Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______ to ________
Commission File Number 0-26924
PANJA INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1815822
(State of Incorporation) (I.R.S. Employer Identification No.)
11995 FORESTGATE DRIVE
DALLAS, TEXAS 75243
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 644-3048
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
COMMON STOCK, $0.01 PAR VALUE 9,294,770
(Title of Each Class) (Number of Shares Outstanding at January 31, 2000)
PANJA INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Consolidated Balance Sheets at December 31, 1999 and March 31, 1999 3
Consolidated Statements of Operations for the Three and Nine Months
Ended December 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Nine Months ended
December 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Change in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 19
PANJA INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, MARCH 31,
1999 1999
---------------- -------------------
Current assets:
Cash and cash equivalents........................................... $ 1,055,712 $ 1,801,756
Receivables - trade and other, less allowance for doubtful accounts
of $569,000 for December 31, 1999 and $420,000 for March 31, 1999. 10,946,285 9,796,261
Inventories......................................................... 12,833,128 10,990,262
Prepaid expenses.................................................... 2,167,738 1,028,767
Income tax receivable............................................... 2,594,359 --
Deferred income tax ................................................ 708,805 708,805
---------------- -------------------
Total current assets................................................... 30,306,027 24,325,851
Property and equipment, at cost, net................................... 6,011,920 5,693,836
Capitalized software................................................... 818,092 --
Deposits and other..................................................... 678,763 732,826
Goodwill, less accumulated amortization of $556,000 for December 31,
1999 and $370,000 for March 31, 1999 ........................... 570,515 756,316
---------------- -------------------
Total assets........................................................... $ 38,385,317 $ 31,508,829
================ ===================
PANJA INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, MARCH 31,
1999 1999
----------------- -------------------
Current liabilities:
Accounts payable............................................... $ 5,385,052 $ 4,076,799
Line of credit and notes payable .............................. 400,000 --
Current portion of long-term debt.............................. 953,196 1,684,000
Accrued compensation........................................... 2,256,764 1,504,118
Accrued restructuring costs ................................... 2,793,000 --
Accrued sales commissions...................................... 907,209 667,051
Accrued dealer incentives...................................... 503,000 442,561
Other accrued expenses......................................... 491,449 212,354
Income taxes payable........................................... -- 386,634
----------------- -------------------
Total current liabilities......................................... 13,689,670 8,973,517
Deferred income taxes ............................................ 90,963 90,963
Long-term debt ................................................... 3,278,153 3,909,284
Commitments and contingencies
Shareholders' equity :
Preferred stock, $0.01 par value
Authorized shares - 10,000,000
Issued shares - none........................................... -- --
Common stock, $0.01 par value:
Authorized shares-- 40,000,000
Issued shares-- 9,515,519 for December 31, 1999 and 8,961,974
for March 31, 1999......................................... 95,155 89,620
Additional paid-in capital..................................... 15,553,069 9,419,066
Retained earnings.............................................. 10,120,469 13,517,996
Less treasury stock (496,476 shares)........................... (4,468,284) (4,468,284)
Accumulated other comprehensive income (loss)................. 26,122 (23,333)
----------------- -------------------
Total shareholders' equity........................................ 21,326,531 18,535,065
----------------- -------------------
Total liabilities and shareholders' equity........................ $ 38,385,317 $ 31,508,829
================= ===================
See accompanying notes.
PANJA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ------------- ------------ ------------
Enterprise system sales............. $ 15,050,895 $ 13,728,913 $ 44,610,890 $ 41,400,276
Residential system sales............ 4,442,024 4,798,821 14,110,506 11,273,679
------------ ------------- ------------ ------------
Net sales........................ 19,492,919 18,527,734 58,721,396 52,673,955
Cost of sales....................... 9,800,571 9,942,013 27,300,200 25,597,044
------------ ------------- ------------ ------------
Gross profit..................... 9,692,348 8,585,721 31,421,196 27,076,911
Selling and marketing expenses...... 7,923,341 5,902,874 22,231,101 17,196,704
Research and development expenses... 2,246,884 1,113,719 5,116,055 3,066,935
Restructuring costs................. 3,436,095 -- 3,436,095 --
General and administrative expenses. 2,141,693 1,291,209 5,466,932 3,920,614
------------ ------------- ------------ ------------
Operating income (loss) ......... (6,055,665) 277,919 (4,828,987) 2,892,658
Interest expense.................... 175,661 94,894 460,982 290,387
Other income, net................... 8,395 21,761 56,464 52,105
------------ ------------- ------------ ------------
Income (loss) before income taxes... (6,222,931) 204,786 (5,233,505) 2,654,376
Income tax provision (benefit)...... (2,147,466) 62,446 (1,835,978) 834,981
------------ ------------- ------------ ------------
Net income (loss)................... $ (4,075,465) $ 142,340 $ (3,397,527) $ 1,819,395
============ ============= ============ ============
Basic earnings (loss) per share..... $ (0.47) $ 0.02 $ (0.40) $ 0.22
============ ============= ============ ============
Diluted earnings (loss) per share... $ (0.47) $ 0.02 $ (0.40) $ 0.21
============ ============= ============ ============
See accompanying notes.
PANJA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31,
1999 1998
--------------- ------------
OPERATING ACTIVITIES
Net income (loss).............................................. $ (3,397,527) $ 1,819,395
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization............................... 1,692,260 1,968,708
Provision for losses on receivables........................ 149,000 202,000
Provision for inventory obsolescence....................... (137,342) 45,000
Write-down of fixed assets for impairment.................. 654,807
Changes in operating assets and liabilities:
Receivables............................................. (1,299,024) (1,245,375)
Inventories............................................. (1,705,524) (1,354,498)
Prepaid expenses........................................ (1,138,971) (512,702)
Accounts payable........................................ 1,308,253 1,771,680
Accrued expenses........................................ 4,125,338 401,721
Income taxes (receivable)/payable....................... (2,980,993) (723,303)
--------------- ------------
Net cash provided by (used in) operating activities............ (2,729,723) 2,372,626
INVESTING ACTIVITIES
Purchase of property and equipment............................. (2,479,350) (1,976,923)
Investment in capitalized software............................. (818,092) --
Decrease in other assets....................................... 54,063 (243,484)
Minority interest in PHAST..................................... -- (1,652,000)
--------------- ------------
Net cash used in investing activities.......................... (3,243,379) (3,872,407)
FINANCING ACTIVITIES
Sale of common stock, net of expenses and exercise of stock options 6,139,538 137,872
Net increase in line of credit................................. 400,000 400,000
Proceeds from long-term debt................................... -- 1,594,841
Repayments of long-term debt................................... (1,361,935) (127,979)
--------------- ------------
Net cash provided by financing activities...................... 5,177,603 2,004,734
Effect of exchange rate changes on cash........................ 49,455 (69,040)
--------------- ------------
Net increase (decrease) in cash and cash equivalents........... (746,044) 435,913
Cash and cash equivalents at beginning of period............... 1,801,756 178,942
--------------- ------------
Cash and cash equivalents at end of period..................... $ 1,055,712 $ 614,855
================ =============
See accompanying notes.
PANJA INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying condensed consolidated financial statements, which should be
read in conjunction with the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999, are unaudited (except for the March 31, 1999 consolidated
balance sheet, which was derived from the Company's audited financial
statements), but have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the entire year
ending March 31, 2000.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------- ----------- ------------- ------------
Numerator:
Net income (loss) $ (4,075,465) $ 142,340 $ (3,397,528) $ 1,819,395
============= =========== ============= ============
Denominator:
Denominator for basic earnings per share
Weighted-average shares outstanding.... 8,650,720 8,299,461 8,557,953 8,280,468
Effect of dilutive securities:
Employee stock options.................... -- 608,083 -- 544,248
------------- ----------- ------------- ------------
Denominator for diluted earnings per share 8,650,720 8,907,544 8,557,953 8,824,716
============= =========== ============= ============
Basic earnings per share................. $ (0.47) $ 0.02 $ (0.40) $ 0.22
============= =========== ============= ============
Diluted earnings per share............... $ (0.47) $ 0.02 $ (0.40) $ 0.21
============= =========== ============= ============
3. Inventories
The components of inventories are as follows:
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
Raw materials $ 5,187,755 $ 5,557,286
Work in progress 1,447,658 788,733
Finished goods 6,774,781 5,358,651
Less reserve for obsolescence (577,066) (714,408)
----------------- --------------
Total $12,833,128 $10,990,262
================= ==============
4. Comprehensive Income
The components of comprehensive income, net of related tax, for the nine-month
period ended December 31, 1999, and 1998 are as follows:
1999 1998
--------------- ---------------
Net income (loss) $(3,397,527) $ 1,819,395
Foreign currency translation adjustments 49,455 (69,040)
--------------- ---------------
Comprehensive income (loss) $(3,348,072) $ 1,750,355
=============== ===============
5. Intel Investment
On December 15, 1999, the Company and Intel Corporation ("Intel") entered
into an agreement pursuant to which, among other things, the Company issued
to Intel, in consideration of services provided by Intel under such
agreement, a warrant to purchase 79,352 shares of Common Stock ("Business
Warrant") which will vest upon the occurrence of certain events. On December
15, 1999, the Company and Intel also entered into a Securities Purchase and
Investor Rights Agreement ("Purchase Agreement") pursuant to which Intel
purchased 423,212 shares of Common Stock and was issued a vested warrant to
purchase 238,057 shares of Common Stock ("Equity Warrant"). The aggregate
purchase price under the Purchase Agreement for the Common Stock and the
Equity Warrant was $5,000,000. The Business Warrant and the Equity Warrant
each have an exercise price of $21.54 per share ("Exercise Price")and a term
of five (5) years. Both the number of shares of Common Stock and the Exercise
Price under the Business Warrant and the Equity Warrant are subject to
adjustment and change as provided by the terms of the warrants.
The Company obtained an independent valuation to determine the estimated fair
value of the common stock and stock warrants issued in this transaction. The
resulting valuation yielded an estimated fair value of $5 million for the
common stock and warrants.
6. Restructuring Costs
During the third quarter of 2000, the Company announced plans to shutdown its
operations located in Salt Lake City and move operations to its corporate
headquarters in Dallas. The move will take place by the third quarter of
fiscal year 2001. This shutdown impacted approximately 94 employees. In
conjunction with this plan, the Company recorded a pretax charge of $2.6
million, all of which was included in restructuring costs. This charge
included $1.3 million in severance costs, $0.7 million in asset impairment
write-downs, and $0.6 million in leasehold cancellation charges. The asset
impairment charge was recorded to write-down the carrying value of the fixed
assets to their estimated fair market value. The assets will continue to be
depreciated from their fair market value over the remaining useful life of
the Salt
8
Lake City location, currently expected to be nine months. The leasehold
cancellation charges represent estimated costs to terminate leasehold
agreements for the Company's Salt Lake City facilities.
During the third quarter of fiscal year 2000, the Company also announced its
intention to dispose of its Synergy division. Approximately 26 employees were
affected by this action. A majority of these employees left the Company by
January 31, 2000. In conjunction with this announcement, the Company recorded
a charge of $1.1 million, of which $0.8 million was included in restructuring
costs and $0.3 million was included in cost of sales. This charge included
$0.6 million in severance costs for affected employees, $0.3 million to
write-down Synergy inventory to net realizable value, and $0.2 million for
other disposal costs.
The following is a reconciliation of the accrued restructuring costs:
Shut-down of Salt Disposal of
Description Lake City facility Synergy division Total
Charges:
Severance $1,315,000 $589,000 $ 1,904,000
Leasehold cancellation charges 649,000 -- 649,000
Disposal costs -- 240,000 240,000
Asset write-downs 655,000 -- 655,000
Inventory write-downs -- 318,000 318,000
Dispositions:
Non-cash write-downs of assets (655,000) (318,000) (973,000)
-------------------- ------------------ ----------------
Balance, December 31, 1999 $1,964,000 $ 829,000 $ 2,793,000
==================== ================== ================
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included in the
1999 Annual Report on Form 10-K of Panja Inc. (the "Company" or "Panja"). The
Company believes that all necessary adjustments (consisting only of normal
recurring adjustments) have been included in the amounts stated below to
present fairly the following quarterly information. Quarterly operating
results have varied significantly in the past and can be expected to vary in
the future. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year.
FORWARD LOOKING INFORMATION
Certain information contained herein contains forward-looking statements
(as defined in the Private Securities Litigation Reform Act of 1995)
regarding future events or the future financial performance of the Company,
and are subject to a number of risks and other factors which could cause the
actual results of the Company to differ materially from those contained in
and anticipated by the forward-looking statements. Among such factors are:
industry concentration and the Company's dependence on major customers,
competition, risks associated with international operations and entry in to
new markets, government regulation, variability in operating results, general
business and economic conditions, customer acceptance of and demand for the
Company's new products, the Company's overall ability to design, test, and
introduce new products on a timely basis, reliance on third parties, the
Company's ability to manage change, dependence on key personnel, dependence
on information systems and changes in technology. The forward-looking
statements contained herein are necessarily dependent upon assumptions,
estimates and data that may be incorrect or imprecise. Accordingly, any
forward-looking statements included herein do not purport to be predictions
of future events or circumstances and may not be realized. Forward-looking
statements contained herein include, but are not limited to, forecasts,
projections and statements relating to inflation, future acquisitions and
anticipated capital expenditures. All forecasts and projections in the report
are based management's current expectations of the Company's near term
results, based on current information available pertaining to the Company,
including the aforementioned risk factors. Actual results could differ
materially.
OVERVIEW
Panja designs, develops, manufactures and markets sophisticated
electronic equipment that provides distributed Internet information and
entertainment content to non-PC devices. This utilization enables end-users
to retrieve, store, and narrowcast Internet information or information
residing in corporate databases to non-PC devices. The principal
configuration of the Company's equipment is a control system, which is
comprised of a central controller, a user-interface device, and a control
card or cards. The control card allows the system to communicate with a
variety of devices linked to the system. Principally, a system allows the end
user to operate in a single environment a broad range of electronic and
programmable devices. These numerous devices consist of video equipment,
audio equipment, lighting equipment, heating and air-conditioning equipment,
camera equipment, and security systems. The configuration of a system is
scalable from control of a single room, to control of a whole-home, to
control of multiple systems at multiple locations.. The Company's WebLinx
software provides the flexibility of allowing the end user to control a
system via the internet from a remote location using any internet browser.
The Company's control systems have applications in both residential
and enterprise settings. The residential applications are currently primarily
comprised of whole-home automation systems, usually installed in upscale
residences. The enterprise applications are broad in focus, primarily used in
board rooms, training rooms, and auditoriums. However, because of the
flexibility in design and ease of use, these systems are also installed in a
number of sports facilities, theme parks, museums, and other settings which
require the control of a wide variety of electronic equipment. Both the
residential and enterprise systems are sold through the Company's network of
1,600 domestic and 100 international audio/video installers, integrators, and
international distributors.
10
The Company has several products that utilize the same system
approach, but are limited to single room automation, which focus on an
entertainment venue. These systems will allow the data, video and audio
content provided by the broadband services to be distributed to entertainment
devices contained within the home, or to the Company's user interface device.
This distribution of information will include news, sports, weather, e-mail,
MP3 files and other similar data. This distribution will be available through
the Company's BroadBand Blast monthly subscription service. These
consumer-focused systems can currently be ordered through the Company's
e-commerce site, www.buyapanja.com. Initial shipments of these products
commenced in January 2000. The Company has begun its efforts to find
additional distribution channels for these consumer products. These efforts
are currently focused on securing agreements with the telephone companies and
cable companies that are providing the broadband access to the consumer.
The Company's quarterly operating results have varied significantly
in the past, and can be expected to vary in the future. These quarterly
fluctuations have been the result of a number of factors and will continue to
change as the Company pursues its consumer opportunities. These factors
include seasonal purchasing of the Company's dealers and distributors,
particularly from international distributors, OEMs, and other large
customers; sales and marketing expenses related to entering new markets; the
timing of new product introductions by the Company and its competitors;
fluctuations in commercial and residential construction and remodeling
activity; and changes in product or distribution channel mix. In addition,
the Company has experienced higher selling and marketing expenses while
introducing its new consumer strategy.
The Company's current products are sold to dealers (typically
audio/visual installer and integrators) or to distributors in the
international market. The Company principally relies on these 1,600 dealers
of electronic and audiovisual equipment to sell, install, support and service
its products in the United States. Internationally, the Company relies on a
network of exclusive distributors and dealers to distribute its products.
Because of the increase in broadband access to the home, the Company has
recognized the potential of the increase in the consumer market for its
products. Accordingly, the Company will focus on adding a new distribution
channel which will provide its equipment in an easy to install configuration
that will parallel the increase of the distribution of information to the
home via broadband access. Also, in conjunction with the Company's focus on
its Internet applications and service, the Company put before the
shareholders for vote to change the Company name to Panja Incorporated which
was approved at the Company's annual shareholders meeting on September 3,
1999.
The Company's U. S. dealers pursue a wide variety of projects that
can range from small conference rooms/boardrooms to very large projects in a
university, government facility, amusement park, or corporate training
facility. The Company's international distributors tend to order in large
quantities to take advantage of volume discounts the Company offers and to
economize on shipping costs. These international orders are not received at
the same time each year. Notwithstanding the difficulty in forecasting future
sales and the relatively small level of backlog at any given time, the
Company generally must plan production, order components, and undertake its
development, selling and marketing activities, and other commitments months
in advance. Accordingly, any shortfall in revenues in a given quarter may
impact the Company's results of operations.
The Company purchases components that comprise approximately 28% to
32% of its cost of sales from foreign vendors. The primary components
purchased are standard power supplies and displays for touch panels.
Historically, the Company has not had any significant cost issues related to
price changes due to purchasing from foreign vendors. However, there can be
no assurance that this will be the case in the future. The Company has
experienced delays of up to three weeks in receiving materials from foreign
vendors. However, the Company takes this issue into consideration when orders
are placed and, therefore, this concern has not, in the past, significantly
impacted the Company's ability to meet production and customer delivery
deadlines. However, a significant shortage of or interruption in the supply
of foreign components could have a material adverse affect on the Company's
results of operations.
The Company's selling and marketing expenses category also includes
customer service and support and engineering. The engineering department of
the Company is involved in research and development as
11
well as customer support and service. Additionally, the Company has created
sales support teams, which are focused on specific geographic regions or
customer categories. These teams include sales personnel, system designers,
and technical support personnel, all of whom indirectly participate in
research and development activities by establishing close relationships with
the Company's customers and by individually responding to customer-expressed
needs.
RESULTS OF OPERATIONS
The following table contains certain amounts, expressed as a percentage of
net sales, reflected in the Company's consolidated statements of income for
the three month and nine month periods ended December 31, 1999 and 1998:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Enterprise system sales..................... 77.2% 74.1% 76.0% 78.6%
Residential system sales.................... 22.8 25.9 24.0 21.4
---------- ---------- ---------- ----------
Net sales 100.0 100.0 100.0 100.0
Cost of sales 50.3 53.7 46.5 48.6
---------- ---------- ---------- ----------
Gross profit 49.7 46.3 53.5 51.4
Selling and marketing expenses...... 40.6 30.2 37.9 31.2
Research and development expenses 11.6 6.2 8.7 5.9
Restructuring costs 17.6 -- 5.9 --
General and administrative expenses 11.0 8.4 9.3 8.8
---------- ---------- ---------- ----------
Operating income (loss) (31.1) 1.5 (8.3) 5.5
Interest expense 0.8 0.5 0.8 0.5
Other income -- 0.1 0.1 0.1
---------- ---------- ---------- ----------
Income (loss) before income taxes (31.9) 1.1 (9.0) 5.1
Income tax provision (benefit) (11.0) 0.3 (3.1) 1.6
---------- ---------- ---------- ----------
Net income (loss) (20.9) 0.8 (5.9) 3.5
========== ========== ========== ==========
THREE MONTHS ENDED DECEMBER 31, 1999 RESULTS COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1998 (ALL REFERENCES ARE TO FISCAL YEARS)
The Company's revenues increased 5% compared to the same quarter
last year. The Company records its revenues in two categories, enterprise and
residential. Both categories of revenue are sold through the Company's
integrator channel. The Company has just completed its first consumer
product, which is currently being sold via the Company's internet site.
Future revenue growth is expected to be realized by the development of new
channel distribution agreements with telephone and cable companies. The
enterprise category includes the Company's OEM sales, and the sales of its
Synergy product. The residential category includes systems sales into the
residential market from both PANJA, the parent company, and PHAST
Corporation. Sales into the International market from PANJA are all
considered enterprise sales, while all sales from PHAST are considered to be
residential sales.
While Enterprise sales grew 10% during the third quarter of fiscal
year 2000, the growth of the markets comprising this category was drastically
different. Domestic commercial sales were up 15% over last year, and
International sales were up 8% over last year. OEM sales decreased 44% from
last year, Synergy sales decreased 9% from last year. Commercial sales growth
is consistent with the Company's
12
historical growth rate. This growth has been maintained notwithstanding the
fact that the Company has introduced several lower-priced, higher feature set
controllers and user-interfaces. While OEM sales decreased, these sales
represent only 2.5% of the total revenue for the quarter. Synergy sales were
adversely affected by competitive factors. The company has announced its
intent to dispose of its Synergy division (see Restructuring costs, below).
Residential system sales decreased 7% from the same quarter last
year. This decrease was a result of several factors. The Company has
introduced lower-priced system designs at PHAST, which provide control for
in-room device control, rather than the whole-home, multi-system control
provided by its Landmark system. As evidence of this, PHAST has increased its
sale of total systems 110% over last year, while total revenue has grown 52%.
Also, last year the Company had announced a price increase during the third
quarter, which caused dealers to accept delivery of systems during the third
quarter for installations planned during the fourth quarter.
Gross margins continued to improve from the previous year. This
improvement was once again significant at PHAST, where margins improved as a
percent of revenue by 40% from the previous year. This increase is due to
increased production efficiencies, elimination of the Audio Ease product
line, and reduction of costs due to consolidation of purchasing with Panja.
However, results from last year included a write-down of inventory for the
discontinuance of it's the Company's AudioEase product line. Gross margins at
the parent company have decreased from last year as a result of the increased
sales of the Viewpoint product previously mentioned. Not only does this
product have a lower selling price, but it also has a lower gross margin
percentage than the Company's traditional products. Gross margins were
adversely affected by the announcement to sell the Synergy division, as the
Company reserved for $318,000 of related inventory costs (see Restructuring
costs below). The Company also increased its reserve for product obsolescence
by $250,000 during the quarter.
Operating expenses, exclusive of restructuring costs, were 11.1%
more of sales this year than the previous year. SALES AND MARKETING expenses
increased 10.4% compared to last year. During the third quarter the Company
spent approximately $1 million, or 5% of revenue, on efforts to communicate
the nature of its new focus on consumer products, as well as trade shows to
exhibit its new products. RESEARCH AND DEVELOPMENT expenses increased 5.4% of
revenue compared to last year. Again, this increase was due to the Company's
increased efforts in developing its new consumer-based, internet related
software and products. GENERAL AND ADMINISTRATIVE expenses increase 2.6% as a
percent of sales compared to last year This increase was a direct result of
legal and accounting costs incurred with the stock purchase agreement with
Intel, an increase in bad debt reserve for PHAST, and an increase in the
accrual for management bonuses.
The Company recorded restructuring charges during the quarter as a
result of its announcement to close its manufacturing facility and offices in
Salt Lake City and move these operations to Dallas, Texas, and as a result of
its decision to dispose of its Synergy division. Restructuring costs
associated with employees' severance packages, leases associated with the
Salt Lake City facilities, write-down of fixed assets to their estimated fair
market value, and shut down costs were included in the $3.4 million charge
included in operating expenses. Another $318,000 associated with Synergy
related inventory was charged to cost of goods sold in conjunction with this
announcement. See Note 6 to the financial statements.
The Company's effective tax rate was approximately 35%, comparable
to last year. The Company currently has a U.S. deferred tax asset of $2.2
million. Utilization of the deferred tax asset is dependent on future taxable
income in excess of existing taxable temporary differences. The asset has
been recognized because management believes it is more likely than not that
the deferred tax asset will be utilized in future years. This conclusion is
based on the belief that current and future levels of taxable income will be
sufficient to realize the benefits of the deferred tax asset.
NINE MONTHS ENDED DECEMBER 31, 1999 RESULTS COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 1998 (ALL REFERENCES ARE TO FISCAL YEARS)
13
The Company's revenues increased 12% compared to the same period
last year. Enterprise sales grew 8% during 1999, and once again the growth of
the markets comprising this category were drastically different. Domestic
commercial sales grew 15% over last year and OEM sales increased 20% over
last year. International sales decreased 2% from last year and Synergy sales
decreased 9% from last year. Domestic commercial sales growth is consistent
with previous years. OEM sales growth was the result of large orders from a
new customer during the first half of the year. International sales have
experienced significant reductions in sales to Canada and Mexico, with sales
into Asia and the Pacific Rim growing over last year. Sales into Europe are
slightly less than last year. Synergy sales have been adversely affected by
competitive factors, and as such the Company has announced plans to dispose
of this division. Residential system sales have grown 25% during fiscal year
2000. This growth has occurred at the same relative growth rate at both Panja
and at PHAST. These sales continue to benefit from the expansion of the
market for home automation.
Gross margins have improved from the previous year. This improvement
has been significant at PHAST, where margins improved as a percent of revenue
by 40% from the previous year. As discussed above, this increase is due to
increased production efficiencies, elimination of the AudioEase product line,
the reduction of costs due to consolidation of purchasing with Panja, and the
fact that there was a write off of AudioEase inventory last year. Gross
margins at the parent company have decreased from last year as a result of
the increased sales of the Viewpoint product discussed above, and an increase
in its reserve for product obsolescence.
Operating expenses, exclusive of restructuring costs, were 10% more
of sales this year than the previous year. Of this increase, SALES AND
MARKETING expenses increase as a percent of sales 6.7% over the previous
year. The Company has expended significant efforts and costs to create market
recognition within the Internet community of its products. These additional
efforts have been focused on attending trade shows that attract the internet
community. RESEARCH AND DEVELOPMENT expenses increased 2.8% as a percent of
revenue over last year. Again, this increase was due to the Company's
increased efforts in developing its new software that provide internet
functionality and the development of its consumer products. In addition to
the increase in research and development expenditures, the Company also
incurred an additional $818,000 in costs for the development of its WebLinx
software, all of which was capitalized. General and Administrative expenses,
increased 0.5% as a percentage of sales. This increase was a direct result of
legal and accounting costs incurred with the stock purchase agreement with
Intel, an increase in bad debt reserve for PHAST, and an increase in the
accrual for management bonuses.
The Company recorded restructuring charges during the quarter as a
result of its announcement to close its manufacturing facility and offices in
Salt Lake City and move these operations to Dallas, Texas, and as a result of
its decision to dispose of its Synergy division. Restructuring costs
associated with employees' severance packages, leases associated with the
Salt Lake City facilities, write-down of fixed assets to their estimated fair
market value, and shut down costs were included in the $3.4 million charge
included in operating expenses. Another $318,000 associated with Synergy
related inventory was charged to cost of goods sold in conjunction with this
announcement. See Note 6 to the financial statements.
The Company's effective tax rate of 35% is comparable to last year.
The Company currently has a U.S. deferred tax asset of $2.2 million.
Utilization of the deferred tax asset is dependent on future taxable income
in excess of existing taxable temporary differences. The asset has been
recognized because management believes it is more likely than not that the
deferred tax asset will be utilized in future years. This conclusion is based
on the belief that current and future levels of taxable income will be
sufficient to realize the benefits of the deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
For the past three years, the Company has satisfied its operating
cash requirements principally through cash flow from operations and
borrowings from the line of credit. In the nine months ended December 31,
1999, the Company used $2.7 million of cash in operations. The Company spent
$2.5
14
million for equipment, including the purchase of computers and furniture for
new offices and training facilities at PHAST. Additionally, the Company has
capitalized $818,000 in costs associated with the development of its WebLinx
software. The Company received a $5 million investment from Intel during the
quarter, as described in footnote 5 to the financial statements.
The Company has a $7.5 million revolving line of credit agreement
that expires on September 30, 2000. It is expected that this line of credit
will be renewed at that time. The line of credit provides for interest at the
bank's contract rate, which is expected to approximate prime. At December 31,
1999, $400,000 was outstanding under the revolving loan agreement.
The Company expects to spend approximately $2.8 million for capital
expenditures in fiscal 2000.
The Company believes that cash flow from operations, the Company's
existing cash resources and funds available under its revolving loan facility
will be adequate to fund its working capital and capital expenditure
requirements for at least the next 12 months. An important element of the
Company's business strategy has been, and continues to be, the acquisition of
similar businesses and complementary products and technology and the
integration of such businesses and products and technology into the Company's
existing operations. Such future acquisitions, if they occur, may require
that the Company seek additional funds.
CONTINGENCIES
The Company is party to ordinary litigation incidental to its
business, none of which is expected to have a material adverse effect on the
results of operations, financial position or liquidity of the Company.
JANUARY 2000 UPDATE
Through the first six weeks of the year 2000, the Company's operations
are functioning completely and have not experienced any significant issues
associated with the Year 2000 problem (as described below). While we are
encouraged by the success of our Year 2000 efforts and that of our customers
and partners, the Company will continue to offer Year 2000 support to
customers and monitor our own operations for compliance.
YEAR 2000
Some computers and other equipment are operated and controlled by
software code in which calendar year data is abbreviated to only two digits.
As a result of this design flaw, some of these systems could fail to produce
correct results beginning on January 1, 2000, if the year indicator "00" is
interpreted to designate the year 1900 rather than the year 2000. This
problem with software design as well as embedded technology such as
microcontrollers is commonly referred to as the "Year 2000" issue. The
Company uses a variety of software products to operate its business, and the
Company's products contain software and embedded technology that are used in
the operation of the products, all of which could be affected by the Year
2000 issue.
STATE OF READINESS
The Company completed a plan to address the problems involved with the
Year 2000 issues. The plan focused on four areas: the Company's internal
software and hardware, the Company's products, the Company's suppliers, and
the equipment that supports the Company's infrastructure.
In order to assess its issues with internal software, the Company made a
complete inventory of all software located on its computer network and
desktop support systems. The manufacturers of these software programs were
contacted in order to ascertain whether these software programs are year 2000
compliant. The Company had an independent review of its information systems
department conducted to confirm its handling of the Year 2000 issues.
Additionally, the Company arranged to have all of its major software programs
tested in a lab, at which time all date indicators were moved forward to the
year 2000.
15
The Company addressed Year 2000 issues in the engineering of its products.
All issues with date compliance in the products were addressed and corrected, or
any remaining incidental issues were communicated to the Company's customers.
The Company relies on over 300 manufacturers and suppliers to provide parts
and equipment that are integrated during the manufacturing of the Company's
products. Because of the reliance on obtaining these products in order to
manufacture the Company's products, it was important for the Company to
ascertain these suppliers' ability to operate their businesses on and after
January 1, 2000. All of these manufacturers and suppliers were contacted by the
Company and asked to respond to a questionnaire that indicated their readiness
to the Year 2000 issues.
Finally, the Company inspected the many systems that provide support to the
infrastructure of its operations. These systems include phone systems, security
systems, air conditioning equipment, machinery and other related equipment that
are used in the Company's physical operations, and outside service contractors
that provide payroll processing, claims processing, and banking services to the
Company. Responses and warranties were received by the manufacturers of the
equipment and by the service providers.
COSTS
The Company incurred approximately $40,000 on these efforts. These
expenditures were included in the normal operating plan of the Company for the
fiscal year 2000. Personnel costs associated with the implementation and
completion of the plan were also covered in the normal operations of the
Company.
RESULTS OF YEAR 2000 ISSUES AND CONTINGENCY PLANS
The Company experienced an extremely low number of calls from customers
related to Year 2000 issues. Further, the Company has not experienced any issues
relating to its suppliers, internal computer systems, or internal infrastructure
support systems. It is the Company's belief that there will be no further
significant problems relating to the Year 2000 issues.
FORWARD-LOOKING STATEMENTS RELATING TO YEAR 2000 ISSUES
The discussion of the Company's efforts and expectations relating to the
Year 2000 issue contain forward-looking statements. The Company's ability to
achieve Year 2000 compliance and the costs associated with such compliance are
based upon management's best estimates, which were derived using numerous
assumptions. These assumptions involve a number of future events, including the
continued availability of certain resources, cooperation by vendors and
customers, and other factors. There can be no assurance that these estimates
will prove to be accurate, and actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in Year 2000 issues, variability of definitions of "compliance
with Year 2000" and the myriad of different products and services, and
combinations thereof, sold by the Company. No assurance can be given that the
aggregate cost of defending and resolving such claims, if any, will not
materially adversely affect the Company's results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
From March 31, 1999, until December 31, 1999 there were no material changes
from the information concerning market risk contained in the Company's Annual
Report on Form 10-K for the year ended March 31, 1999, as filed with the
Securities and Exchange Commision on June 29, 1999 (file no. 0-26924).
16
PANJA INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information pertaining to this item is incorporated herein from Part I.
Financial Information (Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Contingencies).
Item 2. Changes in Securities and Use of Proceeds
On December 15, 1999, the Company and Intel Corporation ("Intel") entered into
an agreement pursuant to which, among other things, the Company issued to Intel,
in consideration of services provided by Intel under such agreement, a warrant
to purchase 79,352 shares of Common Stock ("Business Warrant") which will vest
upon the occurrence of certain events as provided in the Business Warrant. On
December 15, 1999, the Company and Intel also entered into a Securities Purchase
and Investor Rights Agreement ("Purchase Agreement") pursuant to which Intel
purchased 423,212 shares of Common Stock and was issued a vested warrant to
purchase 238,057 shares of Common Stock ("Equity Warrant"). The aggregate
purchase price under the Purchase Agreement for the Common Stock and the Equity
Warrant was $5,000,000. The Business Warrant and the Equity Warrant each have an
exercise price of $21.54 per share ("Exercise Price") and a term of five (5)
years. Both the number of shares of Common Stock and the Exercise Price under
the Business Warrant and the Equity Warrant are subject to adjustment and change
as provided by the terms of the warrants. The securities described above were
issued in reliance on the exemptions from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, and Rule 506 of Regulation D
promulgated thereunder.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1 Amended and Restated Articles of Incorporation the Company.
(Incorporated by reference from Exhibit 4.1 to the Company's
Form S-8 filed March 11, 1996, File No. 333-2202).
3.2 Amended and Restated Bylaws of the Company, as amended.
(Incorporated by reference from Exhibit 3.4 to the Company's
Registration Statement on Form S-1 filed September 13, 1995,
as amended, File No. 33-96886).
3.3 Amendment to Amended and Restated Bylaws of the Company.
(Incorporated by reference from Exhibit 3.5 to the Company's
Registration Statement on Form S-1 filed September 13, 1995,
as amended, File No. 33-96886).
4.1 Specimen certificate for the Common Stock of the Company
(Incorporated by reference from Exhibit 4.1 to the Company's
Registration Statement on Form S-1 filed September 13, 1995,
as amended, File No. 33-96886).
+4.2 Common Stock Warrant No. 001 issued to Intel Corporation to
purchase 238,057 shares of Common Stock.
+4.3 Common Stock Warrant No. 002 issued to Intel Corporation to
purchase 79,352 shares of Common Stock.
- ---------------------------------
+ Filed herewith.
17
+4.4 Securities Purchase and Investor Rights Agreement dated
December 15, 1999.
+27.1 Financial Data Schedule.
b. Reports on Form 8-K
Current Report on Form 8-K (reported on Item 5) dated December 15,
1999, and filed December 23, 1999, regarding the private placement made
by Intel Corporation of the Company's common stock.
- ---------------------------------
+ Filed herewith.
18
PANJA INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Panja Inc.
Date: February 14, 2000 By: /s/ Paul D. Fletcher
-------------------------------------
Paul D. Fletcher
Chief Accounting Officer (Duly Authorized
Officer and Principal Financial Officer)
19