<PAGE>
Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998; Commission file number: 1-12967
NEI WEBWORLD, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2524630
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
4646 BRONZE WAY 75236
DALLAS, TEXAS 75236 (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(214) 330-7273
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 twelve months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past ninety days.
Yes x No
--- ---
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of August 14, 1998 was 3,719,778 shares.
Documents Incorporated by reference: None
Transitional Small Business Disclosure Format: Yes No x
--- ---
1
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PART 1 - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
NEI WEBWORLD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................... $ 250 $ 250
Account receivable - Net............................... 1,693,822 2,050,255
Inventories............................................ 650,400 784,649
Prepaid expenses and other............................. 107,301 86,939
----------- -----------
Total current assets................................... 2,451,773 2,922,093
PROPERTY, PLANT AND EQUIPMENT - Net..................... 9,643,323 9,935,669
INTANGIBLES AND OTHER ASSETS - Net...................... 277,525 341,999
----------- -----------
TOTAL.................................................. $12,372,621 $13,199,761
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable........................................... $ 1,624,286 $ 2,024,904
Current portion of long-term debt...................... 709,650 709,650
Accounts payable....................................... 3,418,948 3,211,722
Accrued expenses and other liabilities................. 352,660 345,396
Accrued management and consulting fees................. 55,000 30,000
----------- -----------
Total current liabilities.............................. 6,160,544 6,321,672
LONG-TERM DEBT - Less current portion................... 5,318,909 5,246,666
SHAREHOLDERS' EQUITY:
Redeemable common stock warrants for 1,150,000 shares.. 126,875 126,875
Common stock: 3,719,778 shares issued and outstanding.. 37,198 37,198
Additional paid-in capital............................. 5,410,606 5,410,606
Accumulated deficit.................................... (4,581,511) (3,843,256)
Notes receivable - shareholders........................ (100,000) (100,000)
----------- -----------
Total shareholders' equity............................. 893,168 1,631,423
----------- -----------
TOTAL.................................................. $12,372,621 $ 13,199,76
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
2
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NEI WEBWORLD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
NET SALES..................................... $4,161,569 $4,697,758
COST OF SALES................................. 3,777,548 4,131,682
---------- ----------
GROSS PROFIT.................................. 384,021 566,076
OPERATING EXPENSES:
Selling, general and administrative......... 589,751 454,081
Depreciation - property..................... 240,413 145,161
Amortization - intangibles.................. 54,038 54,039
Management and consulting fees.............. 32,499 30,000
---------- ----------
Total................................... 916,701 683,281
---------- ----------
OPERATING LOSS................................ (532,680) (117,205)
OTHER INCOME (EXPENSE)
Interest expense............................ (205,226) (128,406)
Other....................................... (349) 1,265
---------- ----------
Total................................... (205,575) (127,141)
---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM................ (738,255) (244,346)
EXTRAORDINARY ITEM - Gain on debt retirement.. 35,000
---------- ----------
NET LOSS...................................... $ (738,255) $ (209,346)
========== ==========
EARNINGS PER SHARE, BASIC AND DILUTED:
Loss before extraordinary item.............. $ (0.20) $ (0.08)
========== ==========
Net loss.................................... $ (0.20) $ (0.07)
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.... 3,719,778 3,170,327
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
NEI WEBWORLD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................... $(738,255) $ (209,346)
Extraordinary gain on debt retirement....... - (35,000)
Non-cash items in net loss:
Depreciation and amortization............ 294,451 199,200
Amortization of debt issuance cost....... 14,306 11,259
Gain on asset disposal................... (319) -
Interest expense portion of
long-term debt increase................. 129,470 102,606
Cash provided by (used for) operating
working capital:
Accounts receivable...................... 356,433 (144,423)
Inventories.............................. 134,249 (213,337)
Prepaid expenses and other............... (20,362) 8,403
Accounts payable and accrued liabilities. 239,490 79,076
Accrued equipment installation cost...... - (449,028)
---------- ----------
Net cash provided by (used for)
investing activities.................. 409,463 (650,590)
INVESTING ACTIVITIES:
Additions to property, plant and equipment.. (30,749) (629,619)
Proceeds from asset disposals............... 83,000 -
Increase in intangibles and other assets.... (3,869) -
---------- ----------
Net cash used for investing activities...... 48,382 (629,619)
FINANCING ACTIVITIES:
Borrowings on notes payable and
long-term debt............................. 250,000 3,204,896
Payments/retirement of notes payable and
long-term debt............................. (694,347) (6,620,085)
Borrowings/payments under capital lease
arrangements............................... (13,498) 171,741
Net proceeds from initial public offering.. - 4,746,244
---------- ----------
Net cash provided by (used for)
financing activities.................. (457,845) 1,502,796
---------- ----------
INCREASE IN CASH.............................. - 222,587
CASH:
Beginning of period......................... 250 43,460
---------- ----------
End of period............................... $ 250 $ 266,047
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NEI WEBWORLD AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIOD ENDED JUNE 30, 1998
Note 1: Interim Financial Statements
The unaudited interim financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring adjustments and accruals) considered necessary
for a fair presentation have been included. Some adjustments involve estimates
which may require revision in subsequent interim periods or at year end. The
unaudited financial statements and footnotes should be read in conjunction with
the Company's financial statements for the year ended March 31, 1998 that are
included in Form 10-KSB that was filed with the Securities and Exchange
Commission on June 29, 1998. Operating results for the three month period are
not necessarily indicative of results expected for the remainder of the year.
Note 2: Going Concern Issue
The Company experienced significant operational inefficiencies in fiscal
1998 in conjunction with the dismantling, relocation and integration of the
printing assets acquired in fiscal 1997 and 1998. The Company continued to
operate while experiencing negative cash flow by completing transactions
involving the financing of its land and building and through a decrease in net
working capital. As of June 30, 1998, the Company has completed the asset
relocation and installation. An operational restructuring is in progress and
the Company's break-even point has been materially reduced. The goal of the
operational restructuring is to return the gross margin to an acceptable level.
The success of this effort is vital to the continued operation of the Company as
a going concern. In its current financial condition, the Company does not have
the resources to support the existing debt service and trade obligations.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The factors noted above indicate
that the Company will be unable to continue as a going concern for a reasonable
period of time unless the Company can return to a positive cash flow operation
and obtain additional external financing. However, management can offer no
assurances that adequate levels of cash flow and finances can be achieved to
enable the Company to continue as a going concern.
Note 3: Inventories
Inventories consist of the following:
June 30, March 31,
1998 1998
--------- ---------
Paper stock $ 492,054 $ 547,624
Ink and other supplies 69,207 77,810
Jobs in process 89,139 159,215
--------- ---------
$ 650,400 $ 784,649
========= =========
5
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PART 1 - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General: NEI WebWorld, Inc. (the "Company", "NEI" or "WebWorld") owns a high-
volume commercial printing facility offering pre-press, printing and post-press
services to customers in the Southwestern United States. NEI specializes in the
printing of multi-color magazine and other periodicals, catalogues, directories,
tabloids, inserts, advertising products and marketing mailers. The printing of
weekly television guides for local newspapers accounted for 61%, 35% and 27% of
net sales for the years ended March 31, 1996, 1997 and 1998, respectively and
26% and 29% for the quarters ended June 30, 1997 and 1998, respectively. In the
current quarter, two additional customers accounted for 6.8% and 5.4% of net
sales, respectively. No other customer accounted for more than 5% of net sales.
The Company was incorporated in 1993 and acquired in 1994 the business of
Newspaper Enterprises, Inc., which primarily printed The Dallas Morning News TV
Magazine. Also in 1994, the Company acquired certain assets of Computer
Language Research, Inc., including three half-web presses and certain post-
production equipment. In September 1996, the Company purchased two full web
presses from The Webworks, Inc. ("Webworks"), a subsidiary of Morris Newspaper
Corporation. In June 1997, the Company purchased an additional heatset web
press and certain pre-press equipment and in September 1997 the Company
completed the acquisition of certain printing equipment of Pelican Press, Inc.
("Pelican").
Going Concern: During the later half of fiscal 1998, the Company completed the
dismantling, relocation and integration of the printing assets acquired in
fiscal 1997 and 1998. The relocation included three full web presses, two half-
web presses, four six to eight pocket saddle stitchers or binders, one twenty
pocket perfect binder, and numerous smaller pieces of equipment including
cutters, folders and a wire roller. The Company's primary production facility
was not large enough to accommodate the acquired assets. Therefore, in
conjunction with the equipment relocation, the Company acquired land and a
building adjacent to its existing facility. Significant monies were expended to
improve both buildings, including electrical upgrades, foundation strengthening
and a redesign of the physical layout to improve the work flow from pre-press
through post-press and shipping. The cost of this property acquisition and
upgrade was greater than anticipated.
The Company experienced significant operational inefficiencies in fiscal 1998 as
a result of the relocation. Paper and other material scrap rates and labor costs
were unusually high during the second, third and fourth quarters of fiscal 1998
due to several factors. Problems in returning the relocated assets to acceptable
operating standards combined with a management decision to maintain production
and delivery schedules for existing customers during the relocation caused
increases in production scrap and production labor overtime. The Company also
maintained skilled press operators during the entire relocation period and full
crews during the period required to test and restart each piece of equipment,
contributing to the adverse labor margins. The Company also experienced
difficulties integrating new production employees. Weak production systems and
procedures contributed to problems in scheduling and quality control.
As a result of these operational problems and the larger than expected cost of
expanding and upgrading its facilities, the Company experienced negative cash
flow from operations during fiscal 1998. In that regard, the Company has
initiated or completed numerous actions. The reinstallation of all acquired
equipment and equipment upgrades is now complete and the Company plans no major
capital expenditures in fiscal 1999. An operational restructuring is also in
progress with the goal to return gross profit margins to acceptable levels and
reduce the Company's break-even point. As part of this restructuring, the
Company hired a new Chief Operating Officer with significant production systems
and management experience. A sales and marketing initiative has begun, dividing
the Company's business into distinct markets and targeting specific customers
and products.
6
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Along with this initiative, the Company completed a detailed review of
profitability on a job by job and customer by customer basis, with a goal to
eliminate all unprofitable relationships.
The Company experienced negative cash flow from operations in the quarter ended
June 30, 1998, due primarily to reduced sales volumes. The primary cause of the
sales volume decrease was the termination of several unprofitable customer
relationships. The Company has continued to operate while experiencing negative
cash flow by increasing external debt financing and through a decrease in net
working capital. The Company will be unable to continue as a going concern for a
reasonable period of time unless it can return to a positive cash flow operation
and obtain additional internal or external financing.
The Company believes it will be successful in achieving acceptable gross margins
and positive cash flow in fiscal 1999; however no such guarantees are made and
until such time, the Company will be dependent on its ability to complete
additional external financings.
Results of Operations: First quarter ended June 30, 1998 compared to the same
period of the prior year.
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
JUNE 30
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Sales............................................ 100.0% 100.0%
Cost of sales.................................... 90.8 87.9
----- -----
Gross profit..................................... 9.2 12.1
Selling, general and administrative expenses..... 14.2 9.7
Depreciation and amortization.................... 7.0 4.2
Management and consulting fees................... 0.8 0.7
----- -----
Operating loss................................... (12.8) (2.5)
Interest expense (net)........................... (4.9) (2.7)
Loss before income taxes and extraordinary item.. (17.7) (5.2)
Income taxes..................................... 0.0 0.0
----- -----
Income (loss) before extraordinary item.......... (17.7) (5.2)
Extraordinary item............................... 0.0 0.7
----- -----
Net loss......................................... (17.7) (4.5)
===== =====
</TABLE>
Sales based on product type are defined and detailed below:
Magazines/Periodicals - Consists of miscellaneous information published on a
fixed schedule. Generally informational versus product oriented.
Catalogues/Directories - Consists of product information or a sales
publications (college class schedules, merchandise listings) and
organizational or geographic directories. Generally published semi-monthly or
quarterly.
Inserts/Coupons - Advertisement included in a publication.
General Commercial and Advertising - Commercial and/or advertising products
and marketing mailers such as brochures, fliers and other one to sixteen page
products. The product is usually distributed or mailed separately.
Business Forms - Forms used internally by another business or organization.
Direct Mail - Products for direct mail promotions.
7
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<TABLE>
<CAPTION>
SALES BY CATEGORY (000'S)
QUARTERS ENDED JUNE 30
1998 1997 VARIANCE
-------- -------- --------
<S> <C> <C> <C>
Magazines/Periodicals $ 1,959 $ 2,451 $ (492)
Catalogues/Directories 854 922 (68)
Inserts/Coupons 747 435 312
General Commercial and Advertising 434 826 (392)
Business Forms 97 25 72
Direct Mail 71 39 32
-------- -------- --------
$ 4,162 $ 4,698 $ (536)
</TABLE>
Sales decreased $536,000 and 11% to $4.2 million as compared to the same period
of the prior year primarily due to a decrease in magazine/periodicals and
general commercial product sales, partially mitigated by an increase in
8
<PAGE>
the sale of insert/coupon product services. The $492,000 decrease in
magazine/periodical sales is due primarily to the loss of two customers, sales
to which totaled $180,000 in the current quarter as compared to $795,000 in the
same quarter of the comparable year. The decrease in general commercial product
services reflects a decrease in sales volume to small customers (those with
quarterly sales of less than $10,000) and the loss of two large customers
totaling $208,000 in sales in the prior year and zero in the current quarter.
These products tend to be fillers, with sales dependent somewhat on available
press time, not supported by long-term contracts and generally price sensitive.
Sales in this category are difficult to predict. The increase in inserts/coupon
sales is due primarily to an increase in production of newspaper inserts.
Gross profit decreased 32% to $384,000 and 9.2% of net sales as compared to
$566,000 and 12.1% of net sales in the prior comparable period. The primary
cause of the gross profit margin decrease is an increase in labor as a percent
of net sales to 24.4% in the current quarter as compared to 21.5% in the
comparable prior quarter. Actual labor costs remained flat at $1 million. The
labor margin decrease reflects the maintenance of a core production labor force
during the period of decreased sales experienced in the current quarter.
Excluding labor, cost of sales was $2.8 million and 66.4% of net sales in the
current period as compared to $3.1 million and 66.4% in the prior period.
Material costs decreased $356,000 to $2.46 million and 59% of net sales as
compared to $2.8 million and 59.9% in the comparable quarter. Paper costs
decreased $233,000 to $1,989,000 but increased as a percent of net sales to
47.8% from 47.3% in the prior year. Cost of materials used in production,
excluding paper, which decreased $79,000 to $278,000 and 6.7% of net sales.
Costs of outside services and freight also decreased $44,000 to $190,000 and
4.5% of net sales. Other manufacturing costs, which include repairs and
maintenance, plant supplies and utilities expenses, remained flat at $306,000
and 7.4% of net sales as compared to $309,000 and 6.6%.
Operating Expenses increased 34% to $916,000 and 22.0% of net sales as compared
to $683,000 and 14.5% of net sales in the prior comparable period. The increase
of $233,000 is due primarily to increases in the following: (1) Depreciation
expense, which increased $95,000 due to an increase in average fixed assets of
approximately $5.8 million in the current quarter as compared to the prior
year's quarter; (2) Professional fees, which increased $43,000 due to the hiring
of an information systems consultant, fees paid in conjunction with the
replatting of the Company's vacant land and additional service fees paid in
conjunction with maintaining public records; and (3) Property taxes, which
increased $37,000 due to the increase of $5.8 million in fixed assets.
Loss Before Extraordinary Items increased $494,000 to a loss of $738,000 for the
current quarter as compared to the same period of the prior year due to the
factors described above. The increase in loss was also affected by an increase
of $77,000 in interest expense in the current quarter, caused by an increase of
$3.6 million in the average debt balance in the current quarter as compared to
the prior year period.
Net Loss increased $529,000 to a loss of $738,000 for the current quarter. The
Net Loss in the quarter ended June 30, 1997 includes a $35,000 gain on early
retirement of debt relating to the acquisition of the Webworks assets.
Net Loss per share increased to $ (0.20) as compared to $ (0.07) for the
comparable period of the prior year. The change in the weighted average common
shares outstanding is due to the completion of an initial public offering
resulting in the issuance by the Company of an additional one million shares of
common stock on May 21, 1997.
Liquidity and Capital Resources:
In May 1997, the Company completed an initial public offering of common stock
and common stock warrants. Proceeds of the offering, less underwriting
commissions and fees and other offering expenses was $4.7 million. Proceeds were
used to repay existing notes payable, to relocate the Webworks assets and for
capital expenditures.
9
<PAGE>
Congress Financial Corporation (Southwest) ("Congress") has provided the Company
revolving credit, equipment, real estate and future capital expenditure
facilities totaling $9 million, of which $4.9 million was available and drawn at
June 30, 1998. The capital expenditure facility's term runs concurrently with
the term of the revolving credit facility and provides financing for up to 85%
of the value of the equipment purchased. These borrowings would be payable over
five years or by the termination of the facilities. At June 30, 1998 the
Company was not in compliance with the financial covenants required by the
Congress financing agreement and had obtained a waiver of compliance from
Congress for the period ended June 30,1998. The Company does not expect to
return to compliance in the subsequent quarter and is negotiating with Congress
for a modification of the financial covenant.
An additional real estate financing facility totaling $2.7 million from another
bank was also outstanding at June 30, 1998. The indebtedness is secured by a
first lien of the Company's land, building and building improvements. The
borrrowing is payable in equal principal and interest payments, amortized over
twenty-five years with balance due in November 2007.
During the recent quarter ended June 30, 1998, the Company realized $409,000 of
cash from operating activities. This results from a loss of $300,000 in cash
from operations and a $709,000 decrease in working capital required. The working
capital change includes decreases in accounts receivable and inventory of
$491,000 and an increase of $239,000 in trade payables and accrued liabilities.
Should operating losses continue at their present rate, additional financing
will be required to sustain operations.
With the exception of historical information, the matters discussed under
"General Results of Operations" and "Liquidity and Capital Resources" contain
forward-looking statements. There are certain important factors which could
cause results to differ materially from those anticipated by some of the
forward-looking statements. Some of the important factors which could cause
actual results to differ materially from those in the forward-looking statements
include, among other things, changes from anticipated levels of sales, whether
due to future national or regional economic and competitive conditions, changes
in relationships with customers including, but not limited to, the Company's
relationship with its significant customers, pricing pressures due to raw
material cost increases, change of tax rates, change of interest rates,
declining conditions in the industry, casualty to or other disruption of the
Company's production facility and equipment, delays and disruptions in the
shipment of the Company's raw materials and other factors that generally affect
business.
10
<PAGE>
PART 2 - OTHER INFORMATION
ITEMS 1, 2, 3, 4, AND 5 ARE OMITTED FROM THIS REPORT AS INAPPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following document is filed as part of this Quarterly Report on
Form 10-QSB.
Exhibit No. Description of Exhibits
----------- -----------------------
27.1* Financial Data Schedule required by Item 601 of
Regulation S-B.
*Filed herewith.
11
<PAGE>
SIGNATURES
In accordance with the requirements of Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEI WEBWORLD, INC.
(Registrant)
Date: August 14, 1998 By: /s/ William K. Daniels
-------------------------------------
William K. Daniels
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 250
<SECURITIES> 0
<RECEIVABLES> 1,866,704
<ALLOWANCES> (172,882)
<INVENTORY> 650,400
<CURRENT-ASSETS> 2,451,773
<PP&E> 11,857,743
<DEPRECIATION> (2,214,420)
<TOTAL-ASSETS> 12,372,621
<CURRENT-LIABILITIES> 6,160,544
<BONDS> 5,318,909
0
0
<COMMON> 164,073
<OTHER-SE> 729,095
<TOTAL-LIABILITY-AND-EQUITY> 12,372,621
<SALES> 4,161,569
<TOTAL-REVENUES> 4,161,569
<CGS> 3,777,548
<TOTAL-COSTS> 3,777,548
<OTHER-EXPENSES> 916,701
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 205,226
<INCOME-PRETAX> (738,255)
<INCOME-TAX> 0
<INCOME-CONTINUING> (738,255)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (738,255)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
