)
Other, net 185,432 1,954
Equity in loss of affiliate (893,965) --
------------ ------------
Total other income (expense) (16,147) (149,312)
------------ ------------
Net income (loss) (5,193,688) (2,599,645)
Preferred dividend requirement -- (680,906)
------------ ------------
Net income (loss) applicable to common shareholders $ (5,193,688) $ (3,280,551)
============ ============
Net income (loss) per common share $ (0.33) $ (0.51)
============ ============
Shares used for computation of net income (loss) per
common share 15,832,509 6,419,880
============ ===========
</TABLE>
See accompanying notes to condensed financial statements.
6
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US ORDER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the 6 months ended
June 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (5,193,688) $ (2,599,645)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization 203,097 290,276
Equity in loss of affiliate 893,965 --
Deferred compensation expense 68,709 92,309
Gain on sale of assets (185,432) (1,954)
Write-down of assets held for resale 50,000 --
Changes in certain assets and liabilities, net of effects of non-cash
transactions:
Decrease (increase) in accounts receivable 512,472 (342,628)
Decrease (increase) in prepaid expenses (192,612) 230,567
Decrease (increase) in inventory 87,802 (132,648)
Decrease (increase) in other assets (246,361) 6,797
Decrease in accounts payable and accrued expenses (498,249) (426,867)
Increase (decrease) in accrued wages and taxes payable (155,567) 105,936
Decrease (increase) in due from affiliates 162,507 (135,177)
Increase (decrease) in deferred revenue (4,800) 150,000
------------ -------------
Net cash used by operating activities (4,498,157) (2,763,034)
------------ -------------
Cash flows from investing activities
Purchases of property and equipment (1,020,928) (337,348)
Proceeds from sale of property and equipment 157,000 --
Increase in restricted cash (1,000,000) --
Purchase of short-term investments (2,500,000) --
Proceeds from sale of terminals and terminal components 186,384 346,843
------------ -------------
Net cash provided (used) by investing activities (4,177,544) 9,495
------------ -------------
Cash flows from financing activities
Proceeds from issuances of common stock, net of discount 684,373 42,140,674
Expenses from the issuance of common stock -- (340,000)
Redemption of Series B preferred stock -- (4,924,646)
Repayment of debt -- (4,632,570)
Principal payments under capital lease obligations (9,187) (315,503)
Payment of dividends -- (2,683,783)
------------ -------------
Net cash provided by financing activities 675,186 29,244,172
------------ -------------
Increase (decrease) in cash and cash equivalents (8,000,515) 26,490,633
Cash and cash equivalents, beginning of period 25,120,109 2,567,838
------------ -------------
Cash and cash equivalents, end of period $ 17,119,594 $ 29,058,471
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
7
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US ORDER, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The condensed balance sheet of US Order, Inc. ("US Order" or the
"Company") as of June 30, 1996, and the related condensed statements of
operations and cash flows for the three and six month periods ended June
30, 1996 and 1995, are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements
have been included. Such adjustments consist only of normal recurring
items. Interim results are not necessarily indicative of results for a full
year.
The condensed financial statements and notes are presented as required
by Form 10-Q, and do not contain certain information included in the
Company's annual audited financial statements and notes. These financial
statements should be read in conjunction with the annual audited financial
statements and the notes thereto, together with management's discussion and
analysis of financial condition and results of operations, contained in the
Company's Form 10-K for the fiscal year ended December 31, 1995.
Certain amounts have been reclassified to conform to the current year
presentation.
(2) Revenue Recognition
The Company recognizes service revenue as the services are provided
and product revenue upon the passage of title. The Company's customers for
its products frequently request, for their convenience, that the Company
maintain storage of these products for a period of time following the date
of sale. Under these arrangements, which are based on written,
noncancellable orders, the Company recognizes revenue upon the completion
of integration of software applications and upon the passage of title to
the customer. Amounts due to the Company from customers under these
arrangements are invoiced upon passage of title or delivery to a special
holding area for the customer and are due under normal and customary credit
terms. The Company also licenses its home banking software directly to end
users and recognizes the related revenue upon shipment of the product to
the customer.
(3) Short-Term Investment
Short-term investments consist of commercial paper with original
maturities beyond three months and less than twelve months. These
investments are readily convertible to cash and are stated at cost, which
approximates fair market value.
8
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(4) Long-Term Investment
On April 6, 1995, the Company entered into a stock exchange agreement
with Colonial Data, a strategic alliance partner. As part of the agreement,
the Company agreed to exchange $3,000,000 of its restricted common stock on
April 15, 1996 for $3,000,000 of Colonial Data's unregistered common stock,
subject to certain limitations. The agreement was modified on April 1, 1996
to change the date of the exchange from April 15, 1996 to July 15, 1996 and
was modified again on July 10, 1996 to change the date of exchange from
July 15, 1996 to October 15, 1996. All other provisions of the stock
exchange agreement continue in full force and effect. Each company's stock
will be valued at the average closing price of their respective common
stock as reported on the Nasdaq National Market, for each of the twenty
trading days prior to October 10, 1996. Both companies will have certain
"piggyback" registration rights and rights of first refusal with respect to
each others' stock. On August 5, 1996, the Company and Colonial Data
entered into an Agreement and Plan of Merger. See Note 7. As a result of
that agreement, the stock exchanges pursuant to the April 6, 1995 stock
exchange agreement with Colonial Data, as modified, have been postponed,
pending consummation of the merger.
The terms of the Company's long-term investment in the common stock of
Colonial Data Technologies Corp. ("Colonial Data") restricts the Company
from selling such stock until June 8, 1997. As of June 8, 1996, Financial
Accounting Standards Board Statement of Financial Accounting Standard No.
115, Accounting for Certain Investments in Debt and Equity Securities
("Statement 115"), became applicable to this investment. The Company has
classified this investment as "available for sale" under the guidance of
Statement 115 and is carrying the investment at fair value, based on the
quoted market value. As of June 30, 1996, an unrealized loss of $852,698 on
this investment has been recognized due to a decline in the market value of
Colonial Data's stock, and this unrealized loss is carried as a separate
component of stockholders' equity. As of July 31, 1996, the unrealized loss
on this investment was $1,579,373 as the market value of Colonial Data's
stock continued to decline. The Company believes that the market decline in
Colonial Data's stock is temporary and is continuing to carry the
unrealized loss on this investment as a separate component of stockholders'
equity.
(5) Lines of Credit
In May 1996, the Company entered into two credit agreements with the
same bank that provide for borrowings up to $5,000,000. The first credit
agreement covers the period May 1996 through May 1997 and is a revolving
line of credit of $1,000,000 that is fully collateralized by a bank
certificate of deposit. The second credit agreement is a $4,000,000 line of
credit utilized for the purpose of issuing letters of credit. The advances
and/or face amounts of letters of credit issued under this agreement are
collateralized by either 100% of pledged certificates of deposit or 90% of
pledged Treasury investments acceptable to the bank. These agreements
provide for various interest rates at the Company's election and do not
have a commitment fee on the unused portion of the credit lines. These
agreements also contain certain conditions including, but not limited to,
restrictions related to cash and cash equivalent balances, net worth,
9
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indebtedness, and loans or advances to other entities, as well as
restrictions with respect to acquisitions and the sale of assets. As of
June 30, 1996 and July 31, 1996, the Company had no borrowings or advances
against the $1 million revolving line of credit, but had committed
$3,309,000 of the $4 million letter of credit line through the issuance of
a letter of credit to Standard Telecommunications Ltd. ("STL") through
December 31, 1996. This letter of credit was issued by the Company for a
commitment to purchase from STL approximately $3,300,000 of its next
generation smart telephones for delivery in 1996. These credit agreements
are collateralized by bank certificates of deposit totaling $4,309,000
which are included in restricted cash in the accompanying balance sheet as
of June 30, 1996.
(6) New Accounting Standards
On January 1, 1996, the Company adopted Financial Accounting Standards
Board Statements of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of ('Statement 121") and No. 123, Accounting for Stock-based
Compensation ("Statement 123"). Statement 121 requires that the Company
review its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. To the extent that the future undiscounted net cash flows
expected to be generated from an asset are less than the carrying amount of
the asset, an impairment loss will be recognized based on the difference
between the asset's carrying amount and its fair market value. The adoption
of Statement 121 had no impact on the accompanying financial statements.
Statement 123 recommends, but does not require, the adoption of a fair
value based method of accounting for stock-based compensation to employees,
including common stock options. The Company has elected to continue
recording stock-based compensation to employees under the intrinsic value
method of accounting for stock-based compensation to employees, as
permitted by Statement 123. Certain pro forma disclosures will be included
in the Company's Form 10-K for the year ending December 31, 1996 as if the
fair value based method had been adopted.
(7) Other Events
On August 5, 1996, the Company and Colonial Data entered into an
Agreement and Plan of Merger pursuant to which the Company and Colonial
Data will be merged with and into a new public company expected to be named
TriTech Corporation ("TriTech"). Under the terms of the Agreement, upon
consummation of the Merger, each outstanding share of common stock of the
Company, $.001 par value, will be converted into one share of common stock
of TriTech, and each outstanding share of common stock of Colonial Data,
$.01 par value, will be converted into one share of TriTech Common Stock.
10
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The Boards of Directors of the Company and Colonial Data have agreed
to recommend approval of the Merger to their respective stockholders. The
obligations of the Company and Colonial Data to consummate the Merger are
subject to the satisfaction of certain conditions set forth in the Merger
Agreement, including the approval of the Merger by the stockholders of the
Company and Colonial Data.
11
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was organized in 1990 to provide interactive applications
(including home banking and home shopping) primarily to individual customers on
a smart telephone.
On August 1, 1994, the Company sold its electronic banking and bill pay
operations to Visa International Services Association ("Visa") for approximately
$15 million, the assumption of certain liabilities and the right to receive
certain royalties during a 72 month period commencing January 1, 1995. In
addition, Visa designated the Company as a "preferred provider" through the
72-month royalty period and, as such, will make its member banks aware that the
Company can provide certain of its interactive applications, customer support
services and smart telephones to Visa member banks. In January 1995, the Company
entered into a strategic alliance with a leading manufacturer of Caller ID
units, Colonial Data, to jointly develop and distribute the Company's next
generation of smart telephones to the telecommunications industry. The Company
expects to begin shipping its next generation smart telephones during the third
quarter of 1996. This next generation smart telephone is sold under the brand
name "Intelifone" in the retail and paging channels and as the "Telesmart 4000"
in the telecommunications channel.
On October 19, 1995, the Company completed a transaction to acquire a 40%
equity interest in Home Financial Network, Inc. ("HomeNet"), a newly formed,
development stage personal computer company that plans to develop and deliver
electronic financial products and services for consumers. At closing, the
Company exchanged 296,746 shares of its common stock, valued at approximately $5
million, for 40% of HomeNet. In April 1996, Fleet Venture Resources, Inc.
acquired a 3.8% equity interest in HomeNet for $1 million, and as a result, the
Company's equity interest in HomeNet was reduced to approximately 39%. The
Company believes that its investment in HomeNet will complement its home banking
strategy by adding a personal computer based application to the current smart
telephone and touch-tone applications that the Company offers. The Company
expects HomeNet to incur operating losses at least through 1996 of which the
Company will record its proportionate share.
To date, the Company has generated limited revenue. As a result of its
strategic relationships in the home banking and smart telephone markets, the
Company will generate revenue by selling its home banking products and smart
telephones, as well as by generating monthly fees for providing ongoing
services, including interactive applications and customer support services.
Revenue from product sales will primarily be dependent on the success of the
Company's two largest strategic partners, Visa InterActive and Colonial Data, in
marketing and selling the products in the banking and smart telephone channels.
In addition, the Company has the right to receive on a quarterly basis from Visa
$0.666 per month per active bill pay customer that uses the Visa Bill-Pay System
through December 31, 2000. This payment from Visa is subject to certain
12
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limitations, including a reduction in the royalty payment for each quarter
beginning January 1, 1995 through December 31, 1997 by an offset amount (the
"Visa Offset"). The Visa Offset, initially set at $73,315 per quarter,
accumulates quarterly up to an aggregate of $879,780. The Company has not
received any revenue from these Visa royalty payments through June 30, 1996 and
does not expect to receive any revenue from these payments, after application of
the Visa Offset, through at least the remainder of 1996.
On August 5, 1996, the Company and Colonial Data entered into an Agreement
and Plan of Merger pursuant to which the Company and Colonial Data will be
merged with and into a new public company expected to be named TriTech
Corporation ("TriTech"). Under the terms of the Agreement, upon consummation of
the Merger, each outstanding share of common stock of the Company, $.001 par
value, will be converted into one share of common stock of TriTech, and each
outstanding share of common stock of Colonial Data, $.01 par value, will be
converted into one share of TriTech Common Stock.
The Boards of Directors of the Company and Colonial Data have agreed to
recommend approval of the Merger to their respective stockholders. The
obligations of the Company and Colonial Data to consummate the Merger are
subject to the satisfaction of certain conditions set forth in the Merger
Agreement, including the approval of the Merger by the stockholders of the
Company and Colonial Data.
Results of Operations
Three months ended June 30, 1996 and 1995
Revenue
The Company's second quarter revenues decreased by $399,180 from $947,333
in 1995 to $548,153 for the same period in 1996. Product revenues decreased by
$470,302 between periods, from $532,675 in the second quarter of 1995 to $62,373
for the same period in 1996. The decrease in product revenues was primarily due
to the Company not shipping any of its next generation smart telephones, the
Intelifone or the Telesmart 4000, during the second quarter of 1996. The Company
expects to begin shipping its next generation smart telephones during the third
quarter of 1996. The product revenues generated in the second quarter of 1995
were from the sale of the Company's previous generation PhonePlus smart
telephones. Service fees revenue for the second quarter of 1996 totaled $478,912
compared to $412,114 in the same period in 1995, an increase of $66,798. Service
fees revenue were generated primarily from two sources: (1) customer support
services and (2) monthly service fees. The Company's customer support services
revenue totaled $335,421 for the second quarter of 1996, an increase of $187,157
over the same period in 1995. These customer support services were remarketed by
Visa Interactive to Visa member banks under the Company's reseller agreement
with Visa Interactive. Monthly service fees totaled $139,857 for the second
quarter of 1996 as compared to $238,849 for the same period in 1995. These
service fee revenues are from customers who use the Company's smart telephones
and interactive applications, and the decrease of $98,992 was primarily due to
the Company's continuing efforts to convert these customers to Visa member
banks.
13
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Cost of Revenue
The Company's second quarter cost of revenue decreased by $456,650 from
$798,295 in 1995 to $341,645 for the same period in 1996. Product cost of
revenue decreased by $450,746 between periods, from $531,378 in the second
quarter of 1995 to $80,632 for the same period in 1996. This decrease is
primarily due to a decrease in sales of the Company's smart telephones resulting
from the transition from primarily selling the Company's PhonePlus smart
telephone to selling its next generation smart telephone, which the Company
expects to begin shipping during the third quarter of 1996. The Company's second
quarter service cost of revenue decreased by $5,904 from $266,917 in 1995 to
$261,013 for the same period in 1996. Service cost of revenue related to
generating monthly fee revenues decreased by $147,111, offsetting a $148,529
increase in costs related to providing customer support services to Visa, Visa
member banks and third parties. The service cost of revenues related to monthly
service fees decreased between periods due to the full depreciation in the
fourth quarter of 1995 of the smart telephones utilized to generate monthly fee
revenues and due to the continuing conversion of customers utilizing smart
telephones to Visa member banks. The increase in cost of revenue related to
customer service was a direct result of increased customer volume and revenue
from this source.
Gross margins for product sales were negligible for both of the quarters
ended June 30, 1996 and June 30, 1995. In addition, as a result of the change in
the composition of service fees revenue and the costs associated with service
fees revenue, gross margins related to service fees increased from 35% in the
second quarter of 1995 to 45% for the same period in 1996. The composition of
product revenues (consisting primarily of PhonePlus smart telephones in both
periods) and the increases in service fee gross margins between periods resulted
in overall gross margins increasing from 16% in the second quarter of 1995 to
38% in the second quarter of 1996. The Company expects that the cost of services
related to customer support will continue to increase throughout 1996 as the
Company develops the infrastructure to handle anticipated growth in business
related to providing customer service to Visa, Visa member banks and other third
parties. Furthermore, the Company expects its gross margin percentages to vary
in future periods based upon the revenue mix between product sales and service
revenues and based upon the composition of both service fee and product revenues
earned during the period.
Research and Development
Research and development costs were $616,565 in the second quarter of 1996
as compared to $198,177 for the same period in 1995. The increase of $418,388
was largely attributable to developing, designing and testing both the Company's
home banking connectivity products and support services and the Company's next
generation smart telephone and its associated interactive services. The Company
has been actively engaged in research and development since its inception and
expects that these activities will be essential to the operations of the Company
in the future.
14
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General and Administrative
General and administrative expenses were $2,680,855 for the second quarter
of 1996 as compared to $1,168,504 in the second quarter of 1995. The increase of
$1,512,351 was a result of the Company's hiring of additional staff and an
increase in costs associated with upgrading systems and operations in
anticipation of the potential of increased business later in 1996 resulting from
its alliances with its strategic partners, particularly related to the March
1996 Microsoft and Visa InterActive bill pay agreement, as well as from other
markets for the Company's smart telephone and home banking products and
services. The Company expects that general and administrative expenses will
continue to increase throughout 1996 as the Company develops the infrastructure
to handle increased business.
Advertising and Promotion
Advertising and promotion expenses increased between periods by $52,050,
from $1,916 in the second quarter of 1995 to $53,966 for the same period in
1996. During the second half of 1996, the Company expects to begin selling its
Intelifone smart telephone directly to retail stores and outlets and to paging
companies. The Company expects its advertising and promotion expenses to
increase substantially from the minimal expenditures incurred during the second
quarter (and first six months) of 1996 and during the fiscal year ended December
31, 1995 with the entrance of its next generation smart telephone into these
retail channels. The Company, however, does not expect its advertising and
promotion expenses to increase, on a per customer basis, to the levels
experienced during 1993 or 1994.
Interest Income
Interest income was $333,366 for the second quarter of 1996 compared to
$112,770 for the second quarter of 1995. The increase of $220,596 was due to the
significant increase in the Company's cash balances and short-term investments
resulting from its June 1995 initial public offering.
Interest Expense
The Company's interest expense in the second quarter of 1996 consisted of
interest incurred in connection with capital leases for computer equipment. The
Company's interest expense for the same period in 1995 consisted of interest
incurred in connection with capital leases for computer equipment and
outstanding borrowings with WorldCorp and VeriFone, Inc. ("VeriFone"). Interest
expense was $328 in the second quarter of 1996 compared to $123,854 in the
second quarter of 1995. The decrease of $123,526 was due to the Company retiring
substantially all of its long-term debt with proceeds derived from its initial
public offering in June 1995.
15
<PAGE>
Other, Net
Other income was $73,599 in the second quarter of 1996 as compared to $0
for the same period in 1995. This increase is due to income recognized from the
sale of the Company's earlier generation smart telephones, which the Company no
longer produces or markets, to a third party to be used as point of sale
terminals. These phones, which are utilized in generating monthly service fees,
were fully depreciated in the fourth quarter of 1995. The Company expects to
continue generating other income from the sale of these earlier generation smart
telephones through at least the remainder of 1996.
Equity in loss of affiliate
Equity in loss of affiliate was $467,629 in the second quarter of 1996
compared to $0 in the second quarter of 1995. The increase was due to the
Company recording its proportionate share of losses of HomeNet and the
amortization of the excess of the purchase price over the Company's share of the
equity in net assets of HomeNet, following the Company's investment in HomeNet
in October 1995. HomeNet is a newly formed, development stage personal computer
software company that plans to develop and deliver electronic financial products
and services to consumers. The Company expects HomeNet's operating losses to
continue through the remainder of 1996.
Six months ended June 30, 1996 and 1995
Revenue
The Company's revenues for the first six months of 1996 increased by
$182,235 from $1,692,025 in 1995 to $1,874,260 for the same period in 1996.
Product revenues increased by $24,086 between periods, from $812,977 in the
first six months of 1995 to $837,063 for the same period in 1996. Product
revenues from home banking connectivity products increased by $68,194 between
periods offsetting a $44,108 decrease in revenue from the sale of the Company's
smart telephones. The decrease in smart telephone product revenues between
periods resulted primarily from the transition from primarily selling the
Company's PhonePlus smart telephone to selling its next generation smart
telephone, which the Company expects to begin shipping during the third quarter
of 1996. Service fees revenue for the first six months of 1996 totaled
$1,027,853 compared to $870,755 in the same period in 1995, an increase of
$157,098. Service fees revenue were generated primarily from two sources: (1)
customer support services and (2) monthly service fees. The Company's customer
support services revenue totaled $715,644 for the first six months of 1996, an
increase of $376,011 over the same period in 1995. These customer support
services were remarketed by Visa Interactive to Visa member banks under the
Company's reseller agreement with Visa Interactive. Monthly service fees totaled
$304,295 for the first six months of 1996 as compared to $506,120 for the same
period in 1995. These service fee revenues are from customers who use the
Company's smart telephones and interactive applications, and the decrease of
$201,825 was primarily due to the Company's continuing efforts to convert these
customers to Visa member banks.
16
<PAGE>
Cost of Revenue
The Company's first six months cost of revenue decreased by $125,187, from
$1,396,618 in 1995 to $1,271,431 for the same period in 1996. Product cost of
revenue decreased by $105,622 between periods, from $798,071 in the first six
months of 1995 to $692,449 for the same period in 1996. This decrease is
primarily due to the composition of home banking product sales between hardware
and software licensing and a decrease in the sale of the Company's smart
telephones between periods. The decrease in smart telephone product sales
resulted from the transition from primarily selling the Company's PhonePlus
smart telephone product sales to selling its next generation smart telephone.
Service cost of revenues decreased between periods by $19,565 from $598,547 in
the first six months of 1995 to $578,982 for the same period in 1996. Service
cost of revenues related to generating monthly fee revenues decreased $323,263
between periods, offsetting a $309,038 increase in costs related to providing
customer support services to Visa, Visa member banks and third parties. The
service cost of revenues related to monthly service fees decreased between
periods due to the full depreciation in the fourth quarter of 1995 of the smart
telephones utilized to generate monthly fee revenues and due to the continuing
conversion of customers utilizing smart telephones to Visa member banks. The
increase in cost of revenue related to customer service was a direct result of
increased customer volume and revenue from this source.
Gross margins for product sales increased from 2% in the first six months
of 1995 to 17% for the same period in 1996 primarily as a result of the
composition of home banking and smart telephone product sales between hardware
and software licensing. In addition, as a result of the change in the
composition of service fees revenue and the costs associated with service fees
revenue, gross margins related to service fees increased from 31% in the first
six months of 1995 to 44% for the same period in 1996. The increases in both
product and service gross margins between periods resulted in overall gross
margins increasing from 17% in the first six months of 1995 to 32% in the first
six months of 1996. The Company expects that cost of services related to
customer support will continue to increase throughout 1996 as the Company
develops the infrastructure to handle anticipated growth in business related to
providing customer service to Visa, Visa member banks and other third parties.
Furthermore, the Company expects its gross margin percentages to vary in future
periods based upon the revenue mix between product sales and service revenues
and based upon the composition of both service fee and product revenues earned
during the period.
Research and Development
Research and development costs were $1,175,876 in the first six months of
1996 as compared to $507,076 for the same period in 1995. The increase of
$668,800 was largely attributable to developing, designing and testing both the
Company's home banking connectivity products and the Company's fourth generation
smart telephone and its associated interactive services. The Company has been
actively engaged in research and development since its inception and expects
that these activities will be essential to the operations of the Company in the
future.
17
<PAGE>
General and Administrative
General and administrative expenses were $4,522,081 for the first six
months of 1996 as compared to $2,232,039 in the same period in 1995. The
increase of $2,290,042 was a result of the Company's hiring of additional staff
and an increase in costs associated with upgrading systems and operations in
anticipation of the potential of increased business later in 1996 resulting from
its alliances with its strategic partners, particularly the March 1996 Microsoft
and Visa InterActive bill pay agreement, as well as from other markets for the
Company's smart telephone and home banking products and services. The Company
expects that general and administrative expenses will continue to increase
throughout 1996 and in the future to develop the infrastructure to handle
increased business.
Advertising and Promotion
Advertising and promotion expenses increased between periods by $75,788,
from $6,625 in the first six months of 1995 to $82,413 for the same period in
1996. During the second half of 1996, the Company expects to begin selling its
Intelifone smart telephone directly to retail stores and outlets and to paging
companies. The Company expects its advertising and promotion expenses to
increase substantially from the minimal expenditures incurred during the first
six months of 1996 and during the fiscal year ended December 31, 1995 with the
entrance of the its next generation smart telephone into these retail channels.
The Company, however, does not expect its advertising and promotion expenses to
increase, on a per customer basis, to the levels experienced during 1993 or
1994.
Interest Income
Interest income was $693,103 for the first six months of 1996 compared to
$127,254 for the same period of 1995. The increase of $565,849 was due to the
significant increase in the Company's cash balances and short-term investments
resulting from its June 1995 initial public offering.
Interest Expense
The Company's interest expense in the first six months of 1996 consisted of
interest incurred in connection with capital leases for computer equipment. The
Company's interest expense for the same period in 1995 consisted of interest
incurred in connection with capital leases for computer equipment and
outstanding borrowings with WorldCorp and VeriFone, Inc. ("VeriFone"). Interest
expense was $717 in the first six months of 1996 compared to $278,520 in the
first six months of 1995. The decrease of $277,803 was due to the Company
retiring substantially all of its long-term debt with proceeds derived from its
initial public offering in June 1995.
18
<PAGE>
Other, Net
Other income was $185,432 in the first six months of 1996 as compared to
$1,954 for the same period in 1995, an increase of $183,478. This increase is
due to income recognized from the sale of the Company's earlier generation smart
telephones, which the Company no longer produces or markets, to a third party to
be used as point of sale terminals. These phones, which are utilized in
generating monthly service fees, were fully depreciated in the fourth quarter of
1995. The Company expects to continue generating other income from the sale of
these earlier generation smart telephones through at least the remainder of
1996.
Equity in loss of affiliate
Equity in loss of affiliate was $893,965 in the first six months of 1996
compared to $0 in the same period of 1995. The increase was due to the Company
recording its proportionate share of losses of HomeNet and the amortization of
the excess of the purchase price over the Company's share of the equity in net
assets of HomeNet, following the Company's investment in HomeNet in October
1995. HomeNet is a newly formed, development stage personal computer software
company that plans to develop and deliver electronic financial products and
services to consumers. The Company expects HomeNet's operating losses to
continue through the remainder of 1996.
Liquidity and Capital Resources
The Company has generated operating losses since its inception. The
Company's products and services are subject to the risks inherent in the
marketing and development of new products. The market for the Company's products
and services is relatively new and is characterized by rapid technological
change, evolving industry standards, changes in end-user requirements and
frequent new product introductions and enhancements. In addition, the industry
for these products and services is intensely competitive. The Company
experiences direct competition from manufacturers of smart telephones and from
companies that develop transaction processing software for interactive
applications and customer support services. To date, the Company has generated
limited revenue through the sale of its products and services, and there can be
no assurance as to what level of future sales or royalties, if any, the Company
will receive from Visa or its member banks.
During the first six months of 1996, operating activities used $4,498,157
compared to $2,763,034 in the same period in 1995. This increase was primarily
related to increased operating losses in the first six months of 1996.
Investing activities used $4,177,544 during the first six months of 1996
compared to providing cash of $9,495 in the same period in 1995. The increase in
the use of cash for investing activities was primarily due to $2,500,000
invested in short-term commercial paper, $1,000,000 invested in a certificate of
deposit pledged as collateral for a line of credit, and an increase in the
purchase of computer equipment to support customer service and upgrade internal
networks.
19
<PAGE>
Financing activities provided cash of $675,186 in the first six months of
1996 compared to $29,244,172 in the same period in 1995. This decrease resulted
from the net proceeds received by the Company's initial public offering in June
1995, after the redemption of preferred stock, repayment of debt, and payment of
dividends on both redeemable and convertible preferred stock.
In October 1995, the Company entered into a facilities operating lease for
30,000 additional square feet of office space which will be used in addition to
the Company's current office space. The lease covers a fifty-three month period
commencing July 1, 1996 with aggregate minimum lease payments equal to
approximately $2,700,000.
In November 1995, the Company committed to purchase from Standard
Telecommunication Ltd. ("STL") approximately $3,300,000 worth of its next
generation smart telephones for delivery during 1996. The Company took delivery
of the first of these next generation smart telephones in the first half of
1996, and the remaining commitment was approximately $3,064,000 as of June 30,
1996. The entire obligation is secured by a cash collateralized letter of
credit. The Company had no other material commitments for capital expenditures
nor does it anticipate a significant change in the current level of its capital
expenditures.
In March 1996, the Company and Colonial Data entered into an agreement,
whereby Colonial Data has the option to purchase any or all of the above
mentioned 30,000 smart telephones at the Company's fully landed cost. Colonial
Data then may sell or lease these smart telephones to customers at a sale or
lease price determined by Colonial Data. For all of these smart telephones sold
or leased by Colonial Data, Colonial Data will pay the Company a product royalty
equal to 50% of the margin on the sale or lease of the smart telephone. If the
Company sells or leases any of these 30,000 smart telephones to a party other
than Colonial Data, the Company has agreed to pay Colonial Data a product
royalty equal to 50% of the margin on the sale or lease of the smart telephone.
The Company did not receive any royalties from, or pay any royalties to,
Colonial Data for smart telephone sales to other parties during the six months
ended June 30, 1996.
In May 1996, the Company entered into a facilities operating lease for
10,478 additional square feet of office space which will be used in addition to
the Company's current office space. The lease covers a 54 month period
commencing August 1996 with aggregate minimum lease payments equal to
approximately $450,000.
In May 1996, the Company entered into two credit agreements with the same
bank that provide for borrowings up to $5,000,000. As of June 30, 1996 and July
31, 1996, the Company had no borrowings against either of these two credit
lines, but had committed $3,309,000 of these credit lines through the issuance
of a letter of credit to STL for the purchase of its next generation smart
telephone.
20
<PAGE>
The Company's primary needs for cash in the future are for investments in
product development, working capital, the financing of operating losses,
strategic ventures, potential acquisitions, such as the pending merger with
Colonial Data, capital expenditures and the upgrade of the Company's systems and
operations in order to support the Visa InterActive and Microsoft bill pay
alliance. In order to meet the Company's needs for cash over the next twelve
months, the Company will utilize proceeds from its 1995 initial public offering,
credit lines, and, to the extent available, gross margins generated from the
sale of its products and services. Additionally, the Company will utilize
proceeds from funds generated from asset sales, including approximately $300,000
of its first and second generation smart telephones (which the Company sells to
third parties for use as point of sale terminals) and its approximately
$2,500,000 advertising credit, which was received as partial consideration for
certain shares of Series C convertible preferred stock in 1993, subject to
certain restrictions regarding its usage.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. This report contains
forward looking statements that are subject to risks and uncertainties,
including, but not limited to, the impact of competitive products, product
demand and market acceptance risks, reliance on key strategic alliances,
fluctuations in operating results, delays in development of highly-complex
products, and other risks detailed from time to time in the Company's filings
with the Securities and Exchange Commission, including the risk factors
disclosed in the Company's Form 10-K for the fiscal year ended December 31,
1995. These risks could cause the Company's actual results for 1996 and beyond
to differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits
--------
<TABLE>
<CAPTION>
Begins after
Exhibit Sequential
No. Exhibit Page No.
------- ------- ------------
<S> <C> <C>
11 Calculations of Earnings per Common Share 25
(b) Reports on Form 8-K
None
</TABLE>
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
US ORDER, INC.
By: /s/ Mark Lynch
----------------------
Mark Lynch
Vice President Finance
Date: August 12, 1996
23
<PAGE>
Commission file number 0-25838
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
to
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended June 30, 1996
US ORDER, INC.
(Exact name of registrant as specified in its charter)
24
<PAGE>
Exhibit 11
1 of 2
US ORDER, INC.
CALCULATIONS OF EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
For the 3 months ended
----------------------
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Adjustments to net income (loss):
Net loss $ (3,205,870) $ (1,230,642)
Preferred dividend requirement -- (293,048)
Net loss applicable to common stock
and common stock equivalents used for ------------ ------------
primary computation $ (3,205,870) $ (1,523,690)
Fully diluted adjustments - preferred dividend requirement -- 293,048
------------- ------------
Adjusted net loss applicable to
common stock assuming full dilution $ (3,205,870) $ (1,230,642)
============ ============
Average number of shares of common stock
outstanding 15,881,587 7,662,191
Fully diluted adjustments (2):
Assume issuance of cheap stock (prior to IPO) -- --
Assume exercise of options and warrants 1,627,258 2,105,544
----------- -----------
Total average number of shares assumed to be
outstanding after full dilution 17,508,845 9,767,735
=========== ===========
Income (loss) per common share:
Primary loss per share (1) $ (.20) $ (0.20)
=========== ===========
Fully diluted loss per share (2) $ (.18) $ (0.13)
=========== ===========
</TABLE>
(1) The assumed exercise of options and warrants in periods of net loss
are anti-dilutive and are not included in the computation and
presentation of primary earnings per share.
(2) The assumed exercise of options, warrants and conversion of preferred
stock are anti-dilutive but are included in the calculation of
fully-diluted earnings per share in accordance with Regulation S-K
Item 601 (a)(11).
25
<PAGE>
Exhibit 11
2 of 2
US ORDER, INC.
CALCULATIONS OF EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
For the 6 months ended
----------------------
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Adjustments to net income (loss):
Net loss $ (5,193,688) $ (2,599,645)
Preferred dividend requirement -- (680,906)
Net loss applicable to common stock
and common stock equivalents used for ------------ ------------
primary computation $ (5,193,688) $ (3,280,551)
Fully diluted adjustments - preferred dividend requirement -- 680,906
----------- -----------
Adjusted net loss applicable to
common stock assuming full dilution $ (5,193,688) $ (2,599,645)
============ ============
Average number of shares of common stock
outstanding 15,832,509 6,419,880
Fully diluted adjustments (2):
Assume exercise of options and warrants 1,746,429 2,075,240
------------ ------------
Total average number of shares assumed to be
outstanding after full dilution 17,578,938 8,495,120
============ ============
Income (loss) per common share:
Primary loss per share (1) $ (.33) $ (0.51)
============ ============
Fully diluted loss per share (2) $ (.30) $ (0.31)
============ ============
</TABLE>
(1) The assumed exercise of options and warrants in periods of net loss
are anti-dilutive and are not included in the computation and
presentation of primary earnings per share.
(2) The assumed exercise of options, warrants and conversion of preferred
stock are anti-dilutive but are included in the calculation of
fully-diluted earnings per share in accordance with Regulation S-K
Item 601 (a)(11).
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 17,120
<SECURITIES> 2,500
<RECEIVABLES> 427
<ALLOWANCES> 99
<INVENTORY> 714
<CURRENT-ASSETS> 21,028
<PP&E> 3,958
<DEPRECIATION> 1,881
<TOTAL-ASSETS> 34,289
<CURRENT-LIABILITIES> 1,834
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 32,424
<TOTAL-LIABILITY-AND-EQUITY> 34,289
<SALES> 837
<TOTAL-REVENUES> 1,874
<CGS> 692
<TOTAL-COSTS> 1,271
<OTHER-EXPENSES> 5,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,177)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,177)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.30)
</TABLE>
