SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 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)
333 North First Street, Suite 200, Jacksonville Beach, Florida 32250
(Address of principal executive offices)
Issuer's telephone number, including area code (904) 249-5756
12735 Gran Bay Parkway Building 200, Jacksonville, Florida 32258
(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 August 5, 1999: 3,817,519
Transitional Small Business Disclosure Format (check one): Yes No X
1
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Compu-DAWN, Inc. AND SUBSIDIARY
- INDEX -
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Page(s)
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PART I Financial Information
Item 1 Financial Statements
Consolidated Condensed Balance Sheets - June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Condensed Statements of Operations - Three and Six Months Ended
June 30, 1999 and 1998 (unaudited) 4
Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30,
1999 and 1998 (unaudited) 5
Notes to Interim Consolidated Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
PART II Other Information
Item 2 Changes in Securities 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 18
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PART I. Financial Information
ITEM 1. Financial Statements
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<CAPTION>
Compu-DAWN, Inc. AND SUBSIDIARY
CONDENSED BALANCE SHEETS
(Unaudited)
- ASSETS -
June 30, December 31,
1999 1998
(as restated)
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CURRENT ASSETS:
Cash and cash equivalents $ 1,149,913 $ 4,378,400
Accounts receivable, net of allowances for doubtful accounts of $13,635
for 1999 and 1998 222,353 319,392
Prepaid expenses 48,678 68,272
Inventory 99,099 -
Loan receivable re: potential acquisition (Note 3) 120,000 -
Loan receivable - other (Note 1) - 736,318
--------------- --------------
TOTAL CURRENT ASSETS 1,640,043 5,502,382
FIXED ASSETS - NET 419,631 218,374
OTHER ASSETS:
Security deposits 37,068 21,525
--------------- ---------------
TOTAL ASSETS $ 2,096,742 $ 5,742,281
============ ============
- LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 631,040 $ 169,519
Deferred revenue 237,580 173,953
Current portion of note payable - officer - 50,000
Capitalized lease payable - current 14,208 6,662
--------------- ----------------
TOTAL CURRENT LIABILITIES 882,828 400,134
-------------- --------------
NON-CURRENT LIABILITIES:
Capitalized lease payable 30,848 15,779
Deferred rent liability 26,058 28,448
--------------- ---------------
TOTAL NON-CURRENT LIABILITIES 56,906 44,227
--------------- ---------------
TOTAL LIABILITIES 939,734 444,361
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized:
Series A Convertible Preferred; 1,075 and 3,250 shares issued and
outstanding for 1999 and 1998, respectively 11 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,
4,088,813 and 3,265,448 shares issued for 1999 and 1998, respectively 40,888 32,654
Additional paid-in capital 15,690,272 13,661,649
Accumulated deficit (14,076,268) (7,620,721)
Accumulated other comprehensive loss (46,900) (150,000)
---------------- --------------
1,608,017 5,923,632
Less: treasury stock, 277,544 and 340,044 shares at cost for 1999
and 1998, respectively (451,009) (625,712)
--------------- --------------
TOTAL SHAREHOLDERS' EQUITY 1,157,008 5,297,920
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $ 2,096,742 $ 5,742,281
============= ============
</TABLE>
See accompanying notes to condensed financial statements.
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Compu-DAWN, Inc. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1999 1998 1999 1998
--------------- ------------ --------------- ------------
(as restated)
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REVENUES:
Products and services $ 158,083 $ - $ 327,887 $ -
------
Interest and other income 54,929 45,335 181,487 66,122
------------ ----------- ------------ ----------
Total revenues 212,012 45,335 509,374 66,122
COSTS AND EXPENSES:
Cost of revenues 131,811 - 195,236 -
General and administrative expenses 255,570 - 701,491 -
Interest expense 91,287 7,268 98,103 10,705
------ ----- ------ ------
Total cost and expenses 478,668 7,268 994,830 10,705
INCOME (LOSS) FROM CONTINUING OPERATIONS (265,656) 38,067 (485,456) 55,417
------------- ----------- --------- -----------
DISCONTINUED OPERATIONS:
Loss from discontinued operations (2,479,246) (460,778) (5,970,091) (954,455)
----------- --------- ----------- ---------
NET LOSS $(2,762,902) $(422,711) $(6,455,547) $(899,038)
=========== ========= =========== =========
BASIC INCOME (LOSS) PER COMMON SHARE:
From continuing operations $(.07) $.01 $ (0.13) $.02
From discontinued operations (.65) ( .15) (1.59) (.33)
------- ----------- ------ ------
Basic net loss per common share $(.72) $(.14) $(1.72) $(.31)
===== ===== ====== =====
DILUTED INCOME (LOSS) PER COMMON SHARE:
From continuing operations $(.07) $.01 $ (0.13) $.01
From discontinued operations (.65) ( .15) (1.59) ( .33)
------- ----------- ------ ------
Diluted net loss per common share $(.72) $(.14) $(1.72) $(.32)
===== ===== ====== =====
Average common shares outstanding, basic 3,857,380 2,936,312 3,763,554 2,888,445
========= ========= ========= =========
Average common shares outstanding, diluted 5,480,971 4,258,136 5,406,584 4,214,277
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
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<CAPTION>
Compu-DAWN, Inc. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30,
1999 1998
(as restated)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 2,763,074 $ 530,102
Cash paid to suppliers and employees (6,193,344) (1,530,131)
Interest paid (6,473) (10,705)
Interest and other income received 181,487 66,122
------------- -------------
Net cash used in operating activities (3,255,256) (944,612)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans and advances (120,000) -
Purchase of fixed assets (181,065) (16,019)
------------- -------------
Net cash used in investing activities (301,065) (16,019)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from offering of shares - 4,743,462
Repayment of officer's loan (50,000) (50,000)
Payments of capital lease obligations (6,166) (2,782)
Proceeds from exercise of stock options 384,000 14,335
------------- --------------
Net cash provided by financing activities 327,834 4,705,015
------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,228,487) 3,744,384
Cash and cash equivalents, at beginning of year 4,378,400 3,081,253
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,149,913 $6,825,637
=========== ==========
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Net loss $(6,455,547) $ (899,038)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 58,091 41,406
Deferred rent (2,390) 162
Write-off of impaired loan 593,941 -
Compensatory shares 1,389,315 81,696
Gain on sale of securities 103,100 -
Stock options issued for consulting services 423,220 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 97,039 (41,687)
Decrease (increase) in prepaid expenses and other assets 160,206 (17,386)
Increase in inventory (38,379) -
Increase (decrease) in accounts payable and accrued expenses 352,521 (145,664)
Increase in deferred revenue 63,627 35,899
-------------- -------------
NET CASH USED IN OPERATING ACTIVITIES $(3,255,256) $ (944,612)
=========== ===========
</TABLE>
See accompanying notes to condensed 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. Through January 8, 1999 the Company was
engaged in one line of business, 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. The Company entered into a second
line of business, the e.TV business, on January 8, 1999.
Through March 31, 1999 the Company, through its wholly owned
subsidiary, e.TV Commerce, Inc., ("e.TV"), operated 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.
At December 31, 1998, the Company had written down a loan
receivable from LocalNet Communications, Inc., ("LocalNet") ,
an unaffiliated Florida corporation, 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 to e.TV, a newly formed subsidiary of
the Company. On January 8, 1999, LocalNet surrendered the
assets representing the collateral underlying this loan.
In March 1999, the Company determined that the fair value of
the assets received by LocalNet aggregated $244,000 and
accordingly the Company recorded a further write-down of the
loan of approximately $592,000 which included additional
advances of approximately $100,000 made to LocalNet in 1999,
prior to the surrender of assets.
In May 1999, the Company decided to divest itself of its public
safety software business and on July 2, 1999, subsequent to the
balance sheet date, the Company consummated the sale of this
division to an unaffiliated third party. The Company received
$500,000 in cash, and is entitled to receive software royalty
payments for five years, ranging from 6.25% to 10% from future
sales of products containing the Company's technology or to
former customers of the Company's public safety software
business. To date, royalty payments have been inconsequential.
On June 29, 1999, the Company discontinued its network referral
marketing operations, the e.TV subsidiary, in order to focus on
developing Internet related products and services and selling
them through retail channels. In July 1999, the Company sold
its independent representative database and assigned its long
distance business to another network marketer of
telecommunication products for $250,000 in cash.
See Note 3 for additional subsequent events.
As a result of the events and transactions described above, the
operations of these two divisions are being accounted for as
discontinued operations and accordingly, amounts in the
financial statements for all periods shown have been restated
to reflect discontinued operations.
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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.
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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 June 30, 1999 and
the results of its operations for the three and six month
periods ended June 30, 1999 and 1998, and its cash flows for
the six month periods ended June 30, 1999 and 1998.
The results of operations for the three and six month periods
ended June 30, 1999 and 1998 are not necessarily indicative of
the results to be expected for the full year.
In January 1999, the Company granted 133,000 stock options to
non-employees. The fair value of these stock options, using the
Black-Scholes valuation model, amounted to approximately
$423,000. This amount was not originally included in the
statement of operations for the six months period ended June
30, 1999, as originally filed on Form 10-QSB for the three
months ended June 30, 1999. As a result, it was necessary to
restate the six months ended June 30, 1999 to include the
expense in the statement of operations which was recognized in
the restated results of operations in the first quarter of
1999, as amended on Form 10-QSB/A for the three months ended
March 31, 1999.
The effect of this restatement on the previously issued interim
financial statements is as follows:
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(unaudited)
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
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Net income (loss) from continuing operations,
as previously reported $ (265,656) $ 38,067 $ (272,656) 55,417
Net income (loss) from continuing operations,
as restated $ (265,656) $ 38,067 $ (485,456) 55,417
Net loss from discontinued operations,
as previously reported $(2,497,246) $ (460,778) $(5,759,671) (954,455)
Net loss from discontinued operations,
as restated $(2,479,256) $ (460,778) $(5,970,091) (954,455)
Net loss, as previously reported $(2,762,902) $ (422,711) $(6,032,327) (899,038)
Net loss, as restated $(2,762,902) $ (422,711) $(6,455,547) (899,038)
Basic income (loss) per common share on
continuing operations, as previously reporte $ (.07) $ .01 $ (.07) $ .02
Basic income (loss) per common share on
continuing operations, as restated $ (.07) $ .01 $ (.13) $ .02
Basic loss per common share on
discontinued operations, as previously report $ (.65) $ (.15) $ (1.53) $ (.33)
Basic loss per common share on
discontinued operations, as restated $ (.65) $ (.15) $ (1.59) $ (.33)
Basic net loss per common share, as
previously reported $ (.72) $ (.14) $ (1.60) $ (.31)
Basic net loss per common share,
as restated $ (.72) $ (.14) $ (1.72) $ (.31)
Note: Diluted earnings per share information was not previously disclosed in the June 30, 1999 financial statements.
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NOTE 2 - CAPITAL STOCK AND EQUIVALENTS:
In January 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, respectively, as provided for
in the agreements.
In January 1999, the Company granted 133,000 stock options to
non-employees. The fair value of these stock options, using the
Black-Scholes valuation model, amounted to approximately
$423,000 and is recognized in the revised and restated results
of the first quarter.
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 aggregate market value at the date
of issuance.
In May 1999, the Company issued 62,500 shares of common stock
to a former officer as consideration for consulting services
valued at $312,500. These shares were issued from the Company's
treasury. In June 1999, in connection with an amended and
restated termination agreement, this officer received an
additional 75,000 shares of common stock, valued at $350,000.
In May and June 1999, options and warrants were exercised to
purchase 97,500 and 8,000 shares of common stock, respectively
for which the Company received $384,000 in cash proceeds.
In June 1999, holders of 600 Series A preferred shares
converted such shares into 120,000 shares of common stock as
provided for in the agreements.
NOTE 3 - POTENTIAL ACQUISITION:
On July 30, 1999, subsequent to the balance sheet date, the
Company signed an Asset Purchase Agreement to acquire
substantially all tangible and intangible assets of Global PC,
Inc. ("Global PC") of Alameda, California. Global PC, Inc. is a
co-developer and worldwide licensee of GEOS, a simplified, user
friendly, low cost computer operating system and software
suite. A closing of the asset purchase is based on several
conditions being met, including, among others, completion of
satisfactory due diligence by the Company, the determination of
the Company's board of directors that the transaction is fair
to the Company and its stockholders, and obtaining an
assignment of the GEOS license agreement which contains terms
satisfactory to the Company.
8
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Compu-DAWN, Inc. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - POTENTIAL ACQUISITION (Continued):
In consideration for the assets and the assumption of certain
liabilities from Global PC the Company has agreed to issue a
number of Common Shares ranging from 624,284 to 699,284 Shares,
and Class A Warrants to purchase up to 2,269,284 Common Shares,
Class B Warrants to purchase up to 1,901,400 Common Shares and
Class C Warrants to purchase up to 385,000 Common Shares. All
the warrants are exercisable at $4.875 per share, the closing
price of the Company's common stock on July 29, 1999.
The Class A Warrants are exercisable from July 1, 2001 to June
30, 2006 to the extent of 50%, 75% or 100% of the underlying
Common Shares provided the Company reaches certain performance
milestones by June 30, 2001. The milestones require that there
are 150,000 to 200,000, 200,001 to 250,000, or 250,001 or more
subscribers to the Company's Internet services who access the
Internet through the Global PC Device by June 30, 2001,
respectively. If there are less than 150,000 of such
subscribers by June 30, 2001, the Class A Warrants will not be
exercisable and shall be automatically canceled.
The Class B Warrants are exercisable: (i) to the extent of 30%
of the underlying Common Shares during the period commencing 90
days after the issuance of the Class B Warrant and ending on
the day before the fifth anniversary of the issuance date (the
"Expiration Date") (ii) to the extent of 23 1/3% of the
underlying Common Shares from each of the first, second and
third anniversary of the issuance date and ending on the
Expiration Date.
The Class C Warrants are exercisable from the first anniversary
of the date of issuance to the Expiration Date.
Furthermore, the exercise of all the warrants is also subject
to stockholder approval to the extent that the number of Common
Shares to be issued upon the exercise of the warrants and
otherwise in connection with the transaction are more than 20%
of the Company's outstanding Common Shares.
On June 22, 1999, the Company received a secured promissory
note from Global PC in the amount of $135,000. Advances made
pursuant to this note bear interest at an annual rate of 10%
and are payable one year from the date of the loan. As of June
30, 1999, the Company had advanced an aggregate of $120,000
under this note.
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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 Coastal Computer Systems, Inc. The
Company was reincorporated in the State of Delaware under its
present name Compu-DAWN, Inc. on October 18, 1996.
During the first two quarters of fiscal 1999, the Company was
engaged in two lines of business. In one, the Company engaged
in the designing, developing, licensing, installing and serving
of computer software products and systems predominantly for
public safety and law enforcement agencies. In its other line
of business, the Company, through its wholly owned subsidiary,
e.TV Commerce, Inc. ("e.TV") operated in the Internet,
e-commerce and telecommunications business marketing products
and services primarily using a referral network marketing
organization of independent representatives.
In May 1999, the Company decided to divest itself of its public
safety software business since the major focus of the Company's
business had shifted to Internet Services, e-commerce and
telecommunication services. On July 2, 1999, the Company
consummated the sale of the public safety software business
division to an unaffiliated third party. In the transaction,
the Company received $500,000 in cash, and is entitled to
receive quarterly software royalty payments ranging from 6.25%
to 10% from future sales of products containing the Company's
technology or to former customers of the Company's public
safety software business. The royalty shall be based on the
funds actually received by the public safety software business
buyer from those orders it receives during the five years
subsequent to the closing of the sale.
On June 29, 1999, e.TV discontinued it's network referral
marketing operations in order to focus on developing Internet
related products and services and selling them through retail
channels. This decision was made after the Company determined
that (a) anticipated second quarter of 1999 revenues from
e.TV's operations would not be realized, (b) second quarter
revenues were relatively flat compared to first quarter
revenues, (c) the third quarter, which includes the summer
months, is historically slow in the network referral industry
as compared to the rest of the year, (d) the Company would
require a substantial capital infusion and management time
commitment to sustain e.TV's operations at current levels and
to possibly achieve future growth and (e) even with a
substantial capital infusion, a growth in e.TV's revenues are
not assured in the short or long term. The Company was able to
reduce cost of goods and moderately decrease overhead, however
these savings were not significant enough to overcome the
decline in e.TV's gross receipts.
In July 1999, e.TV sold its independent representative database
and assigned its UniDial Communications, Inc. ("UniDial") long
distance business to another network marketer of
telecommunication products for $250,000 in cash. Through this
arrangement, the Company believes e.TV's former independent
network referral representatives will continue to receive their
residual commissions they established with UniDial while
continuing to build their home based business, provided that
the former e.TV independent representative is a representative
with the assigned network marketing company.
On July 30, 1999, the Company signed an Asset Purchase
Agreement to acquire substantially all tangible and intangible
assets of Global PC, Inc. ("Global PC") of Alameda, California.
Global PC, Inc. is a co- developer and worldwide licensee of
GEOS, a simplified, user friendly, low cost computer operating
system and software suite. The Global PC technology offers
complete software solutions including the operating system and
a set of applications such as: an Internet browser, email
capabilities, word processing, spreadsheet functionality and
gaming. The software will reside in a low cost "easy-to-use"
personal computer (the "Global PC Device") targeted for
residential users. A closing of the asset purchase is based on
several conditions being met, including, among others,
completion of satisfactory due diligence by the Company, the
determination of the Company's board of directors that the
transaction is fair to the Company and its stockholders, and
obtaining an assignment of the GEOS license agreement which
contains terms satisfactory to the Company. Upon consummating
the acquisition of Global PC, Inc. the Company plans to enter
into agreements with mass merchant and other retailers. The
Global PC appliance is anticipated to enter retail channels in
the fourth quarter of 1999.
10
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Following the closing of the purchase of assets from Global PC,
the Company plans to focus market efforts to those consumers
who currently do not have a personal computer or for those who
are seeking an affordable second unit. The Company plans to
create an "Online Community" by bundling the Company's Internet
services with the sale of the Global PC appliance. The Company
believes that the demographic composition of the consumer will
largely embody first time personal computer users and Internet
subscribers. In so doing, it is anticipated that the Company
expects to realize a variety of additional marketing
opportunities such as financial, transactional and commercial
services, on-line banking, web shopping, and a host of new and
innovative services which are emerging as the e-commerce market
matures.
The Company plans to recruit, train and maintain an experienced
team of software and hardware engineers to support the
development of its expected Global PC business. This
development team will be largely responsible for any future
modifications, enhancements and/or changes to the operating
system. The "Team" will also focus on four major areas:
ease-of-use, the online service and Internet access,
performance and software integration compatibility.
The Company's long-term objective is to be a sublicensor of the
GEOS operating system and hardware reference designs with its
integrated suite of productivity applications to national
brand-name consumer-oriented hardware manufacturers. The
Company is currently seeking strategic partners to manufacture
the Global PC product. Currently, no such relationship is in
place. Accordingly, in order to meet the anticipated fourth
quarter 1999 projected sales demands, the Company is in the
process of establishing a relationship with an unaffiliated
third party to outsource its manufacturing efforts.
The Company expects revenue, beginning in the fourth quarter of
1999, from five key areas:
- Monthly online subscription fees - Internet
subscription revenue bundled with the sale of the Global PC
appliance.
- Banner advertising - the sale of advertising.
- Keyboard real estate "Hot-Buttons" sales - the
Company will have a unique opportunity to sell individual
keys on its proprietary PC keyboard to category specific
vendors. These "Hot-Buttons" will immediately launch the
user to that vendors web site.
- License royalties - revenue derived from the Company's
manufacturing partner who will manufacture the Global PC
product on an OEM basis
- Residuals from online shopping - as a full service
Internet Service provider, the Company intends to seek
residual commissions and overrides associated with online
e-commerce sales transacted through its portal.
In consideration for the assets and the assumption of certain
liabilities from Global PC the Company has agreed to issue a
number of Common Shares ranging from 624,284 to 699,284 Shares,
and Class A Warrants to purchase up to 2,269,284 Common Shares,
Class B Warrants to purchase up to 1,901,400 Common Shares and
Class C Warrants to purchase up to 385,000 Common Shares. All
the warrants are exercisable at $4.875 per share, the closing
price of the Company's common stock on July 29, 1999.
The Class A Warrants are exercisable from July 1, 2001 to June
30, 2006 to the extent of 50%, 75% or 100% of the underlying
Common Shares provided the Company reaches certain performance
milestones by June 30, 2001. The milestones require that there
are 150,000 to 200,000, 200,001 to 250,000, or 250,001 or more
subscribers to the Company's Internet services who access the
Internet through the Global PC Device by June 30, 2001
respectively. If there are less than 150,000 of such
subscribers by June 30, 2001, the Class A Warrants will not be
exercisable and shall be automatically canceled.
The Class B Warrants are exercisable: (a) to the extent of 30%
of the underlying Common Shares during the period commencing 90
days after the issuance of the Class B Warrant and ending on
the day before the fifth anniversary of the issuance date (the
"Expiration Date"), (b) to the extent of 23 1/3% of the
underlying Common Shares from each of the first, second and
third anniversary of the issuance date and ending on the
Expiration Date.
11
<PAGE>
The Class C Warrants are exercisable from the first anniversary
of the date of issuance to the Expiration Date.
Furthermore, the exercise of all the warrants is also subject
to stockholder approval to the extent that the number of Common
Shares to be issued upon the exercise of the warrants and
otherwise in connection with the transaction are more than 20%
of the Company's outstanding Common Shares.
Results of Operations:
As noted above, the Company discontinued its e.TV Commerce,
Inc. subsidiary and divested itself of its public safety
software business. Accordingly, the Results of Operations
discussed below represent only the continuing operations of the
Company.
Revenues:
Revenues for the three months ended June 30, 1999, from
continuing operations, were $158,000 as compared to $0 for the
three months ended June 30, 1998 and $328,000 for the six-month
period ended June 30, 1999 versus $0 for the same period in the
previous year. The revenue is primarily comprised of Internet
subscription fees.
Interest and other income for the three-month period ended June
30, 1999 aggregated approximately $55,000 as compared to
approximately $45,000 for the same period in 1998. The
six-month balances were $181,000 and $66,000 for 1999 and 1998,
respectively. These increases were due to the increase in cash,
which resulted from the Company's private offering of preferred
stock during 1998.
Costs and Expenses:
The total costs and expenses for the three-month period ended
June 30, 1999 were $479,000 as compared to $7,000 for the
comparative period of the prior year. Additionally, the
Company's total costs and expenses for the six-month period
ended June 30, 1999 and 1998 were $995,000 and $11,000,
respectively. The costs and expenses are directly related to
those charges supporting the Internet access book of business.
The Company's second quarter consolidated operating loss from
continuing operations for 1999 was $266,000 as compared to
income of $38,000 for the same period in 1998 and for the
six-month period ended June 30, 1999 the consolidated operating
loss was $485,000 versus income of $55,000 compared to the same
period last year. The losses are largely attributable to the
expenses realized in conjunction with the Internet access
business that began operations in January of 1999.
Income (Loss)
For the three months ended June 30, 1999 the Company reflected
a net loss of $2,763,000 ($.72 per share) as compared to a loss
of $423,000 ($.14 per share) for the corresponding period of
the previous year. For the six-month period ended June 30,
1999, the Company realized a net loss of $6,456,000 ($1.72 per
share) as compared to a loss of $899,000 ($.31 per share) for
the six-month period ended June 30, 1998.
These losses are primarily a result of the operating losses
sustained by the discontinued businesses (discussed earlier)
which reflected aggregate losses of $2,497,000 and $5,760,000
for the three and six month periods ended June 30, 1999,
respectively.
Also impacting the above mentioned one-time events, is the
mutually agreed upon termination of the Company's President,
Chief Executive Officer and Secretary, Mark Honigsfeld. During
the period, Mr. Honigsfeld received $167,000 in cash and 75,000
shares (valued at $350,000) in this transaction. In
addition, Mr. Honigsfeld also has the right to 80% of the
royalty to be received by the Company from the buyer of the
public safety and law enforcement division.
12
<PAGE>
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of $757,000,
a current ratio of 1.86:1 and a debt to net worth ratio of
.8:1. At its year ended December 31, 1998, the Company had
working capital of $5,102,000, 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 period.
Based on historical performance, the Company anticipates it
will need additional capital in approximately 30 days to
continue to develop its business and to sustain its business at
current levels. The Company believes that obtaining additional
funding is essential for it to implement both its short-term
and long-range business plans, and this is one of the focuses
of Management. The Company is currently exploring sources of
capital, including debt and equity investments. 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. If the
Company is unable to secure additional financing within 30
days, it will not be able to continue to develop its current
business plan. Consequently, the Company will have to scale
back its operations.
Additionally, the Company's warrants to purchase 389,200 Common
Shares which were issued in a bridge financing transaction in
December 1996 are currently exercisable 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 six months ended June 30, 1999, the Company utilized
cash for operating activities of $3,255,000. For the
corresponding period of the prior year the Company used cash
for operating activities of $944,000.
The Company utilized cash of approximately $301,000 during the
six months ended June 30, 1999 for investing activities
primarily to acquire fixed assets. The Company also advanced
$120,000 to Global during the current period.
Cash provided by financing activities during the six-month
period ended June 30, 1999 was primarily a result of the
exercise of stock options. For the six months ended June 30,
1998, the Company received cash from an offering of shares.
13
<PAGE>
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.
Contingency Plans
The Company's management is in the process of developing a
"worst-case scenario" with respect to Y2K noncompliance 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.
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.
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 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 ability of the Company to consummate the
acquisition of the Global PC assets, the ability of the Company
to partner with a manufacturer to produce the Global PC Device,
the ability of the Company to enter into arrangements to sell
products through mass retail market channels. 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 ability of
the Company to expand its operations, the level of costs
incurred in connection with the Company's planned expansion
efforts, the
14
<PAGE>
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. 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.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. Changes in Securities
The Company sold the following unregistered securities during the period
covered by this report.
On May 11, 1999, the Company transferred out of treasury 62,500 Common
Shares to Mark Honigsfeld ("Honigsfeld") pursuant to a Consulting Agreement
dated May 11, 1999 (the "Honigsfeld Consulting Agreement") between the Company
and Honigsfeld.
On June 22, 1999 the Company issued 75,000 Common Shares to Honigsfeld
pursuant to the Amended and Restated Termination Agreement relating to the
termination of Honigsfeld's employment agreement with the Company and the
termination of Honigsfeld Consulting Agreement.
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 Mark Honigsfeld
was an accredited and sophisticated investor. Such issuance's 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.
<TABLE>
<CAPTION>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits Description of Exhibit
-------------------------------
<S> <C>
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. ***
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.*
10.1 Termination Agreement dated May 11, 1999 between the Company and Mark Honigsfeld.*****
10.2 Consulting Agreement dated May 11, 1999 between the Company and Mark Honigsfeld.*****
10.3 Amended and Restated Termination Agreement dated July 2, 1999 between the Company and Mark
Honigsfeld.*****
10.4 Assets Purchase Agreement dated July 2, 1999 between the Company and Admit Computer
Systems, Inc.*****
10.5 Purchase Agreement dated July 15, 1999 between e.TV Commerce, Inc. and the Free Network, Inc.*****
11 Computation of Earnings Per Common Share.
27 Financial Data Schedule.
16
</TABLE>
<PAGE>
- ------------
* 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 Quarterly Report on Form
10-QSB for the period ended March 31, 1999.
*****Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the period ended June 30, 1999.
(b) Current Report on Form 8-K
Current Reports on Form 8-K were filed by the Company during the
three month period ended June 30, 1998 as follows:
Date of Event: May 12, 1999
Item Reported: 5
Date of Event: June 9, 1999
Item Reported: 5
Date of Event: June 29, 1999
Item Reported: 5
17
<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: November 18,1999 Compu-DAWN, Inc.
By: /s/ R. E. Teddy Turner, IV
--------------------------------
Chairman of the Board
/s/ David Greenspan
----------------------------------
Chief Financial Officer
18
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999
<S> <C> <C> <C> <C>
1999 1998 1999 1998
--------------- ------------- ----------------- ------------
Basic net income (loss) per common share computation:
Income available to common shareholders from
continuing operations (265,656) 38,067 (485,456) (55,417)
Income available to common shareholders from
discontinued operations (2,479,246) (460,778) (5,970,091) (954,455)
----------- --------- ----------- ---------
Income available to common shareholders from
gain on sale of discontinued operations - - - -
Average common shares outstanding 3,857,380 2,936,312 3,763,554 2,888,445
Basic loss per common share from continuing operations $(.07) $.01 $ (0.13) $.02
Basic loss per common share from discontinued operations (.65) ( .15) (1.59) ( .33)
Basic income per common share from gain from
sale of discontinued operations - - - -
Basic net loss per common share $(.72) $(.14) $(1.72) $(.31)
===== ===== ====== =====
Diluted net income (loss) per common share computation:
Income available to common shareholders from
continuing operations (265,656) 38,067 (485,456) 55,417
--------- ----------- ------------- ----------
Income available to common shareholders from
discontinued operations (2,479,246) (460,778) (5,970,091) (954,455)
----------- --------- ----------- -----------
Income available to common shareholders from
gain on sale of discontinued operations - - - -
Average common shares outstanding 3,857,380 2,936,312 3,763,554 2,888,445
Incremental shares from assumed conversions:
Preferred shares 491,760 977,250 491,760 977,250
Stock options 1,012,493 113,847 1,029,120 115,068
19
<PAGE>
Warrants 119,338 230,727 122,150 233,514
------- ------- -------
Diluted average common shares outstanding 5,480,971 4,258,136 5,406,584 4,214,277
Diluted loss per common share from continuing operations $(.07) $.01 $ (0.13) $ .01
Diluted loss per common share from discontinued operations (.65) (.15) (1.59) ( .33)
Diluted income per common shares from gain on
sale of discontinued operations - - - -
- - - -
Diluted net loss per common share $(.72) $(.14) $(1.72)
===== ===== ====== =====
</TABLE>
<PAGE>
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 six months ended June 30, 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> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,149,913
<SECURITIES> 0
<RECEIVABLES> 235,988
<ALLOWANCES> (13,635)
<INVENTORY> 99,099
<CURRENT-ASSETS> 1,640,043
<PP&E> 734,243
<DEPRECIATION> 314,612
<TOTAL-ASSETS> 2,096,742
<CURRENT-LIABILITIES> 882,828
<BONDS> 0
26
0
<COMMON> 40,888
<OTHER-SE> 1,116,095
<TOTAL-LIABILITY-AND-EQUITY> 2,096,742
<SALES> 327,887
<TOTAL-REVENUES> 509,374
<CGS> 195,236
<TOTAL-COSTS> 896,727
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,103
<INCOME-PRETAX> (6,445,547)
<INCOME-TAX> 0
<INCOME-CONTINUING> (485,456)
<DISCONTINUED> (5,970,091)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,455,547)
<EPS-BASIC> (1.72)
<EPS-DILUTED> (1.72)
</TABLE>
