Exhibit 13.1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER: 000-21729
THE VIALINK COMPANY
(Name of Registrant as Specified in its Charter)
DELAWARE 00-0000000
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
00000 XXXX XXXX, XXXXX 000 00000
XXXXXX, XXXXX (Zip Code)
(Address of Principal Executive Offices)
(000) 000-0000
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None N/A
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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 past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ending December 31, 2002 were
$4,456,247.
As of December 31, 2002, the last business day of the registrant's most
recently completed fiscal year, the aggregate market value of the voting common
stock of the registrant held by non-affiliates of the registrant (affiliates for
these purposes being Registrant's directors, executive officers and holders of
more than 5% of Registrant's common stock on such date) computed by reference to
the price at which the common equity was sold, or the average bid and asked
price of such common equity on that date was $26.8 million. As of March 25,
2003, the issuer had 176,663,306 outstanding shares of Common Stock.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for issuer's 2002 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Annual Report
on Form 10-KSB.
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PART I
ITEM 1. BUSINESS
BUSINESS
We provide subscription-based, business-to-business electronic commerce
services that enable companies in the consumer packaged goods and retail
industries to efficiently manage their highly complex supply chain information.
Our core service, syncLink(R), allows manufacturers, wholesalers, distributors,
sales agencies (such as food brokers) and retailers to communicate and
synchronize item, price and promotion information in a more cost-effective and
accessible way than has been possible using traditional electronic and
paper-based methods. We enable companies to build on the foundation of
synchronized data with more advanced e-commerce practices. Our advanced
services, which are all built on the syncLink foundation, include
distribuLink(SM) for chain pricing data in multi-tier distribution channels,
viaLink invoicing, chainLink(R) scan sales visibility, and sbtLink(SM), the
company's scan based trading service.
We were originally formed in 1985 as Applied Intelligence Group, an
Oklahoma Corporation. In 1998, we changed our name to The
viaLink Company. In
1999, we reorganized as a Delaware Corporation.
INDUSTRY BACKGROUND
THE CONSUMER PACKAGED GOODS AND RETAIL INDUSTRIES
The consumer packaged goods (CPG) and retail industries in the U.S.
manufacture and distribute a wide variety of prepackaged items primarily sold in
supermarkets, convenience stores, small grocery stores, mass merchandisers,
warehouse clubs and chain drugstores. The movement of merchandise from
manufacturer to retailer or operator is characterized by various multi-tiered
distribution methods, such as direct-to-store deliveries and intermediate
deliveries through wholesalers, distributors and retailer warehouses. This
distribution structure is commonly referred to as the "supply chain."
The U.S. CPG and retail industries are very large and highly fragmented.
According to the U.S. Census Bureau, the U.S. CPG, grocery and foodservice
markets represented $1.2 trillion in annual sales (1997 Retail Trade Survey, new
statistics due May 2002) generated by 300,000 retail locations and 740,000
foodservice operators. These retail locations and foodservice operators are
supplied by over 20,000 manufacturers and over 50,000 wholesalers, distributors
and brokers. We believe we offer the only deployed Internet-based, synchronized
item, price and promotion information service to this $1.2 trillion U.S. market.
The global CPG and retail market represents an even larger opportunity for the
Company.
Significant item-specific variations and complexities characterize the CPG
and retail industries. A typical supermarket has an average of 40,000 items in
inventory, supplied by up to 5,000 separate suppliers. A large format
supermarket, or supercenter, can have over 100,000 unique items in inventory. A
convenience store has an average of 2,800 items in inventory, supplied by up to
300 suppliers. According to Information Resources, Inc., between 25,000 to
30,000 new products are introduced in the CPG and grocery industries each year.
Items, prices and promotions are unique to each trading partner
relationship within the supply chain, and different products can be authorized
for sale at the specific store level. Product assortment, pricing and promotion
can vary by geography, store size, or other demographics. Furthermore, item
price and promotion changes at every level of the supply chain can be very
complex and time consuming for companies to manage. Prices and promotions can
change as frequently as daily or weekly for certain products.
We provide our customers with an independent, secure "data of record" for
item, price and promotion information, which they can agree upon as the official
data for their commerce relationship. Our services can be used to provide a
neutral source of data to resolve disputes about prices, products and promotions
between trading partners. The industry fragmentation, the complexity and
frequency of change item, price
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and promotion information, the lack of standardized data, and disparate nature
of industry technology systems provide a tremendous opportunity for us to
prosper as a shared information intermediary.
LACK OF INFORMATION SYNCHRONIZATION IN THE CPG, GROCERY AND RETAIL INDUSTRIES
The CPG, grocery and retail industries' supply chain has experienced low
electronic commerce penetration, especially related to electronic communication
of item, price and promotion data, and continues to be characterized by
significant data complexity, manually intensive business processes, and high
purchase order and invoice error rates.
One of the most significant challenges facing a retailer is the maintenance
of its "pricebook." The pricebook typically contains descriptions of each item
in a store's inventory, including the supplier's and retailer's product code,
item specifications (packaging and selling unit information), Universal Product
Code (UPC), purchase cost, retail sales price and any discounts to be received
from the item supplier. The large number of items, variability of pricing, lack
of reliable information exchanged between trading partners and the traditional
practice of manual updating make pricebook maintenance extremely difficult and
error prone. Larger supply chain participants have attempted to bridge the
information gap by using the traditional electronic data interchange (EDI)
model. EDI technology has been available for many years; however, many suppliers
and retailers have found this approach to be cost prohibitive and
technologically difficult to implement. Additionally, each trading partner
connection requires a separate EDI arrangement, which multiplies the time,
expense and complexity involved. With viaLink, each company makes a single
connection to a shared "database of record" from which many trading partners may
access agreed upon item, price and promotion information.
QUANTIFYING THE MAGNITUDE OF THE INFORMATION PROBLEM IN THE U.S.
Unsynchronized product, price and promotion data and ineffective
communication between retailers and suppliers represent a major source of
inefficiency in the industries. This inefficiency has a significant impact on
profitability. A Joint Industry Study on Efficient Consumer Response concluded
that non-productive costs related to promotion administration, buying and
selling processes, deductions and other clerical and administrative areas
amounted to 3.4% of sales. This translates to over $30 billion in potential
supply chain inefficiencies in the U.S. CPG and retail industries alone. The
study also concluded that item, price and promotion information synchronization
is essential to achieve the benefits of a paperless system.
Many suppliers and retailers continue to employ paper-based, manual
communications to manage their supply chain information, resulting in
operational inefficiencies and administrative errors. These errors result in
frequent invoice errors and discrepancies and consequent administrative
inefficiencies for both suppliers and retailers attempting to research and
reconcile the source of the errors. A 1999 Grocery Manufacturers of America
(GMA) study found that an estimated 60% of all invoices in the CPG industry have
errors and approximately 60% of the errors are due to price and promotion
issues. In 2001, an update of the study, estimated that 65% of discrepancies are
due to price and promotion issues. The study update found that approximately 52%
of all invoices result in the retailer taking deductions when paying invoices
from suppliers. These deductions represent an estimated 9.9% of annual invoice
sales from suppliers.
The ECR study put the administrative cost to resolve invoice errors at $40
per error and noted it can reach up to $236 per error. In the 2001 GMA study,
the 25 participant companies issued approximately 5.2 million invoices annually.
With an error rate of 65% and using a rate of $40 to correct an invoice error,
it cost these companies $135 million per year just to resolve invoice
discrepancies. Companies with a direct-store-delivery model typically issue more
invoices that the average company in this study and may incur relatively higher
costs.
Invoice errors and discrepancies are examples of the inefficiencies and
non-productive costs created in the CPG and retail supply chain. Others sources
of inefficiencies include the cost of manual data entry, incorrect pricing based
on incorrect cost information, delays in new product introductions,
sub-optimized promotions, delays at the time of product delivery to resolve
disputes and similar inefficient processes.
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COST SAVINGS AND BENEFITS OF SYNCHRONIZATION IN THE CPG AND RETAIL INDUSTRIES
A study conduced by GMA in 2000, Enabling E-Commerce Through an
Intermediary Service Provider, in which viaLink served as the intermediary
information service provider looked at benefits of both data synchronization and
scan based trading. The economic benefit of supplier synchronization ranged from
$4,100 to $20,600 per year for a 100-store chain, while for a 100-store retailer
synchronization savings ranged from $4,700 to $10,300 per year per supplier. The
2000 GMA study also found that invoice deductions were reduced by 69% during the
pilot time period. This improvement was driven by a 59% reduction in cost
mismatches/discrepancies and a 100% elimination of item
mismatches/discrepancies. In addition, the time spent resolving item and price
discrepancies that did occur was reduced by half with even greater reductions
for suppliers and retailers with more items, promotions and store-level
complexities.
SCAN BASED TRADING
The traditional business-to-business trading environment in the CPG,
grocery and retail industries is delivery-based (i.e., the point of transaction
is the supplier's point-of-delivery to the retailer). Scan based trading (SBT)
is a next generation supply chain management process that uses point-of-sale
(POS) data to drive settlement, replenishment and promotion. Scan based trading
builds upon synchronization to align supply and demand at the point of sale.
In order to gain broad market acceptance, SBT requires reliable,
synchronized exchange of item, price and promotion information and a shared
control system for managing delivery information, retail sales data, inventories
and shrink reporting. Our syncLink service provides the necessary
synchronization and viaLink's sbtLink service provides the third party control
system necessary to effectively manage SBT processes. SBT represents a change
from current business practices and has broad benefits for both suppliers and
retailers. The long-term benefits to suppliers conducting SBT through our
sbtLink service are the competitive advantage gained through better negotiation
for shelf space and the increased cash flow resulting from improved asset
management. The immediate benefits to suppliers include:
- increased route productivity through use of off-peak delivery hours;
- increased route selling opportunities through elimination of backroom
waiting time and check-in time;
- improved asset utilization due to the widening of delivery windows; and
- timely access to consumer sales information by product, by store and by
day.
For retailers, the long-term benefit of conducting SBT through our sbtLink
service is the competitive advantage gained through better customer satisfaction
and loyalty resulting from accurate stocking and pricing of items. The immediate
benefits to retailers include:
- elimination of back room check-in;
- increased productivity through re-deploying personnel normally involved
in back room check-in;
- improved shrink control;
- reductions in stock-out occurrences;
- reduction in inventory investment; and
- improved assortment.
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According to the 2000 GMA study, the benefits and key findings of
conducting SBT using our syncLink and sbtLink services were as follows:
- 3% to 4% increased sales growth;
- shrink levels controlled at 0.3%; and
- error-free invoicing and payment -- no deductions throughout the pilot
period.
The pilot study concluded that SBT processes are enhanced by using a single
intermediary, such as viaLink. An serves both trading partners because the
intermediary bridges the technical gap between trading partners, allows smaller
companies to participate in advanced electronic commerce practices that would
otherwise be unattainable, and provides accurate and timely reporting that
increases accountability and speed of action among trading partners.
OUR SOLUTIONS
We provide subscription-based, business-to-business electronic commerce
solutions designed specifically to address the complexities and inefficiencies
of the supply chain in the CPG and retail industries.
Our solution architecture is designed to operate across disparate
technology platforms and item coding standards and can be implemented and
deployed rapidly. Instead of making multiple connections to reach many trading
partners, customers make only a single connection, using their preferred method
from a wide range of technologies, including standard Internet browsers, e-mail,
highly sophisticated proprietary network infrastructures, standard EDI formats
or Extensible Markup Language (XML), an emerging standard for the exchange of
data over the Internet.
Our solutions provides suppliers and retailers with benefits throughout the
business cycle from product introduction through invoicing and supports enhanced
analysis and planning functions across business functions:
- reduced invoice discrepancies through synchronization of trading
information, thereby reducing write-offs and the administrative costs
associated with discrepancy resolution;
- reduced manual data entry and pricebook maintenance, thereby increasing
overall administrative efficiency;
- improved ability to manage pricing and to protect gross margin in an
environment with constantly changing prices;
- increased sales force productivity resulting from decreased time spent
resolving errors and disputes and increased time actually selling;
- enhanced promotion effectiveness and ability to facilitate more efficient
new product introductions due to greater trading information visibility;
- improved delivery and store receiving process; and
- increased sales from reducing out-of-stocks and improving replenishment
processes.
We offer a highly functional suite of value-added supply chain electronic
commerce services for the CPG and retail industries. Our solutions comprise a
number of defined services, from data synchronization through advanced trading
partner collaboration processes
SYNCLINK -- DATA SYNCHRONIZATION
Our core service, syncLink, offers manufacturers, distributors,
wholesalers, and retailers one shared source for product attributes, price, and
promotions, including new product introductions, authorizations, and
de-authorizations unique to their trading relationships. The syncLink service
replaces the multiple connections among retailers, operators and suppliers with
a single electronic connection to a shared database. syncLink provides customers
with a cost-effective, accurate, reliable, scaleable, and secure way to
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communicate and synchronize trading information. The syncLink database forms the
foundation for the Company's other electronic services.
DISTRIBULINK -- CHAIN PRICING REPORTING
distribuLink, a reporting service used in multi-tier distribution channels.
It allows authorized manufacturers, wholesalers, distributors and retailers to
share item, price and promotion information. distribuLink provides item and
pricing information visibility though each level of multi-tiered distribution
channels. For example, it enables a manufacturer to view prices and promotions
offered on its products by its distributors to specific retailers.
VIALINK INVOICING
viaLink Invoicing automates the creation of an invoice, based on the
quantity of product delivered to the store and the price of record for the
trading relationship in syncLink.
CHAINLINK -- SCAN SALES VISIBILITY
chainLink provides supply chain visibility to suppliers on a daily basis
through the availability of POS data, by store, by product and by day.
SBTLINK -- SCAN BASED TRADING
sbtLink is viaLink's Scan Based Trading (SBT) service, which enables
trading partners to transact business on items actually sold at the retail store
scanner. Joint visibility to product movement in and out of the store and tools
to support the new business processes involved in SBT enable increased delivery
efficiencies, improved replenishment processes, reduced out-of-stocks and shrink
settlement.
PROMOLINK(SM) -- SCAN BASED PROMOTIONS
promoLink(SM) supports scan based promotions, based on daily store and
product level scan sales data and the promotion of record for the trading
partnership in the viaLink database.
VIALINK'S UCCNET SOLUTIONS
These solutions allow clients to use viaLink as their agent to register
products in the UCCnet registry for GTIN compliance and to publish items to
UCCnet-enabled trading partners through UCCnet. viaLink clients do not have to
go through an independent UCCnet certification process and can reach both the
viaLink and the UCCnet trading communities with a single connection.
We believe that the benefits of our solutions will attract leading
retailers and suppliers to our network of CPG and retail industry participants.
We also believe that the addition of these retailers and suppliers will create a
network effect that increases the value of our viaLink solutions to subscribers.
STRATEGY
Our objective is to become the industry-accepted electronic commerce
utility for synchronizing item, price and promotion information for the food
industry. We plan to accomplish this by implementing the following strategies:
TARGET LEADING RETAILERS AND SUPPLIERS TO CREATE A NETWORK EFFECT
We intend to create a network effect by targeting leading retailers and
suppliers and providing the services necessary to create efficiencies for these
key participants. We believe the adoption of our services by these companies
will be an important endorsement for the rest of the CPG, grocery and retail
industries. As a result of this network effect, we believe the value of our
services to our subscribers will increase with the addition of new trading
partners, thereby increasing the overall value of our solution.
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BUILD ON FIRST MOVER ADVANTAGE AND INCREASE BRAND AWARENESS
We believe our position as the first company to offer a synchronized,
secure, shared database containing item, price and promotion information
provides us with a first mover advantage to attract a xxxxxxxx xxxx of retailers
and suppliers. To increase the number of retailers and suppliers that use our
services, we intend to rapidly build awareness of our services by developing a
compelling brand and value proposition. Our plans include:
- Expanding the capabilities of our internal sales force;
- Working with existing customers to connect new suppliers and retailers;
- Advertising in industry and business media;
- Participating in industry trade shows and conferences; and
- Working with industry trade associations to provide broad industry
influence.
EXPAND SERVICE OFFERINGS
Given the significant complexities and inefficiencies prevalent in the CPG,
grocery and retail supply chains, we expect suppliers and retailers will demand
more advanced supply chain services that assist them in tracking sales,
forecasting demand, replenishing inventory and managing transactions based on
point-of-sale data. syncLink, the foundation of our solution, allows us to
develop and deploy other value-added services. We will continue to invest
resources to develop complementary services that leverage the syncLink database
and create efficiencies for our subscribers.
ENTER NEW MARKETS
We are currently exploring opportunities in other markets outside of the
CPG and retail industries. However, we currently do not expect to pursue any
these expansion opportunities unless such expansion is funded or facilitated by
a significant customer win or with future strategic relationships or alliance
partners.
TECHNOLOGY PLATFORM
Our technology platform is reliable, secure and readily accessible based on
open architectures and industry standard technologies. The platform utilizes
Oracle relational database technology and applications built with the Smalltalk
object-oriented programming and development language. Smalltalk is a portable
development and operational environment, well suited to manage mission-critical
business applications. We allow users to access the system using virtually any
technology, from an Internet browser to sophisticated EDI, including an
XML-based interface.
Access to our services is provided through the Internet, as well as other
methods of electronic communication. In order to maintain the security of its
database, users do not have direct access to the underlying data stored in the
Oracle databases. Users connect to application programs, which interpret the
requests for service, then connect to the Oracle databases for access to the
underlying data.
Our production operations are housed and hosted in Hewlett-Packard's secure
facility in Atlanta, Georgia. This facility is secured through a variety of
technical and physical protection mechanisms, including full-time professional
security staff. The facility provides redundant infrastructure such as backup
utilities and communication lines to support a high availability operation. The
Hewlett-Packard servers hosting our services include fail-over capability, with
redundant data storage and communications resources.
SALES AND MARKETING
We employ a multi-tiered sales and marketing strategy consisting of direct
and indirect sales force personnel to penetrate and influence potential
customers. Currently, our Sales and Marketing team consists
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of 14 full-time employees. Senior executives, particularly on larger key
accounts, are also actively involved in the sales process.
The sales and marketing team is responsible for generating sales leads,
following-up on customer referrals, signing contracts with new customers and
providing input into the Company's services and product development based on
customer feedback and market data. We generate sales leads through trade
advertising, customer referrals, public relations, trade shows and strategic
relationships. We also utilize a variety of other consulting and contractor
relationships with industry experts and opinion leaders to help develop and
promote viaLink's services.
Our strategy is to create a network effect by targeting leading retailers
and suppliers and providing the services necessary to create efficiencies for
all participants. As a result of this network effect, the value to each
participant using our services increases with the addition of each new
participant, increasing the overall value of the our solution. Our marketing
strategy is focused on increasing the awareness of the our brand and services,
educating our target market on the benefits of B2B e-commerce, and positioning
our services as the cornerstone of CPG, grocery and retail e-business
activities.
CUSTOMERS
We currently have about 900 customers, representing manufacturers,
wholesalers, distributors and retailers. Our customers represent the spectrum of
the industry, from small suppliers and regional retail chains to large national
customers whose names are well-known. Our customer base includes:
Retailers and Wholesalers: AAFES, C&K Market, ExxonMobil, Farm Fresh,
FasMart, Kmart, Xxxxxx'x Supermarkets, Meijer, Schnuck Markets, Shop N Save,
Shoppers/Metro, Sunoco, Target, WinCo Foods and Xxxx-Xxxxx.
Suppliers: American Greetings, Bausch & Lomb, Xxx Xxxxx Farms, Chicken of
the Sea, Xxxx Communication Ministries, Coors Brewing Company, Xxxx Foods,
Dreyer's/Edy's Grand Ice Cream, Faultless/Bon Ami, Flowers, Frito-Lay, General
Xxxxx, Xxxxxx Xxxxxx Bakeries, I & K Distributors, Ice Cream Partners,
Interstate Brands, Xxxxxxx, Xxxxxx Paper Xxxxx, Xxxxxx Brewing Company, Xxx.
Xxxxx'x Bakeries, Pepperidge Farm, Pepsi, Perfection Bakeries, Riviana Foods,
Xxxx Xxx Bakery Group, Xxxxxx'x Consumer Brands, Xxxxxx'x of Hanover, Tetley,
Wise Foods and Wyeth Consumer Healthcare.
Sales and Marketing Agencies: Advantage Sales and Marketing SE,
CROSSMARK(R).
Three customers individually accounted for 18%, 13% and 11% of our total
revenues in 2000; 9%, 9% and 5% of our total revenues in 2001; and 11%, 9% and
5% of our total revenues in 2002. Likewise, approximately 60%, 33% and 32% of
our total revenues were attributable to five clients in 2000, 2001 and 2002,
respectively.
PRODUCT DEVELOPMENT AND ENHANCEMENT
We initially introduced syncLink in 1997 and intend to continue to make
significant investments in product development and enhancements to improve and
extend our services, including enhancements to our viaLink Partner Package.
Growth of our services may require that we continue to invest in our
hardware platform, including additional servers, enterprise storage systems and
additional backup and recovery capabilities.
Currently, the dynamic nature of the information technology industry places
significant research and development demands on businesses that desire to remain
competitive. Our future success, particularly our ability to achieve widespread
market adoption, depends on the success of our product development and
enhancement efforts in a timely manner. There are a number of risks and
challenges involved in the development of new features and technologies which,
if not successfully addressed, would harm our business.
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As of December 31, 2002, our product development, technical support and
operations staff consisted of 21 full-time employees. Our product development
expenses were $6.3 million in 2000, $4.6 million in 2001 and $2.1 million in
2002. We believe that continued investments in product development and
enhancement will be required to remain competitive.
PROPRIETARY RIGHTS
Our success and ability to compete are dependent upon our ability to
develop and maintain the proprietary aspects of our technology and operate
without infringing on the proprietary rights of others. We rely primarily on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our proprietary rights.
However, we currently have an application for a patent pending for the sbtLink
portion of our viaLink Partner Package suite of services. Because the software
development industry is characterized by rapid technological change, we believe
that factors such as the technological and creative skills of our personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are very important to establishing and maintaining
a technology leadership position in addition to the various legal protections
available for our technology.
We also require employee and third-party non-disclosure and confidentiality
agreements. We seek to protect our software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. We cannot be certain that others will not develop technologies that
are similar or superior to our technology or design around the copyrights and
trade secrets owned by us. We believe, however, that these measures afford only
limited protection. Despite these precautions, it may be possible for
unauthorized parties to copy portions of our software products, reverse
engineer, or obtain and use information that we regard as proprietary.
Although we are not aware of any claims that we are infringing any
proprietary rights of third parties, there can be no assurance that third
parties will not claim infringement by us in the future. We expect that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any
infringement claims against us, with or without merit, could be time consuming
to defend, result in costly litigation, divert management's attention and
resources, cause product shipment delays or require us to enter into royalty or
licensing agreements. In the event of a successful claim of product infringement
against us, should we fail or be unable to either license the infringed or
similar technology or develop alternative technology on a timely basis, our
business, operating results and financial condition could be materially
adversely affected.
We rely upon software that we license from third parties, including
software that is integrated with our internally developed software and is used
in our products to perform key functions. There can be no assurance that these
third-party software licenses will continue to be available to us on
commercially reasonable terms. The loss of or inability to maintain any such
software licenses could result in shipment delays or reductions until equivalent
software could be developed, identified, licensed and integrated and could
materially adversely affect our business, operating results and financial
condition.
COMPETITION
The business-to-business electronic commerce environment in which we
operate is still evolving and subject to rapid change. Currently, we compete
principally on the basis of the specialized nature and uniqueness of our
services. We believe the in-depth industry knowledge embedded in the
functionality of our services, our cost-effective subscription pricing, and the
accessibility of our services to all potential customers in the industry are
competitive advantages for us. Additionally, we believe we have the only
Internet-based electronic commerce solution in production today for
synchronization of item, price and promotion information for the CPG and retail
industries.
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Currently, we do not know of any direct competition for our electronic
commerce services. However, we believe direct competition for our services will
develop and increase in the future. Direct competition could develop from
several potential sources, including:
- Large, enterprise-wide software vendors, developers and integrators such
as EDS, i2 Technologies, IBM, Manugistics, Oracle and SAP;
- EDI providers such as XXXX and Sterling Commerce;
- Large business-to-business electronic commerce exchange vendors such as
Ariba, CommerceOne and VerticalNet;
- Other database vendors such as X.X. Xxxxxxx, Information Resources and
QRS;
- Industry-led initiatives such as UCCnet; B2B Exchanges such as Transora,
GNX and WWRE;
- Consulting firms such as Accenture, Cap Gemini Ernst & Young, Deloitte &
Touche, KPMG Consulting and PricewaterhouseCoopers; and
- Existing industry participants who may attempt to deploy their
proprietary systems as industry solutions.
These large potential competitors, if successful, may provide functionality
similar to our services. Many of our potential competitors have substantially
greater resources than we do. Any failure by us to achieve rapid market
penetration or to successfully address the risks posed by expected competition
would have a material adverse effect on our business, financial condition and
operating results.
EMPLOYEES
As of December 31, 2002, we had 61 full-time employees, 14 were employed in
sales and marketing, 21 were employed in technical development, technical
support and operations, 21 were employed in implementation, customer support and
service and 5 were employed in human resources, administration, legal, finance
and accounting. None of our employees are represented by a labor union. We have
not experienced any work stoppages and consider our relations with our employees
to be good.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider these factors that may affect future results,
together with all of the other information included in this Form 10-KSB, in
evaluating our business. The risks and uncertainties described below are those
that we currently believe may materially affect us. Additional risks and
uncertainties that we are unaware of or that we currently deem immaterial also
may become important factors that affect us.
Keep these risks in mind when you read "forward-looking" statements
elsewhere in this Form 10-KSB. These are statements that relate to our
expectations for future events and time periods. Generally, the words
"anticipate," "expect," "intend," and similar expressions identify
forward-looking statements. Forward-looking statements involve risks and
uncertainties, and future events and circumstances could differ significantly
from those anticipated in the forward-looking statements. Please see "Special
Cautionary Note Regarding Forward-Looking Statements" below in this Item 1.
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO SUSTAIN AND GROW
OUR BUSINESS
We intend to continue our investment in and development of our services and
technology. We have incurred operating losses and negative cash flow in the past
and expect to incur operating losses and negative cash flow in the future. Our
ability to fund our planned working capital and capital expenditures
9
will depend largely upon our ability to obtain sufficient capital. Our future
capital requirements will depend on a number of factors, including our:
- Services achieving market acceptance;
- Services producing a sustainable revenue stream;
- Working capital requirements; and
- Level of our investment in and development of our services and
technology.
WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL CAPITAL RESOURCES NECESSARY TO
SATISFY OUR CASH REQUIREMENTS OR TO IMPLEMENT OUR GROWTH STRATEGY SUCCESSFULLY.
If we need additional capital, we cannot be certain that it will be on
favorable terms. If we cannot obtain adequate additional capital resources, we
will be forced to curtail our planned business expansion, sell or merge our
business, or commence bankruptcy proceedings. We may also be unable to fund our
ongoing operations, including investment in and development of our services and
technology, and expansion of our sales and marketing activities.
WE HAVE ISSUED OR RESERVED SUBSTANTIALLY ALL OF OUR COMMON STOCK AUTHORIZED BY
OUR STOCKHOLDERS, AND IF WE DO NOT OBTAIN STOCKHOLDER AUTHORIZATION TO ISSUE
ADDITIONAL STOCK WE MAY BE PREVENTED FROM RAISING ADDITIONAL WORKING CAPITAL.
We currently have 300 million shares of common stock authorized for
issuance by our stockholders. As of March 25, 2003, we have either issued or
reserved nearly all of it for (a) future conversion of issued preferred stock
and (b) exercises of issued warrants and stock options. For the last 24 months
we have obtained working capital primarily from the sale and issuance of common
stock or warrants. If the stockholders at the 2003, annual meeting of
stockholders of the Company do not authorize additional shares of common stock
for sale and issuance by us, this historical source of working capital will no
longer be available to us.
IF OUR VIALINK SERVICES FAIL TO GAIN MARKET ACCEPTANCE, OUR BUSINESS WILL BE
MATERIALLY ADVERSELY AFFECTED.
We will derive virtually all of our revenues for the foreseeable future
from implementation fees and subscription revenues from our viaLink services. We
are just beginning to generate a significant amount of revenues from these
services. A number of factors will determine whether our services achieve market
acceptance, including:
- Competitive offerings;
- Performance and functionality of our services;
- Ease of adoption;
- Satisfaction of our initial subscribers; and
- Success of our marketing efforts.
If market acceptance develops more slowly than expected, our business,
operating results and financial condition will be seriously damaged.
OUR SUCCESS IS DEPENDENT UPON A XXXXXXXX XXXX OF LEADING RETAILERS AND SUPPLIERS
SUBSCRIBING TO OUR SERVICES.
Our success depends on a significant number of retailers subscribing to and
using our services and linking with manufacturers, wholesalers and distributors
over the Internet through our syncLink service and the viaLink Partner Package
suite of services. We cannot predict if, or when, a significant number of
manufacturers, suppliers and retailers will subscribe to our services. To
encourage purchasers to subscribe to and use our services, we must offer a broad
range of product, price and promotion information from a
10
large number of suppliers through our syncLink service. However, to attract
suppliers to subscribe to syncLink, we must increase the number of retailers who
use our services. If we are unable to build a xxxxxxxx xxxx of retailers and
suppliers, we will not be able to benefit from a network effect where the value
of our services to each subscriber significantly increases with the addition of
each new subscriber. Our inability to achieve this network effect would reduce
the overall value of our services to retailers and suppliers and, consequently,
would harm our business.
WE HAVE RECEIVED A "GOING CONCERN" OPINION FROM OUR INDEPENDENT ACCOUNTANTS.
Our independent auditors have modified their report on our consolidated
financial statements for the fiscal year ended December 31, 2002, with an
explanatory paragraph regarding our ability to continue as a going concern. This
modified report was originally issued in July 2001. Such an opinion by our
independent auditors may impact our dealing with third parties, such as
customers, suppliers and creditors, because of concerns about our financial
condition. Any such impact could have a material adverse effect on our business,
operating results and financial condition.
OUR SALES CYCLE CAUSES UNPREDICTABLE VARIATIONS IN OUR OPERATING RESULTS.
Our sales cycle has been and may continue to be unpredictable. Our sales
cycle is also subject to delays because we have little or no control over
customer-specific factors, including customers' budgetary constraints and
internal acceptance procedures. Consequently, we may spend considerable time and
expense providing information to prospective customers about the use and
benefits of our services without generating corresponding revenue. The length of
the sales pursuit makes it difficult to accurately forecast the quarter in which
our implementation and subscription services will occur. This may cause our
revenues from those services to be delayed from the expected quarter to a
subsequent quarter or quarters or to vary from quarter to quarter. Furthermore,
there is substantial uncertainty as to when particular sales efforts will begin
to generate revenues. As a result, our revenues and results of operations in any
quarter may not meet market expectations or be indicative of future performance
and it may be difficult for you to evaluate our prospects or to estimate the
value of the company.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT FUTURE OPERATING LOSSES.
We have a history of operating losses, and we expect to incur net losses
into 2003. We incurred net losses of approximately $39.1 million in 2000, $24.5
million in 2001 and $8.1 million in 2002. As of December 31, 2002, we had an
accumulated deficit of approximately $85.3 million representing the sum of our
historical net losses. We continue to expend significant resources to
aggressively develop and market our services into an unproven market. While we
continue to increase our optimism regarding our prospects, there is a
possibility that we may never generate sufficient revenues to achieve or sustain
profitability or generate positive cash flow.
WE DEPEND ON SUPPLIERS FOR THE SUCCESS AND ACCURACY OF OUR SERVICES.
We depend on suppliers to subscribe to our services in sufficient and
increasing numbers to make our services attractive to retailers and,
consequently, other suppliers. In order to provide retailers accurate data, we
rely on suppliers to update their item, price and promotion information stored
in our database. We cannot guarantee that the item, price and promotion
information available from our services will always be accurate, complete and
current, or that it will comply with governmental regulations, such as those
relating to pricing alcohol and liquor or nutritional guidelines. Incorrect
information could expose us to liability if it xxxxx users of our services or
result in decreased adoption and use of our services.
OUR CUSTOMER BASE IS CONCENTRATED AND OUR SUCCESS DEPENDS IN PART ON OUR ABILITY
TO RETAIN EXISTING CUSTOMERS AND SUBSCRIBERS.
If one or more of our major customers were to substantially reduce or
terminate their use of our services, our business, operating results and
financial condition would be harmed. In 2002, we derived 32%
11
of our total revenues from our five largest customers. Our largest customer in
2002 accounted for approximately 11% of our total revenues. The amount of our
revenues attributable to specific customers is likely to vary from year to year.
We do not have long-term contractual commitments with any of our current
customers, and our customers may terminate their contracts with little or no
advance notice and without significant penalty. As a result, we cannot be
certain that any of our current customers will be customers in future periods. A
customer termination would not only result in lost revenue, but also the loss of
customer references that are necessary for securing future customers. During
2002, certain customers, including two customers that were among our five
largest, terminated their agreements for our services.
WE ARE DEPENDENT UPON THE OPERATION OF HEWLETT-PACKARD'S DATA CENTER FOR THE
TIMELY AND SECURE DELIVERY OF OUR SERVICES.
We use Hewlett-Packard's data center as the host for our services. We are
dependent on our continued relationship with Hewlett-Packard and on their data
center for the timely and secure delivery of our services. If Hewlett-Packard's
data center fails to meet our expectations in terms of reliability and security,
or if Hewlett-Packard, as our largest vendor, withdraws its support, our ability
to deliver our services will be seriously harmed, resulting in the potential
loss of customers and subscription revenue. Furthermore, if our relationship
with Hewlett-Packard were terminated, we would be forced to find another service
provider to host our services. Our current service agreement, as extended,
expires on November 30, 2003. If we were required to transition to another
service provider, the transition could result in interruptions of our services
and could increase the cost of obtaining these services.
WE EXPECT TO FACE INCREASED COMPETITION. IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, OUR BUSINESS WILL BE HARMED.
Currently, we do not know of any direct competition for our electronic
commerce services. However, we believe direct competition for our services will
develop and increase in the future. If we face increased competition, we may not
be able to sell our viaLink services on terms favorable to us. Furthermore,
increased competition could reduce our market share or require us to reduce the
price of our services.
To achieve market acceptance and thereafter to increase our market share,
we will need to continually develop additional services and introduce new
features and enhancements. Our potential competitors may have significant
advantages over us, including:
- Significantly greater financial, technical and marketing resources;
- Greater name recognition;
- Broader range of products and services; and
- Larger customer bases.
Consequently, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements.
WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS TO REMAIN
COMPETITIVE.
The Web-based electronic commerce market is characterized by rapid changes
due to technological innovation, evolving industry standards and changes in
customer needs. Our future success will depend on our ability to continue to
develop and introduce a variety of new services and enhancements that are
responsive to technological change, evolving industry standards and customer
requirements on a timely basis. We cannot be certain that technological
developments and products and services our competitors introduce will not cause
our existing services, and new technologies in which we invest, to become
obsolete.
12
OUR CURRENT COST REDUCTION EFFORTS COULD CONTINUE TO STRAIN OUR RESOURCES.
Our current cost reduction efforts place significant demands on our
management and operational resources. We may not be able to maintain and grow
our business at our current reduced staffing levels. Additionally, our failure
to retain the highly trained technical personnel that are essential to our
product development, marketing, service and support may limit the rate at which
we can generate revenue and develop new products or product enhancements. In
order to manage our growth effectively, we must implement and improve our
operational systems, procedures and controls on a timely basis. If we fail to
implement and improve these systems, our business, operating results and
financial condition may be materially adversely affected.
AS PART OF OUR COST REDUCTION IN 2001, THE COMPENSATION OF NEARLY EVERY EMPLOYEE
WAS REDUCED, AND WE MAY NOT BE ABLE TO RETAIN EMPLOYEES AT CURRENT COMPENSATION
LEVELS.
We started 2001 with 135 full-time employees and 20 contract workers who
were engaged on viaLink projects on a full-time basis. As of December 31, 2002,
we had 61 full-time employees. Most current full-time employees are being
compensated at rates from 10% to 15% less than in 2001, and members of
management have foregone bonus payments of up to 50% of base compensation and
have reduced compensation from 10% to 40%. At these reduced rates it is unlikely
we will be able to retain all current employees and officers
THE PRICE OF OUR COMMON STOCK MAY DECLINE DUE TO SHARES ELIGIBLE FOR FUTURE
SALE. ALSO, YOU WILL EXPERIENCE DILUTION IN CONNECTION WITH THE CONVERSION OF
PREFERRED STOCK AND EXERCISE OF WARRANTS.
Sales of a substantial number of shares of common stock, or even the
potential for such sales, could adversely affect the market price of the common
stock and could impair our ability to raise capital through the sale of equity
securities. As of March 25, 2003, we had outstanding 176,663,306 shares of
common stock. These shares are freely tradable without restriction or further
registration under the Securities Act unless purchased by our "affiliates.
Furthermore, an additional:
- 9,547,934 shares of common stock are issuable upon the exercise of
currently exercisable options;
- 209,029 shares of common stock are issuable upon the exercise of
currently outstanding warrants;
- 90,373,750 shares of common stock are issuable upon the conversion of
currently outstanding preferred stock.
Substantially all shares issued following the exercise of these options or
warrants or the conversion of the preferred stock will be freely tradable.
SPECIAL PRECAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "intend," "anticipate,"
"believe," "estimate," "continue" and other similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, make projections of our future results of operations or of our
financial condition or state other "forward-looking" information. We believe
that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or control. The factors listed in the sections captioned "Additional
Factors That May Affect Future Results" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as any
cautionary language in this Form 10-KSB, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements.
13
ITEM 2. DESCRIPTION OF PROPERTY
We currently lease the following facilities under operating leases:
- Approximately 21,700 square feet of space in Dallas, Texas for our
corporate headquarters under a lease expiring on October 31, 2006. The
lease requires monthly rental payments over the term of the lease of
$40,700, subject to normal operating expense escalations beginning
January 2003.
We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Over-the-Counter Bulletin Board (OTCBB).
Our common stock was quoted on the Nasdaq National Market under the symbol
"VLNK" from March 2000 through November 2001. From November 1996 to March 2000
our common stock was quoted on the Nasdaq SmallCap Market. The following table
sets forth, for the periods indicated, the high and low closing prices of the
common stock as reported by the OTCBB, Nasdaq National and SmallCap Markets.
COMMON STOCK
PRICE
-------------
HIGH LOW
----- -----
2000:
First Quarter............................................... 40.88 14.44
Second Quarter.............................................. 25.19 7.25
Third Quarter............................................... 11.31 5.44
Fourth Quarter.............................................. 8.94 2.00
2001:
First Quarter............................................... 5.53 2.00
Second Quarter.............................................. 3.84 1.55
Third Quarter............................................... 1.79 0.09
Fourth Quarter.............................................. 0.40 0.10
2002:
First Quarter............................................... 0.25 0.12
Second Quarter.............................................. 0.18 0.10
Third Quarter............................................... 0.14 0.07
Fourth Quarter.............................................. 0.26 0.09
Series D Convertible Preferred Stock. On September 30, 2002 we completed
the first of two closings for the sale of $4.5 million of Series D Convertible
Preferred Stock to SDS Merchant Fund, L.P. and other purchasers. The first
closing resulted in proceeds of $3,434,850 and the issuance of 286 shares of
Series D Preferred Shares. Each share of Series D Convertible Preferred Stock
has a face value of $12,000 and is convertible into our Common stock at $0.12
per share. At the time of the first closing all outstanding shares of previously
issued Series B and Series C Redeemable Convertible Preferred Stock
14
and accumulated, unpaid dividends were exchanged for 513 shares of our Series D
Convertible Preferred Stock with a face value of $6,150,000.
Additionally, in accordance with the Purchase Agreement, we issued warrants
to purchase 50,000 shares of our common stock for each share of Series D
Convertible Preferred Stock issued including the issuance of warrants to
purchase 25.6 million common shares to holders of the previously issued Series B
and Series C Preferred Stock. On September 30, 2002, we issued warrants to
purchase a total 39.9 million shares of common stock which were exercised
immediately at a nominal exercise price of $0.001.
The Series D Convertible Preferred Stock, par value $.001 per share, is
convertible into shares of our common stock in the manner, and upon the terms,
provisions and conditions set forth in the Certificate of Designation of the
Preferred Stock. The conversion price of the Series D Convertible Preferred
Stock is subject to certain adjustments under the terms of the Certificate of
Designation. The proceeds from issuance of the Series D Convertible Preferred
Stock and Warrant issued and the fair value of the warrants issued to the
holders of the previously issued Series B and Series C Preferred Stock has been
allocated to each instrument based on their relative fair values. Additionally,
the Series D Convertible Preferred Stock includes a beneficial conversion ratio
at the issuance date. The fair value of the Warrants and the intrinsic value of
the beneficial conversion ratio has been deemed a dividend to holders of the
Preferred Stock and considered a non-cash dividend to the Series D Convertible
Preferred Stock shareholders recorded during the third quarter of 2002 and has
been included in the determination of net loss applicable to common stock for
the three and nine months ended September 30, 2002.
The second closing of approximately 112 shares of Series D Convertible
Preferred Stock was completed on February 5, 2003, upon the effectiveness of the
registration statement covering the underlying common shares. The second closing
yielded proceeds to the company of approximately $1.26 million.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock and we
do not intend to pay cash dividends on our capital stock in the foreseeable
future. We currently expect to retain any future earnings to fund the operation
and expansion of our business. Any future determination as to the payment of
dividends will be at the discretion of our board of directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes. The following discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those discussed below and elsewhere in this
Form 10-KSB, particularly under the heading "Additional Factors That May Affect
Future Results."
Statements of our management's intentions, beliefs, anticipations,
expectations and similar expressions concerning future events or outcomes
contained in this Report constitute "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Any
forward-looking statements are made by us in good faith, pursuant to the
safe-harbor provisions of the Reform Act. As with any future event or outcome,
we cannot assure you that the events or outcomes described in forward-looking
statements made in this Report will occur or that the results of future events
or outcomes will not vary materially from those described in the forward-looking
statements. These forward-looking statements reflect our management's current
views and projections regarding economic conditions, industry environments and
our performance. Important factors that could cause our actual performance and
operating results to differ materially from the forward-looking statements
include, but are not limited to, changes in the general level of economic
activity in the markets served by us, introduction of new products or services
by competitors, sales performance, expense levels, interest rates, changes in
our financial
15
condition, availability and terms of capital sufficient to support our current
and anticipated level of activity, delays in implementing further enhancements
to our services and our ability to implement our business strategies.
Our expectations with respect to future results of operations that may be
embodied in oral and written forward-looking statements, including any
forward-looking statements that may be included in this Report, are subject to
risks and uncertainties that must be considered when evaluating the likelihood
of our realization of such expectations. Our actual results could differ
materially. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Additional Factors That May Affect
Future Results."
OVERVIEW
We provide subscription-based, business-to-business electronic commerce
services that enable companies in the consumer packaged goods and retail
industries to efficiently manage their highly complex supply chain information.
Our core service, syncLink(R), allows manufacturers, wholesalers, distributors,
sales agencies (such as food brokers) and retailers to communicate and
synchronize item, price and promotion information in a more cost-effective and
accessible way than has been possible using traditional electronic and
paper-based methods. We enable companies to build on the foundation of
synchronized data with more advanced e-commerce practices. Our advanced
services, which are all built on the syncLink foundation, include
distribuLink(SM) for chain pricing data in multi-tier distribution channels,
viaLink invoicing, chainLink(R) scan sales visibility, and sbtLink(SM), the
company's scan based trading service.
We were originally formed in 1985 as Applied Intelligence Group, Inc. From
inception, our operations consisted primarily of consulting services related to
the planning, designing, building and installation of computerized information
management systems and computerized checkout or point-of-sale systems in the
retail and distribution industry. We also provided a Web-based human resource
recruiting application. In 1993, we began the design and development of viaLink,
an Internet-based subscription service to complement our existing consulting
business. We introduced our syncLink service, in January 1997. In 1998, we sold
our management consulting and systems integration assets to The NetPlex Group,
Inc. in September 1998 and changed our name to The
viaLink Company in October
1998.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") recently released Financial
Reporting Release No. 60, which requires all companies to include a discussion
of critical accounting policies or methods used in the preparation of financial
statements. In addition, Financial Reporting Release No. 61 was recently
released by the SEC to require all companies to include a discussion to address,
among other matters, liquidity, off-balance sheet arrangements, contractual
obligations and commercial commitments. The Company's significant accounting
policies and methods used in the preparation of the Consolidated Financial
Statements are discussed in Footnote 1 of the Notes to Consolidated Financial
Statements. The following is a listing of the Company's critical accounting
policies and a brief discussion of each:
- Allowance for doubtful accounts;
- Revenue recognition; and
- Asset Impairment;
Allowance for Doubtful Accounts. The Company's allowance for doubtful
accounts relates to trade accounts receivable. The allowance for doubtful
accounts is an estimate prepared by management based on identification of the
collectibility of specific accounts and the overall condition of the receivable
portfolios. The Company specifically analyzes trade receivables, historical bad
debts, customer credits, customer concentrations, customer credit-worthiness,
current economic trends and changes in customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts. If the financial condition
of the Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. Likewise,
should the Company determine that it would
16
be able to realize more of its receivables in the future than previously
estimated, an adjustment to the allowance would increase income in the period
such determination was made. The allowance for doubtful accounts is reviewed on
a quarterly basis and adjustments are recorded as deemed necessary.
Revenue Recognition. We expect to generate our future revenues primarily
from monthly subscriptions to our services. For use of our syncLink service, our
customers pay us either a flat monthly subscription rate or a rate based on the
number trading partners and the size and complexity of the trading
relationships. Our other services are available for additional monthly
subscription fees.
We also charge an implementation fee ranging from $1,200 for an on-line
implementation to over $100,000 for more complex supplier and retailer
installations. Our implementation fees are separately priced based on time and
materials. Implementation costs consist primarily of labor by technical support
personnel to configure customer data and establish a connection to our services.
Our subscription services are provided by and are resident on our database
servers. Our customers gain access to and use our services through means ranging
from Internet web browsers to fully automated batch interfaces imbedded in the
customers IT systems. Basic implementation services, including training the
customer on how to use our services and how to format and populate our database
with the customer's data, are provided to all of our customers. Services beyond
the basic implementation services include consulting services that help
customers modify their own IT systems and procedures to enable more automated
interfaces with our services.
Additionally, we received revenues from the performance of certain
Web-hosting services for a limited number of customers for which we provide no
other viaLink services. The web-hosting service is not related or similar in any
regard to our other services and we are no longer providing these services. We
recognize revenues for our subscription, basic implementation and Web-hosting
services over the terms of the subscription and Web-Hosting arrangements.
Revenues collected in advance are deferred and recognized as earned. Revenues
for consulting services related to complex supplier and retailer implementations
are recognized as services are provided.
Contracts for customer use of our services are generally for periods
ranging from one to three years, but are generally cancelable with 30 days
notice. Implementation fees for our services are based on time and materials,
are due up front, are nonrefundable and are separately priced from the use of
our services. Implementation costs consist primarily of labor by technical
support personnel to configure customer data and establish a connection to the
viaLink database. Implementation activities can range from a "basic"
implementation that simply establishes a web browser interface to more involved
activities where we are engaged to assist a customer in modifying their systems
and automating the connection. We have no obligation to perform any future
implementation services and no additional implementation services are necessary
upon renewal of the service by the customer. We recognize implementation fees
and associated costs for the more involved implementation activities as the
services are provided. Implementation fees and associated direct costs to
provide basic implementations are deferred and recognized over the period the
subscription-based services are provided. Implementation fees and associated
direct costs for basic implementations are deferred because we do not have an
objective basis to determine the fair value of the basic implementation services
and they are essential to subscription to our services. The fair value of more
involved implementation activities is established using a residual method and
generally equals the amount charged by us based on time and materials. We
recognized revenue for hosting customer websites and subscription fees for
customer use of our services as these services are provided. Revenues collected
in advance and revenues dependent upon future performance criteria are deferred
and recognized as earned and those performance criteria are met.
In December 1999, the Securities and Exchange Commission staff (the
"Staff") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue
Recognition in Financial Statements. As subsequently interpreted by the Staff
through issuance of a document summarizing frequently asked questions and
answers, the Staff has provided guidance on accounting for revenue from
multiple-element arrangements that are not currently addressed by existing
accounting pronouncements. In particular, the Staff has provided guidance that
revenue should not be allocated among the elements unless the allocation
17
is based on reliable, verifiable and objectively determinable fair values of the
elements. The Staff's guidance also provides that if an undelivered element is
essential to the functionality of a delivered element, no revenue allocated to
the delivered element should be recognized until that undelivered element is
delivered. We adopted SAB 101 in the fourth quarter of 2000, with retroactive
effect to January 1, 2000. Prior to adoption of SAB 101, we recognized all
implementation fees and associated costs as the services were provided. The
cumulative effect of adopting SAB 101 was to increase both deferred revenues and
deferred customer operations expense by approximately $107,000 as of January 1,
2000 with no impact on stockholders' equity.
Asset Impairment. The Company reviews long-lived assets for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
adopted SFAS No. 144 in fiscal year 2002. SFAS No. 144 required the company to
identify events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If impairment indicators are present and the
estimated future undiscounted cash flows are less than the carrying value of the
long-lived assets, the carrying value is reduced to the estimated fair value as
measured by the discounted cash flows. Our continuing losses from operations is
one factor which could be an indicator that the carrying amounts of any of our
assets may not be recoverable. The Company performed an analysis comparing
estimated future cash flows to the carrying value of its assets at December 31,
2002. The analysis did not indicate that an impairment exists as of December 31,
2002. The estimated future cash flows were based upon certain assumptions and
are dependent upon future performance. See ADDITIONAL FACTORS THAT MAY AFFECT
FUTURE PERFORMANCE for factors that may cause our operations to vary from our
estimates. If actual results differ from the estimated future cash flows,
impairment may be evident in future periods.
RESULTS OF OPERATIONS
COMPARISON OF 2002 TO 2001
Revenues. Our revenues in 2002 and 2001 are comprised of revenues for
subscriptions to our services and implementation revenues. The following table
sets forth for the periods indicated the components of revenue included in our
consolidated statements of operations:
2001 2002
---------- ----------
Revenues:
Subscription.............................................. $1,381,990 $2,825,350
Implementation............................................ 2,070,502 1,630,897
---------- ----------
Total revenues............................................ $3,452,492 $4,456,247
========== ==========
Subscription revenues increased 104 % from 2001 to 2002. This increase is
due to increases in the number of subscribers to our services and increases in
our subscription rates. Subscription revenue growth is dependent upon the number
of subscribers to our services and how many trading partners with which they are
exchanging data ("connections"). Continued growth is dependent upon increasing
the number of connections between our existing customers and adding new
customers. The rate at which the connections increase can vary significantly
from customer to customer depending upon each customer's deployment strategies.
Historically, our retailer customers have been able to better assist us in
increasing the number of connections. During 2001, we signed agreements with
Xxxx Xxxxx, Meijer, and Target Stores. During 2002, we signed an agreement with
Exxon-Mobil, expanded our relationship with Target and we have signed 9 other
retailers. Each of these retailers has increased the number of connections with
our supplier customers when comparing 2002 to 2001. As we add additional
retailer customers we expect continued increases in the number of supplier
customers purchasing implementation and subscription services. Our current
pricing for retailers ranges from $25 per supplier per month for a small
retailer and a flat rate of up to $50,000 per month for the largest retailers.
Our pricing for suppliers ranges from $25 up to $5,000 per retailer connection
per month. Our implementation revenues decreased from 2001 to 2002 due
18
to a decrease in the implementation services required for each customer. These
efficiencies were achieved through the use of technology and enhanced internal
processes as part of our implementation services. These efficiencies have
allowed us to quote lower implementation fees for certain customers. We believe
that the lower initial costs for the customer is resulting in increased numbers
of customers purchasing our services and also accelerates the opportunity for
subscription revenues.
Customer Operations. Customer operations expense consists of personnel
costs associated with implementation, consulting and other services and costs of
operating, maintaining and accessing our technical operations and hosting
facilities. Customer operations expense also includes the cost of providing
support and maintenance to customers. Our customer operations expense decreased
from $7.8 million in 2001 to $5.1 million in 2002. This decrease is due
primarily to decreased personnel and contract labor costs from our cost
reduction efforts in late 2001 and 2002, decreases in expenses from our
operations platform at Hewlett-Packard and reduced telecom and other costs
related to the closing of our offices during 2001. Our customer operations team
consisted of 21 people at December 31, 2002. The costs for our operating
platform are generally fixed and represent the operating capacity necessary for
expected growth through 2003. We expect customer operations expenses to increase
only in response to increased demand for our implementation and customer support
services.
Development. Development expense includes personnel and contract labor
costs and professional fees incurred for product development, enhancements,
upgrades, quality assurance and testing. Our development expenses decreased from
$4.6 million in 2001 to $2.1 million in 2002. This decrease is due to decreased
use of service providers to provide development resources and decreases in
personnel costs. Our development team consisted of 21 people at December 31,
2002. Additionally, during 2001, development includes approximately $0.5 million
of non-cash service costs for the amortization of a portion of the fair value of
the warrants and options issued to Cap Gemini Ernst & Young, i2 Technologies and
other service providers. No amounts are included in 2002. We are continuously
undertaking various projects to expand the functionality of our services and we
expect the continuance of these expenses for the foreseeable future.
Selling and Marketing. Selling and marketing expense consists primarily of
personnel costs, travel, promotional events, including trade shows, seminars and
technical conferences, advertising and public relations programs. Selling and
marketing expense decreased from $6.6 million in 2001 to $2.4 million in 2002.
This decrease was primarily due to reductions in personnel costs and decreased
advertising, promotion and professional fees from 2001 to 2002. Personnel costs
decreased from $3.3 million in 2001 to $1.9 million in 2002. During 2001, we
incurred $1.4 million in advertising, promotion and professional fees to
increase the awareness of our viaLink services including the design and
production of sales collateral, media insertion costs and participation in
industry trade shows. During 2002, we incurred less than $0.3 million in
advertising, promotion and professional fees to promote our services. Our sales
and marketing team included 14 people at December 31, 2002. Selling and
marketing expense includes $0.5 million of non-cash service costs in 2001 for
the amortization of a portion of the fair value of the warrants and options
issued to alliance partners and other service providers. No amounts are included
in 2002.
General and Administrative (G&A). G&A expense consists primarily of the
personnel and other costs of the finance, human resources, administrative and
executive departments and the fees and expenses associated with legal,
accounting and other services. G&A expense decreased from $6.5 million in 2001
to $3.3 million in 2002. This decrease in G&A expense is attributable to several
factors: a) decrease of $0.9 million in employee compensation from 2001 to 2002;
b) decrease of $0.3 million in legal and other professional fees; and c) a
decrease of $0.6 million in recruiting fees and relocation of our offices from
Edmond, Oklahoma to Dallas, Texas. G&A expense for 2001 includes $0.6 million in
expenses recorded in connection with certain severance agreements with employees
that were terminated and the remaining obligation for abandoning our Oklahoma
City lease of approximately $0.6 million. In 2002, we successfully terminated
this lease in exchange for $100,000 in cash and $100,000 in our common stock. We
removed all obligations previously recorded related to this agreement resulting
in the reversal of $0.4 million of expense in 2002. G&A expense for 2002
includes $0.7 million in non-cash stock compensation expense
19
recorded for shares issued to terminate employment agreements and $0.3 million
for certain severance agreements with employees that were terminated. We
anticipate that our other G&A expenses will remain constant in absolute dollars
in 2003 reflecting the non-recurrence of the significant items above and further
reduced by effects of our cost reduction efforts taken during 2002.
Depreciation and Amortization. Depreciation and amortization expense
decreased from $1.5 million in 2001 to $1.2 million in 2002. This decrease
reflects the complete depreciation of certain long-lived assets and decreases in
capital expenditures in 2001 and 2002.
Interest Expense, Net. Interest expense, net, was $0.4 million in 2001.
This interest expense related to the amortization of the beneficial conversion
feature of the convertible note as more fully discussed in Note 5 to the
consolidated financial statements and the partial conversion of the convertible
promissory note in April of 2001 and debt extinguishment in November 2001.
Interest income on short-term investments was $0.1 million in 2001 with nominal
amounts recorded in 2002 reflecting decreased cash and investment balances.
Tax Provision. Deferred tax assets and deferred tax liabilities are
separately recognized and measured at currently enacted tax rates for the tax
effect of temporary differences between the financial reporting and tax
reporting bases of assets and liabilities, and net operating loss and tax credit
carryforwards for tax purposes. A valuation allowance must be established for
deferred tax assets if it is not "more likely than not" that all or a portion
will be realized. We have established a full valuation allowance for the net
deferred tax assets as of December 31, 2001 and December 31, 2002, generated by
losses recorded. We will continue to provide a full valuation allowance for
future and current net deferred tax assets until such time as we believe we have
sufficient objective evidence to support that it is more likely than not that
the asset will be realized.
Extraordinary Loss on Modification of Debt. In April 2001, Hewlett-Packard
converted $3.8 million of their secured convertible promissory note into 2.2
million shares of our common stock. In connection with this conversion we
modified certain terms of the secured convertible promissory note for the
remaining balance equal to $3.8 million. The modified note provided for: a) a
decrease in the stated interest rate to 6.0% per year; b) a cash payment of
$275,104 representing a closing fee; c) principal and interest payments payable
in twelve monthly installments of $326,094 beginning January 1, 2002 and a
maturity date of February 1, 2003. In connection with the conversion and the
modification of the note, we issued Hewlett-Packard warrants to purchase
1,384,658 shares of common stock at a purchase price of $3.75 per share. These
transactions with Hewlett-Packard resulted in an extraordinary loss of
approximately $2.9 million recorded in the second quarter of 2001. The
extraordinary loss represents the excess of the fair value of the modified
secured convertible promissory note and warrants issued over the $3.8 million
recorded value of the remaining portion of the convertible debt at the time of
the modification in accordance with the requirements of EITF 96-19, "Debtor's
Accounting for a Modification or Exchange of Debt Instruments." See the
following paragraph for discussion of the Second Global Amendment Agreement with
Hewlett-Packard which resulted in forgiveness of this note in September of 2002.
Extraordinary Gain on Extinguishment of Debt. Extraordinary gain on
extinguishment of debt in 2001 reflects the effect of our Settlement, Amendment,
and Mutual Release Agreement with Hewlett-Packard Company dated November 13,
2001. The $2.3 million recorded as an extraordinary gain was determined as the
excess of any and all amounts due to Hewlett-Packard which were forgiven,
including: a) the principal amount of $3,807,812.59 under the April 10, 2001,
secured convertible promissory note; and b) amounts payable under certain
services and lease agreements over consideration paid which includes: a) a cash
payment of $1,000,000; b) the change in fair value due to our modification of
the strike price of 1,384,658 warrants to $0.10 per share and c) a lease let-out
obligation for equipment no longer being used of $1.8 million. During September
2002, we entered into a Second Global Amendment Agreement with Hewlett-Packard
under which we agreed to pay Hewlett-Packard $350,000 and to issue to
Hewlett-Packard 2.0 million shares of our common stock in exchange for
forgiveness of approximately $2.1 million representing all amounts outstanding,
current and deferred, under certain equipment leases. This agreement resulted in
recording an extraordinary gain of $1.6 million for the extinguishment of debt
20
recorded in 2002. The gain represents the outstanding amounts less the cash paid
and the fair value of the common shares issued.
Dividends on Preferred Stock. Dividends on Preferred Stock includes the
allocation of the proceeds received to the warrants issued and beneficial
conversion features of our Preferred Stock issued during the respective periods.
During 2001, $12.8 million was recorded with the issuance of our Series A
Preferred Stock, $1.5 million for the Series B Preferred Stock and $1.9 million
for the Series C Preferred Stock. During 2002, $3.2 million was recorded with
the issuance of $4.0 million of our Series C Preferred Stock and $6.4 million
was recorded with the issuance of our Series D Convertible Preferred Stock.
Additionally, stated dividends were accrued from each date of issuance through
conversion on the Series A and Series B Preferred Stock. Dividends accrued on
the Series A Preferred Stock were paid in-kind with common shares at the time of
conversion during 2001. Dividends were accrued on the Series B Preferred stock
through conversion on September 30, 2002. The Series C Preferred Stock did not
provide for stated dividends. The Series D Convertible Preferred Stock accrues
dividends at 8% per annum and increases to 12% on January 1, 2004.
COMPARISON OF 2001 TO 2000
Revenues. Our revenues are comprised of revenues for subscriptions to our
services, implementation revenues and certain revenues for Web-hosting services.
We are no longer providing Web-Hosting services. The following table sets forth
for the periods indicated the components of revenue included in our consolidated
statements of operations:
2000 2001
---------- ----------
Revenues:
Subscription.............................................. $ 483,205 $1,381,990
Implementation............................................ 936,032 2,070,502
Hosting................................................... 202,200 --
---------- ----------
Total revenues............................................ $1,621,437 $3,452,492
========== ==========
Subscription and implementation revenues increased from 2000 to 2001
reflecting increases in the number of implementations and increases in
subscribers from 727 customers at December 31, 2000 to 799 customers at December
31, 2001. We expect continued increases in the number of customers purchasing
implementation and subscription services. Additionally, during 2000, we
increased the subscription rates that we charge for our services. Our current
pricing for retailers ranges from $25 per supplier per month for a small
retailer and a flat rate of up to $35,000 per month for the largest retailers.
Our pricing for suppliers ranges from $25 per retailer up to $5,000 per retailer
per month and a flat rate subscription price of up to $100,000 per month.
Customer Operations. Customer operations expense consists of personnel
costs associated with implementation, consulting and other services and costs of
operating, maintaining and accessing our technical operations and hosting
facilities. Customer operations expense also includes the cost of providing
support and maintenance to customers. Our customer operations expense increased
from $7.3 million in 2000 to $7.8 million in 2001. This increase is due
primarily to our expanded operations platform, including the hosting of our
technical operations by Hewlett-Packard. In October 2000 we entered into a lease
agreement with Hewlett Packard to expand our operations platform. This expanded
platform significantly increased the capacity and scalability of our operations.
The expanded platform was complete at the end of the first quarter of 2001. In
November 2001, we modified our agreement with Hewlett-Packard to reduce the
monthly service fees. We expect our customer operations expenses to decrease in
absolute dollars in 2002 reflecting the effects of our cost reduction efforts on
head count.
Development. Development expense includes personnel and contract labor
costs and professional fees incurred for product development, enhancements,
upgrades, quality assurance and testing. Our development expenses decreased from
$6.3 million in 2000 to $4.6 million in 2001. The decrease is due primarily
21
to our decreased use of alliance partners and other service providers to provide
development resources during 2001. In 2000, we incurred $0.5 million in
professional fees provided by Cap Gemini Ernst & Young, these services did not
recur in 2001. Contract labor decreased from $1.0 in 2000 to $0.2 million in
2001. The decrease is offset in part by increased personnel costs for our
development staff prior to our reduction in staff during the third quarter of
2001. During 2000, development includes approximately $1.1 million of non-cash
service costs for the amortization of a portion of the fair value of the
warrants and options issued to Cap Gemini Ernst & Young, i2 Technologies and
other service providers as compared to $0.5 million in 2001. We expect our
development expenses to decrease in absolute dollars in 2002 reflecting the
effects of our cost reduction efforts on head count and vendor costs.
Selling and Marketing. Selling and marketing expense consists primarily of
personnel costs, travel, promotional events, including trade shows, seminars and
technical conferences, advertising and public relations programs. Selling and
marketing expense decreased from $9.7 million in 2000 to $6.6 million in 2001.
This decrease was primarily due to reductions in advertising, promotion and
professional fees from 2000 to 2001. In 2000 we initiated a new marketing and
advertising program to promote our viaLink services for which we incurred $4.4
million in advertising, promotion and professional fees compared to $1.4 million
incurred in 2001. Selling and Marketing includes compensation expenses of $3.7
million and $3.3 million in 2000 and 2001, respectively. Selling and marketing
expense includes $1.1 million and $0.5 million of non-cash service costs in 2000
and 2001, respectively, for the amortization of a portion of the fair value of
the warrants and options issued to alliance partners and other service
providers. We expect selling and marketing expenses to decrease in absolute
dollars during 2002 as compared to 2001.
General and Administrative (G&A). G&A expense consists primarily of the
personnel and other costs of the finance, human resources, administrative and
executive departments and the fees and expenses associated with legal,
accounting and other services. G&A expense decreased from $13.6 million in 2000
to $6.5 million in 2001. This decrease in G&A expense is attributable to several
factors including items in 2000 that did not recur in 2001. In 2000 we incurred
$1.4 million in non-cash stock compensation, $2.6 million related to recruiting
and the relocation of the executive offices from Edmond, Oklahoma to Dallas,
Texas; $0.4 million in deferred offering costs written-off upon withdrawal of a
registration statement relating to a previously proposed offering of our common
stock; and $1.1 million to write-off a purchase deposit and an investment in a
note receivable. During 2001, stock compensation decreased to $0.3 million and
recruiting and relocation expenses decreased to $0.7 million. During 2001, we
recorded $1.2 million in expenses in connection with our office closure and
certain severance agreements with employees that were terminated. We anticipate
that our other G&A expenses will decrease in absolute dollars in 2002 reflecting
the completion of our move from Edmond to Dallas, non-recurrence of the
significant items above and further reduced by effects of our cost reduction
efforts.
Depreciation and Amortization. Depreciation and amortization expense
decreased from $1.6 million in 2000 to $1.5 million in 2001. This decrease
reflects the complete depreciation of certain long-lived assets and decreased
capital expenditures during 2001.
Interest Expense, Net. Interest expense, net, decreased from $2.4 million
in 2000. $0.4 million in 2001. This decrease reflects the completion of the
amortization of the beneficial conversion feature of the convertible note as
more fully discussed in Note 5 to the consolidated financial statements and the
partial conversion of the convertible promissory note in April of 2001 and debt
extinguishment in November 2001. We do not expect significant amounts of
interest expense in the future. Interest income on short-term investments was
$0.7 million in 2000 and $0.1 million in 2001 reflecting decreased cash and
investment balances during 2001.
In April 2001, Hewlett-Packard converted $3.8 million of their secured
convertible promissory note into 2.2 million shares of our common stock. In
connection with this conversion we modified certain terms of the secured
convertible promissory note for the remaining balance equal to $3.8 million. The
modified note provided for: a) a decrease in the stated interest rate to 6.0%
per year; b) a cash payment of $275,104 representing a closing fee; c) principal
and interest payments payable in twelve monthly installments of $326,094
beginning January 1, 2002 and a maturity date of February 1, 2003. In connection
22
with the conversion and the modification of the note, we issued Hewlett-Packard
warrants to purchase 1,384,658 shares of common stock at a purchase price of
$3.75 per share. These transactions with Hewlett-Packard resulted in an
extraordinary loss of approximately $2.9 million recorded in the second quarter
of 2001. The extraordinary loss represents the excess of the fair value of the
modified secured convertible promissory note and warrants issued over the $3.8
million recorded value of the remaining portion of the convertible debt at the
time of the modification in accordance with the requirements of EITF 96-19,
"Debtor's Accounting for a Modification or Exchange of Debt Instruments."
Gain on Sale of Assets. Gain on sale of assets was $0.1 million in 2000
and represents income recognized under our earn-out agreement with NetPlex. No
payments were received in 2001 and the earn-out agreement has expired.
Tax Provision. Deferred tax assets and deferred tax liabilities are
separately recognized and measured at currently enacted tax rates for the tax
effect of temporary differences between the financial reporting and tax
reporting bases of assets and liabilities, and net operating loss and tax credit
carryforwards for tax purposes. A valuation allowance must be established for
deferred tax assets if it is not "more likely than not" that all or a portion
will be realized. We have established a full valuation allowance for the net
deferred tax assets as of December 31, 2000 and December 31, 2001, generated by
losses recorded. We will continue to provide a full valuation allowance for
future and current net deferred tax assets until such time as we believe we have
sufficient objective evidence to support that it is more likely than not that
the asset will be realized.
Extraordinary Gain on Extinguishment of Debt. Extraordinary gain on
extinguishment of debt reflects the effect of our Settlement, Amendment, and
Mutual Release Agreement with Hewlett-Packard Company dated November 13, 2001.
The $2.3 million recorded as an extraordinary gain was determined as the excess
of any and all amounts due to Hewlett-Packard which were forgiven, including: a)
the principal amount of $3,807,812.59 under the April 10, 2001, secured
convertible promissory note; and b) amounts payable under certain services and
lease agreements over consideration paid which includes: a) a cash payment of
$1,000,000; b) the change in fair value due to our modification of the strike
price of 1,384,658 warrants to $0.10 per share and c) a lease let-out obligation
for equipment no longer being used of $1.8 million.
Dividends on Preferred Stock. Dividends on Preferred Stock includes the
allocation of the proceeds received to the warrants issued and beneficial
conversion features of the Series A Preferred Stock of $12.8 million, $1.5
million for the Series B Preferred Stock and $1.9 million for the Series C
Preferred Stock. Additionally, dividends of $0.4 million were accrued from each
date of issuance through conversion or December 31, 2001. Dividends accrued on
the Series A and Series B Preferred Stock were paid in-kind with common shares
at the time of conversion during 2001. The Series C Preferred Stock does not
provide for stated dividends. We will continue to accrue dividends through the
date that that the Series B Preferred Stock is converted into common stock.
LIQUIDITY AND CAPITAL RESOURCES
Our principal potential sources of liquidity are cash on hand, cash
generated from operations and cash provided from financing activities. As of
December 31, 2002, we had cash, cash equivalents and short-term investments of
$0.6 million.
During 2002, we used $9.4 million in operating activities reflecting a net
loss of $8.1 million. Cash used in operating activities also reflects: a) $1.8
million of depreciation and amortization; b) $0.7 million of non-cash stock
compensation; c) $1.6 million for the non-cash extraordinary gain on
extinguishment of debt; d) $0.4 million for the non-cash termination of lease
obligation; and e) $1.8 million in cash used in other working capital changes.
During 2001, we used $18.3 million in operating activities, comprised
principally of a net loss of $24.5 million. Cash used in operating activities
also reflects $2.2 million for non-cash stock compensation and interest expense
for the conversion feature of the Hewlett-Packard note, $2.1 million of
depreciation
23
and amortization, $2.9 million in non-cash extraordinary expense for warrants
issued to Hewlett-Packard in connection with the modification of the existing
convertible note in April 2000, $2.3 million of non-cash extraordinary gain
related to the extinguishment of the convertible note with Hewlett-Packard in
November 2001 and a $1.3 million increase in cash provided by other working
capital changes.
During 2000, we used $26.8 million in operating activities, comprised
principally of a net loss of $39.1 million. Cash used in operating activities
also reflects $7.2 million for non-cash stock compensation and interest expense
for the conversion feature of the Hewlett-Packard note, $2.1 million of
depreciation and amortization, $1.2 million in professional fees paid by issuing
common shares, $0.7 million write-off of deferred offering costs and note
receivable and a $1.1 million increase in cash provided by other working capital
changes.
During 2002, we used approximately $0.2 million in investing activities
reflecting capital expenditures compared to capital expenditures of
approximately $0.5 million in 2001.
During 2000, investing activities provided $4.6 million in net cash. This
amount reflects $8.0 million received upon the maturities of short-term
investments, as partially offset by reinvestment of $1.5 million, investment in
notes receivable of $0.3 million and $1.6 million in capital expenditures and
capitalized software development costs.
During 2002, financing activities provided net cash of $7.4 million,
primarily the result of the issuance of 400 shares of Series C Preferred Stock,
799 shares of Series D Convertible Preferred stock and 15.0 million shares of
our common stock for warrants exercised, less offering and registration costs of
$0.5 million.
During 2001, financing activities provided net cash of $18.5 million,
primarily the result of the issuance of $17.3 million of preferred stock and
$2.6 million from the issuance of 17.0 million shares of our common stock.
Additionally, we received $1.1 million in proceeds from the exercise of
outstanding stock options and warrants and purchases under stock purchase plans
and incurred approximately $1.9 million of offering placement and registration
costs. Additionally, we paid $0.5 million in cash to extinguish approximately
$3.8 million of convertible notes.
During 2000, financing activities provided net cash of $16.6 million,
primarily the result of the issuance of 1.5 million shares of our common stock.
Additionally, we received $1.0 million in proceeds from the exercise of
outstanding stock options and warrants and purchases under stock purchase plans
and incurred approximately $0.5 million of offering costs, a portion of which
were subsequently written-off.
During the second quarter of 2001, the company commenced implementation of
a cost cutting program. Initiatives included the closing of offices in Edmond,
Oklahoma and Chicago, Illinois, a voluntary 25 percent base pay deferral and
bonus elimination by senior management, realignment of development expenses in
conjunction with customers' near-term implementation schedules and lower vendor
service costs.
During the third quarter of 2001, the company continued its efforts to
reduce its cost structure. The reductions included a reduction in the then
current workforce of approximately 45 percent, salary reductions for remaining
employees, including additional salary reductions by senior management, and
expense reductions including travel, administrative and vendor service costs. As
a result of these changes, the gross cash operating expenses were decreased to
approximately $1.0 million per month (excluding non-cash items) during late
2001.
During the third quarter and into the fourth quarter of 2002, the company
has taken and continues to take additional measures to reduce its cost
structure. The reductions have included headcount reductions at the executive
level, negotiations with significant vendors and other expense reductions
including travel, administrative and vendor service costs. As a result of these
changes, the gross cash operating expenses have decreased to approximately $0.8
million per month (excluding non-cash items) during the fourth quarter of 2002
and into early 2003.
24
We have incurred operating losses and negative cash flow in the past and
expect to incur operating losses and negative cash flow through 2003. Our
spending may increase in the future for further technology and product
development and other technology and database costs. We also expect increases in
customer operations expense to be incurred after corresponding increases in
contracted revenues.
Our independent auditors have issued their Independent Auditors' Report on
the Company's consolidated financial statements for the fiscal year ended
December 31, 2002 with an explanatory paragraph regarding the Company's ability
to continue as a going concern. We have generated net losses for the years ended
December 31, 2000, 2001 and 2002 and have generated an accumulated deficit of
$85.3 million as of December 31, 2002. We have incurred operating losses and
negative cash flow in the past and expect to incur operating losses and negative
cash flow during 2003. During the second quarter of 2001 we began to experience
delays in signing small supplier customers which were an important component of
our expected implementation revenues for the second quarter of 2001 and these
delays have continued into 2002. These efforts are a part of our retailer
"community development" activities. We continue to pursue sales efforts with the
small suppliers and still believe that they will become subscribers to our
services. Due to these delays, we have focused our sales efforts on leading
customers, particularly retailers, each of which could have a greater
incremental effect on increasing subscription revenues. An increase in the
number of leading customers is critical to generating positive cash flow from
operations.
The delay in generating revenues creates a need for us to obtain additional
capital in 2003 in order for us to execute our current business plan
successfully. The amount of capital will be dependent upon (a) our services
achieving market acceptance, (b) the timing of additional customer signings, (c)
our ability to sustain current decreased levels of spending, and/or (d) the
amount of, if any, unanticipated expenditures. There can be no assurance as to
whether, when or the terms upon which any such capital may be obtained. Any
failure to obtain an adequate and timely amount of additional capital on
commercially reasonable terms could have a material adverse effect on our
business, financial condition and results of operations, including our ability
to continue as a going concern.
We currently have 300 million shares of common stock authorized for
issuance by our stockholders. As of March 25, 2003, we have either issued or
reserved nearly all of it for (a) future conversion of issued preferred stock
and (b) exercises of issued warrants and stock options. For the last 24 months
we have obtained working capital primarily from the sale and issuance of common
stock or warrants. If the stockholders at the 2003 annual meeting of
stockholders of the Company do not authorize additional shares of common stock
for sale and issuance by us, this historical source of working capital will no
longer be available to us.
The Company leases its office and storage space under operating leases. The
terms range from month-to-month up to five years and include options to renew.
The Company also leases office equipment under various non-cancelable lease
agreements.
Future minimum lease payments under non-cancelable operating leases at
December 31, 2002 follows:
OPERATING
LEASES
----------
2003........................................................ $ 531,000
2004........................................................ 531,000
2005........................................................ 531,000
2006........................................................ 442,000
Thereafter.................................................. --
----------
Future minimum lease payments............................... $2,035,000
==========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, issued Statement of
Financial Accounting Standards (SFAS) No. 133. SFAS No. 133, as amended,
establishes new standards of accounting and
25
reporting for derivative instruments and hedging activities. SFAS No. 133
requires that all derivatives be recognized at fair value in the balance sheet,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. SFAS No. 133 was effective for our fiscal
year 2001. SFAS No. 133 did not have a material effect on our financial position
or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Xxxxxxxx Xx. 000, Xxxxxxx Recognition in Financial Statements (SAB
101), providing the staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. SAB 101 became effective for
the fourth quarter of the year ended December 31, 2000. The cumulative effect of
the adoption of SAB 101 is reported as a change in accounting method as of
January 1, 2000 in our December 31, 2000 financial statements. The adoption of
SAB 101 results in the deferral of a portion of our implementation revenues and
expenses for each customer over the period the subscription-based viaLink
services are provided. Effective January 1, 2000, we recorded a cumulative
effect adjustment increasing deferred revenue and deferred customer operations
expense by $107,000 with no change to stockholders' equity or retained earnings.
Adoption of SAB 101 resulted in increased revenues and customer operations
expense of $45,000 for the year ended December 31, 2000.
In June 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 141 also specifies the criteria
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. Statement 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The Company was required to adopt the provisions of Statement 141
immediately. Furthermore, any goodwill and any intangible asset determined to
have an indefinite useful life that are acquired in a purchase business
combination completed after June 30, 2001 will not be amortized, but will
continue to be evaluated for impairment.
The Company has adopted the provisions of SFAS No. 141 and SFAS No. 142.
The adoption of SFAS No. 142 did not have a significant impact on its financial
condition or results of operations.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. The Company will adopt SFAS No. 143 in fiscal year 2003. The
Company does not expect the provisions of SFAS No. 143 to have a material effect
on its financial condition and results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The Company adopted SFAS No. 144 in fiscal year 2002. The
adoption of the provisions of SFAS No. 144 did not have a significant impact on
its financial condition or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 applies to costs
associated with an exit activity (including restructuring) or with a disposal of
long-lived assets. SFAS No. 146 is effective prospectively for exit or disposal
activities initiated subsequent to December 31, 2002. The Company does not
expect the provisions of SFAS No. 146 to have a material effect on its financial
condition and results of operations.
26
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The Company has implemented
the transition and annual disclosure requirements as required by SFAS No. 148,
which were effective for fiscal years ending after December 15, 2002. The
interim disclosure requirements are effective for the first interim period
beginning after December 15, 2002. The Company does not expect SFAS No. 148 to
have a material effect on its financial condition and results of operations.
In November 2002, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company is currently evaluating the effect that the adoption of EITF Issue No.
00-21 will have on its financial condition and results of operations.
ITEM 7. FINANCIAL STATEMENTS
See Index to Financial Statements on Page F-1 of this Annual Report on Form
10-KSB.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth under the caption
"Management" in the Company's definitive Proxy Statement for its annual meeting
of stockholders (the "Proxy Statement"), which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934 and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the caption
"Executive Compensation" in the Proxy Statement, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The additional information required by this Item is set forth under the
caption "Certain Transactions" in the Proxy Statement, which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and is incorporated herein by reference.
TRANSACTIONS WITH HEWLETT-PACKARD
On February 4, 1999, we entered into a financing agreement and note
purchase agreement with Hewlett-Packard pursuant to which Hewlett-Packard
purchased a $6.0 million subordinated secured convertible promissory note,
convertible into common stock at the option of Hewlett-Packard beginning
27
August 2000 at a conversion price of $1.75 per share. The note provided for
interest at 11.5% per annum, with interest payments deferrable to maturity in
February 2004. The note contained a beneficial conversion feature valued at
approximately $20.0 million at the commitment date. Accordingly, we allocated
the full amount of proceeds to the beneficial conversion feature and recorded
$6.0 million as additional paid-in capital at the time of closing. The amount
was accreted by charges to interest expense and corresponding increases in
long-term debt during the period from issuance of the note to August 2000 when
the note became convertible. Non-cash interest charges of $3.6 million and $2.4
million were recognized in 1999 and 2000, respectively, as accreted charges to
interest expense. We recognized interest expense at 11.5% per annum until the
note was converted to common stock.
In April 2001, Hewlett-Packard converted $3.8 million of their secured
convertible promissory note into 2.2 million shares of our common stock. In
connection with this conversion we modified certain terms of the secured
convertible promissory note for the remaining balance equal to $3.8 million. The
modified note provided for: a) a decrease in the stated interest rate to 6.0%
per year; b) a cash payment of $275,104 representing a closing fee; c) principal
and interest payments payable in twelve monthly installments of $326,094
beginning January 1, 2002 and a maturity date of February 1, 2003. In connection
with the conversion and the modification of the note, we issued Hewlett-Packard
warrants to purchase 1,384,658 shares of common stock at a purchase price of
$3.75 per share. These transactions with Hewlett-Packard resulted in an
extraordinary loss of approximately $2.9 million recorded in the second quarter
of 2001. The extraordinary loss represents the excess of the fair value of the
modified secured convertible promissory note and warrants issued over the $3.8
million recorded value of the remaining portion of the convertible debt at the
time of the modification in accordance with the requirements of EITF 96-19,
"Debtor's Accounting for a Modification or Exchange of Debt Instruments."
On November 13, 2001, we entered into a Settlement, Amendment, and Mutual
Release Agreement with Hewlett-Packard Company whereunder (1) any and all past
due amounts under any obligation of ours to Hewlett-Packard were forgiven and we
were released from any and all claims by Hewlett-Packard of any kind including
those based upon the antecedent debts, (2) the principal amount of $3.8 million
under the April 10, 2001, secured convertible promissory note was forgiven, (3)
the security interest of Hewlett-Packard in our intellectual property was
terminated, (4) our purchase option for various items of equipment under expired
equipment leases was preserved to allow us to purchase computer equipment having
a value of approximately $100,000, and (5) the monthly payments under an ongoing
equipment lease and support agreement were lowered to approximately $200,000,
all in exchange for the our agreeing to (a) pay the sum of $1,000,000 to
Hewlett-Packard, (b) restructure and extend the term of the equipment lease with
Hewlett-Packard by adding an additional year to the term, thus ending the lease
in July 2004, (c) repricing 1,384,658 warrants for our common stock obtained by
Hewlett-Packard in connection with the April 10, 2001, promissory note from
$3.75 per share to $0.10 per share, and (d) releasing Hewlett-Packard from any
and all claims. Under the terms of this agreement Hewlett-Packard will maintain
a security interest in the equipment it leases to us on a going forward basis.
The $2.3 million recorded as an extraordinary gain was determined as the excess
of any and all amounts due to Hewlett-Packard which were forgiven, including: a)
the principal amount of $3.8 million under the secured convertible promissory
note; and b) $1.4 million for amounts payable under certain services and lease
agreements over consideration paid which includes: a) a cash payment of
$1,000,000; b) the change in fair value due to our modification of the strike
price of 1,384,658 warrants to $0.10 per share and c) a lease let-out obligation
for equipment no longer being used of $1.8 million. This transaction was
accounted for in accordance with the provisions of Statement of Financial
Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled
Debt Restructurings."
At the time of this settlement, we also entered into a lease let-out
agreement with Hewlett-Packard which provided for our continued obligation for
certain assets leased from Hewlett-Packard under operating leases. These assets
were not being used by the company and we agreed to allow Hewlett-Packard to
sell these assets and reduce the amounts due under the let-out agreement. The
total lease obligation of $1.8 million was accrued at December 31, 2001 as a
component of the extraordinary gain recorded in 2001. During September 2002, we
entered into a Second Global Amendment Agreement with
28
Hewlett-Packard. Under this agreement, we agreed to pay Hewlett-Packard $350,000
and to issue to Hewlett-Packard 2.0 million shares of our common stock in
exchange for forgiveness of approximately $2.1 million representing all amounts
outstanding, including the lease let-out entered into in 2001. This agreement
resulted in recording an extraordinary gain of $1.6 million for the
extinguishment of debt recorded in 2002. The gain represents the outstanding
amounts less the cash paid and the fair value of the common shares issued.
Additionally, we modified the payment terms under an existing lease for
equipment under lease which is recorded as a capital lease at December 31, 2002.
The modified terms require payments totaling $480,000 over a period of 24
months.
TRANSACTIONS WITH CAP GEMINI ERNST & YOUNG LLP
On May 3, 1999, the Company entered into an agreement with Cap Gemini Ernst
& Young LLP (CGEY), pursuant to which CGEY provided us with consulting and
integration services and sales and marketing support, to assist in the
development and market penetration of our viaLink services. In connection with
this agreement, we issued CGEY a warrant to purchase up to 1,000,000 shares of
our common stock at a price of $2.00 per share contingent upon our ability to
register the common stock underlying the warrant agreement. Additionally, we
agreed to pay a royalty of 7.0% of our service revenues to CGEY for a period of
two years and, in the event that at least ten "significant clients" of CGEY
become subscribers to our services during this two year period, we would have
been obligated to continue this royalty payment in perpetuity. CGEY will not
receive any royalties for services we provide to clients subject to the
reporting requirements of the federal securities laws for which it serves as the
principal independent auditor. As of the date of the issuance of the warrant,
the warrant conversion price was below the fair value of our stock. The fair
value of this warrant was recorded as an asset and an increase in additional
paid in capital of $1.9 million. On August 9, 1999, CGEY exercised warrants to
purchase 250,000 shares of common stock resulting in gross proceeds received by
us of $500,000. On November 10, 1999, CGEY exercised warrants to purchase the
remaining 750,000 shares of common stock resulting in gross proceeds received by
us of $1.5 million. During 2000, royalties under this agreement totaled $96,000
and are included in selling and marketing expense. Effective May 2001, we
terminated our agreements with CGEY.
TRANSACTIONS WITH i2 TECHNOLOGIES, INC.
On October 12, 1999, The Company entered into a strategic relationship with
i2 Technologies, Inc. ("i2"), the primary focus of which was to integrate the
products and services of our two companies and to extend the solutions across
multiple industries. i2 was to use our syncLink services to provide product,
price and promotion information to facilitate business processes between trading
partners using an Internet-accessible shared database. Our two companies agreed
to develop joint sales and marketing programs, and develop enhancements to the
viaLink services. Additionally, i2 invested $5.0 million in the Company in
exchange for 895,536 shares of
viaLink common stock and a warrant to purchase up
to an additional 746,268 shares of common stock at $6.70 per share, representing
a twenty percent (20%) premium over the market price of the stock at the time of
the agreement. The initial term of the agreement was to expire on December 31,
2003. The fair value of this warrant was recorded as an asset and an increase in
additional paid-in capital and resulted in non-cash charges to our statement of
operations during the term of the agreement. Additionally we agreed to pay i2 a
royalty of five percent (5%) of the syncLink and Chain Pricing subscription
revenues during the period the agreement is in place. We also agreed to pay a
royalty, in addition to the five percent, based upon subscription revenues
received from new customers with whom i2 had "significant involvement" in the
sales process. i2 agreed to pay us a royalty based upon revenues i2 received
from providing syncLink and Chain Pricing services outside of the consumer
packaged goods industry. During 2000, royalties under this agreement totaled
$26,000 and are included in selling and marketing expense. Effective January 29,
2001, we terminated our agreements with i2.
29
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual report on Form
10-KSB:
1. Financial Statements
See Index to Financial Statements on page F-1 of this Annual Report on Form
10-KSB
2. Financial Statements Schedules
Financial statement schedules under the applicable rules and regulations of
the Securities and Exchange Commission have been omitted as the schedules are
not applicable or the information required thereby is included in the Company's
financial statements or notes thereto.
3. Exhibits
The following instruments are included as exhibits to the report. Exhibits
incorporated by reference are so indicated.
4.1(1) Form of Certificate of Common Stock
4.2(2) Form of Series A Warrant
4.3(3) Form of Series D Convertible Preferred Stock
4.4(4) Form of Purchase Agreement for Series D Convertible
Preferred Stock
4.5(4) Certificate of Designations relating to Series D Convertible
Preferred Stock
4.6(4) Form of Series D Warrant
4.7(4) Form of Registration Rights Agreement
4.8(5) Form of Second Global Amendment Agreement entered into by
and between Hewlett-Packard Company and the Registrant
4.11(3) Series D Convertible Preferred Stock Purchase Agreement
Dated as of September 30, 2002, among the Registrant and
Certain Purchasers
4.12(3) Series D Convertible Preferred Stock Purchase Agreement
Dated as of September 30, 2002, among the Registrant and
Certain Purchasers
10.1(3) Form of Service Agreement
10.2(6) Separation Agreement entered into by and between Xxxxxx X.
Xxxxx and the Registrant
10.3(6) Separation and Consulting Agreement entered into by and
between Xxxx Xxxxxxxx and the Registrant
10.4(6) Termination of Executive Security Agreement entered into by
and between Xxxxx X. Xxxxxx and the Registrant
10.5(6) Amendment to Employment Agreement and Termination of
Executive Security Agreement entered into between Xxxxxxx X.
Xxxxxxxx and the Registrant
10.6(6) Separation Agreement entered into between Xxxxx X. Xxxxx and
the Registrant
10.7(3) Release Agreement entered into between Edmond, Oklahoma,
landlord and the Registrant ending all obligations for the
Registrant's former offices
10.8(3) Amendment to Employment Agreement between Xxxxx X. Xxxxxx
and the Registrant
10.9(7) Termination of Employment Agreement between Xxxxx X.
Xxxxxxxxx and the Registrant
10.10(7) Separation Agreement between Xxxxx Xxxxx and the Registrant
10.11(3) Amendment to Employment Agreement between Xxxxxx X. Xxx and
the Registrant
10.12(3) Amendment to Employment Agreement between Xxxx Xxxxx and the
Registrant
10.13(8) Employment Agreement between Xxxx Xxxxx and the Xxxxxxxxxx
00 Consent of KPMG LLP
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
30
---------------
(1) Incorporated herein by reference to the Registrant's Registration Statement
on Form 8-A/A Amendment No. 2 filed under Section 12(g) of the Exchange Act
on June 21, 2000.
(2) Incorporated by reference herein to the Registrant's Current Report on Form
8-K dated February 7, 2001.
(3) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-2/A Amendment No. 2 filed on January 23, 2003.
(4) Incorporated by reference herein to the Registrant's Current Report on Form
8-K dated October 2, 2002.
(5) Incorporated by reference herein to the Registrant's Current Report on Form
8-K dated September 5, 2002.
(6) Incorporated by reference herein to the Registrant's Quarterly Report on
Form 10-QSB for the period ending June 30, 2002.
(7) Incorporated by reference herein to the Registrant's Quarterly Report on
Form 10-QSB for the period ending September 30, 2001.
(8) Incorporated by reference herein to the Registrant's Annual Report on Form
10-KSB for the fiscal year ending December 31, 2000.
4. Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K, dated December 20, 2002,
reporting pursuant to Item 5 of such Form that one of our Directors has advised
us that he has entered into a written stock selling plan in accordance with SEC
Rule 10b5-1. Pursuant to which he will gradually liquidate a portion of his
holdings in the Company.
The Registrant filed a Current Report on Form 8-K, dated January 24, 2003,
reporting pursuant to Item 5 of such Form that the Board of Directors of The
viaLink Company in its meeting on Friday, January 24, 2003, named Xxxxxx X. Xxx
to the office of Chief Executive Officer. The Board also increased the number of
Directors to seven and appointed Xx. Xxx as a Class 1 Director, to serve until
re-elected at the Company's 2003 Annual Meeting.
The Registrant filed a Current Report on Form 8-K, dated February 5, 2003,
reporting pursuant to Item 5 of such Form that it had received $1.26 million to
complete the round of financing announced in October, 2002. This financing
provided the company with a total of $4.5 million in equity financing.
The Registrant filed a Current Report on Form 8-K, dated March 6, 2003,
reporting pursuant to Item 5 of such Form that will announce its fourth quarter
and full year 2002 results on March 13, 2003. Additionally, the company will
host an investor conference call the same day at 4:30 p.m. Eastern Standard
Time, to review the company's results.
The Registrant filed a Current Report on Form 8-K, dated March 13, 2003,
reporting pursuant to Item 5 of such Form the company's condensed, consolidated
results for the fourth quarter and full year 2002.
31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, as of the 28th day of March, 2003.
THE
VIALINK COMPANY
(Registrant)
By: /s/ XXXXXX X. XXX
------------------------------------
Xxxxxx X. Xxx
Chief Executive Officer
By: /s/ XXXXX X. XXXXXX
------------------------------------
Xxxxx X. Xxxxxx
Vice President, Chief Financial
Officer
(principal financial and accounting
officer)
32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I certify that:
1. I have reviewed this report on Form 10-KSB of The
viaLink Company as of,
and for, the periods presented in this report;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the periods covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operation and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company is made known to us by others,
particularly during the periods in which this report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
report (the "Evaluation Date"); and
(c) presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit committee of
our board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect our ability to record,
process, summarize, and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The Company's other certifying officer and I have indicated in this
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By: /s/ XXXXXX X. XXX
------------------------------------
Xxxxxx X. Xxx
Chief Executive Officer
Date: March 31, 2003
33
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I certify that:
1. I have reviewed this report on Form 10-KSB of The
viaLink Company as of,
and for, the periods presented in this report;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the periods covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operation and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company is made known to us by others,
particularly during the periods in which this report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
report (the "Evaluation Date"); and
(c) presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit committee of
our board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect our ability to record,
process, summarize, and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The Company's other certifying officer and I have indicated in this
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By: /s/ XXXXX X. XXXXXX
------------------------------------
Xxxxx X. Xxxxxx
Vice President and Chief Financial
Officer
Date: March 31, 2003
34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF THE
VIALINK COMPANY
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 2001 and
2002................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 2001 and 2002....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 2000, 2001 and 2002... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002....................... F-6
Notes to Consolidated Financial Statements................ F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The
viaLink Company:
We have audited the accompanying consolidated balance sheets of The viaLink
Company and its subsidiary as of December 31, 2001 and 2002, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The viaLink Company and its subsidiary as of December 31, 2001 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in note 2 to
the consolidated financial statements, the Company's recurring losses from
operations and resulting dependence upon access to additional external financing
raise substantial doubt concerning its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
Dallas, Texas
March 14, 2003
F-2
THE VIALINK COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2002
2001 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,702,782 $ 561,617
Accounts receivable -- trade, net of allowance for
doubtful accounts of $100,000 in 2001 and $115,000 in
2002................................................... 798,379 965,158
Prepaid expenses and other current assets................. 463,752 156,503
------------ ------------
Total current assets................................. 3,964,913 1,683,278
Furniture, equipment and leasehold improvements, net........ 1,450,387 782,870
Software development costs, net............................. 996,942 410,598
Other assets................................................ 86,464 60,197
------------ ------------
Total assets......................................... $ 6,498,706 $ 2,936,943
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................. $ 5,611,357 $ 1,293,257
Deferred revenues......................................... 273,405 44,459
Current portion of capital lease obligations.............. -- 148,758
------------ ------------
Total current liabilities............................ 5,884,762 1,486,474
Long-term liabilities:
Capital lease obligations, less current portion........... -- 237,020
------------ ------------
Total liabilities.................................... 5,884,762 1,723,494
Commitments and contingencies (Notes 6 and 10)
Redeemable convertible preferred stock:
Series B Preferred stock, $.001 par value; 10,000,000
shares authorized; 90 shares issued and outstanding at
December 31, 2001,..................................... 907,841 --
Series C Preferred stock, $.001 par value; 10,000,000
shares authorized; 300 shares issued and outstanding at
December 31, 2001,..................................... 3,000,000 --
Stockholders' equity (deficit):
Common stock, $.001 par value; 300,000,000 shares
authorized; 67,076,838 and 160,519,660 shares issued
and outstanding at December 31, 2001 and 2002,
respectively........................................... 67,077 160,520
Series D Preferred stock, $.001 par value; 10,000,000
shares authorized; 799 shares issued and outstanding at
December 31, 2002...................................... -- 9,584,850
Additional paid-in capital................................ 73,835,260 76,724,178
Accumulated deficit....................................... (77,196,234) (85,256,099)
------------ ------------
Total stockholders' equity (deficit)................. (3,293,897) 1,213,449
------------ ------------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit).................... $ 6,498,706 $ 2,936,943
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
THE VIALINK COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
2000 2001 2002
------------ ------------ ------------
Revenues:
Subscription..................................... $ 483,205 $ 1,381,990 $ 2,825,350
Implementation................................... 936,032 2,070,502 1,630,897
Web-Hosting...................................... 202,200 -- --
------------ ------------ ------------
Total revenues.............................. $ 1,621,437 $ 3,452,492 $ 4,456,247
Operating expenses:
Customer operations.............................. 7,308,645 7,800,644 5,070,716
Development...................................... 6,281,645 4,559,379 2,115,012
Selling and marketing............................ 9,729,799 6,566,305 2,429,091
General and administrative....................... 13,604,905 6,485,779 3,289,022
Depreciation and amortization.................... 1,570,057 1,498,569 1,241,088
------------ ------------ ------------
Total operating expenses.................... 38,495,051 26,910,676 14,144,929
------------ ------------ ------------
Loss from operations............................... (36,873,614) (23,458,184) (9,688,682)
Interest expense, net............................ (2,379,909) (377,088) --
Gain on sale of assets........................... 124,419 -- --
------------ ------------ ------------
Net loss before extraordinary items:............... (39,129,104) (23,835,272) (9,688,682)
Extraordinary loss on modification of debt....... -- (2,927,773) --
Extraordinary gain on extinguishment of debt..... -- 2,296,022 1,628,817
------------ ------------ ------------
Net loss........................................... (39,129,104) (24,467,023) (8,059,865)
Dividends on preferred stock:
Value of warrants and beneficial conversion... -- (16,238,970) (9,599,655)
Stated dividends.............................. -- (445,426) (39,945)
------------ ------------ ------------
Net loss applicable to common stock................ $(39,129,104) $(41,151,419) $(17,699,465)
============ ============ ============
Net loss applicable to common stock per common
share --
Basic and diluted............................. $ (1.89) $ (1.22) $ (0.17)
============ ============ ============
Weighted average common shares outstanding --
Basic and diluted............................. 20,732,411 33,805,389 103,731,119
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
THE VIALINK COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED
--------------------- ---------------------- PAID-IN STOCK
SHARES AMOUNTS SHARES AMOUNTS CAPITAL COMPENSATION
------ ------------ ----------- -------- ------------ ------------
Balance, January 1, 2000..................... -- $ -- 9,784,822 $ 9,785 $ 31,750,749 $(1,389,079)
Exercise of stock options and warrants..... 1,471,737 1,472 812,646
Stock issued under employee stock purchase
plan..................................... 42,561 43 196,609
Issuance of stock options to service
providers................................ 424,541
Issuance of stock options to employees..... 997,500 (997,500)
Amortization of unearned stock
compensation............................. 1,898,684
Proceeds from issuance of common stock,
net...................................... 1,494,351 1,494 16,066,306
Issuance of common stock for services...... 80,817 81 1,663,954
Two-for-one stock split, March 2000 (Note
7)....................................... 9,905,278 9,905 (9,905)
Net loss...................................
------ ------------ ----------- -------- ------------ -----------
Balance, December 31, 2000................... -- -- 22,779,566 22,780 51,902,400 (487,895)
Exercise of stock options and warrants..... 4,264,123 4,264 692,557
Stock and options issued under employee
stock purchase and option plans.......... 1,049,797 1,049 516,125 (140,000)
Amortization of unearned stock
compensation............................. 627,895
Fair value adjustment, stock options to
service providers........................ (17,243)
Partial conversion of convertible note..... 2,175,893 2,176 3,805,637
Issuance of warrants to Hewlett Packard.... 2,951,329
Proceeds from issuance of common stock..... 17,032,812 17,033 2,607,987
Proceeds from issuance of preferred
stock.................................... 4,647 16,238,970
Offering, placement and registration
costs.................................... 3,030,000 3,030 (1,978,196)
Dividends on preferred stock:
Beneficial conversion feature............ 12,779,250 (16,238,970)
Stated dividends......................... 437,092 (445,426)
Common stock issued:
Series A preferred conversion............ (4,647) (12,779,250) 12,712,490 12,713 12,766,537
Series B preferred conversion............ 3,036,592 3,037 596,963
Dividends paid with common Stock......... (437,092) 995,565 995 436,590
Net loss...................................
------ ------------ ----------- -------- ------------ -----------
Balance, December 31, 2001................... -- $ -- 67,076,838 $ 67,077 $ 73,835,260 $ --
Exercise of stock options and warrants..... 14,989,873 14,991 657,794
Stock issued under employee stock purchase
and option plans......................... 2,997,637 2,997 442,272
Restricted stock issued to employees....... 7,828,417 7,828 696,730
Stock issued to Hewlett Packard............ 2,000,000 2,000 78,000
Beneficial conversion feature of Series C
Preferred Stock issued................... 1,299,108
Value assigned to warrants issued and
modified in connection with the issuance
of Series C
Preferred Stock.......................... 1,911,613
Value assigned to warrants and common
shares issued in connection with the
issuance of Series D Preferred Stock..... 39,936,877 39,937 3,380,906
Offering and registration costs............ 1,825,455 1,825 (548,532)
Issuance of Series D Preferred Stock:
Exchange of Series B and Series C
Preferred Stock........................ 513 3,195,916 2,777,826
Dividends on Preferred Stock:
Value attributed to Beneficial conversion
feature, shares and warrant:
Series C............................... (3,210,721)
Series D............................... 286 6,388,934 (6,388,934)
Stated dividend at 6%.................. (39,945)
Dividends on Preferred Stock paid with
Common stock............................. 7,872,583 7,873 (7,873)
Series C Preferred Stock conversion into
Common stock............................. 15,991,980 15,992 1,840,674
Net loss.................................
------ ------------ ----------- -------- ------------ -----------
Balance, December 31, 2002................... 799 $ 9,584,850 160,519,660 $160,520 $ 76,724,178 $ --
====== ============ =========== ======== ============ ===========
ACCUMULATED
(DEFICIT) TOTAL
------------ ------------
Balance, January 1, 2000..................... $(13,600,107) $ 16,771,348
Exercise of stock options and warrants..... 814,118
Stock issued under employee stock purchase
plan..................................... 196,652
Issuance of stock options to service
providers................................ 424,541
Issuance of stock options to employees..... --
Amortization of unearned stock
compensation............................. 1,898,684
Proceeds from issuance of common stock,
net...................................... 16,067,800
Issuance of common stock for services...... 1,664,035
Two-for-one stock split, March 2000 (Note
7)....................................... --
Net loss................................... (39,129,104) (39,129,104)
------------ ------------
Balance, December 31, 2000................... (52,729,211) (1,291,926)
Exercise of stock options and warrants..... 696,821
Stock and options issued under employee
stock purchase and option plans.......... 377,174
Amortization of unearned stock
compensation............................. 627,895
Fair value adjustment, stock options to
service providers........................ (17,243)
Partial conversion of convertible note..... 3,807,813
Issuance of warrants to Hewlett Packard.... 2,951,329
Proceeds from issuance of common stock..... 2,625,020
Proceeds from issuance of preferred
stock.................................... 16,238,970
Offering, placement and registration
costs.................................... (1,975,166)
Dividends on preferred stock:
Beneficial conversion feature............ (3,459,720)
Stated dividends......................... (8,334)
Common stock issued:
Series A preferred conversion............ --
Series B preferred conversion............ 600,000
Dividends paid with common Stock......... 493
Net loss................................... (24,467,023) (24,467,023)
------------ ------------
Balance, December 31, 2001................... $(77,196,234) $ (3,293,897)
Exercise of stock options and warrants..... 672,785
Stock issued under employee stock purchase
and option plans......................... 445,269
Restricted stock issued to employees....... 704,558
Stock issued to Hewlett Packard............ 80,000
Beneficial conversion feature of Series C
Preferred Stock issued................... 1,299,108
Value assigned to warrants issued and
modified in connection with the issuance
of Series C
Preferred Stock.......................... 1,911,613
Value assigned to warrants and common
shares issued in connection with the
issuance of Series D Preferred Stock..... 3,420,843
Offering and registration costs............ (546,707)
Issuance of Series D Preferred Stock:
Exchange of Series B and Series C
Preferred Stock........................ 5,973,742
Dividends on Preferred Stock:
Value attributed to Beneficial conversion
feature, shares and warrant:
Series C............................... (3,210,721)
Series D............................... --
Stated dividend at 6%.................. (39,945)
Dividends on Preferred Stock paid with
Common stock............................. --
Series C Preferred Stock conversion into
Common stock............................. 1,856,666
Net loss................................. (8,059,865) (8,059,865)
------------ ------------
Balance, December 31, 2002................... $(85,256,099) $ 1,213,449
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
THE VIALINK COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
2000 2001 2002
------------ ------------ -----------
Cash flows from operating activities:
Net loss.............................................. $(39,129,104) $(24,467,023) $(8,059,865)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 2,068,341 2,116,819 1,827,432
Non-cash stock compensation........................ 1,898,684 627,895 704,558
Non-cash service costs for warrant and options
issued to service providers...................... 2,243,602 1,025,623 --
Non-cash extraordinary loss on modification of
debt............................................. -- 2,927,773 --
Non-cash extraordinary gain on extinguishment of
debt............................................. -- (2,296,022) (1,628,817)
Non-cash interest expense on convertible debt...... 3,083,116 497,733 --
Professional fees paid with common shares.......... 1,185,883 -- --
Write-off of deferred offering costs and notes
receivable....................................... 671,248 -- --
Non-cash termination of lease obligation........... -- -- (391,000)
Increase (decrease) in cash for changes in:
Accounts receivable, net......................... (391,867) (283,716) (166,779)
Prepaid expenses and other assets................ 216,682 209,976 333,516
Accounts payable and accrued liabilities......... 1,201,562 1,173,471 (1,773,014)
Deferred revenue................................. 122,640 150,765 (228,946)
------------ ------------ -----------
Net cash used in operating activities......... (26,829,213) (18,316,706) (9,382,915)
------------ ------------ -----------
Cash flows from investing activities:
Capital expenditures.................................. (1,053,369) (514,211) (187,793)
Purchase of short-term investments.................... (1,524,698) -- --
Investment in note receivable......................... (265,000) -- --
Proceeds upon maturity of short-term investments...... 8,004,141 -- --
Capitalized expenditures for software development..... (589,888) -- --
------------ ------------ -----------
Net cash provided by (used in) investing
activities.................................. 4,571,186 (514,211) (187,793)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from exercise of stock options, stock
purchase warrants and stock purchase plans......... 1,010,770 1,073,995 672,785
Proceeds from issuance of preferred stock............. -- 17,279,250 7,303,465
Proceeds from issuance of common stock................ 16,067,800 2,625,020 --
Offering, placement and registration costs............ (456,248) (1,925,166) (546,707)
Payments for extinguishment of convertible debt....... -- (500,000) --
------------ ------------ -----------
Net cash provided by financing activities..... 16,622,322 18,553,099 7,429,543
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents.... (5,635,705) (277,818) (2,141,165)
Cash and cash equivalents, beginning of year............ 8,616,305 2,980,600 2,702,782
------------ ------------ -----------
Cash and cash equivalents, end of year.................. $ 2,980,600 $ 2,702,782 $ 561,617
============ ============ ===========
Supplemental schedule of non-cash investing and
financing activities:
Vendors and severance paid with common stock.......... $ -- $ -- $ 445,269
============ ============ ===========
Issuance of common stock for software development
services........................................... $ 478,152 $ -- $ --
============ ============ ===========
Assets acquired under capital leases.................. $ 134,163 $ -- $ 413,606
============ ============ ===========
Preferred stock, dividends accrued, payable in-kind... $ -- $ 7,841 $ --
============ ============ ===========
Preferred stock, dividends, paid with common stock.... $ -- $ 437,585 $ 39,945
============ ============ ===========
Hewlett-Packard conversion of debt into common
stock.............................................. $ -- $ 3,807,813 $ --
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Description of Business -- We provide subscription-based,
business-to-business electronic commerce services that enable food industry
participants to more efficiently manage their highly complex supply chain
information. Our services allow manufacturers, wholesalers, distributors, sales
agencies (such as food brokers) and retailers to communicate and synchronize
item, pricing and promotion information in a more cost-effective and accessible
way than has been possible using traditional electronic and paper-based methods.
Our strategy is to continue our investment in marketing and sales
activities, development of our viaLink services and customer support services to
facilitate our plan to penetrate the market and build recurring revenues
generated from subscriptions to our viaLink services. Consequently, we resemble
a development stage company and will face many of the inherent risks and
uncertainties that development stage companies face. There can be no assurance,
however, that these efforts will be successful. Our failure to successfully
execute our strategy would have a material adverse effect on our business,
financial condition and results of operations, including our viability as an
enterprise. As a result of the high level of expenditures for investment in
technology development, implementation, customer support services, and selling
and marketing expenses, we expect to incur losses in the foreseeable future
periods until such time, if ever, as the recurring revenues from our viaLink
services are sufficient to cover the expenses.
Our clients and customers range from small, rapidly growing companies to
large corporations in the consumer packaged goods and retail industries and are
geographically dispersed throughout the United States.
Basis of Presentation -- The financial statements include the accounts of
the viaLink Company and its wholly owned subsidiary. In April 2000, we formed
viaLink International, Inc., a wholly-owned subsidiary. viaLink International
was a Delaware corporation formed to include our international operations.
viaLink International was dissolved in 2002. Our consolidated financial
statements include the accounts of viaLink International. All intercompany
transactions and balances have been eliminated in consolidation.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of management's
estimates and assumptions in determining the carrying values of certain assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts for certain revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents and Short-term Investments -- For purposes of the
statement of cash flows, we consider all highly liquid investments with a
maturity of three months or less at the time of purchase to be cash equivalents.
Similar investments with a maturity, at purchase, of more than three months are
classified as short-term investments held to maturity and are carried at
amortized cost.
Risks from Concentrations -- Financial instruments which potentially
subject us to concentrations of credit risk consist principally of temporary
cash investments, notes receivable and accounts receivable. We place our
temporary cash investments with high credit quality financial institutions.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of individual accounts and their dispersion across
different regions. We do not believe a material risk of loss exists with respect
to our financial position due to concentrations of credit risk.
Our revenues are dependent on large implementation and subscription fees
from a limited number of customers. In 2000, three customers individually
accounted for 18, 13 and 11 percent of revenues. In 2001, three customers
individually accounted for 9, 9 and 5 percent of revenues. In 2002, three
customers individually accounted for 11, 9 and 5 percent of revenues. In 2000,
2001 and 2002, approximately 60, 33 and 32 percent, respectively, of our total
revenues were attributable to five clients. We will continue to be
F-7
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dependent upon revenues from a limited number of customers until we achieve
market penetration. During 2000, 2001 and 2002 our statement of operations
includes provisions for bad debt of $159,000, $238,000 and $107,000
respectively. During 2000, 2001 and 2002 we wrote-off uncollectible accounts
receivable of $42,000, $296,000 and $92,000, respectively.
Furniture, equipment and leasehold improvements -- Furniture, equipment and
leasehold improvements are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred. Upon disposition, the cost and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is reflected in operations for the period. We depreciate furniture
and equipment using the straight-line method over their estimated useful lives
ranging from 2 to 10 years. Leasehold improvements are amortized over the lease
term using the straight-line method.
Impairment of long-lived assets -- We review long-lived assets for
impairment when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If impairment indicators are present
and the estimated future undiscounted cash flows are less than the carrying
value of the long-lived assets, the carrying value is reduced to the estimated
fair value as measured by the discounted cash flows.
Revenue Recognition -- Our revenues consist of recurring monthly
subscription fees for customer use of the viaLink services and implementation
fees. Contracts for customer use of the viaLink services are generally for
periods ranging from one to three years, but are generally cancelable with 30
days notice. Implementation fees for the viaLink services are based on time and
materials, are nonrefundable and are separately priced from the use of the
viaLink services. Implementation costs consist primarily of labor by technical
support personnel to configure customer data and establish a connection to the
viaLink database. Implementation activities can range from a "basic"
implementation that simply establishes a web browser interface to more involved
activities where we assist a customer to modify the customer's systems and
automate the connection. We have no obligation to perform any future
implementation services and no additional implementation services are necessary
upon renewal of the service by the customer. We recognize implementation fees
and associated costs for the more involved implementation activities as the
services are provided. Implementation fees and associated direct costs to
provide basic implementations are deferred and recognized over the period the
subscription-based viaLink services are provided. Implementation fees and
associated direct costs for basic implementations are deferred because we do not
have an objective basis to determine the fair value of the basic implementation
services and they are essential to the viaLink services. The fair value of more
involved implementation activities is established using a residual method and
generally equals the amount charged by viaLink based on time and materials. We
recognize subscription fees for customer use of the viaLink services as these
services are provided. Revenues collected in advance and revenues dependent upon
future performance criteria are deferred and recognized as earned and those
performance criteria are met.
In December 1999, the Securities and Exchange Commission staff (the
"Staff") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue
Recognition in Financial Statements. As subsequently interpreted by the Staff
through issuance of a document summarizing frequently asked questions and
answers, the Staff has provided guidance on accounting for revenue from
multiple-element arrangements that are not currently addressed by existing
accounting pronouncements. In particular, the Staff has provided guidance that
revenue should not be allocated among the elements unless the allocation is
based on reliable, verifiable and objectively determinable fair values of the
elements. The Staff's guidance also provides that if an undelivered element is
essential to the functionality of a delivered element, no revenue allocated to
the delivered element should be recognized until that undelivered element is
delivered. We adopted SAB 101 in the fourth quarter of 2000, with retroactive
effect to January 1, 2000. Prior to adoption of SAB 101, we recognized all
implementation fees and associated costs as the services were provided. The
cumulative effect of adopting SAB 101 was to increase both deferred revenues and
F-8
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred customer operations expense by approximately $107,000 as of January 1,
2000 with no impact on stockholders' equity.
Development -- We incurred costs and expenses of approximately $6.9
million, $4.6 million and $2.1 million, for product development in 2000, 2001
and 2002, respectively. We capitalize certain of these costs, including
interest, that are directly related to the development of software to be sold
and software developed for internal use. Capitalization of costs for internal
use software begins after the preliminary project stage and ends when the
software is substantially complete and ready for its intended use. We also
capitalize certain of these costs, including interest, for software to be sold
beginning when technological feasibility has been established and ending when
the product is available for customers. Capitalized software development costs
are amortized using the straight-line method over the estimated useful life of
three to five years and are subject to impairment evaluation in accordance with
the provisions of SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of."
Earnings Per Share -- Basic earnings per share is calculated by dividing
net income (loss) by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is calculated by dividing net
income (loss) by the weighted-average number of common shares and dilutive
potential common shares outstanding during the period. Diluted earnings per
share also includes the impact of convertible debt, if dilutive, using the
if-converted method.
Income Taxes -- We account for income taxes using the asset and liability
method. Deferred tax liabilities or assets are recognized for the anticipated
future tax effects of temporary differences that arise as a result of the
differences in the carrying amounts and tax bases of assets and liabilities, and
for loss carryforwards and tax credit carryforwards. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. We record a valuation allowance when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
Reclassifications -- Certain prior year amounts have been reclassified to
conform to the 2002 financial statement presentation.
2. LIQUIDITY AND GOING CONCERN
We reported a substantial loss from operations for each of the fiscal years
ended December 31, 2000, 2001 and 2002, and we expect to incur losses for the
fiscal year ending December 31, 2003. The extent of these losses will depend
primarily on the amount of revenues generated from implementations of and
subscriptions to our viaLink services, which have not yet achieved significant
market acceptance or market penetration and the amount of expenses incurred in
generating these revenues. In order to achieve market penetration and acceptance
we expect to continue our expenditures for development of our viaLink services.
These expenses have substantially exceeded our revenues.
Our delay in generating revenues creates a need for us to obtain additional
capital in order for us to execute our current business plan successfully. The
amount of capital will be dependent upon (a) our services achieving market
acceptance, (b) the timing of additional customer signings, (c) our ability to
sustain current decreased levels of spending, and/or (d) the amount of, if any,
unanticipated expenditures. There can be no assurance as to whether, when or the
terms upon which any such capital may be obtained. Any failure to obtain an
adequate and timely amount of additional capital on commercially reasonable
terms could have a material adverse effect on our business, financial condition
and results of operations, including our viability as an enterprise.
We currently have 300 million shares of common stock authorized for
issuance by our stockholders. As of December 31, 2002, we have either issued or
reserved nearly all of it for (a) future conversion of
F-9
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issued preferred stock and (b) exercises of issued warrants and stock options.
For the last 24 months we have obtained working capital primarily from the sale
and issuance of common stock, preferred stock or warrants. If the stockholders
at the 2003 annual meeting of stockholders of the Company do not authorize
additional shares of common stock for sale and issuance by us, this historical
source of working capital will no longer be available to us.
We have an accumulated deficit of $85.3 million as of December 31, 2002. We
have historically funded operations with the proceeds from the sale of preferred
and common stock. We have not generated positive cash flows from operations in
2000, 2001 and 2002 and do not believe the company will generate positive cash
flows from operations until late in 2003 or after. In addition, we do not
currently have any committed debt or equity financing that might be required to
sustain operations through the balance of 2003, if necessary. These factors
raise substantial doubt concerning our ability to continue as a going concern.
The consolidated financial statements do not include any adjustments related to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue operating as a going concern.
3. FURNITURE, EQUIPMENT, LEASEHOLD IMPROVEMENTS AND SOFTWARE DEVELOPMENT COSTS
Furniture, equipment and leasehold improvements at December 31, 2001 and
2002 consisted of the following:
2001 2002
----------- -----------
Furniture and fixtures..................................... $ 159,909 $ 159,909
Computer equipment......................................... 2,235,865 2,760,524
Computer software.......................................... 2,228,352 2,244,589
Leasehold improvements..................................... -- 32,675
----------- -----------
4,624,126 5,197,697
Less: accumulated depreciation and amortization............ (3,173,739) (4,414,827)
----------- -----------
Furniture, equipment and leasehold improvements, net....... $ 1,450,387 $ 782,870
=========== ===========
Computer equipment in 2002 included $413,606 of assets under capital leases
and no amounts as of December 31, 2001. Accumulated amortization for assets
under capital leases at December 31, 2002 was $68,934.
We incurred total costs of approximately $6.9 million, $4.6 million and
$2.1 million for development of software in 2000, 2001 and 2002, respectively.
We capitalized $0.6 million of these costs for development of software in 2000
and no amounts were capitalized in 2001 or 2002. Interest capitalized during
2000 was not material. Amortization of developed software during 2000, 2001 and
2002 was $0.5 million, $0.6 million and $0.6 million, respectively. Accumulated
amortization at December 31, 2001 and 2002 was $2.3 million and $2.9 million,
respectively.
F-10
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2001 and 2002
consisted of the following:
2001 2002
---------- ----------
Accounts payable............................................ $1,223,577 $ 423,820
Accrued employee compensation............................... 844,372 663,361
Accrued rent and other occupancy expenses................... -- 101,556
Accrued lease, services and other, Hewlett-Packard.......... 680,854 --
Accrued lease termination expenses, real estate............. 591,940 --
Accrued lease termination expenses, Hewlett-Packard......... 1,798,000 --
Accrued professional fees and contract labor................ 55,000 85,591
Other accrued expenses...................................... 417,614 18,929
---------- ----------
Total accounts payable and accrued liabilities.............. $5,611,357 $1,293,257
========== ==========
5. TRANSACTIONS WITH HEWLETT-PACKARD
On February 4, 1999, we entered into a financing agreement and note
purchase agreement with Hewlett-Packard pursuant to which Hewlett-Packard
purchased a $6.0 million subordinated secured convertible promissory note,
convertible into common stock at the option of Hewlett-Packard beginning August
2000 at a conversion price of $1.75 per share. The note bears interest at 11.5%
per annum, with interest payments deferrable to maturity in February 2004. The
note contained a beneficial conversion feature valued at approximately $20.0
million at the commitment date. Accordingly, we allocated the full amount of
proceeds to the beneficial conversion feature and recorded $6.0 million as
additional paid-in capital at the time of closing. The amount was accreted by
charges to interest expense and corresponding increases in long-term debt during
the period from issuance of the note to August 2000 when the note became
convertible. Non-cash interest charges of $3.6 million and $2.4 million were
recognized in 1999 and 2000, respectively, as accreted charges to interest
expense. We recognized interest expense at 11.5% per annum until the note was
converted to common stock.
In April 2001, Hewlett-Packard converted $3.8 million of their secured
convertible promissory note into 2.2 million shares of our common stock. In
connection with this conversion we modified certain terms of the secured
convertible promissory note for the remaining balance equal to $3.8 million. The
modified note provided for: a) a decrease in the stated interest rate to 6.0%
per year; b) a cash payment of $275,104 representing a closing fee; c) principal
and interest payments payable in twelve monthly installments of $326,094
beginning January 1, 2002 and a maturity date of February 1, 2003. In connection
with the conversion and the modification of the note, we issued Hewlett-Packard
warrants to purchase 1,384,658 shares of common stock at a purchase price of
$3.75 per share. These transactions with Hewlett-Packard resulted in an
extraordinary loss of approximately $2.9 million recorded in the second quarter
of 2001. The extraordinary loss represents the excess of the fair value of the
modified secured convertible promissory note and warrants issued over the $3.8
million recorded value of the remaining portion of the convertible debt at the
time of the modification in accordance with the requirements of EITF 96-19,
"Debtor's Accounting for a Modification or Exchange of Debt Instruments."
On November 13, 2001, we entered into a Settlement, Amendment, and Mutual
Release Agreement with Hewlett-Packard Company whereunder (1) any and all past
due amounts under any obligation of ours to Hewlett-Packard were forgiven and we
were released from any and all claims by Hewlett-Packard of any kind including
those based upon the antecedent debts, (2) the principal amount of $3.8 million
under the April 10, 2001, secured convertible promissory note was forgiven, (3)
the security interest of
F-11
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hewlett-Packard in our intellectual property was terminated, (4) our purchase
option for various items of equipment under expired equipment leases was
preserved to allow us to purchase computer equipment having a value of
approximately $100,000, and (5) the monthly payments under an ongoing equipment
lease and support agreement were lowered to approximately $200,000, all in
exchange for the our agreeing to (a) pay the sum of $1,000,000 to
Hewlett-Packard, (b) restructure and extend the term of the equipment lease with
Hewlett-Packard by adding an additional year to the term, thus ending the lease
in July 2004, (c) repricing 1,384,658 warrants for our common stock obtained by
Hewlett-Packard in connection with the April 10, 2001, promissory note from
$3.75 per share to $0.10 per share, and (d) releasing Hewlett-Packard from any
and all claims. Under the terms of this agreement Hewlett-Packard will maintain
a security interest in the equipment it leases to us on a going forward basis.
The $2.3 million recorded as an extraordinary gain was determined as the excess
of any and all amounts due to Hewlett-Packard which were forgiven, including: a)
the principal amount of $3.8 million under the secured convertible promissory
note; and b) $1.4 million for amounts payable under certain services and lease
agreements over consideration paid which includes: a) a cash payment of
$1,000,000; b) the change in fair value due to our modification of the strike
price of 1,384,658 warrants to $0.10 per share and c) a lease let-out obligation
for equipment no longer being used of $1.8 million. This transaction was
accounted for in accordance with the provisions of Statement of Financial
Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled
Debt Restructurings."
At the time of this settlement, we also entered into a lease let-out
agreement with Hewlett-Packard which provided for our continued obligation for
certain assets leased from Hewlett-Packard under operating leases. These assets
were not being used by the company and we agreed to allow Hewlett-Packard to
sell these assets and reduce the amounts due under the let-out agreement. The
total lease obligation of $1.8 million was accrued at December 31, 2001 as a
component of the extraordinary gain recorded in 2001. During September 2002, we
entered into a Second Global Amendment Agreement with Hewlett-Packard. Under
this agreement, we agreed to pay Hewlett-Packard $350,000 and to issue to
Hewlett-Packard 2.0 million shares of our common stock in exchange for
forgiveness of approximately $2.1 million representing all amounts outstanding,
including the lease let-out entered into in 2001. This agreement resulted in
recording an extraordinary gain of $1.6 million for the extinguishment of debt
recorded in 2002. The gain represents the outstanding amounts less the cash paid
and the fair value of the common shares issued. Additionally, we modified the
payment terms under an existing lease for equipment under lease which is
recorded as a capital lease at December 31, 2002. The modified terms require
payments totaling $480,000 over a period of 24 months.
6. ALLIANCE AGREEMENTS
On May 3, 1999, we entered into an agreement with Cap Gemini Ernst & Young
LLP (CGEY), pursuant to which CGEY provided us with consulting and integration
services and sales and marketing support, to assist in the development and
market penetration of our viaLink services. In connection with this agreement,
we issued CGEY a warrant to purchase up to 1,000,000 shares of our common stock
at a price of $2.00 per share contingent upon our ability to register the common
stock underlying the warrant agreement. Additionally, we agreed to pay a royalty
of 7.0% of our service revenues to CGEY for a period of two years and, in the
event that at least ten "significant clients" of CGEY become subscribers to our
services during this two year period, we would have been obligated to continue
this royalty payment in perpetuity. CGEY will not receive any royalties for
services we provide to clients subject to the reporting requirements of the
federal securities laws for which it serves as the principal independent
auditor. As of the date of the issuance of the warrant, the warrant conversion
price was below the fair value of our stock. The fair value of this warrant was
recorded as an asset and an increase in additional paid in capital of $1.9
million. The fair value of the warrant at the measurement date was determined
using a Black-Scholes option pricing model with the following assumptions:
interest rate (zero-coupon U.S. government issued
F-12
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with a remaining life equal to the expected term of the warrant) of 6.0%; a
dividend yield of 0%; volatility factor of the expected market price of our
common stock of 100.4%; and weighted-average expected life of the warrant of 1.5
years. The asset was amortized over the service period as non-cash charges to
our statement of operations. On August 9, 1999, CGEY exercised warrants to
purchase 250,000 shares of common stock resulting in gross proceeds received by
us of $500,000. On November 10, 1999, CGEY exercised warrants to purchase the
remaining 750,000 shares of common stock resulting in gross proceeds received by
us of $1.5 million. During 2000, royalties under this agreement totaled $96,000
and are included in selling and marketing expense. Effective May 2001, we
terminated our agreements with CGEY.
On October 12, 1999, we entered into a strategic relationship with i2
Technologies, Inc. ("i2"), the primary focus of which was to integrate the
products and services of our two companies and to extend the solutions across
multiple industries. i2 will use our syncLink services to provide product, price
and promotion information to facilitate business processes between trading
partners using an Internet-accessible shared database. Our two companies agreed
to develop joint sales and marketing programs, and develop enhancements to the
viaLink services. Additionally, i2 invested $5.0 million in us in exchange for
895,536 shares of viaLink common stock and a warrant to purchase up to an
additional 746,268 shares of common stock at $6.70 per share, representing a
twenty percent (20%) premium over the market price of the stock at the time of
the agreement. The initial term of the agreement was to expire on December 31,
2003. The fair value of this warrant was recorded as an asset and an increase in
additional paid-in capital and resulted in non-cash charges to our statement of
operations during the term of the agreement. The fair value of the warrant at
the measurement date was determined using a Black-Scholes option pricing model
with the following assumptions: interest rate (zero-coupon U.S. government
issued with a remaining life equal to the expected term of the warrant) of
5.91%; a dividend yield of 0%; volatility factor of the expected market price of
our common stock of 101.6%; and weighted-average expected life of the warrant of
2.0 years. Additionally we agreed to pay i2 a royalty of five percent (5%) of
the syncLink and Chain Pricing subscription revenues during the period the
agreement is in place. We also agreed to pay a royalty, in addition to the five
percent, based upon subscription revenues received from new customers with whom
i2 had "significant involvement" in the sales process. i2 agreed to pay us a
royalty based upon revenues i2 received from providing syncLink and Chain
Pricing services outside of the consumer packaged goods industry. During 2000,
royalties under this agreement totaled $26,000 and are included in selling and
marketing expense. Effective January 29, 2001, we terminated our agreements with
i2.
7. COMMON STOCK
On March 1, 2000, our board of directors approved a two-for-one stock split
in the form of a dividend. The par value of the common stock remained $.001 per
share. The stock split was effective March 28, 2000 and is reflected in the per
share data in the accompanying financial statements and notes to the financial
statements.
On March 22, 2000, we entered into a Securities Purchase Agreement pursuant
to which i2 Technologies, Inc., Hewlett-Packard Company and Millennium Partners,
L.P. paid us an aggregate of $6.0 million as consideration for (1) 200,403
shares of our common stock and (2) warrants to purchase 31,866 shares of our
common stock at an exercise price of $39.39 per share. The warrants can be
exercised at any time on or before March 24, 2003. Additionally, we issued
warrants to purchase 2,844 shares of our common stock at an exercise price of
$42.20 to an investment bank as partial compensation for services rendered to us
as our financial advisor in connection with that transaction. All of these
warrants contain anti-dilution protection provisions.
On May 31, 2000, we entered into a Securities Purchase Agreement pursuant
to which RGC International Investors, LDC ("RGC") paid us an aggregate of $10.0
million as consideration for
F-13
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) 960,615 shares of our common stock and (2) a warrant to purchase 768,492
shares of our common stock at initial exercise price of $12.06 per share. The
exercise price was subject to certain adjustments based on the market price of
our common stock. The warrants were exercised on December 29, 2000, utilizing
non-cash exercise provisions outlined in the warrant agreement, and an
acceleration of the market price adjustment, resulting in the issuance of
984,945 shares to RGC. Upon closing of the transaction with RGC, we issued a
warrant to purchase 45,608 shares of our common stock at an exercise price of
$13.15 to an investment bank as partial compensation for services rendered to us
as our financial advisor in connection with that transaction.
On December 29, 2000, we entered into a Securities Purchase Agreement
pursuant to which RGC paid us an aggregate of $1.0 million as consideration for
333,333 shares of our common stock at a price of $3.00 per share.
In December 1997, we entered into an agreement with Investor Awareness to
provide investor relations services. Subject to certain criteria in the
agreement, Investor Awareness would be granted an option to purchase 40,000
shares of our common stock at $1.5625 per share. On June 15, 2000, we entered
into a Settlement Agreement with Investor Awareness pursuant to which we issued
options to purchase 20,000 shares of our common stock to two principals of
Investor Awareness with an exercise price of $0.78125 and sold an aggregate of
20,000 additional shares of our common stock to these individuals as settlement
of a lawsuit alleging that we failed to issue the option under the terms of the
agreement. We recorded an expense of $185,000 included in general and
administrative expense for the year ended December 31, 2000, representing the
fair value the options issued.
A reconciliation of the numerator and the denominator used in the
calculation of earnings (loss) per share is as follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
------------ ------------ ------------
Basic:
Net loss applicable to common stock...... $(39,129,104) $(41,151,419) $(17,699,465)
Weighted average common shares
outstanding........................... 20,732,411 33,805,389 103,731,119
------------ ------------ ------------
Net loss per share............... $ (1.89) $ (1.22) $ (0.17)
============ ============ ============
Diluted:
Net loss applicable to common stock...... $(39,129,104) $(41,151,419) $(17,699,465)
Weighted average common shares
outstanding........................... 20,732,411 33,805,389 103,731,119
Add: Net effect of dilutive potential
shares................................ -- -- --
------------ ------------ ------------
20,732,411 33,805,389 103,731,119
Net loss per share............... $ (1.89) $ (1.22) $ (0.17)
============ ============ ============
F-14
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended December 31, 2002, options to purchase 15,158,350 shares
at a weighted average exercise price of $2.90, 90.4 million shares of common
stock to be issued upon the conversion of our Series D Preferred Stock at a
conversion price of $0.12 per share and warrants to purchase common shares at
exercise prices in the following table were outstanding, but were not included
in the computation of diluted earnings per share because the effect of these
outstanding options, stock issuable upon conversion of Preferred Stock and
warrants would be antidilutive.
UNDERLYING
COMMON SHARES EXERCISE PRICE
------------- --------------
100,000................................................... $ 0.15
50,000................................................... 0.30
59,029................................................... 10.16
For the year ended December 31, 2001, options to purchase 14,814,031 shares
at a weighted average exercise price of $4.23, 25.5 million shares of common
stock to be issued upon the conversion of our Series B and Series C Preferred
Stock at an effective conversion price calculated at December 31, 2001 of $0.153
per share and warrants to purchase common shares at exercise prices in the
following table were outstanding, but were not included in the computation of
diluted earnings per share because the effect of these outstanding options,
stock issuable upon conversion of Preferred Stock and warrants would be
antidilutive.
UNDERLYING COMMON SHARES EXERCISE PRICE
------------------------ --------------
1,384,658 $ 0.10
100,000 0.15
224,500 0.16
1,605,067 0.30
9,108,000 0.40
40,000 1.50
59,029 10.16
43,164 29.19
3,943 31.23
For the year ended December 31, 2000, options to purchase 11,189,720 shares
at a weighted average exercise price of $6.90 and warrants to purchase 40,000,
746,268, 45,608 and 34,538 shares of common stock at $1.50, $6.70, $13.15 and
$39.39, respectively, and 4,180,000 shares of common stock to be issued upon the
conversion of the note issued to Hewlett-Packard were outstanding, but were not
included in the computation of diluted earnings per share because the effect of
these outstanding options, warrants and stock issuable upon conversion of debt
would be antidilutive.
8. STOCK OPTION AND STOCK PURCHASE PLANS
Stock Purchase Plan -- We established The viaLink Company Employee Stock
Purchase Plan on April 1, 1997. At our 1999 annual meeting our stockholders
approved the adoption of the 1999 Employee Stock Purchase Plan which replaced
the predecessor Employee Stock Purchase Plan as of July 1, 1999. The 1999 Stock
Purchase Plan provides eligible employees of viaLink with the opportunity to
acquire a proprietary interest in viaLink through participation in a payroll
deduction based employee stock purchase plan designed to operate in compliance
with Section 423 of the Internal Revenue Code. The price will be 85 percent of
the per share fair market value on either the granting date or the exercise
date, whichever market value is lower. The number of shares of common stock
authorized and reserved for issuance under
F-15
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Plan is 800,000 shares. For the years ended December 31, 2000, 2001 and
2002: 42,561, 191,250 and 157,158 shares, respectively, of common stock have
been purchased under the stock purchase plan.
Stock Option and Grant Plans -- We adopted The viaLink Company 1995 Stock
Option Plan in March 1995 and amended the 1995 Plan on April 30, 1996 and
September 1, 1998. The 1995 Plan was replaced by The viaLink Company 1999 Stock
Option/Stock Issuance Plan in May 1999. While we may no longer grant options
pursuant to the 1995 Plan, options granted under the 1995 Plan remain
outstanding. The 1995 Plan provided for the issuance of incentive stock options
and non-incentive stock options to attract, retain and motivate management,
directors, professional employees, professional non-employee service providers
and other individuals who have benefited or could benefit the Company.
The viaLink Company 1998 Non-Qualified Stock Option Plan was adopted on
February 9, 1998, and amended effective September 1, 1998. The Non-Qualified
Plan was replaced by the 1999 Stock Option/ Stock Issuance Plan in May 1999.
Although the Company may no longer grant options pursuant to the Non-Qualified
Plan, options granted under the Non-Qualified Plan remain outstanding.
At our 1999 annual meeting, our stockholders approved the adoption of The
viaLink Company 1999 Stock Option/Stock Issuance Plan to attract and retain the
services of individuals essential to the Company's long-term growth and
financial success. Our officers and other key employees, non-employee board
members and consultants and other advisors are eligible to receive option grants
under the 1999 Plan.
We have reserved 21,000,000 shares of our common stock for issuance over
the ten year term of the 1999 Plan, including shares initially reserved under
the predecessor plans. This share reserve will automatically be increased on the
first trading day of each calendar year, beginning with the 2000 calendar year,
by an amount equal to 5% of the shares of common stock outstanding on the last
trading day of the immediately preceding calendar year, but in no event will
such annual increase exceed 500,000 shares. Options may be granted under the
1999 Plan at an exercise price per share not less than the fair market value per
share of common stock on the option grant date.
We apply SFAS No. 123, "Accounting for Stock Based Compensation as amended
by SFAS No. 148, "Accounting for Stock Based Compensation -- Transition and
Disclosure" and related interpretations in accounting for our stock options
granted to non-employee consultants and service providers. The fair value of the
options granted are recorded as an operating expense and an increase in
additional paid in capital over the term of the service agreement. The fair
value of each option grant was determined using Black-Scholes option pricing
model with the following assumptions used during 2000: interest rate
(zero-coupon U.S. government issued with a remaining life equal to the expected
term of each option) of 6.34%; a dividend yield of 0%; volatility factors of the
expected market price of our common stock ranging from 101% to 156%; and
weighted-average expected life ranging from 1.5 to 2.5 years. During 2000, we
granted options to purchase 30,000, 16,000, 10,000, 50,000 and 74,000 shares at
exercise prices per share of $8.31, $8.91, $9.06, $17.50 and $40.25,
respectively. The expense recorded for these options is based upon the fair
value for each grant at each financial statement date until the measurement date
occurs. Stock compensation expense included in the statement of operations for
all grants to non-employee consultants is included in the table below.
F-16
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We apply APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for our employee stock options. XXX Xx. 00
requires compensation expense be recorded for any excess of the market value of
the underlying stock over the option price on the measurement date. During May
1999, we granted options for 2,540,000 and 360,000 shares at exercise prices per
share of $3.61 and $3.13, respectively, compared to the market price of $4.25 on
the date of grant. The excess of the market value over the exercise price was
amortized over the vesting period. The exercise price equaled the market price
at the date of grant for all other option grants during 2000, 2001 and 2002.
Stock compensation expense included in the statement of operations for these
grants representing the portion of the service period in 2000 and 2001 is
included in the table below:
2000 2001 2002
---------- -------- --------
Stock-based compensation included in the
determination of net income:
Non-employee consultants and service providers.... $ 425,000 $ 3,000 $ --
Employees......................................... $1,898,684 $627,895 $704,558
Pro forma information regarding net income and earnings per share is
required by and has been determined as if we had accounted for its employee
stock options under the fair value method defined by SFAS No. 123 and amended by
SFAS No. 148. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years ended December 31,:
2000 2001 2002
------------ ------------ ----------
Interest rates, (Zero-coupon U.S.
Government Bonds issued with remaining
life equal to expected term of options... 5.6% to 6.3% 4.5% 2.5%
Dividend yields............................ 0% 0% 0%
Volatility factors of our common stock..... 112% to 157% 150% to 177% 143%
Weighted average expected life............. 2.5 years 2.5 years 2.5 years
Resulting weighted average grant date fair
value.................................... $12.45 $0.50 $0.09
Additional expense under fair value
method................................... $26,812,436 $20,422,032 $9,220,071
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
Our historical and pro forma information is as follows for the years ended
December 31:
2000 2001 2002
------------ ------------ ------------
Net loss applicable to common stock, as
reported................................. $(39,129,104) $(41,151,419) $(17,699,465)
Pro forma-diluted.......................... $(65,941,540) $(61,573,451) $(26,919,536)
Net loss per share-diluted, as reported.... $ (1.89) $ (1.22) $ (0.17)
Pro forma-diluted.......................... $ (3.18) $ (1.82) $ (0.25)
F-17
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of our stock option activity and related information follows for
the years ended December 31, 2000, 2001 and 2002:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding at December 31, 1999............................ 10,439,692 $ 4.35
Granted................................................... 2,494,000 17.44
Exercised................................................. (582,804) 1.36
Canceled.................................................. (1,161,168) 9.37
----------
Outstanding at December 31, 2000............................ 11,189,720 6.90
Granted................................................... 6,011,370 0.68
Exercised................................................. (124,480) 1.57
Canceled.................................................. (2,262,579) 9.08
----------
Outstanding at December 31, 2001............................ 14,814,031 4.23
Granted................................................... 3,700,000 0.12
Exercised................................................. -- --
Canceled.................................................. (3,355,681) 5.70
----------
Outstanding at December 31, 2002............................ 15,158,350 $ 2.90
========== ======
F-18
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING EXERCISE
EXERCISE PRICE OUTSTANDING PRICE LIFE EXERCISABLE PRICE
-------------- ----------- -------- --------- ----------- --------
$0.12........................... 3,700,000 $ 0.12 9.6 years -- $ 0.12
$0.25 to $0.27.................. 3,861,050 $ 0.26 8.6 years 2,574,033 $ 0.26
$0.45........................... 3,936 $ 0.45 3.2 years 3,936 $ 0.45
$0.59........................... 144,000 $ 0.59 8.6 years 72,000 --
$0.75 to $0.83.................. 2,455,814 $ 0.76 5.6 years 2,455,814 $ 0.79
$0.97 to $1.04.................. 393,600 $ 1.04 7.5 years 393,600 $ 0.97
$1.60........................... 11,000 $ 1.60 8.5 years 11,000 $ 1.60
$2.25........................... 60,000 $ 2.25 6.0 years 60,000 $ 2.25
$2.94 to $3.13.................. 121,000 $ 2.94 7.4 years 121,000 $ 2.94
$3.46 to $3.82.................. 2,080,250 $ 3.65 6.0 years 2,080,250 $ 3.65
$5.56 to $6.06.................. 600,000 $ 5.78 7.0 years 500,000 $ 5.83
$8.91........................... 353,000 $ 8.91 7.7 years 117,667 $ 8.91
$10.06.......................... 97,500 $10.06 7.4 years 97,500 $10.06
$14.13 to $15.22................ 879,000 $15.06 7.0 years 795,667 $15.14
$17.50.......................... 210,000 $17.50 7.0 years 140,000 $17.50
$40.25.......................... 188,200 $40.25 7.2 years 125,467 $40.25
---------- --------- ------
At December 31, 2002............ 15,158,350 9,547,934 $ 2.90
========== ========= ======
At December 31, 2001............ 14,814,031 8,392,771 $ 4.23
========== ========= ======
At December 31, 2000............ 11,189,720 4,598,579 $ 3.77
========== ========= ======
9. INCOME TAXES
The differences in federal income taxes at the statutory rate and the
provision for income taxes for the years ended December 31, 2000, 2001, and 2002
are as follows:
2000 2001 2002
------------ ----------- -----------
Income tax expense (benefit) at federal
statutory rate............................. $(13,303,895) $(8,318,788) $(2,740,354)
State income taxes........................... (1,565,164) (978,681) (322,395)
Reduction of valuation allowance credited to
Additional paid-in capital................. -- 1,296,938 267,732
Benefit of net operating loss carryforwards
not Recognized............................. 14,766,373 7,356,540 2,463,020
Change in valuation allowance for current
year temporary differences................. -- 624,509 326,706
Other........................................ 102,686 19,482 5,291
------------ ----------- -----------
Provision for income taxes................... $ -- $ -- $ --
============ =========== ===========
F-19
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following:
DECEMBER 31,
---------------------------
2001 2002
------------ ------------
Deferred tax assets:
Allowance for doubtful accounts........................ $ 38,000 $ 43,700
Compensated absences................................... 85,813 81,192
Tax credit carryforwards............................... 30,178 41,133
Depreciation and amortization.......................... 213,893 316,708
Net operating loss carryforwards....................... 26,905,929 29,368,949
------------ ------------
27,273,813 29,851,682
Deferred tax liabilities:
Deferred service fees.................................. -- --
Discount on long-term debt............................. -- --
Software development costs............................. (378,838) (156,027)
Depreciation and amortization.......................... -- --
------------ ------------
Net deferred tax asset, before valuation allowance....... 26,894,975 29,695,655
Valuation allowance...................................... (26,894,975) (29,695,655)
------------ ------------
Net deferred tax asset................................... $ -- $ --
============ ============
The discount recognized in 1999 for the value of the beneficial conversion
feature in the note payable to Hewlett-Packard, and the assets recognized in
1999 for the value of the warrants issued to Cap Gemini Ernst & Young LLP and i2
Technologies, Inc. were not recognized for income tax purposes. Accordingly, we
established deferred tax liabilities totaling approximately $3.8 million for
these temporary differences by reducing the amount recorded as additional paid
in capital for the value of the beneficial conversion feature and the warrants.
These deferred tax liabilities were used to support the recoverability of an
equivalent amount of deferred tax assets, thereby reducing the amount of
valuation allowance. The benefit of this reduction in the valuation allowances
was recognized as additional paid-in capital.
Our tax deduction for stock-based compensation in 2000, 2001 and 2002
exceeds the cumulative expense for those options and warrants recognized for
financial reporting purposes by approximately $7.6 million. This excess
deduction is a component of the net operating loss carryforwards for which a
deferred tax asset and corresponding valuation allowance of approximately $2.9
million have been recognized at December 31, 2002. When the net operating loss
carryforwards are utilized for financial reporting purposes, this portion of the
benefit will be credited directly to additional paid in capital.
At December 31, 2002, we had net operating loss ("NOL") carryforwards for
federal and state purposes of approximately $77.2 million and $77.7 million,
respectively. The Federal and State NOL carryforwards begin to expire in 2011.
SFAS 109 requires that we record a valuation allowance when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of the deferred tax asset depends on our
ability to generate sufficient taxable income in the future. We have recognized
a full valuation allowance for the amount of net deferred tax asset at December
31, 2001 and 2002 since the we resemble a development stage company and have no
history of profitability.
Our ability to utilize the NOL carryforward to reduce future taxable income
may be limited upon occurrence of certain capital stock transactions during any
three-year period resulting in an aggregate ownership change of more than 50%.
F-20
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
We lease our office and storage space under operating leases. The terms
range from month-to-month up to ten years and include options to renew. We also
lease office and computer equipment under various non-cancelable lease
agreements. Total rental expense in 2000, 2001 and 2002 for all leases was
$1,039,000, $1,705,000 and $1,120,000, respectively.
Future minimum lease payments under non-cancelable operating leases at
December 31, 2002 follows:
OPERATING
LEASES
----------
2004........................................................ $ 531,000
2005........................................................ 531,000
2006........................................................ 531,000
2007........................................................ 442,000
Thereafter.................................................. --
----------
Future minimum lease payments............................... $2,035,000
==========
We previously had a lease for our previous corporate headquarters under a
ten-year lease expiring on June 30, 2006. We had subleases for approximately
18,000 square feet of the 30,000 square foot office facility for monthly rental
payments of approximately $18,500. During 2001, we recognized an expense equal
to our remaining obligation for abandoning this property of approximately
$592,000. In 2002, we successfully terminated our lease in exchange for $100,000
in cash and $100,000 in our common stock. We removed all obligations previously
recorded related to this agreement resulting in a gain of $391,000 recorded in
2002.
11. RETIREMENT PLAN
We have a profit sharing plan (the "Plan") for certain eligible employees
who have attained the age of 18 and completed one year of service. Under the
Plan, employer contributions are made at management's discretion. Participants
may contribute up to 6% of earnings as eligible contributions and up to 15% of
earnings in total for any Plan year. Our discretionary matching percentage is up
to 100% of each participant's total eligible contributions for a year. The
Company made no contributions in 2000, 2001 or 2002.
12. PREFERRED STOCK
On February 2 -- 7, 2001 we entered into a series of agreements pursuant to
which investors paid us an aggregate of $10,018,250 in consideration for (1)
3,643 shares of our Series A Convertible Participating Preferred Stock
convertible into shares of our common stock at an initial conversion price of
$2.75 per share and (2) Series A Warrants to purchase up to 3,643,000 shares of
our common stock at initial exercise price of $3.75 per share. On March 30,
2001, we received approval of our stockholders with respect to the issuance as
required by NASD Rule 4350. The conversion price of the Series A Preferred Stock
is subject to certain adjustments. On September 30, 2001, the conversion price
of the Series A Preferred Stock was adjusted per the terms of our Certificate of
Designation to $1.925 per share.
After the May 29, 2001, effectiveness of the registration statement
covering the resale of the underlying common stock, one of the investors (1)
received a Series B Warrant to purchase up to 666,667 shares of our common stock
at an initial exercise price of $3.00 per share and (2) invested an additional
$1,999,250 in consideration for 727 shares of preferred stock and a Series A
Warrant to purchase up to 727,000 shares of our common stock. In July 2001 we
entered into transactions with the
F-21
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
holder of the Series B Warrants pursuant to which the terms of the Series B
Warrants were modified and the outstanding Series B Warrants were subsequently
exercised. After the above-described transaction, no Series B Warrants remain
outstanding.
Certain of our executive officers agreed to pay us an aggregate of $761,750
in consideration for 277 shares of preferred stock and Series A Warrants to
purchase 277,000 shares of our common stock. The investment by these officers
was contingent upon approval by our stockholders of the issuance as required by
NASD Rule 4350, which was obtained on March 30, 2001.
As compensation for services rendered to us by our financial advisor in
connection with the transaction, we issued (1) Placement Agent Warrants to
purchase 464,700 shares of our common stock at an exercise price of $3.75 per
share, (2) Placement Agent Warrants to purchase 66,667 shares of our common
stock at an exercise price of $3.00 per share and (3) Placement Agent Warrants
to purchase 464,700 shares of our common stock at an exercise price of $2.75 per
share.
The proceeds from issuance of the Series A Convertible Participating
Preferred Stock and the Series A Warrants were allocated to each instrument
based on their relative fair values. Additionally, the Series A Convertible
Preferred Stock includes a beneficial conversion ratio at the issuance date. The
fair value of the Warrants and the intrinsic value of the beneficial conversion
ratio, limited to the amount of proceeds, are deemed a dividend to holders of
the Preferred Stock. The Warrants are exercisable and the Preferred Stock is
convertible immediately. The sum of the relative fair value of the Series A
Warrants and the intrinsic value of the beneficial conversion ratio of the
Series A Convertible Participating Preferred Stock was determined to be in
excess of the total proceeds received by the Company; therefore, the entire
$12,779,250 in proceeds is considered a non-cash dividend to the Series A
Convertible Participating Preferred Stock shareholders recorded at the date of
issuance and included in the determination of net loss applicable to common
stock for the first quarter and second quarter of 2001. The dividend from
issuance through conversion was recorded at the stated dividend of 6.0% per
year.
In October 2001, we entered into agreements with the holders of our Series
A Preferred Stock pursuant to which the terms of the Series A Preferred Stock
were modified to include an adjustment of the conversion price from $0.9625 to
$0.82, the in-kind pre-payment of the present value of future premiums and an
adjustment of the Series A Warrant Exercise price to $0.10 per share if such
warrants were exercised prior to October 31, 2001 and $0.30 if exercised
thereafter. During October 2001, 2.8 million shares of our common stock were
issued upon exercise of these warrants at $0.10 per share. Warrants to purchase
1.3 million shares at $0.30 remained unexercised at December 31, 2001. All
Series A Preferred Stock was converted into common stock during 2001.
On November 7, 2001 we filed a prospectus supplement, pursuant to which, we
offered 150 Shares of our Series B Convertible Preferred Stock and Warrants to
purchase 2,500,000 shares of our common stock to SDS Merchant Fund, L.P.
("SDS"). The Series B Convertible Preferred Stock, par value $.001 per share, is
convertible into shares of our common stock in the manner, and upon the terms,
provisions and conditions set forth in the Certificate of Designation of the
Preferred Stock. The conversion price of the Series B Convertible Preferred
Stock is subject to certain adjustments under the terms of the Certificate of
Designation. The proceeds from issuance of the Series B Convertible
Participating Preferred Stock and Warrant issued to SDS have been allocated to
each instrument based on their relative fair values. Additionally, the Series B
Convertible Preferred Stock includes a beneficial conversion ratio at the
issuance date. The fair value of the Warrants and the intrinsic value of the
beneficial conversion ratio, limited to the amount of proceeds, has been deemed
a dividend to holders of the Preferred Stock and has been considered a non-cash
dividend to the Series B Convertible Preferred Stock shareholders recorded at
the date of issuance and is included in the determination of net loss applicable
to common stock for 2001. During 2001, SDS converted $600,000 of Series B
Preferred Stock into 3.0 million shares of common
F-22
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock. At December 31, 2001, $900,000 Series B Convertible stock remained
outstanding and immediately convertible into common stock at the option of the
holder.
On December 28, 2001 we filed a prospectus supplement, pursuant to which,
we offered 300 Shares of our Series C Convertible Preferred Stock and Warrants
to purchase 9,000,000 shares of our common stock to SDS Merchant Fund, L.P. and
other purchasers (collectively the "purchasers"). The Series C Convertible
Preferred Stock, par value $.001 per share, is convertible into shares of our
common stock in the manner, and upon the terms, provisions and conditions set
forth in the Certificate of Designation of the Preferred Stock. The conversion
price of the Series C Convertible Preferred Stock is subject to certain
adjustments under the terms of the Certificate of Designation. The proceeds from
issuance of the Series C Convertible Participating Preferred Stock and Warrant
issued has been allocated to each instrument based on their relative fair
values. Additionally, the Series C Convertible Preferred Stock includes a
beneficial conversion ratio at the issuance date. The fair value of the Warrants
and the intrinsic value of the beneficial conversion ratio has been deemed a
dividend to holders of the Preferred Stock and is considered a non-cash dividend
to the Series C Convertible Preferred Stock shareholders recorded at the date of
issuance and has been included in the determination of net loss applicable to
common stock for 2001.
The Certificate of Designation for the Series B and Series C Preferred
stock includes certain provisions and conditions for redemption if certain
significant events occur, including a change of control. The provisions allow
the holders to redeem the Preferred Stock for the greater of the liquidation
preference or the product of the number of shares issuable at the current market
price and the Closing Bid Price of the Common Stock on the trading day
immediately preceding an event that causes redemption. As such we classified the
amounts as redeemable preferred stock on the balance sheet at December 31, 2001
and the amounts were excluded from the calculation of stockholders' equity until
converted into common stock.
The Series B and Series C Preferred Stock include provisions that in the
event of the liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or involuntary, that the holders of the Series B and
Series C Preferred Stock shall be entitled to receive, out of the assets of the
company, an amount equal to $10,000 per share of Preferred Stock plus any
accrued and unpaid dividends. Such payment would be made prior to any
distribution to the holders of Common Stock. At December 31, 2001, the carrying
value of the Series B and Series C Preferred stock is equal to this liquidation
preference.
On September 30, 2002, all outstanding shares of Series B and Series C
Preferred Stock and accumulated, unpaid dividends were exchanged for 513 shares
of our Series D Preferred Stock with a face value of $6,150,000. Additionally,
in accordance with the Purchase Agreement, the holders of the Series B and
Series C Preferred Stock were issued warrants to purchase 25.6 million shares of
common stock which were exercised immediately at a nominal exercise price of
$0.001.
On September 30, 2002 we completed the first of two closings for the sale
of $4.5 million of Series D Convertible Preferred Stock to SDS Merchant Fund,
L.P. and other purchasers. The first closing resulted in proceeds of $3,434,850
and the issuance of 286 shares of Series D Preferred Shares. Each share of
Series D Convertible Preferred Stock has a face value of $12,000 and is
convertible into our Common stock at $0.12 per share. At the time of the first
closing all outstanding shares of Series B and Series C Redeemable Convertible
Preferred Stock and accumulated, unpaid dividends were exchanged for 513 shares
of our Series D Convertible Preferred Stock with a face value of $6,150,000.
Additionally, in accordance with the Purchase Agreement, we issued warrants
to purchase 50,000 shares of our common stock for each share of Series D
Convertible Preferred Stock issued including the issuance of warrants to
purchase 25.6 million common shares to holders of the Series B and Series C
Preferred Stock. On September 30, 2002, we issued warrants to purchase a total
F-23
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
39.9 million shares of common stock which were exercised immediately at a
nominal exercise price of $0.001.
The Series D Convertible Preferred Stock, par value $.001 per share, is
convertible into shares of our common stock in the manner, and upon the terms,
provisions and conditions set forth in the Certificate of Designation of the
Preferred Stock. The conversion price of the Series D Convertible Preferred
Stock is subject to certain adjustments under the terms of the Certificate of
Designation. The proceeds from issuance of the Series D Convertible Preferred
Stock and Warrant issued and the fair value of the warrants issued to the
holders of the Series B and Series C Preferred Stock has been allocated to each
instrument based on their relative fair values. Additionally, the Series D
Convertible Preferred Stock includes a beneficial conversion ratio at the
issuance date. The fair value of the Warrants and the intrinsic value of the
beneficial conversion ratio has been deemed a dividend to holders of the
Preferred Stock and considered a non-cash dividend to the Series D Convertible
Preferred Stock shareholders recorded during the third quarter of 2002 and has
been included in the determination of net loss applicable to common stock for
the three and nine months ended September 30, 2002.
The second closing of approximately 112 shares of Series D Convertible
Preferred Stock is contingent upon the effectiveness of the registration
statement covering the underlying common shares. The second closing yielded
proceeds to the company of approximately $1.26 million.
F-24
THE VIALINK COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SELECTED QUARTERLY DATA
Selected unaudited quarterly data are as follows:
2002
-------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
------------ ------------ ----------- -----------
Revenues....................... $ 960,480 $ 1,103,693 $ 1,144,951 $ 1,277,123
Loss from operations........... (2,710,594) (2,311,173) (3,030,403) (1,636,512)
Extraordinary loss on
modification of debt......... -- -- -- --
Extraordinary gain on
extinguishment of debt....... -- -- 1,628,817 --
Net loss....................... (2,710,594) (2,311,173) (1,401,586) (1,636,512)
Net loss applicable to common
stock........................ (5,934,630) (2,324,488) (7,803,835) (1,636,512)
Net loss applicable to common
stock per share........... $ (0.09) $ (0.03) $ (0.08) $ (0.01)
2001
-------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
------------ ------------ ----------- -----------
Revenues....................... $ 1,081,398 $ 875,577 $ 744,939 $ 750,578
Loss from operations........... (7,467,237) (7,291,311) (5,939,526) (2,760,110)
Extraordinary loss on
modification of debt......... -- (2,927,773) -- --
Extraordinary gain on
extinguishment of debt....... -- -- -- 2,296,022
Net loss....................... (7,569,433) (10,394,755) (6,011,363) (491,472)
Net loss applicable to common
stock........................ (18,279,309) (12,717,983) (6,158,824) (3,995,303)
Net loss applicable to common
stock per share........... $ (0.80) $ (0.51) $ (0.21) $ (0.07)
F-25
INDEX TO EXHIBITS
4.1(1) Form of Certificate of Common Stock
4.2(2) Form of Series A Warrant
4.3(3) Form of Series D Convertible Preferred Stock
4.4(4) Form of Purchase Agreement for Series D Convertible
Preferred Stock
4.5(4) Certificate of Designations relating to Series D Convertible
Preferred Stock
4.6(4) Form of Series D Warrant
4.7(4) Form of Registration Rights Agreement
4.8(5) Form of Second Global Amendment Agreement entered into by
and between Hewlett-Packard Company and the Registrant
4.11(3) Series D Convertible Preferred Stock Purchase Agreement
Dated as of September 30, 2002, among the Registrant and
Certain Purchasers
4.12(3) Series D Convertible Preferred Stock Purchase Agreement
Dated as of September 30, 2002, among the Registrant and
Certain Purchasers
10.1(3) Form of Service Agreement
10.2(6) Separation Agreement entered into by and between Xxxxxx X.
Xxxxx and the Registrant
10.3(6) Separation and Consulting Agreement entered into by and
between Xxxx Xxxxxxxx and the Registrant
10.4(6) Termination of Executive Security Agreement entered into by
and between Xxxxx X. Xxxxxx and the Registrant
10.5(6) Amendment to Employment Agreement and Termination of
Executive Security Agreement entered into between Xxxxxxx X.
Xxxxxxxx and the Registrant
10.6(6) Separation Agreement entered into between Xxxxx X. Xxxxx and
the Registrant
10.7(3) Release Agreement entered into between Edmond, Oklahoma,
landlord and the Registrant ending all obligations for the
Registrant's former offices
10.8(3) Amendment to Employment Agreement between Xxxxx X. Xxxxxx
and the Registrant
10.9(7) Termination of Employment Agreement between Xxxxx X.
Xxxxxxxxx and the Registrant
10.10(7) Separation Agreement between Xxxxx Xxxxx and the Registrant
10.11(3) Amendment to Employment Agreement between Xxxxxx X. Xxx and
the Registrant
10.12(3) Amendment to Employment Agreement between Xxxx Xxxxx and the
Registrant
10.13(8) Employment Agreement between Xxxx Xxxxx and the Xxxxxxxxxx
00 Consent of KPMG LLP
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
---------------
(1) Incorporated herein by reference to the Registrant's Registration Statement
on Form 8-A/A Amendment No. 2 filed under Section 12(g) of the Exchange Act
on June 21, 2000.
(2) Incorporated by reference herein to the Registrant's Current Report on Form
8-K dated February 7, 2001.
(3) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-2/A Amendment No. 2 filed on January 23, 2003.
(4) Incorporated by reference herein to the Registrant's Current Report on Form
8-K dated October 2, 2002.
(5) Incorporated by reference herein to the Registrant's Current Report on Form
8-K dated September 5, 2002.
(6) Incorporated by reference herein to the Registrant's Quarterly Report on
Form 10-QSB for the period ending June 30, 2002.
(7) Incorporated by reference herein to the Registrant's Quarterly Report on
Form 10-QSB for the period ending September 30, 2001.
(8) Incorporated by reference herein to the Registrant's Annual Report on Form
10-KSB for the fiscal year ending December 31, 2000.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The viaLink Company:
We consent to incorporation by reference in the registration statements
(No.333-55912) on Form S-3 and (No. 333-41320) on Form S-8 of The viaLink
Company of our report dated March 14, 2003, relating to the consolidated balance
sheets of The viaLink Company as of December 31, 2001 and 2002, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 2002, which report
appears in the December 31, 2002 annual report on Form 10-KSB of The viaLink
Company.
Our report dated March 14, 2003, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and is dependent
upon access to additional external financing, which raise substantial doubt
about its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
KPMG LLP
Dallas, Texas
March 28, 2003
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE XXXXXXXX-XXXXX ACT OF 2002
In connection with the accompanying Annual Report of The viaLink
Company (the Company) on Form 10-KSB for the period ending December 31, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Xxxxxx X. Xxx, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Xxxxxxxx-Xxxxx Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Xxxxxx X. Xxx
------------------------
Xxxxxx X. Xxx
Chief Executive Officer
March 31, 2003
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE XXXXXXXX-XXXXX ACT OF 2002
In connection with the accompanying Annual Report of The viaLink
Company (the Company) on Form 10-KSB for the period ending December 31, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Xxxxx X. Xxxxxx,Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Xxxxxxxx-Xxxxx Act of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Xxxxx X. Xxxxxx
----------------------------------
Xxxxx X. Xxxxxx
Vice President and Chief Financial
Officer
March 31, 2003
