SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 1999
Commission file number 000-22611
Compu-DAWN, Inc.
(Exact name of Small Business Issuer as Specified in Its Charter)
Delaware 11-3344575
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12735 Gran Bay Parkway West, Building 200, Jacksonville, Florida 32258
(Address of principal executive offices)
Issuer's telephone number, including area code (904) 680-6680
77 Spruce Street, Cedarhurst, New York 11516
(Former Name, Former Address and Formal Fiscal Year, if Changed Since
Last Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
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
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of May 10, 1999: 3,448,269
Transitional Small Business Disclosure Format (check one):
Yes No X
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Compu-DAWN, Inc. AND SUBSIDIARY
- INDEX -
Page(s)
PART I Financial Information
<S> <C>
Consolidated Condensed Balance Sheets - March 31, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Operations - Three Months Ended March 31,
1999 and 1998 4
Consolidated Condensed Statements of Cash Flows - Three Months Ended March 31,
1999 and 1998 5
Notes to Interim Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
PART II Other Information 14
SIGNATURES 17
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PART I. Financial Information
ITEM 1. Financial Statements
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Compu-DAWN, Inc. AND SUBSIDIARY
BALANCE SHEETS
- ASSETS -
March 31, December 31,
1999 1998
--------- ------------
(Unaudited)
CURRENT ASSETS:
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Cash $ 801,387 $2,528,400
Marketable securities 1,850,000 1,850,000
Accounts receivable, net of allowances for doubtful accounts of $13,635
for 1999 and 1998 313,512 319,392
Prepaid expenses 105,687 68,272
Inventory 394,053 -
Loan receivable - 736,318
------------- ------------
TOTAL CURRENT ASSETS 3,464,639 5,502,382
FIXED ASSETS - NET 353,871 218,374
OTHER ASSETS:
Security deposits 37,068 21,525
------------- -----------
$ 3,855,578 $5,742,281
============= ==========
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 813,887 $ 169,519
Deferred revenue 170,873 173,953
Current portion of note payable - officer 25,000 50,000
Capitalized lease payable - current 13,490 6,662
------------- -------------
TOTAL CURRENT LIABILITIES 1,023,250 400,134
------------- ------------
NON-CURRENT LIABILITIES:
Capitalized lease payable 34,766 15,779
Deferred rent liability 27,253 28,448
------------ -------------
62,019 44,227
------------ -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized:
Series A Convertible Preferred; 1,675 and 3,250 shares issued and
outstanding for 1999 and 1998, respectively 17 33
Series B Convertible Preferred; 1,480 and 1,750 shares issued and
outstanding for 1999 and 1998, respectively 14 17
Common stock, $.01 par value, 20,000,000 shares authorized,
3,788,313 and 3,265,448 shares issued for 1999 and 1998, respectively 37,883 32,654
Additional paid-in capital 14,398,253 13,661,649
Accumulated deficit (10,890,146) (7,620,721)
Accumulated other comprehensive income (loss) (150,000) (150,000)
-------------- --------------
3,396,021 5,923,632
Less: treasury stock, 340,044 shares at cost for 1999 and 1998 (625,712) (625,712)
--------------- --------------
2,770,309 5,297,920
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$ 3,855,578 $ 5,742,281
============= ============
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See notes to financial statements.
3
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Compu-DAWN, Inc. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
March 31,
1999 1998
---- ----
REVENUES:
<S> <C> <C>
Representative revenue $ 515,061 $ -
Residual revenue 395,847 -
Products and services 359,549 -
Software sales 127,782 101,873
Maintenance income 91,349 65,086
------------ -----------
1,489,588 166,959
------------ ----------
COSTS AND EXPENSES:
Cost of revenues 1,002,309 123,538
General and administrative expenses 2,790,188 425,396
Research and development 11,907 111,702
------------ ----------
3,804,404 660,636
------------ ----------
(LOSS) FROM OPERATIONS (2,314,816) (493,677)
------------ ----------
OTHER INCOME (EXPENSES):
Interest and other income 126,558 20,787
Interest expense (6,816) (3,437)
Non-recurring refunds (482,033) -
Write-off of impaired loan (592,318) -
------------ -----------
(954,609) 17,350
------------ -----------
(LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES 3,269,425) (476,327)
Provision (credit) for income taxes - -
-------------- ------------
NET (LOSS) $(3,269,425) $(476,327)
=========== =========
BASIC (LOSS) PER COMMON SHARE $(1.02) $(.17)
======= =====
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 3,192,646 2,839,907
========= =========
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See notes to financial statements.
4
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Compu-DAWN, Inc. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
March 31,
1999 1998
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Cash received from customers $ 1,492,388 $ 264,343
Cash paid to suppliers and employees (3,204,366) (691,885)
Interest paid (6,816) (3,750)
Interest and other income received 126,558 20,787
----------- ----------
Net cash (utilized) by operating activities (1,592,236) (410,505)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans and advances (16,222) -
Purchase of fixed assets (90,589) (12,401)
------------ -----------
Net cash (utilized) by investing activities (106,811) (12,401)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of officer's loan (25,000) (25,000)
Payments of capital lease obligations (2,966) (2,458)
Proceeds from exercise of stock options - 11,335
------------ -----------
Net cash (utilized) by financing activities (27,966) (16,123)
------------ -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,727,013) (439,029)
Cash and cash equivalents, at beginning of year 2,528,400 3,081,253
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 801,387 $2,642,224
============ ==========
RECONCILIATION OF NET (LOSS) TO NET CASH (UTILIZED)
BY OPERATING ACTIVITIES:
Net (loss) $(3,269,425) $ (476,327)
Adjustments to reconcile net (loss) to net cash (utilized) by operating activities:
Depreciation and amortization 33,374 20,605
Deferred rent (1,195) 82
Write-off of impaired loan 592,318 -
Compensatory shares 726,815 40,848
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 5,880 (75,952)
(Increase) decrease in prepaid expenses (2,958) 27,758
Increase (decrease) in accounts payable and accrued expenses 659,368 (120,855)
(Increase) in inventory (333,333) -
(Decrease) increase in deferred revenue (3,080) 173,336
------------- ------------
NET CASH (UTILIZED) BY OPERATING ACTIVITIES $(1,592,236) $ (410,505)
=========== ===========
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See notes to financial statements.
5
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Compu-DAWN, Inc. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - DESCRIPTION OF COMPANY:
Compu-DAWN, Inc., the Company, was incorporated under the name
of Coastal Computer Systems, Inc., in New York on March 31,
1983, and was reincorporated in Delaware under its present name
on October 18, 1996. Since January 8, 1994 the Company has been
engaged in two lines of business. In one, the Company, through
its wholly owned subsidiary e.TV Commerce, Inc., ("e.TV")
operates in the Internet, e-commerce and telecommunications
business (the "e.TV Business"), marketing and selling its
products and services primarily using a person to person sales
approach with the services of commissioned sales
representatives in a multi-level referral network marketing
organization. The Company has been in this business, since
January 8, 1999. In its other line of business, the Company is
engaged in the designing, developing, licensing, installing and
servicing computer software products and systems predominantly
for public safety and law enforcement agencies. The Company's
customers, to date, are primarily located in New York State.
At December 31, 1998, the Company had written down a loan
receivable from LocalNet Communications, Inc., ("LocalNet") to
approximately $750,000, the represented fair value of the
assets collateralizing the loan. On January 7, 1999, the
Company assigned its interest in this loan from LocalNet, an
unaffiliated Florida corporation, to e.TV, a newly formed
subsidiary of the Company. On January 8, 1999, LocalNet
peacefully surrendered the assets representing the collateral
underlying this loan. The fair value of the assets received
aggregated $244,000 (including cash of $83,778) and accordingly
the Company has recorded a further write-down of the loan by
approximately $592,000.
The Company's consolidated statements of operations include the
revenues and expenses of e.TV from January 9, 1999. The
following proforma results were developed assuming the
surrender of LocalNet's assets had occurred at the beginning of
the earliest period presented.
Three Months Ended
March 31,
1999 1998
--------------- --------------
Revenues $ 1,615,785 $2,267,248
Costs and expenses 3,227,603 2,641,453
Loss from operations (1,611,818) (374,205)
Net loss $(2,567,481) $ (356,855)
Loss per share $(.80) $(.13)
The accounting policies followed by the Company are set forth
in Note 2 to the Company's annual report filed on Form 10-KSB
for the year ended December 31, 1998. Specific reference is
made to this report for a description of the Company's
securities and the notes to the financial statements included
therein.
6
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Compu-DAWN, Inc. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - DESCRIPTION OF COMPANY (Continued):
In the opinion of management, the accompanying unaudited
interim consolidated condensed financial statements of
Compu-DAWN, Inc., contain all adjustments necessary to present
fairly the Company's financial position as of March 31, 1999
and the results of its operations and its cash flows for the
three month periods ended March 31, 1999 and 1998.
The results of operations for the three month periods ended
March 31, 1999 and 1998 are not necessarily indicative of the
results to be expected for the full year.
NOTE 2 - CAPITAL STOCK AND EQUIVALENTS:
During the quarter ended March 31, 1999, holders of 1,575
Series A preferred shares and 270 Series B preferred shares
converted such shares into 315,000 and 50,467 common shares as
provided for in the agreements.
In February 1999, the Company issued the following:
(a) 10,000 shares of common stock to a consultant for services
rendered in October 1998. The value of these services,
$15,000, was accrued at December 31, 1998
(b) 117,398 shares of common stock to a supplier of inventory
to e.TV as an inducement to enter into a contract with the
Company. These shares were valued at the market price at
the date of issuance, for an aggregate of $606,815 and
(c) 30,000 shares of common stock to an entity in connection
with a one year consulting contract. These shares were
valued at $120,000, the aggregated market value at the date
of issuance.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company was incorporated in the State of New York on March 31, 1983
under the name of Coastal Computer Systems, Inc. The Company was reincorporated
in the State of Delaware under its present name Compu-DAWN, Inc., on October 18,
1996.
The Company is engaged in two lines of business. In one, the Company,
through its wholly owned subsidiary, e.TV Commerce, Inc. ("e.TV"), operates in
the Internet, e-commerce and telecommunications business (the "e.TV Business"),
marketing products and services primarily using a person to person sales
approach with the services of commissioned independent sales representatives in
a referral network marketing organization. Key services and products in this
line of business include the following:
o Interactive advanced digital tv set-top boxes which enable
the consumer to access the Internet through the consumer's
tv set over a telephone line, conduct electronic commerce
through e.TV's own e-commerce shopping mall, and access a
variety of different software applications through network
computing capabilities;
o Sales of long distance telephone service;
o Sales of
Internet access service;
o On-line shopping;
o Pre-paid cellular telephone service; and
o Web page design and sales
In its other line of business, the Company is engaged in the business of
designing, developing, licensing, installing and servicing computer software
products and systems predominantly for public safety and law enforcement
agencies (the "Public Safety Software Business"). Historically, the Company's
public safety customers have been primarily located in New York State.
The Company generates Public Safety Business Revenues from the granting of
nonexclusive, non-transferable and non-assignable licenses to use software it
has developed, through fixed price contracts. Revenues from such fixed price
contracts are recognized using the percentage of completion method of
accounting. The Company retains title to the software and warrants that it will
provide technical support and repair any defects in the software at no charge.
The warranty period for each contract is negotiated individually, with the
periods ranging from 90 days to three years. To date, repair costs have been
minimal and, therefore, the Company has not had to establish a reserve for
warranty costs.
The Company also provides post-contract, customer support to licensees of
its software. Revenues from such services are recognized ratably over the period
of performance. Fees billed and/or received prior to performance of services are
reflected as deferred revenues.
The Company's revenues, expenses and operating results have varied
considerably in the past and are likely to vary in the future. Fluctuations in
revenues depend on a number of factors, some of which are beyond the Company's
control. These factors include, among other things, the timing of contracts,
delays in customer acceptance of the Company's software products and
competition.
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In a transaction which occurred during the current quarter, LocalNet
Communications, Inc. ("LocalNet") surrendered certain of its assets to a
subsidiary of the Company e.TV in satisfaction of a loan payable to the Company.
Contemporaneously with this transaction, the Company commenced the e.TV Business
as described above.
The Company's Board of Directors has determined that the Company's efforts
should be focused on the e.TV Business. Accordingly, the Company entered into a
letter of intent in May 1999 to sell primarily all of the assets which make up
the Company's Public Safety division to an unrelated third party which is in a
business similar to that of the Company's public safety division.
The Company decided to divest itself of its public safety division since
the main focus of its business has shifted to Internet services, e-commerce and
telecommunications services which is operated through e.TV. The public safety
division accounted for approximately 14% of the Company's revenues during the
first quarter of 1999. The letter of intent contemplates a cash payment of
$500,000 and a 10% royalty related to future sales of products containing the
Company's technology or sales to current Compu-DAWN customers, and a 6.25%
royalty related to future sales of products containing a hybrid of the Company's
technology and the purchaser's technology. The royalties will relate to sales in
the five year period after the closing. Although the Company anticipates
negotiating and entering into a contract based on the letter of intent, there
can be no assurance such a contract will be entered into and the transaction
closed.
The consolidated financial information presented herein includes: (i)
condensed balance sheets as of March 31, 1999 and December 31, 1998; (ii)
condensed statements of operations for the three month periods ended March 31,
1999 and 1998 and (iii) condensed statements of cash flows for the three month
periods ended March 31, 1999 and 1998.
Results of Operations
Revenues
Revenue for the three months ended March 31, 1999 were $1,489,588 as
compared to $166,959 for the same period of the prior year. This increase was
primarily a result of revenues of $1,270,457 generated in the e.TV Business by
the Company's newly formed subsidiary e.TV.
During the period, e.TV's revenue of $1,270,457 trended favorably:
January $297,339
February $419,724
March $553,394
Costs and Expenses
The total costs and expenses for the three month period ended March 31,
1999 were $3,804,404 ($1,035,547 for the public safety division and $2,768,857
for e.TV) as compared to $660,636 for the comparative period of the prior year
division, an increase of $3,143,768. This variance is primarily attributable to
factors relating either directly or indirectly to the investment in and
operating activities of acquiring the e.TV Business. With respect to the public
safety division, it recorded a one time charge of $834,133 largely related to
the issuance of common stock to suppliers of e.TV. If the one-time
aforementioned non-cash transaction were not included in costs and expenses, the
public safety
9
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division would have realized total costs and expenses of $201,414 or a decrease
of $459,222 as compared to the same period last year. This is due to a decrease
in research and development costs of nearly $100,000 as well as the deferment of
certain overhead allocations (i.e., salaries, benefits, etc.) to e.TV. Further,
the Company is not presently developing and producing new products, but instead
concentrating on enhancing and maintaining existing products.
The company's consolidated operating loss for 1999 was $2,314,816 as
compared to $493,677 for 1998. This is mainly due to the operating loss of
$1,498,400 which was sustained by e.TV and the one time investment/operating
activity explained above of $834,133, during the reported period.
Other Income and Development
Interest and other income for 1999 aggregated approximately $127,000 as
compared to approximately $21,000 for 1998. This increase was due to the
increase in cash which resulted from the Company's private offering of preferred
stock during 1998.
During 1999, the Company recognized a one time write down of a receivable
from an unaffiliated entity (LocalNet Communications, Inc.) in the amount of
$592,318. See note 1 to the Financial Statements for further discussion. In
addition, e.TV satisfied a LocalNet liability in the amount of $482,033. This
amount represents refunds due to former sales representatives of LocalNet and
whom e.TV is utilizing in its current business operations. Combined, these
one-time activities adversely affected the net loss by $1,074,351.
Income/(Loss)
For the three months ended March 31, 1999 the Company reflected a net loss
of $3,269,425 ($1.02per share) as compared to a loss of $476,327 ($.17 per
share) for the corresponding period of the previous year. The explanations of
these losses are explained in the above discussions.
It is important to illustrate, that if the "one-time" transactions relating
to the investment in e.TV were not executed the companies' results would be
favorably affected by $1,908,484, yielding a net loss of $1,360,941.
Liquidity and Capital Resources
At March 31, 1999, the Company had working capital of $2,441,389, a current
ratio of 3.4:1 and a debt to net worth ratio of .4:1. At its year ended December
31, 1998, the Company had working capital of $5,102,248, a current ratio of
13.8:1 and a debt to net worth ratio of .1:1. The erosion of the Company's
working capital is attributable to the losses experienced by the Company during
the current quarter.
Based on historical performance, the Company anticipates it will need
additional capital in approximately three months to continue to develop its
business and to sustain its business at current levels. The Company is currently
exploring sources of capital, including debt and equity investment. Currently
the Company has not identified any investors, and if the Company does, there can
be no assurance that any investor will make a debt or equity investment in the
Company. If an investment is made, the Company cannot assure that it will be
made on terms as favorable as the Company would like nor can the Company predict
at this time the size of such an investment.
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Additionally, the Company's warrants to purchase 389,200 Common Shares
which were issued in a bridge financing transaction in December 1996 are
exercisable on and after June 10, 1999 at $3.00 per share. Although the Company
hopes the warrants will be exercised, if the market price of the Company's
publicly traded Common Shares is less than $3.00 per share it is unlikely that
the warrants will be exercised. Even if the market price of the Company's
publicly traded stock is above $3.00 a share, there can be no assurance that any
of the warrants will be exercised, and if any are exercised, the Company cannot
predict the number of warrants that would be exercised or when the warrants
would be exercised.
Cash Flows
For the three months ended March 31, 1999, the Company utilized cash for
operating activities of $1,592,236. For the corresponding period of the prior
year the Company used cash for operating activities of $410,505.
The Company utilized cash of approximately $107,000 during the three months
ended March 31, 1999 for investing activities primarily to acquire fixed assets.
For the three months ended March 31, 1999 the Company used cash for
financing activities primarily for the repayment of officer's loans.
Other
The Company believes that the cash and cash equivalents available and funds
expected to be generated from operations, will be sufficient for at least the
ensuing three month period. See Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
above for a discussion regarding the need for additional capital.
Year 2000 Issues
The Year 2000 ("Y2K") problem is the result of computer programs being
written using two digits (rather than four) to define the applicable year. Any
of the Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. The Company has instituted a Y2K compliance
program, the objective of which is to determine and assess the risks of the Y2K
issue, and plan and institute mitigating actions to minimize those risks. The
Company's standard for compliance requires that, for a computer system or
business process to be Y2K compliant, it must be designed to operate without
error in date and date-related data prior to, on and after January 1, 2000. The
Company expects to be fully Y2K compliant with respect to all significant
business systems prior to May 31, 1999.
The Company's Y2K plan consists of four phases: (1) assessment and analysis
of "mission critical" systems and equipment; (2) remediation of systems and
equipment, through strategies that include the enhancement of new and existing
systems, upgrades to operating systems already covered by maintenance agreements
and modifications to existing systems; (3) testing of systems and equipment; and
(4) contingency planning which will address possible adverse scenarios and the
potential financial impact to the Company's results of operations, liquidity or
financial position.
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Public Safety Business
With regard to information technology systems ("IT systems"), the first
three steps of this plan, assessment, remediation, and testing, are complete,
and the Company is currently in the contingency planning phase for all IT
systems and equipment. The remediation program consisted largely of updating all
software and operating systems with the purchase of the latest "off-the-shelf"
versions of such items. Management believes that all of the Company's public
safety IT systems and equipment have been remediated.
Assessment, remediation and testing were all performed by the Company's
staff, at a cost that is not believed by the Company's management to be
material. Y2K costs are expensed as incurred.
An inventory and assessment of all non-IT systems (items containing
embedded chips, such as elevators, electronic door locks, telephones, etc.) is
being undertaken. The great majority of these non-IT systems are not believed to
be potential sources of significant disruption, although the contingency plans
(described below) will address non-IT Y2K failure as well as IT systems failure.
e.TV Business
The great majority of the IT systems that the Company uses in connection
with its e.TV Business is contained in one software package, which package
enables the Company to run its network marketing operations. Management has
identified this software package as the single most important group of IT
systems used in the e.TV Business which must be made Y2K compliant. Remediation
of these systems was accomplished by the supplier of the software package, which
has also given written certification to the Company of the package's Y2K
compliance.
In addition to the network marketing operations software, there are several
smaller IT systems. These are provided by Atlantic Teleservices, the company
which also provides the facility from which the e.TV Business activities are
operated. Management of the Company believes that these smaller IT systems, as
well as the various non-IT items under Atlantic Teleservices' control, do not,
either singly or in the aggregate, represent a material Y2K compliance issue.
Remediation of these items, if necessary, will have to be accomplished by
Atlantic Teleservices. Management has requested assurances from Atlantic
Teleservices that the IT and the non-IT aspects of the facility will be Y2K
compliant in a timely fashion. Management's contingency plan will address both
IT and non-IT non-compliance.
Contingency Plans
The Company's management is in the process of developing a "worst-case
scenario" with respect to Y2K non-compliance and to develop contingency plans
designed to minimize the effects of such scenario. Although management believes
that it is very unlikely that any of these worst-case scenarios will occur,
contingency plans will be developed and will address both IT system and non-IT
system failure.
Public Safety Business. Management believes that all of its IT systems are
currently compliant, and that there are no third party suppliers or customers
whose IT system Y2K non-compliance will affect its own operations. However,
management is aware that some of the public safety agencies to whom it has sold
and installed systems may be using other systems, and/or components, that
interface with the Company's products and which may not be Y2K complaint. The
use of such other systems
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and/or components may disrupt or even completely disable an agency's entire IT
system, or significant parts thereof. Notwithstanding that any such event would
have no direct bearing on the Company's operations, the Company is alerting its
customers to the possibility of this problem and suggesting that they test all
aspects - both hardware and software - of their systems.
The only non-IT system whose Y2K non-compliance could materially affect the
Company's public safety business is its telephone system. The Company's
contingency plan, which is in place currently, consists of the availability of
multiple wireless phones and the ability to switch incoming lines from its PBX
system to standard analog phones.
e.TV Business. In the event of Y2K- related computer failure, there could
be material adverse effects on both the Company's internal operations and to its
customer-support operations. The Company could be unable to support its customer
base because its computer system would not be functioning. In such event, the
Company plans to use one of its backup computers, which will have its clock set
back a year at some time prior to December 31, 1999. This plan will be activated
if the Company's remote support systems do not function past January 1, 2000. In
addition, management has begun to formulate a contingency plan to address the
consequences of Y2K-related IT failure to its own operations. This plan will
include the printing out of hard copies of all records contained in the systems
package for the network marketing operation, and the implementation of manual
processing systems, to the extent feasible. Management expects this plan to be
fully formulated and in place by June 30, 1999.
In terms of non-IT and third-party Y2K non-compliance, the worst-case
scenario for the Company's e.TV Business would involve the loss of electricity
and telephone lines simultaneously. The loss of telephone lines by itself would
not present a significant disruption, due to the fact that the Company has
telephone lines that are not routed through its PBX system, and also has
multiple wireless telephones which would be available in such situation; in
addition, in the event the PBX system stops functioning altogether, the Company
has the capacity to remove incoming lines to standard analog telephones. The
Company has both wireless and land line telephone service suppliers, so that
management believes that the complete loss of telephone communications is
unlikely. A much more significant potential problem is the loss of electricity,
due to the fact that the Company has no alternate supplier. If the electrical
system fails but the Company has access to telecommunications, it would be able
to supply its customers with telephone support and limited direct system
support. If, however, both the telephone and electrical systems were not
functional at the same time, the Company would not be able to function for an
indeterminate period of time.
The Company intends to request assurances of Y2K readiness from its
telephone and electrical suppliers. However, management has been informed that
some suppliers have either declined to provide the requested assurances, or have
limited the scope of assurances that they are willing to give. If suppliers of
services that are critical to the Company's operations were to experience
business disruptions as a result of their lack of Y2K readiness, their problems
could have a material adverse effect on the financial position and results of
operations of the Company. The impact of a failure of readiness by critical
suppliers cannot be estimated with confidence, and the effectiveness of
contingency plans to mitigate the effect of any such failure is largely
untested. Management cannot provide an assurance that there will be no material
adverse effects to the financial condition or results of operations of the
Company as a result of Y2K issues.
13
<PAGE>
Forward Looking Statements
Certain information contained in the matters set forth above are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and is subject to the safe harbor created by that
act. The Company cautions readers that certain important factors may affect the
Company's actual results and could cause such results to differ materially from
any forward- looking statements which may be deemed to have been made above and
elsewhere in this Quarterly Report or which are otherwise made by or on behalf
of the Company. For this purpose, any statements contained above and elsewhere
in this Quarterly Report that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate," or "continue" or the negative variations of those
words or comparable terminology are intended to identify forward-looking
statements. Factors which may affect the Company's results include, but are not
limited to, the risks and uncertainties associated with multi-level network
marketing, the Internet and Internet-related technology and products, new
technology developments, developments and regulation in the telecommunications
industry, the competitive environment within the Internet and telecommunications
industries, the level of spending by law enforcement and public safety agencies
for computer application software and hardware, the competitive environment
within the public safety technology industry, the ability of the Company to
expand its operations, the level of costs incurred in connection with the
Company's planned expansion efforts, the financial strength of the Company's
customers and suppliers, unascertainable risks related to possible unspecified
acquisitions, the competence required and experience of management, the risk of
loss of management and personnel, economic conditions, the risks and
uncertainties inherent in litigation, and the ability of the Company to raise
additional capital which will be required in the near term to continue to
develop and sustain business at current levels. The Company is also subject to
other risks detailed herein or detailed from time to time in the Company's
Securities and Exchange Commission ("SEC") filings. Readers are also urged to
carefully review and consider the various disclosures made by the Company which
attempt to advise interested parties of the factors which affect the Company's
business.
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
In March 1999, an action was instituted in the Supreme Court of the State
of New York, Nassau County, by Rugby National Corp. ("Rugby"), Harvey Weinstein
("Weinstein") and Credomarka National Corp. against the Company, Rugby
Acquisition Corp., a wholly owned subsidiary of the Company, and Mark
Honigsfeld, Chief Executive Officer of the Company until May 11, 1999. A
description of the action was reported in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999. The Company and Mr. Honigsfeld
believe that they have meritorious defenses to all of the plaintiffs claims. In
April, 1999 the Company and Mr. Honigsfeld served an answer and interposed
counterclaims asserting, among other things that plaintiffs breached certain
merger and loan agreements entered into with the Company, by defaulting under a
loan and security agreement and by refusing and/or failing to fulfill certain
obligations under a merger agreement, all of which resulted in damages in an
amount to be determined at trial. Due to the inherent uncertainties in
litigation, the Company cannot predict nor guarantee the outcome of this
litigation.
14
<PAGE>
ITEM 2. Changes in Securities
The Company sold the following unregistered securities during the period
covered by this report. As of February 4, 1999, the Company issued 117,398
Common Shares to Boca Research, Inc. ("Boca Research") in consideration of Boca
Research's agreement to manufacturer e.TV's tv set-top box product on an
exclusive basis for sale through a multi-level referral network marketing system
and as a incentive for Boca Research to enter into a manufacturing arrangement
with the Company.
As of February 17, 1999, the Company issued 30,000 Common
Shares to Union Atlantic, LLC ("Union Atlantic") in partial
consideration for consulting advisory services relating to
corporate development, development of strategic relationships
to increase revenue and brand awareness in connection with the
Company's e.TV Business, corporate finance and identification
of potential acquisition and merger targets.
These transactions were private transactions not involving a
public offering and were exempt from the registration
provisions of the Securities Act pursuant to Section 4(2)
thereof. The Company determined that Boca Research and Union
Atlantic were sophisticated investors. Such issuances of Common
Shares was without the use of an underwriter, and the
certificates evidencing such Common Shares bear restrictive
legends permitting the transfer thereof only upon registration
of such securities or pursuant to an exemption under the
Securities Act.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits Description of Exhibit
-------- ----------------------
2 Agreement of Merger between the Company and Coastal
Computer Systems, Inc., a New York corporation.*
3.1 Articles of Incorporation of the Company.*
3.2 Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock, filed with the
Secretary of State of the State of Delaware on June 5,
1998.**
3.3 Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock, filed with the
Secretary of State of the State of Delaware on September 2,
1998. ***
15
<PAGE>
3.4 Amended and Restated By-Laws of the Company.****
4.1 Specimen Common Share Certificate.*
4.2 Form of Underwriter's Common Share Purchase Warrant.*
11 Computation of Earnings Per Common Shares
27 Financial Data Schedule
- ------------
* Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2, Registration No. 333-18667.
** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the period ended June 30, 1998.
*** Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the period ended September 30, 1998.
**** Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998.
(b) Current Report on Form 8-K
A Current Report on Form 8-K was filed by the Company during
the three month period ended March 31, 1998 as follows:
Date of Event: January 8, 1999
Item Reported: 2
Date of Event: January 8, 1999
Item Reported: 7
Date of Event: March 8, 1999
Item Reported: 5
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused the Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15,1999 Compu-DAWN, Inc.
By: /s/ R.E. (Teddy) Turner, IV
---------------------------
Chairman of the Board
/s/ David Greenspan
----------------------------
Chief Financial Officer
17
<PAGE>
<TABLE>
<CAPTION>
Compu-DAWN, Inc.
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
For the Three Months
Ended March 31,
1999 1998
<S> <C> <C>
NET (LOSS) $(3,269,425) $(476,327)
=========== =========
WEIGHTED AVERAGE SHARES:
Common shares outstanding 3,192,646 2,839,907
========= =========
BASIC (LOSS) PER COMMON SHARE: $(1.02) $(.17)
====== =====
18
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Compu-DAWN, Inc.
EXHIBIT 27
FINANCIAL DATA SCHEDULE
The schedule contains summary financial information extracted from the
consolidated financial statements for the three months ended March 31, 1999 and
is qualified in its entirety by reference to such statements.
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001028079
<NAME> Compu-DAWN
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> 801,387
<SECURITIES> 1,850,000
<RECEIVABLES> 327,147
<ALLOWANCES> 13,635
<INVENTORY> 394,053
<CURRENT-ASSETS> 3,464,639
<PP&E> 643,767
<DEPRECIATION> 289,896
<TOTAL-ASSETS> 3,855,578
<CURRENT-LIABILITIES> 1,023,250
<BONDS> 34,766
0
31
<COMMON> 37,883
<OTHER-SE> 2,732,395
<TOTAL-LIABILITY-AND-EQUITY> 3,855,578
<SALES> 1,489,588
<TOTAL-REVENUES> 1,489,588
<CGS> 1,002,309
<TOTAL-COSTS> 3,804,404
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,816
<INCOME-PRETAX> (3,269,425)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,269,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,269,425)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
