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 March 31, 1999
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Commission file number 000-22611
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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
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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 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 -
<TABLE>
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Page(s)
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PART I- Financial Information
Item I. Financial Statements
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
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
PART II Other Information
Item 1. Legal Proceedings 16
Item 2. Change in Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
</TABLE>
<PAGE>
PART I. Financial Information
ITEM 1. Financial Statements
Compu-DAWN, Inc. AND SUBSIDIARY
BALANCE SHEETS
(Unaudited)
- ASSETS -
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(as restated)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,651,387 $4,387,400
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
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TOTAL ASSETS $ 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
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TOTAL CURRENT LIABILITIES 1,023,250 400,134
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NON-CURRENT LIABILITIES:
Capitalized lease payable 34,766 15,779
Deferred rent liability 27,253 28,448
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TOTAL NON-CURRENT LIABILITIES 62,019 44,227
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TOTAL LIABILITIES 1,085,269 444,361
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 15 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 14,821,472 13,661,649
Accumulated deficit (11,313,366) (7,620,721)
Accumulated other comprehensive loss (150,000) (150,000)
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3,396,021 5,923,632
Less: treasury stock, 340,044 shares at cost for 1999 and 1998 (625,712) (625,712)
--------------- --------------
TOTAL SHAREHOLDERS' EQUITY 2,770,309 5,297,920
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,855,578 $ 5,742,281
============= ============
</TABLE>
See accompanying notes to condensed
financial statements.
3
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Compu-DAWN, Inc. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1999 1998
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<S> <C> <C>
(as restated)
REVENUES:
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
Interest and other income 126,558 20,787
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Total Revenues 1,616,146 187,746
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COSTS AND EXPENSES:
Cost of revenues 1,002,309 123,538
General and administrative expenses 3,213,408 425,396
Research and development 11,907 111,702
Interest expense 6,816 3,437
Non-recurring refunds 482,033 -
Write-off of impaired loan 592,318 -
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Total Costs and Expenses 5,308,791 664,073
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NET LOSS ($3,692,645) ($476,327)
============= ============
BASIC AND DILUTED LOSS PER COMMON SHARE $(1.16) $(.17)
======= =====
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 3,192,646 2,839,907
========= =========
</TABLE>
See accompanying notes to condensed
financial statements.
4
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Compu-DAWN, Inc. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1999 1998
---- ----
(as restated)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
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
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Net cash used in operating activities (1,592,236) (410,505)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Loans and advances (16,222) -
Purchase of fixed assets (90,589) (12,401)
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Net cash used in investing activities (106,811) (12,401)
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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 used in financing activities (27,966) (16,123)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,727,013) (439,029)
Cash and cash equivalents, at beginning of year 4,378,400 3,081,253
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,651,387 $2,642,224
============== ==========
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Net loss $(3,692,645) $ (476,327)
Adjustments to reconcile net loss to net cash used in 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
Stock options issued for consulting services 423,220
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
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NET CASH USED IN OPERATING ACTIVITIES $(1,592,236) $ (410,505)
=========== ===========
</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 referra 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.
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
(unaudited)
March 31,
1999 1998
Revenues $ 1,615,785 $ 2,267,248
Costs and expenses 3,650,823 2,641,453
Loss from operations (2,035,038) (374,205)
Net loss $(2,990,701) $ (356,855)
Loss per share $ (.94) $ (.13)
6
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Compu-DAWN, Inc. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - DESCRIPTION OF COMPANY (Continued):
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.
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.
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 recorded in the statement of operations
as originally filed on Form 10-QSB for the three months ended March
31, 1999. As a result, it is necessary to restate the three months
ended March 31, 1999 to include the expense in the statement of
operations.
The effect of this restatement on the previously issued interim
financial statements is as follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
<S> <C> <C>
Net loss, as previously reported $ 3,269,424 $ 476,327
Net loss, as restated $ 3,692,645 $ 476,327
Basic and diluted net loss per common
share, as previously reported $ (1.02) $ (0.17)
Basic and diluted net income per common
share, as restated $ (1.16) $ (0.17)
</TABLE>
7
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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 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 included in these restated first quarter results.
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.
8
<PAGE>
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 separate 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 includ the following:
- 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;
- Sales of long distance telephone service;
- Sales of Internet access service;
- On-line shopping;
- Pre-paid cellular telephone service; and
- 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
9
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Company's software products and competition.
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 sale 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
10
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$4,227,624 ($1,035,547 for the public safety division and $3,192,077
for e.TV) as compared to $660,636 for the comparative period of the
prior year division, an increase of $3,566,988. 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 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 $2,738,036 as
compared to $493,677 for 1998. This is mainly due to the operating
loss of $1,921,620 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 $3,692,645 ($1.16per 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 $1,784,161.
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
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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.
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
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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.
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 equipmen 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
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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 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 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
14
<PAGE>
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.
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
15
<PAGE>
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,
1998. 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.
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
16
<PAGE>
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. ***
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.
17
<PAGE>
*** 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.
(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
18
<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
20
<PAGE>
Compu-DAWN, Inc.
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
For the Three Months
Ended March 31,
1999 1998
NET LOSS $(3,692,645) $(476,327)
=========== =========
WEIGHTED AVERAGE SHARES:
Common shares outstanding 3,192,646 2,839,907
========= =========
BASIC AND DILUTED LOSS PER COMMON SHARE: $(1.16) $(.17)
====== =====
- Exhibit 11 -
<PAGE>
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