SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 000-28115
INTELLIWORXX, INC.
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(Name of Small Business Issuer in its Charter)
Florida 59-3336148
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1819 Main Street, 11th Floor Sarasota, Florida 34236
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(Address of principal executive offices, including zip code)
(941) 365-7790
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(Issuer's Telephone Number)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock No Par Value
N/A
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(Former name, address and fiscal year, if changes since last year)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES ( X ) NO ( )
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ( X )
The registrant's revenues for the most recent fiscal year is $1,986,839
The aggregate market value of the Company's stock held by non-affiliates of the
registrant (5,838,307 shares) was approximately $72,249,049 as of March 27, 2000
based upon the closing sale price on the OTC Bulletin Board reported for that
date which was $12.375. Shares of common stock held by each officer and director
and by each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
At March 27, 2000, 17,189,771 shares of common stock, no par value (the
registrant's only class of voting stock) were outstanding.
Information contained on Intelliworxx' web site does not constitute part of
these government filings.
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TABLE OF CONTENTS
PAGE
PART I
ITEM 1. Description of Business 3
ITEM 2. Description of Property 13
ITEM 3. Legal Proceedings 13
ITEM 4. Submission of Matters to a Vote of Security Holders 14
PART II
ITEM 5. Market for Common equity and Related Stockholder Matters 15
ITEM 6. Selected Financial Data 17
ITEM 7. Management's Discussion and Analysis of Financial 17
Condition and Results of Operations
ITEM 8. Changes In and Disagreements with Accounts on 20
Accounting and Financial Disclosure
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control 21
Persons Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation 24
ITEM 11. Security Ownership of Certain Beneficial Owners and 27
Management
ITEM 12. Certain Relationships and Related Transactions 29
ITEM 13. Exhibits and Reports on Form 8-K 30
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB, including all documents incorporated by
reference, includes "forward-looking" statements within the meaning of Section
27A of the Securities Act and Section 21 E of the Exchange Act and the Private
Securities Litigation Reform Act of 1995, and we desire to take advantage of the
"safe harbor" provisions thereof. Therefore, we are including this statement for
the express purpose of availing ourselves of the protections of such safe harbor
with respect to all of such forward-looking statements. The forward-looking
statements in this Report reflect our current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including specifically the (1) absence of
significant revenues, (2) history of losses, (3) no assurance that technology
can be completed or that its completion will not be delayed, (4) significant
competition, (5) the uncertainty of patent and proprietary rights, (6) possible
adverse effects of future sales of shares on the market, and (7) those other
risks and uncertainties discussed herein, that could cause actual results to
differ materially from historical results or those anticipated. In this report,
the words, "anticipates," "believes," "expects," "intends," "future" and similar
expressions identify certain of the forward-looking statements. Readers are
cautioned not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. We undertake no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that may arise after the date hereof. All subsequent written
and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this section.
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PART I
Item 1. DESCRIPTION OF BUSINESS
The registrant, Intelliworxx, Inc. (formerly known as Outdoor Resorts, Inc., a
Florida corporation (referred to herein as "Intelliworxx" or the "Company"), was
organized on July 1, 1995 for the purposes of acquiring campgrounds.
On November 23, 1998, Intelliworxx merged with a Florida corporation named
Intelliworxx, Inc. ("Old Intelliworxx") in a transaction that was accounted for
as a reverse acquisition. The shareholders of Old Intelliworxx received an
aggregate of 12,000,000 shares of the registrant in exchange for all of the
outstanding shares of Old Intelliworxx. As part of the merger transaction the
Company's name was changed to its present form, new officers and directors were
elected and the number of authorized shares of common stock was increased from
50,000,000 to 100,000,000. After the merger, new management changed the
direction of the Company from campground management to mobile computer-based
technologies. Since the merger, Intelliworxx has developed numerous
mobile-computing products.
BUSINESS AND PRODUCT OVERVIEW
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The Company's primary focus is its Mentorworxx(TM) technology. Mentorworxx
provides the ability to accurately and quickly diagnose and repair complex
systems using voice-interactive mobile computers and proprietary interface
methodology. This focus on Mentorworxx requires expertise in several core
technologies including high-speed mobile computing, human-machine interface,
advanced multimedia techniques, voice recognition, video compression, Internet
applications, and software design and manufacturing.
Management has developed what it believes is a fairly unique business model
that, combined with the technological core demanded by mentoring, enables it to
develop a range of seemingly diverse product lines with maximum efficiency and
speed. These product lines include both hardware and software and offer specific
solutions for individual customer needs. With products both in production and
under development, systems are designed primarily using microprocessors from
Intel Corporation ("Intel") and Windows(R) operating systems from Microsoft
Corporation ("Microsoft").
The Intelliworxx Business Model
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The Company targets large market niches and provides major players in those
markets with sustainable competitive advantages. The Company does this by
rapidly supplying solutions that require expertise in advanced high-speed
digital hardware design and software design and integration. The Intelliworxx
business model embodies two distinct concepts, "reusable technologies" and the
"virtual original equipment manufacturer" ("virtual OEM").
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Modern computer-based technology uses a collection of basic components such as
Pentium(TM) microprocessors from Intel and speech engine software from Lernout &
Hauspie Speech Products N.V. ("Lernout & Hauspie"). In the fast-evolving world
of technology products, new components appear at an ever-increasing pace. The
concept of reusable technologies means the Company develops advanced circuitry
and software (its "core technologies") in a well-defined, modular manner such
that the end results can be quickly deployed in a range of new products. This
concept also includes designing with an eye towards tomorrow's basic components.
Emphasis on reusable technologies leads to a three-step product development
process:
o Development of core technologies with an emphasis on reusable
technology
o Development of product platform based on these core technologies using
state-of-the art components for mobile computing
o Creation of an individual customer's solution from a selected product
platform
In this way, Intelliworxx is capable of quickly and efficiently producing
specific products for customers by utilizing reusable technologies that can be
turned into multiple products in a fraction of the usual development time.
Intelliworxx does not manufacture its products. The Company "outsources" its
product manufacturing to electronic manufacturing services companies. A company
that develops and sells its own products but has other companies perform the
manufacturing is sometimes known as a "virtual original equipment manufacturer"
or virtual OEM. Intelliworxx's management team, which has significant contract
manufacturing experience, utilizes the virtual OEM model to free the Company
from having to hire manufacturing personnel and funding manufacturing equipment.
It enables the Company to focus on applying technology to meet customer
requirements.
Intelliworxx Products
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Mentorworxx(TM) Software
Intelliworxx has developed interactive mentoring software for the technology
maintenance and medical procedure assist markets. Mentoring is when one person
with expertise in a given area aids another in solving problems. This is
accomplished by the person with expertise answering questions and offering tips.
Mentoring as used by the Company involves replacing the human expertise with
computer technology. The Company refers to its software as Mentorworxx(TM)
software incorporating "interactive multimedia mentoring" or "iM3(TM)"
technology. This software provides voice-driven, interactive access to specific
diagnostic and/or procedure data for commercial or military technology and
medical providers. The software, written for the Microsoft Windows(R) operating
systems, functions best on the Company's VoiceTablet(TM), UCM(TM), or Advanced
AutoPC, but works for any Pentium class, Windows(R)-based computer. Management
believes that this software will increase the productivity of technology
maintenance personnel and medical workers.
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The Mentorworxx(TM) software has three components. Mentorworxx Explore(TM) is
the software component that plays back multimedia content to the user via voice
commands. It functions similar to the familiar "internet web-browser" wherein
the user intuitively selects underlined word or phrases ("links") on the screen
and is taken to the page directed by the link. Mentorworxx Create(TM) is the
program customers use to design their own mentoring applications. It is a visual
development environment that conceptually guides the user through the process of
creating the mentoring application. The user enjoys complete control over the
content preparation, presentation and linking data. The pages that are generated
can be read by any browser as well as by the Company's Mentorworxx Explore(TM)
product. Mentorworxx Convert(TM) is designed to overcome the single most
daunting concern regarding the development of mentoring systems - converting
existing data. Mentorworxx Convert(TM) can save hundreds of hours previously
devoted to the preparation of a mentoring system. Once templates have been
configured, Mentorworxx Convert(TM) automatically reads in all existing manual
based text and graphic data and prepares pages with links for use in Mentorworxx
Explore(TM).
The VoiceTablet(TM)
A portable tablet computer is a hand-held clipboard with a flat display screen
and the electronics to drive the device. Intelliworxx has created the
VoiceTablet(TM), a rugged, portable tablet computer that can be voice-driven, or
touch/pen activated. The main differences between standard tablet computers and
the VoiceTablet(TM) are in the interface advantages. The VoiceTablet(TM) is
uniquely equipped with advanced audio circuitry optimized for voice input and
output and advanced video multimedia capabilities including the ability to play
digital video disk ("DVD") movies. Additionally, the VoiceTablet(TM) uses the
Intel Pentium(R) II Processor as a large amount of processing power is necessary
to perform both multi-media and speech applications simultaneously. The
VoiceTablet(TM) has been designed to use the Intel Pentium(R) III Processor as
well.
Intelliworxx has partnered with Lernout & Hauspie to provide advanced
voice-driven applications for the VoiceTablet(TM). Lernout & Hauspie is a
leading provider of speech and linguistics products and have a commanding
worldwide market share of the voice-driven medical applications arena (source:
Lernout & Hauspie web site http://www.lhs.com and conversations with Lernout &
Hauspie personnel). Intelliworxx is an authorized Value Added Reseller ("VAR")
for the entire line of Lernout & Hauspie products and applications. Lernout &
Hauspie is an authorized VAR for the Company's VoiceTablet(TM) and
Mentorworxx(TM) software, described in the previous section.
The VoiceTablet(TM) has applications for the healthcare, public safety,
technology maintenance, insurance, manufacturing, and in-flight entertainment
markets. VoiceTablets(TM) have been produced for various customers including
government agencies, Fortune 100 companies, several police departments, a major
European airline and Lernout & Hauspie. VoiceTablets(TM) equipped with the
Company's Mentorworxx(TM) software have also been delivered to the US Marines
and US Navy.
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The Advanced AutoPC
An Advanced AutoPC system and accompanying software has been developed for the
commercial and military automotive industries to provide information and
entertainment in a moving vehicle. The system is voice and touch-driven with a
compliment of interactive features that include Global Positioning Satellite
based navigation, cellular phone control, wireless Internet access,
environmental control and other functions. The system is capable of running
Microsoft's Windows 95/98, NT, 2000, or Windows(R) CE operating systems and is
the only such product to accommodate Intel's Pentium(R) MMX and Pentium(R) II
Processors.
A version of our Advanced AutoPC is in production (300 unit build) for a major
U.S. automotive manufacturer. Current purchase orders, which the Company's
management believes to be firm, specify delivery of up to 10,000 units during
the 12 months ending December 31, 2000. The Company is developing its own
Advanced AutoPC product that will be offered to existing AutoPC OEMs and
resellers for them to resell as their own brand.
The UCM(TM)
The Company has developed a multipurpose Pentium(TM)-based, multimedia-equipped
module called the Ubiquitous Computing Module ("UCM"). This device incorporates
advanced mobile computing features in a package smaller than a videocassette. In
keeping with the Company's reusable technologies concept, the UCM(TM) has been
developed as a computing "engine" to be embedded into vehicles as well as into
other devices. It can accommodate any of Intel's family of Pentium(R) processors
and is capable of running Microsoft's Windows(R) 95/98, NT/2000, or Windows(R)
CE operating systems. The UCM(TM) is being used corporate aircraft and in police
cars for several police departments.
WaveLink(TM)
Intelliworxx has combined advanced compression software with dedicated hardware
circuitry and a proprietary camera design to enable the fast transfer of video
data over POTs ("plain old telephone") wires as well as in the wireless arena.
The product, Wavelink(TM), is a PC card that plugs into a PC card slot and is
ideally suited to tablet or laptop computing. The Company's unique solution for
real-time mobile video conferencing over POTs will allow for high quality
transmission of video signals over low bandwidth mediums.
Prototype development is nearing completion and will be targeted at the
Company's existing customer base. However, WaveLink(TM) will allow any desktop
or laptop computer to provide full motion, high quality video conferencing.
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INDUSTRY OVERVIEW
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Maintaining a competitive edge in the advanced electronic product arena is a
challenge that developers and manufacturers continually face. These challenges
include, but are not limited to, market demands for increased product
performance, the need for a lower cost per function, and the need to decrease
the time from product development to market.
Mobile computers (notebook computers, computers in cars, airplanes or boats,
etc.) have become increasingly popular as part of the solution to many business
problems. As mobile computers gain greater levels of computing power, so do the
demands for additional features from mobile users. New demands such as
voice-driven operation, multimedia playback ability and wireless access to data
are challenging designers to provide these features in increasingly smaller
packages.
From 1992 to 1997 the production of electronic equipment in the United States
grew from $217 billion to over $345 billion spread over several categories
(source: The US Census Bureau, http://www.census.gov/epcd/www/advanc2b.htm#S3).
Management believes that mobile computing has been and will continue to be one
of the fastest growing segments of electronic equipment production.
TARGET MARKETS
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Mentoring
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The $85 billion per year (source: Bureau of Labor Statistics,
http://stats.bls.gov/ news.release/sept.t12.htm and management's calculation)
education and training industry is undergoing a profound change. The need for
targeted, real time training of workers in the military and industry has been
growing for several years. Knowledge must be delivered to the technical
workforce at precisely the right time to insure workers can perform. Improved
job performance and productivity and increased worker competence and flexibility
are compelling factors in the growth of mentoring systems.
Mentoring in the Automotive Industry - There are over 200 million vehicles
registered in the U.S. (source: Automotive News, Dec. 1998) and more than 50
million new vehicles produced worldwide each year. Each of these vehicles
requires an average of $600 per year in repair and maintenance (Source: General
Motors Service Parts Division 1998 Estimate) resulting in a $120 billion dollar
per year industry. It has been reported that as much as one third of this total
is consumed by misdiagnosis. The domestic automotive industry currently supports
the repair and maintenance of its vehicles with 21,000 dealerships and 300,000
independent service facilities, employing over 750,000 light-duty vehicle
technicians and 500,000 heavy-duty vehicle technicians (source: Environmental
Protection Agency ("EPA") correspondence with Intelliworxx).
Mentoring in the Military - The Deputy Undersecretary of Defense for Readiness
and Training, Mr. Thomas Longstreth, has indicated that mentoring is a primary
initiative for all branches of the US Military. Over 50% of the entire military
budget is spent on maintenance and training (source: Longstreth, TechLearn
Conference 1998 Orlando, FL). Intelliworxx is a member of the Department of
Defense's Advanced Distributed Learning core team and has participated in
top-level government training policy discussions.
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Mentoring in Public Safety - Emergency response to chemical or biological
terrorist attacks or spills has become a national concern at the highest levels
of the government, and is of significant immediate concern to police, fire and
rescue organizations. The list of chemical and biological agents has grown, as
has the estimated risk of terrorist attacks. The current materials required for
use by all military and public safety workers in the event of public
endangerment has grown in complexity and bulk. The Company's Mentorworxx
solution simplifies access and use of data and its intuitive, voice interactive
interface facilitates accurate decision making in high-stress situations.
Mentoring represents a valuable market opportunity for the Company in this area,
in addition to its activities in AutoPC and Tablet Computing.
Tablet Computing
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Tablet computing is not a new market arena. Tablet computers have existed for
many years, but, much like the palmtop industry, were not viable choices for
mobile job assistance, as they did not have the features necessary to entice
buyers. Even so, tablet computers have enjoyed increasing sales due to demand
for data access for mobile workers. The table below indicates the sales picture
for tablet computing.
Tablet Computer Sales
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1997 1998
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Manufacturer Unit Sales $ Sales Unit Sales $ Sales
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Fujitsu Corporation 33,000 $ 75,000,000 44,000 $100,000,000
Telxon Corporation 24,000 $ 54,000,000 32,000 $ 72,000,000
MicroSlate Inc. 15,000 $ 34,000,000 20,000 $ 45,000,000
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Source: Derived from the Fujitsu Corporation, Telxon Corporation and MicroSlate
Inc. Web Sites and Management's Estimates
Intelliworxx has engineered a combination of Pentium(R) II electronics,
multimedia features and interactive software that allow the user to operate the
tablet "hands-free". Typically, tablet computers are operated through the use of
a pen or touch screen interface. While these options are still available, the
Intelliworxx enhanced tablet computer is driven primarily by voice command.
Tablet computing is increasing in popularity in healthcare, technology
maintenance, transportation, insurance, and in-flight entertainment. Public
Safety is also a growing market for tablet computers. There are over 560,000
police squad cars nationwide, with 738,000 sworn officers (source: Cross Match,
Inc., correspondence with Intelliworxx).
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The Advanced AutoPC market
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Stereo equipment manufacturers such as Clarion Corporation ("Clarion"), Pioneer
Electronics Inc. ("Pioneer"), and Alpine Electronics Inc. ("Alpine") introduced
AutoPC products for navigation purposes. Many AutoPC suppliers will be providing
products aimed at lower cost vehicles where consumers are adaptable to narrower
feature sets. However, consumers are expressing the desire for more features and
functionality. According to market analysis from a major US automotive
manufacturer, vehicles with suggested retail prices in excess of $30,000 will
include AutoPC offerings that will provide genuine PC computing power with more
features including continuous voice dictation and multiple DVD playback (the
"Advanced AutoPC"). As prices for the Advanced AutoPC drop, it will replace the
existing, limited functionality AutoPC products.
Domestic automakers are projecting requirements for in excess of one million
systems annually going into the new century. Near term projections for advanced
systems will hinge upon the sales of moderate to higher priced vehicles. On the
succeeding page is a table indicating potential for domestic car sales for 1999
for Advanced AutoPC systems (source: http://carpoint.msn.com).
1999 Projected Moderate to High
Priced Auto Sales
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Projected Unit Sales
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Auto Maker 1999 Cars over $30,000
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General Motors Corporation 9,239,000 369,560
Ford Motor Company 6,943,000 277,720
Chrysler Corporation 4,789,000 191,560
With 54 million automobiles and trucks manufactured each year, Microsoft, Intel
and industry analysts agree that the AutoPC market is the next area of explosive
growth for PC-based hardware and software in which Intelliworxx plans to
participate.
The Company also intends to target the Recreational Vehicle ("RV") market for
AutoPC sales. Fleetwood, Winnebago, Skyline and other RV companies sell over
250,000 vehicles each year in the United States alone.
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MARKETING STRATEGY
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The Company markets to Original Equipment Manufacturers ("OEMs") and Value Added
Resellers ("VARs") for whom the Intelliworxx advanced mobile computing solutions
provide sustainable competitive advantages. Targeted industries include
automotive, healthcare, aviation, military (personal combat data units, vehicle
mounted electronics, training, maintenance and repair), public safety and
commercial equipment maintenance and repair (aircraft, motor vehicle,
industrial, plant, etc.). The target OEMs in these industries are the final
equipment assemblers or system integrators themselves. The appeal of these
targets is high margins, substantial but manageable volumes and minimal
competition.
By targeting large, established OEMs and VARs, the Company does not need to
staff a large sales department itself. In effect, the OEM and VAR sales forces
become the Company's "virtual" sales force. Intelliworxx presently has OEM or
VAR relationships with 15 such companies. Another advantage to these
relationships is that our OEM and VAR partners are directly responsible for
supporting the end user. This frees the Company from staffing a large customer
support department and allows it to focus on solutions for its target markets.
COMPETITION
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The computer technology industry is highly competitive and fragmented, and the
Company may face significant competition in each of its product markets. The
Company's competitors differ depending on product type, geographic market, and
application type. Several of the Company's competitors are well established and
have greater assets and financial resources than the Company, and have larger
marketing and research and development budgets. Several of the Company's
competitors also have larger service organizations.
Competition in the Company's markets is influenced by technical capacity,
customer support, product longevity, supplier stability, breadth of product
offerings, reliability, performance, and price. The Company believes that it can
successfully compete in its chosen market niches due to its proprietary
mentoring software and methodology, advanced technological capabilities, quick
and efficient product development and its ability to meet customer price points.
In addition, the Company's marketing strategy focuses on becoming a supplier to
would be competitors. In this way the Company concentrates on core technology,
product development and efficient manufacturing. The Company also can utilize
the sales force and established relationships of these customers who otherwise
would be competitors.
WORLD WIDE WEB
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The Company has a World Wide Web home page at http://www.intelliworxx.com. This
web page contains basic information about the Company, its latest news,
technology, products, application notes, links to partners, special programs,
investor information and frequently asked questions, as well as how to contact
the Company. The Intelliworxx web page is also listed with many of the most
popular web search engines. The Company has identified many sales leads and beta
testers through use of the web.
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TRADEMARKS
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The Company's intellectual property attorneys are actively pursuing the
registration for the following trademarks:
1 VoiceTablet
2 Interactive Multi Media Mentoring
3 iM3
4 Mentorworxx
5 Mentorworxx Explore
6 Mentorworxx Create
7 Mentorworxx Convert
8 Intelliworxx
9 VoiceAudio
10 UCM
11 WaveLink
PATENTS
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The Company's success may depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and to
operate without infringing upon the patent or other proprietary rights of others
and without breaching or otherwise losing rights in the technology licenses upon
which any Company products are based. The Company has filed for two patents and,
where appropriate, the Company will in the future apply for patents for certain
key technology. Patent applications filed by the Company or by the Company's
licensors may not result in issued patents or the scope and breadth of any
claims allowed in any patents issued to the Company or its licensors may not
exclude competitors or provide competitive advantages to the Company. In
addition, patents issued to the Company or its licensors may not be held valid
if subsequently challenged or others may claim rights in the patents and other
proprietary technologies owned or licensed by the Company. Others may have
developed or may in the future develop similar products or technologies without
violating any of the Company's proprietary rights. Furthermore, the Company's
loss of any license to technology that it now has or acquires in the future may
have a material adverse effect on the Company's business, operating results and
financial condition.
Patent applications in the U.S. are currently maintained in secrecy until
patents are issued. In foreign countries, this secrecy is maintained for a
period of time after filing. Accordingly, publication of discoveries in the
scientific literature or of patents themselves or laying open of patent
applications in foreign countries tends to lag behind actual discoveries and
filing of related patent applications. Due to this factor and the large number
of patents and patent applications related to mobile computing technologies and
other products and technologies that the Company is pursuing, comprehensive
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patent searches and analyses associated with mobile computing and other products
and technologies that the Company is pursuing are often impractical or not
cost-effective. As a result, the Company's patent and literature searches cannot
fully evaluate the patentability of the claims in the Company's patent
applications or whether materials or processes used by the Company for its
planned products infringe or will infringe upon existing technologies described
in U.S. patents or may infringe upon claims in patent applications made
available in the future. Because of the volume of patents issued and patent
applications filed relating to mobile computing technologies and other products
and technologies that the Company is pursuing, the Company believes there is a
significant risk that current and potential competitors and other third-parties
have filed or will file patent applications for, or have obtained or will
obtain, patents or other proprietary rights relating to materials, products or
processes used or proposed to be used by the Company. In any such case, to avoid
infringement, the Company would have to either license such technologies or
design around any such patents. The Company may be unable to obtain licenses to
such technologies or, if obtainable, such licenses may not be available on terms
acceptable to the Company or the Company may be unable to successfully design
around these third-party patents.
Participation in litigation or patent office proceedings in the U.S. or other
countries, which could result in substantial cost to and diversion of effort by
the Company, may be necessary to enforce patents issued or licensed to the
Company, to defend the Company against infringement claims made by others or to
determine the ownership, scope or validity of the proprietary rights of the
Company and others. The parties to such litigation may be larger, better
capitalized than the Company and better able to support the cost of litigation.
An adverse outcome in any such proceedings could subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties and/or require the Company to cease using certain
technologies, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.
GOVERNMENT APPROVALS
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None of the Company's products or services presently require any government
approval. The Company does not know of any existing or pending governmental
regulations that would have an effect on its business.
SERVICE AND SUPPORT
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The Company demands that its resellers and OEM partners have complete service
and support in place for their end users including telephone help desk centers
and depot repair centers. The Company also has a range of personnel, from
technical customer service representatives to program managers to design
engineers, who support the resellers and OEM partners with customer service
issues.
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SEASONALITY
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The Company does not experience seasonal up or down turns.
SOURCES AND AVAILABILITY OF RAW MATERIALS
- -----------------------------------------
The Company relies on the availability of Microsoft operating systems and Intel
microprocessors in order to manufacture its products. In addition, there are a
number of other electronic components the Company includes in its designs. These
components are available from a wide range of vendors, none of which are deemed
to be a critical single source supplier.
WORKFORCE
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The Company currently employs 42 individuals in the following functional areas:
20 employees in Engineering and Technical Support, seven employees in Sales and
Marketing, seven employees in Administration and eight employees in
Manufacturing and Materials. The Company does not have a collective bargaining
agreement with its employees and considers its relationship with its employees
to be excellent.
Item 2. DESCRIPTION OF PROPERTY
The Company's principal office is located at 1819 Main Street, Sarasota, Florida
34236, where it leases approximately 20,000 square feet under a lease agreement
that expires in September 2004.
The Company also leases approximately 1,000 square feet of office space in
Decatur, Alabama and 300 square feet of office space in Silver Spring, Maryland.
Both leases are for duration of 12 months, with the terminations in December
2000 and February 2001 respectively.
The Company believes that its facilities are adequate for its present operations
and its anticipated operations during the next twelve months.
Item 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to litigation, which arises, in the
normal course of business. There is no litigation pending, or to the Company's
knowledge, threatened that, if determined adversely, would have a material
adverse effect upon the business or financial condition of the Company.
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Certain officers of the Company and the Company are defendants in a lawsuit
filed in the Federal District Court for the Middle District of Florida. The
plaintiff in the action claims an unspecified amount of damage resulted from the
alleged misappropriation of intellectual and other property and the alleged
breach of employment agreements between the plaintiffs and officers in question.
Intelliworxx has filed a counterclaim against the plaintiffs seeking damages in
excess of $3,000,000 for interfering with advantageous business relationships
and interference with contractual relations. The Company has been advised by its
intellectual property experts that the plaintiffs' allegations of
misappropriated technology or intellectual property are unsupportable. The
Company has been advised by its litigation counsel that the litigation will not
result in any material liability to Intelliworxx or to the officers in question.
As a precaution, the officers in question have entered into indemnification
agreements with the Company to mitigate any effect that the action may have on
the Company. The action is in the final stages of discovery.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of the Company's security holders since the
filing of the Company's Form 10-SB/A Amendment No. 1 on November 30, 1999.
14
<PAGE>
PART II
Item 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Company's common stock is listed on the OTC Bulletin Board under the trading
symbol "IWXX." The Company's common stock has been traded since December 1998.
Currently, the following brokerage firms are making a market in the Company's
common stock: Knight Securities, Inc., Sharpe Capital, Inc., Hill Thompson Magid
& Co, Inc., Paragon Capital Corporation, Herzog Heine Geduld, Inc., WM. V.
Frankel & Co., Fleet Securities, Wien Securities Corp. and GVR Company.
The following table sets forth for the period indicated, the range of high and
low closing bid quotations per share. These quotations represent inter-dealer
prices, without retail markups, markdowns or commissions and may not necessarily
represent actual transactions.
Price per Share
--------------------
Period Ended High Low
- ------------ ---- ---
1998
- ----
Fourth Quarter $ 5.75 $ 2.00
1999
- ----
First Quarter $ 6.75 $ 5.25
Second Quarter $ 7.25 $ 6.13
Third Quarter $ 7.75 $ 6.03
Fourth Quarter $ 12.63 $ 6.00
The Company has in excess of 700 shareholders of record. The Company has not
paid, nor does it anticipate paying dividends in the foreseeable future.
DESCRIPTION OF SECURITIES
- -------------------------
Common Stock
- ------------
The Company is authorized to issue 100,000,000 shares of common stock, no par
value. The holders of each share are entitled to one vote for each share held
and are entitled to dividends when and as declared by the Board of Directors. At
December 31, 1998, common shares issued and outstanding totaled 14,066,666. At
December 31, 1999, common shares issued and outstanding totaled 15,199,166. As
of March 27, 2000, common shares issued and outstanding totals 17,189,771.
15
<PAGE>
Options granted on the common stock of the Company to employees under the 1999
Equity Incentive Plan total 985,393 at an average exercise price of $6.19. No
shares have been issued for the options and no other options have been granted.
Preferred Stock
- ---------------
The Company is authorized to issue 25,000,000 shares of preferred stock, no par
value, which may be issued in classes or series with various rights and
designations to be determined by the Board of Directors. Each share of preferred
stock is entitled to dividends when and if declared by the Board of Directors.
To date, no preferred shares have been issued.
RECENT SALES OF UNREGISTERED SECURITIES
- ---------------------------------------
In December 1998, the Company issued 12,000,000 shares to shareholders of Old
Intelliworxx in connection with the acquisition of the Company. The issuance was
a non-public offering exempt from registration pursuant to Section 4(2) of the
Act.
From December 12, 1998 through February 19, 1999, the Company sold an aggregate
of 2,000,000 shares to five accredited investors for an aggregate offering price
of $1,000,000 or $0.50 per share. The offering was made pursuant to Regulation
D, Rule 504 of the Securities Act of 1933.
On February 12, 2000, the Company issued 1,127,047 shares of its common stock
and warrants to purchase 65,725 shares of the Company's common stock in
satisfaction of notes payable and accrued interest totaling approximately
$3,945,000. Each warrant entitles the holder to purchase a share of the
Company's common stock at a rate of $3.00 per share. The warrants expire on
January 12, 2005. The convertible instruments were issued to 41 individuals,
trusts and companies in a non-public offering exempt from registration pursuant
to Section 4(2) of the Act and the conversion of the instruments is exempt from
registration pursuant to Section 3(a)(9) of the Act.
On March 3, 2000, the Company completed a private placement offering consisting
of an aggregate of 863,558 shares of common stock of the Company and warrants to
purchase an aggregate of 144,116 shares of the Company's common stock. The
offering price was $3.50 per share and the Company's net proceeds to the Company
totaled approximately $2,988,000. Each warrant entitles the holder to purchase a
share of the Company's common stock at a rate of $3.00 per share. The warrants
expire on January 12, 2005. The offering was sold to 23 accredited investors in
a non-public offering exempt from registration pursuant to Section 4(2) and Rule
506 of Regulation D of the Act. In connection with the sale of the shares and
warrants, the Company agreed to include the common shares and warrants in a
registration statement with the Securities and Exchange Commission on or before
July 1, 2000.
16
<PAGE>
Item 6. Selected Financial Data
The following selected financial data for the years ending December 31, 1999 and
1998, are audited and have been derived form the Company's financial statements.
This information should be read in conjunction with the financial statements and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
From Inception
Year Ending (February 12, 1998) to
December 31, 1999 December 31, 1998
----------------- -----------------
Statement of Operations Data
- ----------------------------
Total Revenue $ 1,986,839 $ 994,448
Operating Loss $(3,723,392) $(1,366,823)
Net Loss $(4,208,425) $(1,453,240)
Net Loss Per Share $ (0.28) $ (0.11)
Balance Sheet Data
- ------------------
Current Assets $ 1,662,759 $ 549,053
Total Assets $ 2,436,243 $ 880,515
Current Liabilities $ 6,146,266 $ 1,418,907
Total Liabilities $ 6,168,060 $ 1,418,907
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Introduction
- ------------
This discussion summarizes the significant factors affecting the operating
results, financial condition and liquidity/cash flow of the Company during the
period from Inception (February 12, 1998) to December 31, 1998 and the twelve
months ended December 31, 1999. This item should be read in conjunction with the
financial statements and notes hereto included.
Note that, since, for accounting purposes the transaction in which the Company
merged with Old Intelliworxx was treated as a reverse merger, the results of the
Company's operations prior to the inception of Old Intelliworxx are not included
in the financial statements and are not discussed herein because they are
immaterial.
17
<PAGE>
Results of Operations
- ---------------------
The Period from Inception of Old Intelliworxx (February 12, 1998)
to December 31, 1998
- -----------------------------------------------------------------
Revenue for 1998 totaled approximately $994,000 consisting primarily of new
product development contracts with a major US automotive manufacturer and with
the US Navy, administered by the National Committee for Manufacturing Sciences,
Inc. ("NCMS"). The attendant cost of revenue totaling approximately $654,000
consisted of direct development costs incurred by the Company's hardware and
software engineering staff.
Selling, general and administrative expenses for 1998 totaled approximately
$1,376,000. These costs provided the basis for the Company's infrastructure that
will maintain the selling and general expenses into the future. Research and
Development expenses for 1998 totaled approximately $265,000.
Depreciation, amortization and interest expense totaled approximately $153,000
in 1998.
The Twelve Months Ended December 31, 1999
- -----------------------------------------
Revenue for 1999 is approximately $1,987,000, consisting of software and
hardware development revenue of approximately $1,232,000 and product sales of
$755,000. The Company began shipping product in February 1999. Both software and
hardware development revenues and product sales in 1999 compare favorably to the
results in 1998. The increase of approximately $993,000 represents a 100%
improvement in revenue as compared to 1998. Cost of revenue for 1999 is
approximately $1,784,000, which represents an increase over 1998 of
approximately $1,130,000 or 173%. This increase is reflective of the direct
materials costs incurred, the addition of manufacturing personnel and increased
allocation of research and development as projects moved into production.
Selling, General and Administration ("SG&A") totals approximately $2,370,000.
The increase of approximately $998,000 or 72% is primarily due to growth from a
start-up in 1998 (seven SG&A employees at December 31, 1998) to its current
staffing of sixteen SG&A at year-end 1999. Additionally, the Company expanded
its office space during the last quarter of 1999, increasing its lease expense
by approximately $60,000 per quarter. Research and Development expense totaled
approximately $1,401,000 for 1999. This increase of approximately $1,137,000 or
429% reflects the Company emphasis in the areas of hardware and software
development. During 1999, the Company added six development engineers to greatly
increase its capabilities.
Depreciation and Amortization and Interest Expense for 1999 total approximately
$650,000, which is a $497,000 or 325% increase over 1998. This increase is
directly related to the Company's use of high interest, short-term credit
facilities to fund the operation.
18
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company has financed its operations and capital expenditures primarily
through cash flow from operations, short-term credit facilities and the sale of
the Company's common stock. The Company has also used long-term, capitalized
lease transactions to finance capital expenditures. For 1998, the Company's
primary source of cash was from financing activities that totaled approximately
$888,430. Of this amount, proceeds from the issuance of promissory notes totaled
approximately $740,681 and proceeds from the sale of its common stock totaled
$250,100. For 1999, the Company's primary source of cash was also from financing
activities. Proceeds from the issuance of promissory notes totaled approximately
$4,563,748 while proceeds from the sale of common stock totaled $750,000.
The Company's cash totaled approximately $77,000 and $461,000 on December 31,
1998 and December 31, 1999 respectively. Capital expenditures for 1998 totaled
approximately $374,000, of which approximately $210,000 is computers and related
hardware and software principally used in the Company's research and development
efforts. For 1999, the Company spent an additional $252,000 on capital
expenditures, including those expenditures financed with capitalized lease
obligations totaling $87,000. Such capitalized leases were entered into to
acquire substantially all of the Company's office furniture.
In February 2000, the Company completed a private placement offering in which
proceeds to the Company totaled approximately $2,988,000 from the sale of
863,558 shares of its common stock and 114,116 warrants to purchase common stock
of the Company.
Also in February, promissory note holders converted approximately $3,945,000 in
short-term debt in exchange for 1,127,407 shares of common stock.
Simultaneously, the Company repaid certain other promissory note holders
resulting in a reduction of approximately $1,400,000 in short-term debt. As a
result of the conversions and debt repayment the Company greatly reduced its
monthly interest payments. Although there can be no assurance of continued debt
and/or equity financing, the Company expects to be able to meet its debt
obligations and to finance operations and capital expenditures through
internally generated funds, future borrowing (including amounts expected to be
available under revolving bank credit facilities, purchase order and accounts
receivable financing and capital lease transactions) and capital stock
transactions to possibly additional private placements and a registered
offering.
During the next twelve months, the Company does not expect to make any
significant purchases of plant or equipment.
The Company anticipates its number of employees to increase from 40 to 75 during
the next twelve months.
19
<PAGE>
Impact of Year 2000 Issues
- --------------------------
In 1999 Intelliworxx conducted a review of its business systems and its products
in an attempt to identify ways in which its systems could be affected by Year
2000 issues. Based on this review, we found that our internal information
systems and all of our product offerings were Year 2000 compliant.
All internal information systems of the Company and all software used in
products of the Company were purchased in 1998 or later, well after its software
vendors stated that their products were Year 2000 compliant.
All corporate information systems and all employee computers were backed up to
tape at the end of the day on December 31, 1999 and proper functioning was
tested on January 1, 2000. No Year 2000 problems were identified and we expect
no Year 2000 related problems to arise in the future.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
20
<PAGE>
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
Name Age Position
- ---- --- --------
Kevin B. Rogers 45 Chairman of the Board, President, Chief
Executive Officer
Michael P. Jonas 37 Executive Vice President, Director
Christopher J. Floyd 37 Vice President Finance, Chief Financial
Officer, Treasurer, Director
Donald H. Pound, Jr. 40 Vice President Engineering, Director
Vincent D. Reynolds 40 Vice President Software Technology
James L. Roach 47 Vice President Mentoring Systems
Donald R. Mastropietro 51 Corporate Secretary, Director Accounting &
Administration
John W. English 67 Director
Earl B. Fowler 74 Director
Oscar J. Williams 56 Director
Kevin B. Rogers - Chairman of the Board, President, and Chief Executive Officer
- - Mr. Rogers has served as Chairman of the Board, President and Chief Executive
Officer of Intelliworxx since Old Intelliworxx was organized in 1998. From 1995
to 1997, Mr. Rogers served as President of Interactive Solutions, Inc., a
company he founded to develop and manufacture voice activated, wearable computer
technology. In 1993 Mr. Rogers founded RiverBend Technologies, Inc. to develop
and market products for the healthcare and restaurant industries. He served as
its President and CEO until 1995 and sold RiverBend in 1996. From 1990 to 1993
Mr. Rogers served as partner and Chief Designer for Universal Technologies,
Inc., creating integrated Point of Sale, outdoor video ordering and paperless
back office database systems. Mr. Rogers graduated in 1980 from the University
of Kentucky with a Bachelor of Science in Psychology. In 1983, he earned a
Master of Arts in Psychology from University of California, Los Angeles
concentrating in Human Factors Engineering and Interface Design.
21
<PAGE>
Michael P. Jonas - Executive Vice President, Director - Mr. Jonas has served as
Executive Vice President of Intelliworxx since Old Intelliworxx was organized in
1998 and was elected as a director on April 3, 1998. From 1993 to 1998, Mr.
Jonas worked for Teltronics, Inc., an electronic manufacturing services
corporation in the positions of Manager of Contract Manufacturing, Director of
Contract Manufacturing and finally, as Vice President of Contract Manufacturing.
From 1989 to 1993, Mr. Jonas worked for EMI/ECS, Inc., serving first as Director
of Marketing and Sales and later as Vice President of Operations. Mr. Jonas
graduated in 1984 with a Bachelor of Engineering from Stevens Institute of
Technology. He received his Master of Business Administration in 1993 from
Kensington University.
Christopher J. Floyd - Vice President Finance, Chief Financial Officer,
Treasurer and Director - Mr. Floyd has served as Vice President Finance, Chief
Financial Officer, Treasurer and Director of Intelliworxx since July 20, 1998.
From 1996 to 1998 Mr. Floyd served as President of Floyd Media, Inc., a
privately held consulting firm. From 1993 to 1996, Mr. Floyd served as partner,
Executive Vice President and Chief Financial Officer for Microflex
International, Inc., a computer reseller and network services Company in
Lakeland, Florida. From 1991 to 1993 Mr. Floyd served as an auditor and
management consultant for Ernst & Young in Berlin, Germany. Mr. Floyd graduated
in 1986 from the University of South Florida with a Bachelor of Science in
Electrical Engineering degree. He received his Master of Business Administration
degree in 1991 from The Wharton School in Philadelphia.
Donald H. Pound, Jr. - Vice President Engineering and Director - Mr. Pound has
served as Vice President Engineering of Intelliworxx since Old Intelliworxx was
organized in 1998 and was elected as a Director on April 3, 1998. He served as
Secretary from the organization of Old Intelliworxx until March 21, 2000. From
1996 through 1997 he served as Director of Electronics Engineering for
Interactive Solutions, Inc., a developer and manufacturer of voice activated,
wearable computer technology. From 1992 until 1996, Mr. Pound was employed in
the contract electronic design industry working for ASIC Designs, Inc. in
Naperville, IL, designing mobile computers. Mr. Pound graduated in 1983 from
Purdue University with a Bachelor of Science in Electrical Engineering.
Vincent D. Reynolds - Vice President Software Technology - Mr. Reynolds has
served as Vice President Software Technology of Intelliworxx since Old
Intelliworxx was organized in 1998 and served as a Director from April 3, 1998
until March 21st, 2000. From 1996 to 1997 Mr. Reynolds was Director of Software
Technology for Interactive Solutions, a developer and manufacturer of voice
activated, wearable computer technology. From 1995 to 1996 Mr. Reynolds served
as Programmer/Analyst for Key Communications, a company that provides medical
lab systems. From 1993 to 1995 Mr. Reynolds worked as Senior Technologist at
RiverBend Technologies, a company founded by Mr. Rogers to develop and market
products for the healthcare and restaurant industries. In 1993 Mr. Reynolds
served as Senior Software Developer for Rally's Hamburgers developing a
multimedia order confirmation system.
22
<PAGE>
James L. Roach - Vice President Mentoring Systems - Mr. Roach has served as Vice
President Mentoring Systems since January 1999. From 1991 to 1998 Mr. Roach was
employed at General Motors Corporation as the Senior Project Engineer in the
Service Research department developing and field-testing new technologies for
improving the diagnostic abilities of dealership technicians. From 1988 to 1991
Mr. Roach worked as an advanced service readiness engineer for Saturn Corp. Mr.
Roach graduated in 1981 from Midlands Technical College with a degree in
Electronics Engineering Technology
Donald R. Mastropietro - Corporate Secretary and Director Accounting and
Administration - Mr. Mastropietro has served as Director Accounting and
Administration since May 19, 1999 and Corporate Secretary of the Company since
his appointment on March 21, 2000. From 1996 until he joined the Company, Mr.
Mastropietro worked as a Financial Consultant for several public and private
companies. From 1993 to 1996 he served as Chief Financial Officer of EVRO
Corporation. From 1972 to 1993, Mr. Mastropietro held several accounting
positions at Teltronics, Inc, serving the last five years as Vice President of
Finance, Chief Financial Officer, Secretary and Treasurer. Mr. Mastropietro
graduated in 1970 from Ohio Northern University with a BA in Business
Administration with an Accounting concentration.
John W. English - Director - Mr. English was elected as a Director of the
Company on March 21, 2000. From November 1981 until March 1993, Mr. English
served as Vice President and Chief Investment Officer of the Ford Foundation.
From October 1975 to March 1993he served as Director of Investment Management
for AT&T in New York City. Mr. English currently serves on numerous national and
international boards and investment committees. He is Chairman of the Board of
H.S.B.C. Corporation's China Fund, Inc. (NYSE: HBC) and State Street Bank's
Select Sector SPDR Trust (AMEX: SPY). He also serves as a Trustee of the
Northern Trust Company's Institutional Funds, Washington Mutual's WM Group of
Funds (NYSE: WM), and is a Director of A.L.T. Films, Inc. Mr. English is also
serves on the General Board Of Pensions and Health Benefits of the United
Methodist Church, the United Board for Christian Higher Education in Asia, and
the Board of Advisors of the Templeton Foundation's Prizes for Progress in
Religion.
Earl B. Fowler - Director - Mr. Fowler was elected as a Director of the Company
on March 21, 2000. From July 1985 to present, Admiral Fowler has been President
and owner of Fowler International Corporation, a consulting firm he founded with
operations in the U.S. and Taiwan. From March 1980 to June 1985, Admiral Fowler
served as Commander Naval Sea Systems Command and Chief Engineer of the Navy,
responsible for a 110,000 person organization with an annual budget exceeding
$20 billion dollars. From August 1976 to March 1980, he served as Commander
Naval Electronic Systems Command, responsible for design, development and
procurement of communications, radar, surveillance and space systems. Today he
is Director and Chairman of the Audit Committee for Foundation Health Systems
Corporation (NYSE: FHS), a health maintenance organization and Chairman of the
Board for SPD Technologies, Inc., a circuit breaker and switch gear
manufacturer.
23
<PAGE>
Oscar J. Williams - Mr. Williams was elected as a Director of the Company on
March 21, 2000. In 1999 Mr. Williams founded Intellysis Capital Advisors LLC, a
venture fund management company dedicated to the development of high-tech
start-up companies in the Telecommunications and Internet area. From 1998 to
1999 he cofounded and served as Vice President Finance and Chief Financial
Officer of 2nd Century Communications, Inc., a new breed of Competitive Local
Exchange Carrier using convergence of voice and data over a single protocol,
where he raised $25 million in seed capital. From 1991 to 1998, Mr. Williams
served as Vice President of Finance and Chief Financial Officer at Intermedia
Communications, Inc. (NasdaqNM: ICIX) where he raised $750 million in debt and
equity and was instrumental in guiding the company from a market value of
several million to over two billion in four years.
The Company provides indemnification of its officers and directors from personal
liability for their actions, conduct and recommendations taken or made in good
faith in the exercise of their business judgment under the given circumstances,
all in accordance with applicable sections of the statutes of the State of
Florida.
Item 10. EXECUTIVE COMPENSATION
The Summary Compensation Table below details all plan and non-plan compensation
awarded to, earned by, or paid to the named executive officer in 1998 and in
1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Annual Compensation(1) Long-Term Compensation
---------------------- ----------------------
Awards Payouts
------ -------
Securities
Name Other Restricted Underlying All Other
and Annual Stock Options/ LTIP Compen-
Principal Salary Bonus Compen- Award(s) SARs Payouts sation
Position Year ($) ($) sation ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kevin B. Rogers 1999 124,615 0 0 0 0 0 0
President, Chief
Executive Officer 1998 90,000 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Salary for 1998 is from February 1 through December 31. Salary for 1999 is
from January 1 through December 31.
1999 EQUITY INCENTIVE PLAN
- --------------------------
On February 25, 1999, the Board of Directors of the Company adopted the
Intelliworxx, Inc. 1999 Equity Incentive Plan (the "Plan") that was subsequently
approved by a majority of the shareholders on March 19, 1999. The Plan
designated an Equity Incentive Committee (the "Committee") appointed by the
Board of Directors and authorizes the Committee to grant or award to eligible
participants of the Company and its subsidiaries and affiliates, until February
25, 2009, stock options, stock appreciation rights, restricted stock or deferred
stock awards for up to 3,000,000 shares of the common stock of the Company.
24
<PAGE>
The following is a general description of certain features of the Plan that is
annexed in this filing as an exhibit.
1. Eligibility. Officers, employees and consultants of the Company, its
subsidiaries and its affiliates who are responsible for the
management, growth and profitability of the business of the Company,
its subsidiaries and its affiliates, are eligible to be granted stock
options, stock appreciation rights, and restricted or deferred stock
awards under the Plan. Directors are eligible to receive Director
Stock Options.
2. Administration. The Committee administers the Plan. The Committee has
full power to select, from among the persons eligible for awards, the
individuals to whom awards will be granted, to make any combination of
awards to any participants and to determine the specific terms of each
grant, subject to the provisions of the Plan.
3. Stock Options. The Plan permits the granting of non-transferable stock
options that are intended to qualify as incentive stock options
("ISO's") under Section 422 of the Internal Revenue Code of 1986 and
stock options that do not qualify ("Non-Qualified Stock Options"). The
option exercise price for each share covered by an option shall be
determined by the Committee, but shall not be less than 80% of the
fair market value of a share on the date of grant. The term of each
option will be fixed by the Committee, but may not exceed 10 years
from the date of the grant in the case of an ISO or 10 years and two
days from the date of the grant in the case of a Non-Qualified Stock
Option.
4. Stock Appreciation Rights. Non-transferable stock appreciation rights
("SAR's") may be granted in conjunction with options, entitling the
holder upon exercise to receive an amount in any combination of cash
or unrestricted common stock of the Company (as determined by the
Committee), not greater in value than the increase since the date of
grant in the value of shares covered by such right. Each SAR will
terminate upon the termination of the related option.
5. Restricted Stock. Restricted shares of the common stock may be awarded
by the Committee subject to such conditions and restrictions as they
may determine, which may include the attainment of performance goals.
The Committee shall also determine whether a recipient of restricted
shares will pay a purchase price per share or will receive such
restricted shares without any payment in cash or property.
25
<PAGE>
6. Deferred Stock. Deferred stock awards may also be made under the Plan.
These are non-transferable awards entitling the recipient to receive
common stock of the Company without any payment in cash or property in
one or more installments at a future date or dates, as determined by
the Committee. Receipt of deferred stock may be conditioned on such
matters as the Committee shall determine, including continued
employment and attainment of personal goals.
7. Loan Provisions. The Plan authorizes the Company, with the consent of
the Committee, to make or arrange for loans to employees in connection
with the exercise of options, or the payment of any purchase price for
restricted stock granted under the Plan, or the payment of Federal and
State income taxes resulting from the granting or exercising of
options or other awards under the Plan. The Committee has full
authority to decide whether to make such loans and to determine the
term and provisions of any such loans including interest charged and
repayment terms.
8. Transfer Restrictions. Grants under the Plan are not transferable
except, in the event of death, by will or by the laws of descent and
distribution.
9. Termination of Benefits. In certain circumstances, such as death,
disability, and termination without cause; beneficiaries in the Plan
may exercise options and SAR's and receive the benefits of restricted
stock grants following their termination or their employment or tenure
as a Director as the case may be.
10. Change of Control. The Plan provides that (a) in the event of a
"Change of Control" (as defined in the Plan), unless determined by the
Committee prior to such Change in Control, or (b) to the extent
expressly provided by the Committee at or after the time of grant, in
the event of a "Potential Change of Control" (as defined in the Plan),
(i) all stock options and related SAR's (to the extent outstanding for
at least six months) will become immediately exercisable; (ii) the
restrictions and deferral limitations applicable to outstanding
restricted stock awards and deferred stock awards will lapse and the
shares in question will be fully vested; and (iii) the value of such
options and awards, to the extent determined by the Committee, will be
cashed out on the basis of the highest price paid (or offered) during
the preceding 60-day period, as determined by the Committee. The
Change of Control and Potential Change of Control provisions may serve
as a disincentive or impediment to a prospective acquirer of the
Company and, therefore, may adversely affect the market price of the
common stock of the Company.
11. Amendment of the Plan. The Plan may be amended from time to time by
majority vote of the Board of Directors provided as such amendment may
affect outstanding options without the consent of an option holder nor
may the plan be amended to increase the number of shares of common
stock subject to the Plan without stockholder approval.
26
<PAGE>
On February 25, 1999, the Company granted incentive stock options for 257,572
shares at a purchase price of $6.00 per share and granted non-incentive stock
options for 53,250 shares at a purchase price of $6.00 per share. On October 26,
1999, the Company granted incentive stock options for 264,548 shares at a
purchase price of $6.70 and granted non-incentive stock options for 226,524
shares at a purchase price of $6.70. On December 6, 1999, the Company
non-incentive stock options for 244,000 shares at a purchase price of $5.50.
All options granted are exercisable as follows: 50% on the first anniversary of
the option grant date and 25% on each subsequent anniversary of the option grant
date. No options were exercisable under the Plan until February 25, 2000. As of
March 27, 2000, no options have been exercised and no underlying shares have
been issued.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Title of Amount Percent of
Class Name and Address of Owner Owned Class (5), (6)
- ----- ------------------------- ----- --------------
Common Kevin B. Rogers, Chairman, President, Chief
Executive Officer, Chairman of the Board
1819 Main St., Eleventh Floor
Sarasota, FL 34236
1,823,667 10.61%
Common Michael P. Jonas, Executive Vice
President, Director
1819 Main St., Eleventh Floor
Sarasota, FL 34236 1,815,667(1) 10.56%
Common Christopher J. Floyd, Vice President
Finance, Treasurer, Chief Financial Officer,
Director
1819 Main St., Eleventh Floor
Sarasota, FL 34236 1,878,667(2) 10.93%
Common Donald H. Pound, Jr., Vice President
Engineering, Director
1819 Main St., Eleventh Floor
Sarasota, FL 34236 1,823,667 10.61%
27
<PAGE>
Common Vincent D. Reynolds, Vice President
Software Technology
1819 Main St., Eleventh Floor
Sarasota, FL 34236 1,823,667 10.61%
Common James L. Roach, Vice President
Mentoring Systems
1819 Main St., Eleventh Floor
Sarasota, FL 34236 375,000 *
Common Donald R. Mastropietro, Corporate
Secretary
1819 Main St., Eleventh Floor
Sarasota, FL 34236 56,860(6) *
Common Ian N. Whitehead
1819 Main St., Eleventh Floor
Sarasota, FL 34246 1,463,667(3) 8.51%
Common Oscar J. Williams, Director
9252 N. 56th Street, 2nd Floor
Tampa, FL 33617 292,462(4) *
Common John W. English
988 Boulevard of the Arts, Suite 216
Sarasota, FL 34236 0 *
Common Earl B. Fowler
2311 Crystal Drive, Suite 500
Arlington, VA 22202 0 *
All Officers and Directors as a group (10 persons) 9,889,657 57.53%
- ----------
(1) Mr. Jonas has a beneficial ownership in 937,500 shares of common stock of
the Company, which are owned by his wife. The number of shares owned by
Michael P. Jonas is net of 8,000 shares of common stock of the Company
transferred to family members of which he has no control.
(2) Christopher J. Floyd is Co-Trustee of the Floyd Family Trust that owns
55,000 shares of common stock of the Company.
(3) The number of shares owned by Ian N. Whitehead are net of 360,000 shares of
common stock of the Company transferred by Mr. Whitehead to irrevocable
Trusts in which he has no beneficial interests.
(4) The number of shares owned by Oscar J. Williams are beneficially owned by
virtue of his partnership interest in Intellysis Capital Partners, LLC.
(5) There were 17,189,771 shares of common stock outstanding as of March 27,
2000.
28
<PAGE>
(6) Percent of Class Owned does not reflect the potential exercise of any of
the 985,393 employee stock options currently outstanding of which 156,158,
222,190 and 122,000 can be exercised after February 25, 2000, October 26,
2000 and December 6, 2000 respectively. As of March 27, 2000, no options
have been exercised. Donald R. Mastropietro owns options for 90,000 shares,
50% of which are exercisable after October 26, 2000. No other officers,
directors, or security holders listed in the table above own any warrants,
options or rights. The Company has not issued any warrants, options or
other rights except to its employees through the 1999 Equity Incentive Plan
as described next.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Christopher J. Floyd is Co-Trustee of the Floyd Family Trust that owns 55,000
shares of common stock of the Company.
29
<PAGE>
INDEX TO EXHIBITS
Exhibit Description of Document
- ------- -----------------------
2.0 Agreement and Plan of Reorganization by and among Outdoor Resorts,
Inc., Intelliworxx, Inc., and Kevin B. Rogers, Michael P. Jonas,
Donald H. Pound, Jr., Vincent D. Reynolds, Ian N. Whitehead, and
Christopher J. Floyd, the Shareholders of Intelliworxx, Inc., dated
November 23, 1998.(a)
3(i) Articles of Incorporation for Outdoor Resorts, Inc. (now known as
Intelliworxx, Inc. ) filed July 1, 1995.(a)
3(ii) Articles of Merger of Intelliworxx, Inc. with and into Outdoor
Resorts, Inc. and Articles of Amendment to Articles of Incorporation
of Intelliworxx, Inc., f/k/a Outdoor Resorts, Inc., filed December
1, 1998.(a)
3(iii) Bylaws.(a)
99.0 Form of Stock Certificate.(a)
99.1 Intelliworxx, Inc. 1999 Equity Incentive Plan.(a)
- ----------
(a) Filed as an exhibit to Report on Form 10-SB dated November 15, 1999.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
INTELLIWORXX, INC.
Date: March 29, 2000 by: /s/ Kevin B. Rogers
- -------------------- -----------------------
Kevin B. Rogers, Chairman of the Board,
Chief Executive Officer and President
Date: March 29, 2000 by: /s/ Christopher J. Floyd
- -------------------- ----------------------------
Christopher J. Floyd, Director, Chief
Financial Officer, Vice President Finance
and Treasurer
Date: March 29, 2000 by: /s/ Michael P. Jonas
- -------------------- ------------------------
Michael P. Jonas, Director and Executive
Vice President
Date: March 29, 2000 by: /s/ Donald H. Pound, Jr.
- -------------------- ----------------------------
Donald H. Pound, Jr., Director, Vice
President Engineering and Secretary
Date: by:
- -------------------- ----------------------------
Oscar J. Williams, Director
Date: by:
- -------------------- ----------------------------
Earl B. Fowler, Director
Date: by:
- -------------------- ----------------------------
John W. English, Director,
31
<PAGE>
INTELLIWORXX, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity (Deficit) F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
F-1
<PAGE>
ALESSANDRI & ALESSANDRI, P.A.
Certified Public Accountants
- --------------------------------------------------------------------------------
Independent Auditors' Report
Intelliworxx, Inc.
Sarasota, Florida
We have audited the accompanying balance sheets of Intelliworxx, Inc.
("Company"), as of December 31, 1999 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1999 and for the period since inception (February 12, 1998) to December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Intelliworxx, Inc., as of
December 31, 1999 and 1998, and the results of its operations and its cash
flows, for the year ended December 31, 1999 and for the period from inception
(February 12, 1998) to December 31, 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the notes to the
financial statements, the Company had a working capital deficit at December 31,
1999 and 1998, and has not achieved profitable operations. Accordingly, the
Company is dependent upon the attainment of profitable operations, loans, and
equity financing to conduct its operations, which situation raises substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
/s/ Alessandri & Alessandri, P.A.
---------------------------------
Alessandri & Alessandri, P.A.
March 23, 2000
- --------------------------------------------------------------------------------
Accountants & Consultants
5121 Ehrlich Road - Suite 107-B - Tampa, Florida 33624
(813) 969-1995 - Fax (813) 960-2740
Member: American Institute of Certified Public Accountants/Division of CPA Firms
Member: Florida Institute of Certified Public Accountants
F-2
<PAGE>
<TABLE>
<CAPTION>
INTELLIWORXX, INC.
BALANCE SHEETS
December 31, 1999 and 1998
- -------------------------------------------------------------------------------------------------------
ASSETS
1999 1998
------------ ------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 461,288 $ 76,526
Accounts receivable 144,151 238,846
Inventory (at acquisition cost-not in excess of market) 1,048,551 210,128
Prepaid expenses 8,769 23,553
------------ ------------
Total Current Assets 1,662,759 549,053
------------ ------------
EQUIPMENT AND FURNITURE
Equipment and furniture, at cost (net of depreciation of $199,560
and $55,800 respectively) 371,035 262,856
------------ ------------
OTHER ASSETS
Notes receivable & accrued interest 114,464
Software license, at cost (net of amortization of $22,000
and $11,000 respectively) 33,000 44,000
Software license deposit 150,000
Other 104,985 24,606
------------ ------------
Total Other Assets 402,449 68,606
------------ ------------
TOTAL $ 2,436,243 $ 880,515
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (including current portion of capitalized lease payable) $ 4,188,113 $ 538,350
Accounts payable 664,182 440,812
Wages and related taxes payable 916,110 272,199
Accrued interest 372,861 65,546
Other 5,000 102,000
------------ ------------
Total Current Liabilities 6,146,266 1,418,907
------------ ------------
LONG-TERM LIABILITIES:
Capitalized lease payable - less current portion 21,794
------------ ------------
Total Liabilities 6,168,060 1,418,907
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stock - No Par Value; 25,000,000 shares authorized; none issued
Common Stock - No Par Value; 100,000,000 shares authorized; shares
issued and outstanding 15,199,166 and 14,066,666 respectively 1,929,848 914,848
Retained Earnings (deficit) (5,661,665) (1,453,240)
------------ ------------
Total Stockholders' Equity (3,731,817) (538,392)
------------ ------------
TOTAL $ 2,436,243 $ 880,515
============ ============
See Notes to Financial Statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIWORXX, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDING DECEMBER 31, 1999, and
FOR THE PERIOD FROM INCEPTION (February 12, 1998) to DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------
Inception
Year ended (February 12, 1998) to
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
REVENUES $ 1,986,839 $ 994,448
COST OF SALES 1,783,747 653,995
------------ ------------
GROSS MARGIN 203,092 340,453
------------ ------------
OPERATING EXPENSES:
General and administrative 1,436,654 757,071
Sales and marketing 933,747 618,620
Research and development 1,401,323 264,785
Depreciation and amortization 154,760 66,800
------------ ------------
Total Operating Expenses 3,926,484 1,707,276
------------ ------------
LOSS BEFORE OTHER ITEMS (3,723,392) (1,366,823)
OTHER INCOME & EXPENSE
Interest and miscellaneous income 10,572 --
Interest expense (495,605) (86,417)
------------ ------------
NET LOSS $ (4,208,425) $ (1,453,240)
============ ============
Loss per share $ (0.28) $ (0.11)
Weighted average number of shares 15,104,791 13,211,273
See Notes to Financial Statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIWORXX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (February 12, 1998) TO December 31, 1999
- ------------------------------------------------------------------------------------
Retained
Common Stock Earnings
Shares $ (Loss)
------------ ------------ ------------
<S> <C> <C> <C>
Issuance of founders shares 999,900
Shares issued to reflect reverse
purchase acquisition 12,000,000 $ 564,748
Proceeds from issuance of common stock 1,000,100 250,100
Common stock issued for liabilities 66,666 100,000
Net Income (Loss) $ (1,453,240)
------------ ------------ ------------
Balance, December 31, 1998 14,066,666 914,848 (1,453,240)
Issuance of shares for notes payable 132,500 265,000
Sale of common stock 1,000,000 750,000
Net Income (Loss) (4,208,425)
------------ ------------ ------------
Balance, December 31, 1999 15,199,166 $ 1,929,848 $ (5,661,665)
============ ============ ============
See Notes to Financial Statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIWORXX, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDING DECEMBER 31, 1999, and
FOR THE PERIOD FROM INCEPTION (February 12, 1998) to DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------
Inception
Year ended (February 12, 1998) to
December 31, 1999 December 31, 1998
----------------- -----------------
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) From Operations: $(4,208,425) $(1,453,240)
Add: Non-Cash Items
Depreciation and amortization 154,760 66,800
Common stock issued affect reverse purchase acquisition 564,768
Adjustment of note payable (10,308)
Changes in Assets and Liabilities:
Notes receivable (114,464)
Accounts receivable 94,695 (238,846)
Inventory (838,423) (210,128)
Prepaid expenses 14,784 (23,533)
Deposits & other assets (230,379) (24,606)
Accounts payable 223,370 440,812
Wages and related taxes 643,911 272,179
Accrued interest 307,315 65,546
Other liabilities (97,000) 102,000
----------- -----------
Net Cash From (To) Operating Activities (4,060,164) (438,248)
----------- -----------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Acquisition of equipment and furniture (251,939) (318,656)
Purchase of software license (55,000)
----------- -----------
Net Cash From (To) Investing Activities (251,939) (373,656)
----------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from borrowings 4,563,748 740,681
Repayment of borrowings (616,883) (102,351)
Proceeds from sale of common stock 750,000 250,100
----------- -----------
Net Cash From (To) Financing Activities 4,696,865 888,430
----------- -----------
Increase (Decrease) in Cash 384,762 76,526
Cash Balance, Beginnng 76,526 --
----------- -----------
Cash Balance, Ending $ 461,288 $ 76,526
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 142,571 $ 86,417
See Notes to Financial Statements.
F-6
</TABLE>
<PAGE>
INTELLIWORXX, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
1. HISTORY AND OPERATIONS:
- --------------------------
Intelliworxx, Inc. ("Company"), was organized on February 12, 1998 under
the laws of the State of Florida. Since inception, its primary business has been
the development of specialized computer program applications and certain related
computer hardware.
On November 20, 1998, the Board of Directors of the Company approved a
merger with Outdoor Resorts, Inc. ("Resorts"), a publicly registered entity (the
registrant, organized July 1, 1995), which merger was consummated on November
23, 1998. Under the terms of the merger, the stockholders of the Company
received 12,000,000 shares of the common stock of Resorts in exchange for the
600,000 common shares of the Company then outstanding. At the date of the
merger, Resorts did not have any assets, liabilities, or operations. Resorts
changed its name to Intelliworxx, Inc. For financial reporting purposes, this
transaction was accounted for as a reverse purchase acquisition under which the
entities were recaptialized to include the historical financial information of
the Company.
During the period from inception (February 12, 1998) to December 31, 1998,
the Company was in its development stage, which stage ended as of December 31,
1998. Losses of $1,453,240 were accumulated in the development stage.
2. BASIS OF ACCOUNTING:
- -----------------------
The financial statements of the Company as of December 31, 1999 and 1998
and for the year and period then ended have been prepared on the basis that the
Company is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. At December 31,
1999 the Company's current assets totaled $1,662,759 and current liabilities
aggregated $6,466,266, for a working capital deficit of $4,483,507. For the
period from inception (February 12, 1998) to December 31, 1999, the Company has
incurred losses totaling $5,661,665, which has significantly impacted the
liquidity and capital resources of the Company, and raises substantial doubt
about the ability of the Company to continue as a going concern. No adjustments
have been recorded in the financial statements of the Company to reflect the
uncertainty of the going concern and the related realization of assets and
satisfaction of liabilities.
Since inception (February 12, 1998) December 31, 1999, the Company met its
cash needs primarily from short-term borrowings from individuals; private
placements of 1,000,000 of its common shares for $250,000, and 1,000,000 of
common shares for $750,000; conversion of short term debt of $265,000 into
132,500 common shares; and, from revenues of $1,986,839 in 1999 and $1,096,448
in 1998. Management expects to achieve its future cash needs from a combination
of sales of its equity securities and borrowings, pending attainment of
profitable operations.
F-7
<PAGE>
During January and February 2000, the Company converted $3,944,734 of
short-term debt into 1,127,047 common shares and sold 863,558 of common shares
and 144,116 of common share warrants for $3,022,500 (see Note 18).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------
CASH AND CASH EQUIVALENTS: Cash and cash equivalents are comprised of cash
and highly liquid investments with a maturity of three months or less when
purchased. The Company had no cash equivalents as of December 31, 1999.
INVENTORY: Inventories are stated at the lower of acquisition cost, not in
excess of market, and are primarily based on first-in, first-out. Manufacturing
costs are allocated to current production cost, while general and
administrative, and research and development expenses are charged to operating
expenses as incurred.
EQUIPMENT AND FURNITURE: Equipment and furniture are stated at their
acquisition cost. The cost of replacements, renewals, and betterments, that
neither ad materially to the value of the equipment and furniture, nor
appreciable prolong their lives are charged to expense as incurred. Depreciation
is provided using the straight-line method over the estimated useful lives,
which generally ranges from two to five years.
INTANGIBLE ASSETS: Intangible assets, such as software licenses, are
carried at cost, and are amortized using the straight-line method over the life
of the license, or the cost is amortized to the cost of units produced if the
license amount represents a prepaid royalty based upon usage.
INCOME TAXES: The provision (benefit) for income taxes is based upon the
pre-tax earnings (loss) reported in the financial statements, adjusted for
transactions that may never enter in the computation of income taxes payable. A
deferred tax asset or liability is recognized for the estimated future tax
affect attributable to temporary differences in the recognition of income and
expenses for financial statements and income tax purposes. A valuation allowance
is provided in the event that the tax benefits are not expected to be realized.
EARNINGS (LOSS) PER SHARE: Earnings (loss) per common share are based upon
the weighted number of common shares outstanding during the period.
For the period ended December 31, 1998, the calculation of the loss per
share is based upon the weighted average number of shares outstanding as though
the merger had occurred at the beginning of the period.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
REVENUE RECOGNITION: The Company derives its revenues from sales of
products and from computer software development and hardware engineering design
services. Revenues are recognized upon the delivery of the products and
services. The Company also derives revenues under contracts that include either
engineering design and development, development of computer program applications
and related hardware, and/or manufacture of a product. Percentage of completion
accounting has been adopted by the Company to recognize revenues from those
contracts that extend beyond interim and annual reporting periods.
RESEARCH & DEVELOPMENT, ADVERTISING, AND START-UP COSTS: Research &
development, advertising, and start-up costs are charged to expense as incurred.
CONCENTRATIONS OF RISK and CREDIT RISK: The Company is operating solely in
a specialized part of the computer application industry. Its operations in that
specialized area requires development of unique computer program software and
certain related hardware. Competing entities in the specialized area generally
have more extensive resources and have been operating for longer periods of
time. The Company does not have a material concentration of accounts receivable
or other credit risk.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company has not recognized any charges
from the impairment of its long-lived assets, as it believes that its long-lived
assets have not been impaired.
FINANCIAL INSTRUMENTS: Assets and liabilities, as a matter of accounting
policy, are reflected in the accompanying financial statements at values that
the Company considers to represent their respective fair values.
4. NOTES PAYABLE:
- -----------------
At December 31, 1999, the Company had an aggregate unpaid principal balance
of $4,209,907 of notes payable, of which $4,160,372 represented borrowings
primarily from individuals, some of which were convertible into common stock of
the Company, and $49,535 was from capitalized lease payables. Except for the
capitalized lease payables, none of the notes payable had collateral, bear
interest at rates ranging from 10% to 52% per annum, and are due on demand. In
January 2000, the Company borrowed an additional $710,000 from individuals. In
March 2000 the Company reduced its total notes payable by approximately
$5,345,000 by converting $3,944,734 of its notes payable and accrued interest
into equity (1,127,047 of common shares of the Company), and by cash payments of
about $1,400,000 (see Note 18).
F-9
<PAGE>
The capitalized lease payables bear interest at rates ranging from 10% to
21% per annum and are due in monthly amounts of principal and interest of $2,814
through October 2002. Assets having a total cost of $87,295 were capitalized
with respect to the capitalized leases.
5. INCOME TAXES:
- ----------------
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable United States statutory federal income
tax rate to pre-tax income as a result of the following differences at December
31, 1999.
Income tax provision (benefit) at 34% $(1,431,000)
Increase in rates resulting from
state taxes (153,000)
Valuation allowance 1,584,000
-----------
Effective tax rates $ None
The Company will need to realize significant profits to utilize the net
operating losses, all of which may not be available due to the change in control
and issuance of additional stock. Because of these uncertainties, a valuation
allowance was established in the same amounts as the deferred tax assets because
the benefit is more likely than not to be lost. Net operating losses of the
Company total approximately $5,662,000 at December 31, 1999 and expire in 2018
($1,454,000) and 2019 ($4,208,000).
6. COMMON AND PREFERRED STOCK
- -----------------------------
PREFERRED STOCK: The Company is authorized to issue 25,000,000 shares of no
par value preferred stock. At December 31, 1999, no preferred stock had been
issued.
COMMON STOCK: The Company is authorized to issue 100,000,000 shares of
common stock. Dividends are available when declared by the Company. At December
31, 1999, there were 15,199,166 of the common shares outstanding.
7. COMMON STOCK OFFERINGS:
- --------------------------
In December 1998, the Company issued 1,000,000 shares of common stock at
$.25 per share for a total of $250,000 under a registration exemption provided
by Securities and Exchange Commission Rule 504. In addition, during the first
quarter of 1999, the Company issued 1,000,000 shares of common stock at $.75 per
share for a total of $750,000. In January and February 2000 the Company issued
863,588 common shares and 144, 116 warrants for $3,022,500, before expenses.
F-10
<PAGE>
8. YEAR 2000 COMPUTER ISSUE:
- ----------------------------
Management asserts that it has reviewed all of its computer programs and
systems and believes that they are Year 2000 compliant. While management cannot
insure that the computer systems of its customers and suppliers are Year 2000
compliant, it believes that because their primary customers and suppliers are
generally in, or closely associated with, the computer industry, that such are
or will be Year 2000 compliant. As of March 2000, the Company has not
experienced any Year 2000 computer difficulties.
9. COMMITMENTS AND CONTINGENCIES:
- ---------------------------------
The Company leases its facilities under a lease that requires monthly
rental payments of $33,060 per month and expires in September 2004. Rental
expense for 1999 and 1998 was $201,000 and $119,000, respectively.
The Company and certain of its officers and directors are presently
defendants in two legal actions, and from time to time, the Company could be
subject to pending claims and lawsuits arising in the ordinary course of
business. With respect to the pending legal actions, the Company's legal counsel
believes that the Company has meritorious defenses and in the opinion of
management and legal counsel, the ultimate resolution of these pending legal
proceedings will not have a material adverse affect upon the Company's
operations or financial position. Accordingly, no adjustments have been recorded
in connection with the aforementioned legal actions.
10. INVENTORIES:
- ----------------
At December 31, 1999, inventories were comprised as follows:
Raw materials $ 549,148
Work in process 279,130
Finished product 220,273
----------
Total $1,048,551
----------
11. REVENUES:
- -------------
During the year ended December 31, 1999, the Company recorded total
revenues of $1,986,839, which consisted of $755,318 from product sales and
$1,231,521 from engineering and development project revenues.
12. SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
- -----------------------------------------------------
In 1998 the Company issued 12,066,666 common shares to accomplish an
acquisition and pay liabilities of $100,000, and in 1999 issued 132,500 common
shares to pay notes payable of $265,000.
F-11
<PAGE>
13. COMMON SHARE STOCK OPTIONS:
- -------------------------------
During 1999, the Company adopted an equity incentive plan for employees,
consultants, and directors. Stock options that can be granted under the plan
maybe incentive stock options or non-qualified stock options. A designated
committee of directors has the discretion to award the stock options. Upon
adoption of the plan in 1999, the Company reserved 3,000,000 common shares for
distribution to optionees.
In 1999, the Company granted options to employees to purchase 985,393
common shares at a weighted average of $6.19 per share that approximated the
market value of the common stock at date of grant. Non-qualified stock options
represent 523,774 of the 985,393 granted, and the remainder of 461,619 were
incentive stock options. The option grants provide that 50% of the options maybe
exercised during the first year following the option grant, and 25% each during
the succeeding two years, and generally expire ten years from the date of the
grant.
14. DILUTED EARNINGS PER SHARE:
- -------------------------------
Diluted earnings (loss) per share is not presented because the outstanding
options to purchase common shares under the Company's incentive and
non-incentive plans would cause an anti-dilutive affect upon the diluted
earnings (loss) per share for 1999.
15. NOTES RECEIVABLE:
- ---------------------
At December 31, 1999, notes receivable and accrued interest totaled
$114,464, of which $103,158 is due from officers of the Company. In March 2000
the $103,158 was repaid.
16. WAGES AND RELATED TAXES PAYABLE:
- ------------------------------------
The Company is delinquent in filing and paying its payroll taxes for 1999.
As of December 31, 1999, past due payroll taxes totaled $616,000, and related
accrued penalties and interest totaled $270,000.
17. RECLASSIFICATIONS:
- ----------------------
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
18. SUBSEQUENT EVENTS:
- ----------------------
In January 2000, the Company borrowed $710,000 from individuals in the form
of interest bearing convertible promissory notes. In March 2000, the Company
reduced its total notes payable and accrued interest by approximately $5,345,000
by converting $3,945,000 of its total notes payable into equity (1,127,047
common shares of the Company and warrants to purchase 65,724 common shares of
the Company at $3.00 per share until February 2005), and by cash payments of
about $1,400,000.
Also, in February 2000, the Company sold, in accordance with Regulation D
of the United States Securities Act of 1933, 863,558 common shares and 114,116
warrants for $2,988,000, net of expenses. The warrants grant the holder the
right to purchase common shares at $3.00 per share and are exercisable during
the five-year period from date of issuance. In connection with the sale of the
shares and warrants, the Company agreed to include the common shares and
warrants in a registration statement with the Securities and Exchange Commission
on or before July 1, 2000.
F-12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 11-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 FEB-12-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 461,288 76,526
<SECURITIES> 0 0
<RECEIVABLES> 144,151 238,846
<ALLOWANCES> 0 0
<INVENTORY> 1,048,551 210,128
<CURRENT-ASSETS> 1,662,759 549,053
<PP&E> 570,595 318,656
<DEPRECIATION> 199,560 55,800
<TOTAL-ASSETS> 2,436,243 880,515
<CURRENT-LIABILITIES> 6,146,266 1,418,907
<BONDS> 0 0
0 0
0 0
<COMMON> 1,929,848 914,848
<OTHER-SE> (5,661,665) (1,453,240)
<TOTAL-LIABILITY-AND-EQUITY> 2,436,243 880,515
<SALES> 1,986,839 994,448
<TOTAL-REVENUES> 1,997,411 994,448
<CGS> 1,783,747 653,995
<TOTAL-COSTS> 1,783,747 653,995
<OTHER-EXPENSES> 3,926,484 1,707,276
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 495,605 86,417
<INCOME-PRETAX> (4,208,425) (1,453,240)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,208,425) (1,453,240)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,208,425) (1,453,240)
<EPS-BASIC> (0.279) (0.110)
<EPS-DILUTED> (0.279) (0.110)
</TABLE>
