U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from January 1, 2000 to June 30, 2000.
Commission file number 000-30468
CELEXX CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 65-0728991
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
7251 West Palmetto Park Road,
Suite 208
Boca Raton, Florida, 33433
(Address of principal executive offices)
561-395-1920
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
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 disclosure of delinquent filers in response to Item 405 of Regulation
S-B is 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. [ ]
ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR: $3,565,274
The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 21, 2000 was approximately $6,240,000 (based on the last
sale price as reported on the over-the-counter Bulletin Board).
The number of shares outstanding of each of the issuer's classes of common
equity as of September 21, 2000: Common Stock, $.001 Par Value - 24,019,696
shares
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one): Yes __ No _X
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CELEXX CORPORATION
June 30, 2000 Transition Report on Form 10-KSB
INDEX
Part I
Item 1. Description of Business............................................. 3
Item 2. Description of Property............................................ 14
Item 3. Legal Proceedings.................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Part II
Item 5. Market for Common Equity and Related Stockholder Matters........... 16
Item 6. Management's Discussion and Analysis or Plan
of Operations...................................................... 17
Item 7. Financial Statements....................................... F-1 - F-19
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure........................................... 21
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act.................. 22
Item 10. Executive Compensation............................................. 24
Item 11. Security Ownership of Certain Beneficial Owners and
Management......................................................... 27
Item 12. Certain Relationships and Related Transactions..................... 28
Part IV
Item 13. Exhibits and Reports on Form 8-K................................... 29
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PART I
Item 1.
DESCRIPTION OF BUSINESS
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE
BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT
EXPECTATIONS, ESTIMATES AND PROJECTIONS, BELIEFS AND ASSUMPTIONS. WORDS SUCH AS
"ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES,"
VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT
ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. THESE
RISKS AND UNCERTAINTIES INCLUDE THOSE DISCUSSED BELOW UNDER "BUSINESS - RISK
FACTORS" ON PAGES 11 THROUGH 14 AND ELSEWHERE IN THIS FORM 10-KSB. UNLESS
REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. HOWEVER, READERS SHOULD CAREFULLY REVIEW THE FACTORS
DISCUSSED IN OTHER REPORTS OR DOCUMENTS THAT THE COMPANY FILES FROM TIME TO TIME
WITH THE SECURITIES AND EXCHANGE COMMISSION, PARTICULARLY THE QUARTERLY REPORTS
ON FORM 10-QSB AND ANY CURRENT REPORTS ON FORM 8-K.
OVERVIEW
On June 9, 2000, our Board of Directors approved the change of our fiscal
year-end from a year ended on December 31, which was the fiscal year end used in
our last Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission to the new fiscal year end of June 30. This report for the six-month
period ended June 30, 2000 covers the transition period. Unless otherwise
indicated, references to fiscal 1999 mean the fiscal year ended December 31,
1999, and fiscal 2000 will refer to the six months ended ending June 30, 2000.
CeleXx Corporation ("CeleXx", the "Company" or "we") was organized under the
laws of the State of Nevada on February 19, 1997, under the name, "Spectrum
Ventures, Inc." In February 1999, the Company merged with Cobra Technologies
International, Inc., a Delaware corporation with the Company surviving. The name
of the surviving corporation was changed to Cobra Technologies, Inc. and in
August 1999 and November 1999 was further changed to CobraTec, Inc. and CeleXx
Corporation, respectively.
On February 18, 1999, the shareholders of Spectrum Ventures, Inc. voted to
acquire all of the outstanding common stock of Cobra Technologies International,
Inc., a newly-formed Delaware corporation ("Cobra International"), pursuant to
an Agreement and Plan of Reorganization in exchange for 4,500,000 of the
Company's stock.
Effective May 25, 1999, the Company acquired through its wholly owned
subsidiary, Pinneast.com, Inc. ("Pinneast"),all of the outstanding common stock
of Pinnacle East, Inc. a South Carolina corporation, pursuant to an Agreement
and Plan of Reorganization for a value of $900,000. Payment consisted of 500,000
shares of CeleXx common stock and $100,000 in cash, that as of June 30, 2000,
$58,500 had been paid. Stephen Lounsberry and Mitchell N. Smith, President and
Vice President of Pinneast, respectively, also owning 100% of the outstanding
capital stock of Pinneast, received 275,000 and 225,000 common shares of CeleXx,
respectively. All key management personnel were retained and signed 3-year
employment agreements.
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The Company's second acquisition, Computer Marketplace, Inc. ("CMI") was
completed on April 14, 2000, pursuant to an Agreement and Plan of Reorganization
for a value of $ 4,300,000. Payment consisted of 1,400,000 shares of CeleXx
common stock, payment of $1,500,000 in cash and a promissory note for $1 million
at 6%, payable in equal installments at the first and second anniversaries. All
key management personnel were retained and signed 3-year employment agreements.
CeleXx Corporation to date has a short operating history, and since its
inception has generated losses from operations on a consolidated basis amounting
to $4,730,858. At present, the only material businesses that have been
successfully combined with the Company are Pinneast and CMI. While the Company
plans to continue to acquire existing businesses in accordance with its business
plan, there can be no assurances that the Company will be successful in its
acquisition plans or in securing financing to acquire such operating companies.
To date, the Company has not earned a profit and can give no assurances if and
when it will become profitable. Similarly, because of its limited operating
history and accumulated losses, the Company's ability to attract desirable
businesses for acquisition could be limited. Moreover, there can be no assurance
that such acquisition candidates, if found, could be acquired under terms
acceptable to the Company. Consequently, failure to complete future acquisitions
could limit the Company's ability to expand in accordance with its business
plan.
In the second quarter of 2000, CeleXx structured its existing business into four
(4) operating groups.
GENERAL
CeleXx Corporation is an integrated management company involved in the
acquisition, consolidation, integration and management of private Information
Technology (IT) businesses. The headquarters organization provides overall
management and direction for the operating entities, essentially leaving them
free of many of administrative encumbrances such as human resource planning,
finance and accounting, to concentrate on their core businesses.
CeleXx's operations are organized into four groups according to function:
Integrated Solutions, Performance Media, Information Engineering, and Special
Applications. Each Group is under the direction of a Group President, who is
responsible for the day to day management and direction of operations within the
Group, and for coordinating the Group's functions to ensure a seamless
integration with the other operating groups; thereby, giving our customers all
the benefits of an enterprise-wide IT service provider.
The Performance Media Group (PMG) develops high-end multimedia applications in
all the major formats delivering e-Education, Distance Learning, and other
interactive Web-based solutions. In addition, PMG delivers technical training
and support to clients, and supports the assessment, customization,
implementation and delivery of other major providers' Learning Management
Systems (LMS). E-education is the culmination of internally based training and
learning using the Internet.
Revenues within the Celexx Performance Media Group and contracts for future
business have increased substantially since 1999. PMG continues to develop in
the areas of corporate training, Distance Learning and e-Education markets. In
December 1999, for example, the Group signed an open-ended contract to web-host
Dow Chemical's worldwide computer based training programs.
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The Integrated Solutions Group (ISG) integrates new systems with legacy systems;
new and legacy systems with the Internet; provides network engineering; custom
configuration of multiple systems; and provides integration, design,
customization and implementation of computer telephony networks and voice over
Internet Protocol (VoIP) applications.
Revenues within the Integrated Solutions Group also continue to increase with
the increased contractual services with Sudexho-Marriott, Investors Bank, Cisco
and other major clients for which the Company is providing custom systems and/or
solutions. In addition, the Company is partnering with Hewlett-Packard, Exodus,
Citrix and other major OEMs and solutions providers.
The Information Engineering Group (IEG) includes the development of complex
electronic databases and specialized engineering functions in graphics,
facilities management and wireless technologies to provide customers with highly
specialized solutions in the handling of large-scale data. Currently, no
revenues have been earned through IEG. The Company had contracted to acquire
Moore Resource Systems, Inc., a private company and provider of data base
integration services to the oil and gas energy sector, based in Canada. The
closing for this transaction was scheduled to occur prior to September 1, 2000,
however, after extensive negotiations and the effects of a low stock price on
the Company stock and related non-completion of financing the transaction was
cancelled. Management of the Company determined that it was not in the best
interest of the Company's shareholders to continue with this acquisition at this
time until the Company's stock price becomes more favorable. The Company
presently continues discussions with Moore Resource Systems and other potential
target acquisitions for this group. There can be no assurance that the Company
will be in a position to attract sufficient capital or that such capital will be
available to the Company on favorable and desirable terms to complete this
acquisition. If the Company is unsuccessful in its attempt to raise growth and
working capital at rates that are acceptable to the Company, and cannot complete
this acquisition its prospects for growth could be greatly diminished.
The Special Applications Group (SAG) encompasses the development and
distribution of specialized products, custom engineering and software
development, and "help desk" operations. At present, the Company has one such
product, Dealer2Dealer, a web-based solution for tracking the inventories of new
and used automobiles. This group has earned no revenues.
The field of Information Technology (IT) has grown in tandem with the worldwide
proliferation of computerization over the last two decades, and has expanded its
rate of growth with the commercialization and universal acceptance of the
Internet and corporate Intranets over the last five years. Several sources,
including International Data Corporation (IDC), concur that the number of online
users will grow from about 150 million worldwide now to about 500 million by
2003. This projected growth is expected, in turn, to fuel the demand for new
computer products and services and create new market opportunities in this
field.
According to IDC, business-to-business e-commerce is one of fastest growing
sectors of e-commerce and is expected to exceed $179 billion by 2001. To
capitalize on this growth, many businesses are expanding and upgrading their
Internet and networking infrastructures. The industry is highly competitive and
is characterized by numerous small companies, many offering proprietary products
and services. Although there are a few significant players, such as IBM and
Cisco, as yet, no clear leader has emerged. The company currently holds a
negligible market share in this field, and currently has neither the capital nor
technical resources to capture meaningful market share. Nevertheless, revenues
from this source are growing.
IDC is a leading provider of information technology data, industry analysis and
strategic and tactical guidance to builders, providers and users of information
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technology. IDC is based in Framingham, Massachusetts and maintains offices in
more than 40 countries around the world.
MANAGEMENT AND STRATEGY
The core management of CeleXx is composed of individuals experienced in finance,
accounting, and Information Systems. Members of our management team have been
employed by or have been consultants to startup companies and multinational
corporations such as IBM, McGraw-Hill and Xerox for more than two decades. Our
President, Treasurer and Chief Financial Officer have all been involved in the
financial and business aspects of mergers and acquisitions, as well as with the
investigation and business analysis of prospective acquisitions at Xerox and
McGraw-Hill, and for many smaller entrepreneurial firms.
The core strategy of our company is to acquire complementary businesses in the
information technology industry that add value by increasing market share,
revenues, or profits, or by reducing operating costs, or by enhancing the
Company's ability to perform in the market place. We must caution, however, that
the achievement of these targets is highly dependent upon current management as
well as upon the Company's ability to attract new capital. There can be no
assurance that we will be in a position to attract sufficient capital or that
such capital will be available to the Company on favorable and desirable terms.
If the Company is unsuccessful in its attempt to raise growth and working
capital at rates that are acceptable to the Company, its prospects for growth
could be greatly diminished.
To date, CeleXx has focused on service and solution companies that provide
customers with systems and network integration, the Internet, and computer and
web based training. Companies in systems engineering, systems design, e-commerce
platform development, and network consulting are the most desired potential
acquisition candidates for CeleXx. Through the acquisition of CMI, CeleXx has
also become involved in developing and delivering telecommunications systems
such as telephone routers, networked e-mail systems, and remote telephone
diagnostic systems. Today, telephony integration represents almost 20% of our
revenues.
One important criterion for acquisition is the potential synergy of the business
to be acquired with those that already exist within the CeleXx structure. CMI
and Pinneast, for example, share a number of their larger clients. CMI provides
hardware, systems, and services to several of these clients while Pinneast
provides training and e-Education to assure that users understand and take full
advantage of the systems that CMI has provided. CeleXx generally looks for
companies that will add $5 million to $15 million, or more to revenue; and/or
companies that have been profitable on a pretax, pre-interest basis. Acquisition
valuations are often based on an EBIT multiple of four (4) to six(6). In
addition, the companies must have at least a three-year history with recently
audited financial information and a strong management team. CeleXx requires top
management to stay with the company after the acquisition and ties a portion of
the final purchase price to future performance. In any event, CeleXx reserves
the right to negotiate the purchase price and terms of an acquisition, and may,
from time to time, elect to acquire a business with a history of losses if, in
the opinion of the management and the board of directors of the Company, such an
acquisition might add value to the Company and/or holdings under the CeleXx
umbrella.
CORPORATE STRUCTURE
Our Group structure, which was instituted during the second quarter of 2000,
combines and integrates the best practices of our operations and establishes a
solid platform for growth in a world that is becoming increasingly dependent
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upon the Internet, corporate intranets, wide area networking and the electronic
exchange of information.
These groups, and the companies within the groups, share many similar customers
and provide value-added products and services that are complementary but
non-competitive within the CeleXx family.
THE CELEXX PERFORMANCE MEDIA GROUP
Pinneast was formed in January 1994 in order to capitalize on the growing demand
for computer-based alternatives to instructor lead training. As the anchor of
the CeleXx Performance Media Group (PMG) it provides our customers, mainly
Fortune 500 companies, with customized interactive (i.e., can be controlled by
the user) multimedia (i.e., combining text, graphics and motion) training design
and development services. Toward this end, PMG evaluates the specific practices
and procedures a client might be using, and then details a plan for developing
training programs that address the client's specific requirements. For the most
part, these training programs are designed to fill specific needs; for example,
to help employees improve performance (productivity); to help employees gain
awareness of certain issues, their causes, and cures (e.g., sexual harassment);
to help employees avoid common accidents or to comply with certain governmental
regulations such as OSHA; to teach new skills (e.g., how to operate a certain
machine); or to teach general skills (e.g., computing). PMG also develops and
produces marketing tools (e.g., promotional material, video demonstrations,
etc.) for customers to distribute in the form of CD ROMS or via the Internet.
Today, PMG's clients include a broad base of industrial companies, banks,
financial institutions, government agencies and educational institutions.
Prominent among its clients are Dow Chemical, for which PMG produces and hosts
(maintains the site for) world-wide Web-based training programs; The US Army,
for which PMG develops a wide array of training programs related to the proper
use and maintenance of weapons systems; Delta Airlines, for which PMG designs
and produces safety training programs; and Bank of America, for which PMG
develops financial training programs. All of PMG's programs are high in
multimedia (text, video, graphics and motion) content and are delivered to the
end user via CD ROMs, the Internet (World Wide Web), or private corporate
intranets (Internet based links for a specific company or group).
Operations currently within Performance Media Group generated about $200,000 in
revenue during their first year, primarily from its first customer, Fleet
Mortgage, and from a local grocery chain, Harris Teeter Grocers. During the
second year, a two-year, $800,000 contract with Hoechst Chemical was established
to provide OSHA mandated training to its Hoechst Chemical's employees. PMG also
continued to expand within the financial community by generating contracts with
several banks and insurance companies.
In 1996, PMG (through Pinneast) expanded its distance learning and e-Education
deployment as it delivered an Internet-accessed medical support program, called
Learners Toolkit for Open Time, for the Thomas Jefferson University Hospital. By
1998, the revenue base had expanded to more than $800,000 and contracts with
companies throughout a variety of industries and government organizations were
established. In 1999, PMG signed an open-ended contract to host Dow Chemical's
worldwide computer based training programs.
While the PMG group has been particularly successful with companies in a few key
industries such as finance, insurance, transportation and manufacturing, the
scope of its services can be applied to most businesses and government
organizations. Generally, however, its customers need to be large enough to have
ongoing training and training support programs for their employees. PMG
maintains a customer retention rate in excess of 80%.
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PMG's products fall into three main categories: training, distance learning, and
marketing. E-education products include custom computer-based training (CBT)
programs, custom web-based training (WBT) programs, instructional design,
instructor-lead training, learning management systems (LMS) and consultation.
PMG's marketing products include: interactive marketing CD-ROMs, corporate web
page development, e-commerce systems, site development, and consultation.
In developing and producing training programs for its clients, PMG combines
business performance consulting, instructional design, graphic design and
animation, computer methodologies and media technologies to meet the specific
performance improvement (productivity) needs of its clients. The solutions and
training programs are delivered via CD-ROM or the Web. Furthermore, the Company
markets and distributes its products and services through trade sources,
customer referrals and direct marketing.
PMG's instructional design philosophy and approach focus on helping clients
improve employee performance through training. The interactive nature of the
program permits the user (learner) to stop, start, or repeat any portion of the
program he or she may desire, at any time. PMG's approach to interactive
multimedia design addresses multiple learning styles in an attempt to more
effectively reach the diverse audiences for which these programs are intended.
Secondly, our interactive multimedia programs engage the learner with simulated
performance-based routines, enhanced by corrective feedback that is directly
applicable to the learner's real world performance responsibilities.
The instructional material is designed to engage or link the learner to
interactive multimedia so that real world knowledge, skills and methodologies
are practiced and developed and, thus, become directly transferable to
on-the-job performance. In addition to designing from the learner's performance
perspective and needs, PMG designs training programs within the context of the
client's business objectives and priorities so that individual performance
improvements are relevant: they impact overall business performance.
The CeleXx Performance Media Group currently has 24 employees.
THE CELEXX INTEGRATED SOLUTIONS GROUP
Computer Marketplace, Inc. (CMI) was acquired in April 2000, to become the
flagship of the CeleXx Integrated Solutions Group (ISG). At the time of its
acquisition, CMI, located in Tewksbury, Massachusetts, was a sixteen-year-old
network solution and system design company, founded in 1983.
Today, the CeleXx Integrated Solutions Group focuses on providing Fortune 1000
companies, government agencies and educational institutions with networking
solutions, systems integration, and computer telephony integration. Within the
Group is broad and diversified client list ranging from major telecommunications
companies to public school systems throughout North America. ISG's customers
include: America On-Line, Lucent Technologies, AT&T, J.C. Penny, Bell Canada,
The Prudential Insurance Companies, the Boston Public Schools, Sprint Corp., IBM
Global Services, USA Group, USA Bank, and Hewlett Packard Co., among many
others. ISG services these customers by designing, installing and implementing
local area network (LAN) and wide area network (WAN) systems, by customizing
software on clients' existing computer networks allowing the client the
transmission of telephone conversation via the internet for long distance calls
and computer related maintenance functions. In 1998, CMI reported $16.7 million
in revenues, with pretax earnings of approximately $922,000. For the fiscal
years ended, February 1999 and 2000, CMI reported revenues of $16.7 million and
$15.8 million and pretax earnings of $921 thousand and $364 thousand,
respectively. For the period from March 1, 2000 to June 30, 2000, CMI had $2.9
million in revenues and pretax earnings of approximately $62 thousand.
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CMI got started in 1983 as a retail operation and rapidly grew to five store
locations. In 1990, management undertook a major restructuring in order to
capitalize on the growing demand for software, systems and solutions rather than
just hardware. Management also recognized the opportunity to utilize this new
focus to expand its market nationwide and establish an international presence.
Consequently, the company shifted its focus from individuals and small
operations to businesses and eliminated the retail side of the business. It
moved its operations into a single location and began advertising in local
business journals. In addition, CMI developed new marketing strategies focusing
on system integration, services and Fortune 1000 companies. Within the last
several years, CMI expanded its network solutions business and entered into the
growing field of telecommunications. Today, the company is divided into two
basic divisions: Networking and Telephony.
Today, the CeleXx Integrated Solutions Group provides its customers with
complete, ready-to-run networks using Novell and Windows NT platforms. ISG
assesses a customer's needs, determines the appropriate configuration, purchases
the necessary software and hardware and then assembles and tests the components
at the customer's site. While certain large installations can run as high as $1
million or more, the average order for a network solution is about $200,000. ISG
takes care of all aspects of the installation, from delivery and setup to
completing the necessary licensing and warranty procedures. ISG also provides
its customers with systems operation training, vendor updates and upgrades, as
well as a 24-hour Help Service.
Today, CMI is also engaged in helping its customers capitalize on the
capabilities of the Internet. More specifically, CMI is helping customers
implement voice over IP (Internet Protocol) technology, which is a low cost
alternative to standard telephone service. This is accomplished through the
design and implementation of customized software on a client's existing computer
network, or on a new network, allowing the client the transmission of telephone
conversation via the Internet for long distance calls. Network contracts
represent approximately 50% of the company's revenues.
Over the last few years, services have also been expanded to include a
trademarked "Share-A-Network Engineer" program, which provides customers with
the benefits of an on-call Certified Network Engineer who can work closely with
the customers' Information Services (IS) department but does not need to be
employed on a fulltime basis. The Share-A-Network Engineer program is a
cost-effective way for the smaller customer to receive the technical benefits
that their larger counterparts receive. This segment of the business is expected
to grow as the Group expands its network solutions services to companies in the
SMR (small and medium enterprise) marketplace.
CMI also provides its customers with systems and solutions for their
telecommunications needs. The telephony division, formed about three years ago,
assists major telecommunications systems providers, such as AT&T, Cisco, Lucent,
Qwest and Sprint, in assisting their clients to more effectively manage their
call routing systems. ISG brings in the relevant equipment, configures the
networking functions in terms of software and hardware, installs the necessary
telephony software, conducts in-depth testing of the systems, and ships a ready
to use system to the end-user site. End customers include airlines, banks,
insurance companies, investment firms and customer-oriented organizations across
the US and Canada. Orders average about $400,000 and are usually fulfilled
within 4 weeks. Occasionally, orders are received from Europe and the typical
user is a Fortune 500 company.
Currently, the CeleXx Integrated Solutions Group has 42 employees.
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CELEXX CANADA, LTD.
CeleXx Canada, Ltd. was established as a wholly owned subsidiary during the
current period for the purpose of acquiring Canadian businesses under the CeleXx
umbrella. Presently the subsidiary is inactive.
On April 7, 2000, the Company completed a financing agreement with Birch Circle
LLC ("Birch"), a private investment banking firm, based in Connecticut and
raised $3,500,000 for the Company through the sale of shares of the Company's
Series A Convertible Preferred Stock ("Preferred Shares"), receiving net
proceeds of $3,144,727. Approximately $1.6 million of the net proceeds
(including accounting and attorney's fees) had been earmarked for the
acquisition of CMI. The Preferred Shares will pay dividends at the rate of 6%
per annum, and the dividend may be paid in cash or common shares of the Company,
at the option of the Company. If the Company elects to pay dividends on the
Preferred Shares in common shares, the number of common shares shall be
determined by dividing the cash amount of the dividend by the conversion price
of the Preferred Shares. The conversion price means the lower of: (a), the
average closing bid price on the day immediately preceding the closing of the
transaction or (b), 80 % of the 5-day trading average closing bid price of the
common shares prior the date of conversion.
Within 45 days of the closing, the Company was required to file a registration
statement with the Securities & Exchange Commission (SEC) covering the resale of
the common shares upon conversion, to permit their resale without restriction.
The Company filed a Form SB-2 registration on June 22,2000 for 11,172,222 shares
of common stock issuable upon conversion of the 6% Convertible Preferred Stock
at a conversion price of $1.06 per share. The number of shares of common stock
registered were pursuant to the terms of a Registration Agreement that was a
part of the financing agreement and, is an approximation which is based on a
hypothetical conversion of such shares. The actual number of shares of common
stock that would be issuable upon conversion is determined by a conversion
formula, which, in part, cannot be determined on the date thereof. As of
September 21, 2000, the Company has received notices of conversion from the
preferred stock holder to convert $128,000, including accrued interest,
approximating 123,000 shares of common stock.
The Company will have the right, in its sole discretion, to redeem, in cash, in
whole or in part, the number of shares submitted for conversion. The redemption
price shall be 125% of the average closing bid price for the day immediately
preceding the date of redemption multiplied by the number of shares of common
stock issued upon conversion. In addition, the Company may, in its sole
discretion, redeem in cash, and in whole or in part, all unconverted shares at
the rate of 125% of the principal amount. However, the Company must give
investors 30 days notice prior to such redemption.
RISK FACTORS
IN ADDITION TO OTHER INFORMATION IN THIS FORM 10-KSB, THE FOLLOWING RISK FACTORS
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS
BECAUSE SUCH FACTORS CURRENTLY HAVE A SIGNIFICANT IMPACT OR MAY HAVE A
SIGNIFICANT IMPACT ON THE COMPANY'S BUSINESS, OPERATING RESULTS OR FINANCIAL
CONDITION. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-KSB AS A RESULT OF THE RISK
FACTORS DISCUSSED BELOW AND ELSEWHERE IN THIS FORM 10-KSB.
UNCERTAINTY OF FUTURE PROFITABILITY; NEED FOR ADDITIONAL FUNDS
The Company's recent operations for the year ended December 31, 1999 and period
from January 1, 2000 to June 30, 2000, have consumed substantial amounts of cash
and have generated net losses of $1,906,397 and $3,195,341, respectively, and
accumulated a deficit of $ 5,463,859 at June 30, 2000. The Company believes that
it will require additional cash infusions from a private placement or other
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equity financing to meet the Company's projected working capital, projected
acquisitions and other cash requirements in fiscal 2001.
The sale or issuance of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. There can be no
assurance that additional financing, if required, will be available when needed
or, if available, will be on terms acceptable to the Company. Any inability to
satisfy the Company's operating cash needs or the inability to finance the
purchase of goods sold to others could have a material adverse effect on the
Company's business, financial condition and results of operation.
Additionally, the Company's acquisition pricing have generally included
contingent consideration to the selling individuals based on future stock
pricing performance. The success of this strategy depends not only on the
performance of the businesses and overall Company results of earnings but,
reception and effect by the investment community on the Company's stock in the
open market. Stock performance at pricing below the Company's negotiated pricing
guarantee to selling shareholders of acquired entities could potential result in
additional dilution to existing shareholders.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
Since the Company recognizes IT services revenue only when personnel are engaged
on client projects, the relative utilization of such personnel directly affects
the Company's operating results. In addition, a majority of the Company's IT
operating expenses, particularly personnel and related costs, are substantially
fixed in advance of any particular period. As a result, variations in
utilization of personnel may materially affect the Company's operating results.
Termination or completion of engagements in the Company's IT services business
or failure to obtain additional engagements in its IT services business could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes that future operating results will also be subject to
fluctuations due to a variety of factors, many of which are beyond the Company's
control. Such factors may include, but are not limited to, demand for the
Company's technology or services, availability of skilled sales and technical
personnel, introduction or enhancement of technologies or services by the
Company or its competitors, market acceptance of new technology or service
offerings, technological changes, increased competition, litigation costs,
results of litigation, and general economic conditions.
WE HAVE SUBSTANTIAL COMPETITION IN THE INFORMATION TECHNOLOGY SERVICE SOLUTION
BUSINESS
We cannot know that we will have the financial resources, technical expertise or
marketing and support capabilities to compete successfully in the Information
Technology business. System integration and e-commerce will result in even
greater competition. Inasmuch as there are no significant barriers to entry, we
believe that competition in this market will intensify. We believe that our
ability to compete successfully will depend on a number of factors, including:
THE COMPANY'S PRESENT AND POTENTIAL COMPETITORS CAN BE DIVIDED INTO SEVERAL
GROUPS
Computer hardware and service vendors and/or manufacturers; Internet integrators
and web presence providers; large information consulting service providers;
telecommunications companies; Internet and online service providers; and
software vendors. Almost all of the Company's current and potential competitors
have longer operating clients and significantly greater financial, technical,
marketing and public relation resources than the Company and could
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decide at any time to increase their resource commitments to the Company's
target market. As a strategic response to changes in the competitive
environment, the Company may from time to time make certain pricing, service
technology or marketing decisions or business or technology acquisitions that
could have a material adverse effect on the Company's business, financial
condition, results or operations and prospects. Competition of the type
described above could materially adversely affect the Company's business,
results of operations, financial condition and prospects.
In addition, the Company's ability to generate new clients will depend to a
significant degree on the quality of its products and services and its
reputation among its clients and potential clients, compared with the quality of
its services provided by, and the reputations of, the Company's competitors. To
the extent the Company loses clients to its competitors because of
dissatisfaction with the Company's services, or its reputation is adversely
affected for any other reason, the Company's business, result of operations,
financial condition and prospects could be materially adversely affected.
There are relatively low barriers to entry into the Company's business. Because
firms such as the Company rely on the skill of their personnel and the quality
of their client service, they have no patented technology that would preclude or
inhibit competitors from entering their markets. The Company is likely to face
additional competition from new entrants into the market in the future. There
can be no assurance that existing or future competitors will not develop or
offer services that provide significant performances, price, creative or other
advantages over those offered by the Company, which could have a material
adverse effect on its business, financial condition, results of operations and
prospects.
We may not have the resources required for us to respond effectively to market
or technological changes or to compete successfully with current and future
competitors. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on our business, operating results or financial condition. We cannot
assure you that we will be able to successfully compete against our current or
future competitors or that competitive pressures will not have a material
adverse effect on our business, operating results and financial condition.
MANAGEMENT OF ACQUIRED BUSINESSES
The Company's acquisitions have placed, and are expected to continue to place, a
significant strain on its managerial and operational resources. To manage these
acquired businesses and others that may be acquired in the future, the Company
must continue to implement and improve its operational, management and financial
systems and to train and manage its employee base. The Company expects that its
operational, management and financial systems will face additional strains as a
result of possible acquisitions in the future.
INTEGRATION OF ACQUISITIONS
As part of its business strategy, the Company may seek out business combinations
with other Internet or IT Services companies. Such business combinations involve
a number of risks, including, without limitation, difficulty assimilating the
operations and personnel, expenditure of management time, expenses associated
with the transactions, additional expenses associated with amortization of
acquired intangible assets, the implementation and maintenance of standards,
controls, procedures, and policies, the impairment of relationships with
employees and customers as a result of the integration of new management
personnel, and potential unknown liabilities associated with acquired
businesses. To the extent that any of the companies that the Company acquires
fail, the Company could be required to write-off the amount of the investment.
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There can be no assurance that the Company will be successful in addressing
these risks or any other problems encountered in connection with such business
combinations.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of its
senior management and key success depends substantially on the continued efforts
of its senior management team. The Company does not carry key person life
insurance on any of its senior management personnel. The loss of the services of
any of its executive officers or other key employees could have a material
adverse effect on the business, financial condition and results of operations of
the Company. The Company's future success also depends on its continuing ability
to attract and retain highly qualified sales, technical and managerial
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to retain its key managerial, sales and
technical employees or that it will be able to attract and retain additional
highly qualified sales, technical and managerial personnel in the future. The
inability to attract and retain the necessary sales, technical and managerial
personnel could have a material adverse effect upon the Company's business,
financial condition, and results of operation.
CONCENTRATION OF STOCK OWNERSHIP
As of September 21, 2000, the present directors, executive officers, greater
than 5% stockholders, and their respective affiliates beneficially own
approximately 50% of the outstanding common stock of the Company ("Common
Stock"). As of September 21, 2000, Doug H. Forde, the Company's Chairman and
CEO, and Lionel Forde, Director and Vice President, together beneficially own
approximately 35% of the outstanding Common Stock of the Company. As a result of
their ownership, the directors, executive officers, greater than 5%
stockholders, and their respective affiliates collectively are able to control
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Such concentration of
ownership may also have the effect of delaying or preventing a change in control
of the Company.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been and may continue to be
subject to wide fluctuations in response to a number of events and factors, such
as quarterly variations in operating results, changes in financial estimates and
recommendations by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company, and news reports relating to trends in the Company's markets. In
addition, the stock market, in general, and the market prices for IT companies,
in particular, have experienced volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's Common
Stock, regardless of the Company's operating performance.
RISKS RELATING TO SMALL COMPANY STOCKS
The Company's Common Stock trades on the over-the-counter Bulletin Board under
the symbol "CLXX". The Securities and Exchange Commission has adopted
regulations which generally define a penny stock to be any security that has a
market price (as defined) of less than $5.00 per share, subject to certain
exceptions including listing on the NASDAQ Small Cap Market. The shares of our
common stock may be deemed to be penny stocks and thus will become subject to
rules that impose additional sales practice requirements on brokers/dealers who
sell such securities to persons other than established customers and accredited
investors. Consequently, the "penny stock" rules may restrict the ability of
broker/dealers to sell the common stock and may affect the ability of purchasers
to sell the common stock in a secondary market.
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Item 2.
DESCRIPTION OF PROPERTY
The Company currently leases approximately 3,000 square feet of office space
located at 7251 West Palmetto Park Road, Boca Raton, Florida as its corporate
headquarters. Early in the year 2001, the Company plans to relocate from its
current Boca Raton location to its new corporate headquarters, consisting of
approximately 5,000 square feet, in Coral Springs, Florida. The terms and
conditions of our lease include our move to the new location. Presently, the
monthly rent is $5,900 and the lease terminates in 2004.
Pinneast leases building space at 1221 Sunset Blvd., West Colombia, South
Carolina under a three 3 year lease that requires minimum annual payments
totaling approximately $25,000.
CMI leases building and office space totaling approximately 8,000 square feet at
885 Main Street, Tewksbury, Massachusetts under a five (5) year lease that
requires minimum annual payments totaling approximately $72,000. The lease is
entered with a realty company owned by David Burke, Sr., a Director and officer
of the Company.
Item 3.
LEGAL PROCEEDINGS
On August 1, 2000 the Company was served in a lawsuit filed by E-Pawn.com,
Inc.("EPWN") in the Circuit Court of the 15th Judicial Circuit, Palm Beach
County, Florida. The case is styled E-Pawn.com, Inc. vs. CeleXx Corporation and
Douglas H. Forde, Case no. CL007436AN. The lawsuit alleges causes of action for
breach of contract, fraud and breach of fiduciary duty. EPWN is seeking damages,
specific performance and an injunction. This matter began on or about March 10,
2000, when the Company's ("Celexx" and/or the "Company") president signed an
omnibus agreement with E-Pawn.com, Inc. (EPWN:OTCBB)("E-Pawn") whereby, under
certain conditions: (a) E-Pawn was to purchase 1,000,000 shares of Celexx common
stock at $5.00 per share in cash, (b) Celexx would receive payments for
management fees as the appointed manager of E-Pawn and, (c) upon the final
funding of 1,000,000 shares of Celexx Common Stock at $5.00 per share E-Pawn
would have the option to exchange $50 million in market value of E-Pawn common
stock for $50 million in market value of Celexx common stock. The closing of the
above transactions was to occur on or before March 31, 2000. At E-Pawn's
request, in April 2000 an amendment to the agreement was signed to provide for
the exchange of 1,000,000 restricted shares of Celexx common stock for 1,000,000
shares of freely trading common stock of E-Pawn to satisfy the cash payment for
the 1,000,000 Celexx shares. The option arrangement was also amended to be
completed with an exchange of 10 million shares of E-Pawn shares for 12 million
shares of Celexx common stock. Celexx issued the 1,000,000 shares of common
stock to E-Pawn on April 13, 2000 and received 1,000,000 shares of free trading
E-Pawn shares from a stockholder of E-Pawn. Celexx also loaned $500,000 to
E-Pawn in the form of an unsecured, short-term demand loan. The agreement and
amendments were at all times subject to various approvals, including the Celexx
Board of Directors. The granting of the $50 million stock exchange would have
represented a change in control and, as a merger transaction, required Celexx
shareholder approval.
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The Company's counsel has opined that the above transaction was void ab initio
(from the beginning). In response to the Company's action, E-Pawn has commenced
suit to enforce only those sections of the agreement that are favorable to them.
The Company has moved to dismiss the lawsuit and vigorously defend the action.
Celexx's counsel believes that the lawsuit is frivolous and is of the opinion
that the Company will prevail. Notwithstanding, E-Pawn has acknowledged
receiving from the Company $500,000. Accordingly, the Company recorded a
provision for potential uncollectibilty of this loan to E-Pawn.
CeleXx and E-Pawn agreed in principle to settle the lawsuit that E-Pawn filed
against Celexx and any claims that the companies may have with respect to each
other. The settlement will include unconditional releases and will be subject to
documentation and delivery of all considerations. The settlement includes, among
other things, the issuance of an additional 2,000,000 shares of Celexx
restricted common stock to E-Pawn (E-Pawn already has 1,000,000 shares). Celexx
will also cancel the $500,000 debt that is due from E-Pawn and return 1,000,000
freely tradable shares of E-Pawn that it currently holds. Celexx in return will
receive 5,250,000 restricted shares of common stock of E-Pawn.
The Company is also party to two other matters of litigation and claims which
management believes are normal in the course of its operations. While the
results of such litigation and claims cannot be predicted with certainty, The
Company believes the final outcome of such matters will not have a materially
adverse effect on its results of operations or financial position.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 8, 2000, the Company held an Annual Meeting of stockholders. At the
meeting, the stockholders voted on the following proposals: (I) to elect
directors to serve for the ensuing year or until their respective successors are
duly elected and qualified. The nominees were Doug Forde, David Langle, Vincent
Caminiti, Lionel Forde, David Burke, Sr., Moty Herman and William Lerner, (ii)
to ratify the appointment of Feldman Sherb & Co., P.C., as independent
accountants of the Company for the fiscal years ending December 31, 1999 and six
months ended June 30,2000, (iii) to amend the articles of incorporation to
increase the number of authorized shares of common stock from 20,000,000 to
100,000,000 and designate 20,000,000 shares of blank check preferred stock, and
(iii)to amend the Company's 1999 Stock Option Plan to increase the number of
shares issuable under the Plan.
Doug Forde, David Langle, Vincent Caminiti, Lionel Forde, and David Burke, Sr.
were elected as directors whose terms expire in 2003. Moty Herman and William
Lerner were elected as directors whose terms expire in 2002. The foregoing
directors were elected by the following number of votes:
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NOMINEE FOR AGAINST/ABSTAIN
------------------ ----------- ---------------------
Doug Forde 8,721,558 -0-
David Langle 8,721,558 -0-
Vincent Caminiti 7,096,725 1,624,833
Lionel Forde 8,671,558 50,000
David Burke, Sr. 8,721,558 -0-
Moty Herman 8,721,558 -0-
William Lerner 8,721,558 -0-
The stockholders ratified the appointment of Feldman Sherb & Co., P.C. as
independent accountants of the company for the fiscal years ended December 31,
1999 and June 30, 2000,
FOR AGAINST/ABSTAIN
----------- -----------------------
8,720,708 850
The shareholders approved to amend the articles of incorporation to increase the
number of authorized shares of common stock from 20,000,000 to 100,000,000 and
designate 20,000,000 shares of blank check preferred stock
FOR AGAINST/ABSTAIN
----------- -----------------------
8,721,558 -0-
The shareholders approved to amend the Company's 1999 Stock Option Plan to
increase the number of shares issuable under the Plan from 1,000,000 to
4,500,000 shares.
FOR AGAINST/ABSTAIN
----------- -----------------------
8,721,558 -0-
PART II
Item 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
SINCE NOVEMBER 4, 1999 our Common Stock has traded on the over-the-counter
Bulletin Board under the symbol "CLXX", and commenced its trading on October 16,
1998. Prior to November 4, 1999 our common stock traded under the symbol "CBRA".
The following table sets forth, for the period since October 1998, the high and
low bid quotations for our Common Stock for the periods indicated as reported by
the OTC Bulletin Board. The quotations represent prices between dealers and do
not include retail mark-up, markdown or commissions or necessarily represent
actual transactions.
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PERIOD HIGH LOW
--------- ---- ---
October 16, 1998 - December 31, 1998 $.625 $0.06
January 1, 1999 - March 31, 1999 $6.00 $0.875
April 1, 1999 - June 30, 1999 $1.53 $0.875
July 1, 1999 - September 30, 1999 $1.15 $0.63
October 1, 1999-December 31, 1999 $0.83 $0.45
January 1, 2000- March 31, 2000 $4.13 $0.56
April 1, 2000- June 30, 2000 $2.68 $0.812
July 1, 2000- September 28, 2000 $1.19 $0.375
The transfer agent for the Company's Common Stock is American Registrar &
Transfer Company, 342 East 900 South Street, Salt Lake City, Utah 84111.
We have never paid cash dividends on our Common Stock. We presently intend to
retain future earnings, if any, to finance the expansion of our business and do
not anticipate that any cash dividends will be paid in the foreseeable future.
The future dividend policy will depend on our earnings, capital requirements,
expansion plans, financial condition and other relevant factors.
The approximate number of record holders of the Common Stock as of September 22,
2000, were 265. The Company believes that the actual number of shareholders is
significantly larger because there are several brokerage and clearing houses
that hold shares on behalf of many beneficial holders of its Common Stock.
Item 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following is Management's discussion and analysis of the consolidated
financial condition and results of operations of the Company. It should be read
in conjunction with the audited consolidated financial statements and related
notes included elsewhere in this Form 10-KSB. When used in this discussion, the
words "estimate," "project," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected, including, but not limited to, those discussed in "Item 1 -
Description of Business - Risk Factors" and elsewhere in this Form 10-KSB and
from time to time in the Company's periodic reports. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
result of any revisions to those forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
Effective January 1, 2000 the Company changed its fiscal year from December 31
to June 30. Accordingly, the discussion of financial results set forth below
compares the six-month period ended June 30, 2000 to the six-month period ended
June 30, 1999, the twelve months ended December 31, 1999 and for the period July
10, 1998 (inception) to December 31, 1998.
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CeleXx Corporation is an integrated management company involved in the
acquisition, consolidation, integration and management of private Information
Technology (IT) businesses. In general, these businesses provide services such
as engineering design and layout for the installation of network systems, Web
site development, computer hardware and software integration, and training and
ongoing technical support to client companies. In certain situations, however,
computer hardware and software may be sold as part of the overall service
solution.
The Company's recent operations have consumed substantial amounts of cash and
have generated net losses and an accumulated deficit. The Company believes that
it will require a cash infusion from a private placement or other equity
financing to meet its projected working capital and other cash requirements.
Absent such additional cash infusion from a private placement or other equity
financing, the Company's continued existence is in substantial doubt. The sale
of additional equity or other securities could result in additional dilution to
the Company's stockholders. There can be no assurance that such additional
financing can be obtained on acceptable terms, if at all.
RESULTS OF OPERATIONS
Comparison of six months ended June 30, 2000 to six months ended June 30, 1999
The Company's total revenue increased $3,339,243, or 1,477%, from $226,031 in
1999 to 2000 as a result of its acquisitions of Pinneast in May 1999 and
CMI in April 2000.
Gross profit decreased to 28% in 2000 from 58% in 1999. This decrease is a
result of the lower margins generated from the network systems business of CMI.
Operating expenses which consist of selling, general, and administrative
("SG&A") expenses increased $2,877,106 or 350% to $3,699,639 in 2000 from $
822,533 in 1999. As a percentage of sales, SG&A expenses were 104% of total
sales in 2000 compared with 364% of sales in 1999. The increase in SG&A expenses
is primarily due to the recognition of $1,758,782 in non-recurring, non-cash
compensation expense for the issuance of stock for services rendered, increases
in salaries, professional expenses and transaction costs associated with
on-going acquisitions and capital raising efforts, along with an increase in
consulting and travel expenses, and the inclusion of SG&A expenses for the
Company's two acquisitions of approximately $1,200,000. Depreciation and
amortization expenses for 2000 and 1999 were $ 156,708 and $ 15,524,
respectively. The depreciation and amortization expenses are primarily due to
the acquisitions of Pinneast.com, Inc. and Computer Marketplace, Inc. in 2000.
The Company recorded no income tax expenses. At June 30, 2000,the Company has a
consolidated federal and state net operating loss carryforward of approximately
$5,418,000, expiring between the years of 2014 and 2020.
Comparison of Fiscal Year 1999 to Fiscal Year 1998
The Company's total revenue increased $ 680,989, or 100%, from $ 0 in 1998 to
1999 as a result of its first acquisition of Pinneast in May 1999.
Gross profit increased to 48% in 1999 from 0% in 1998. This increase is a result
of an increase in the percentage of IT revenue derived from it's the Company's
sole operating unit during this period.
Operating expenses which consist of selling, general, and administrative
("SG&A") expenses increased by $1,758,171 or 556% to $ 2,074,292 in 1999 from $
316,121 in 1998. As a percentage of sales, SG&A expenses were 304% of total
sales in 1999 compared with no sales in 1998. The increase in SG&A expenses is
primarily due to increases in salaries, professional expenses and non-cash
transaction costs associated with on-going
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acquisitions and capital raising efforts, along with an increase in consulting
and travel expenses. Depreciation and amortization expenses for 1999 totaled
$125,920. The Company had no depreciation and amortization expenses in 1998. The
depreciation and amortization expenses are primarily due to the acquisition of
Pinneast.com, Inc. In 1999, the Company recorded no income tax expenses. At
December 31, 1999,the Company has a federal and state net operating loss
carryforward of approximately $2,223,000.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL
In connection with its various acquisitions, the Company recorded goodwill and
other intangibles, that are being amortized on a straight-line basis over a
period of 7 to 10 years, its estimated period over which the Company is expected
to benefit from such intangible assets. At June 30, 2000 and December 31, 1999,
the unamortized goodwill and other intangibles combined were $ 3,999,251 and
$1,114,579, respectively (which represented 49% and 75% of total assets and 91%
and 148% of stockholders' equity, respectively). Goodwill arises when an
acquirer pays more for a business than the fair value of the tangible and
separately measurable intangible net assets of the business. For financial
reporting purposes, goodwill and all other intangible assets are amortized over
the estimated period benefited. The Company has determined the life for
amortizing goodwill based upon several factors, the most significant of which
are the relative size, historical financial viability and growth trends of the
acquired companies and the relative lengths of time such companies have been in
existence.
Management of the Company periodically reviews the Company's carrying value and
recoverability of unamortized goodwill and other intangibles. If the facts and
circumstances suggest that the goodwill and other intangibles may be impaired,
the carrying value of such assets will be adjusted accordingly, and will result
in an immediate charge against income during the period of the adjustment and/or
the length of the remaining amortization period may be shortened, which will
result in an increase in the amount of amortization during the period of
adjustment and each period thereafter until fully amortized. Once adjusted,
there can be no assurance that there will not be further adjustments for
impairment and recoverability in future periods. Of the various factors to be
considered by management of the Company in determining whether goodwill and
other intangibles is impaired, the most significant will be (i) losses from
operations, (ii) loss of customers and (iii) industry developments, including
the Company's ability to maintain its market share, development of competitive
products or services and imposition of additional regulatory requirements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its cash requirements primarily from
private equity issuances and loans from certain officers and shareholders. In
the six-month period June 30, 2000, the Company secured its cash infusion
primarily from a capital raising of $3,500,000 from the sale of shares of the
Company's Series A Convertible Preferred Stock, netting $3,144,727 after related
costs. The Company's cash balance at June 30, 2000 was $522,471.
During the six months ended June 30, 2000, net cash provided by financing of
$2,285,448 exceeded cash used in operating activities and investing activities
combined of $1,900,659, resulting in an increase of $384,789 in cash. During the
fiscal year ended December 31, 1999, net cash provided by investing and
financing activities of $1,191,110 exceeded cash used in operating activities of
$1,053,428, resulting in a $137,682 increase in cash.
The Company's operating entity, Pinneast.com, has three working capital credit
lines with a U.S. bank totaling $300,000. At June 30, 2000 approximately
$221,000 was due and outstanding. The three lines are secured by substantially
all of the Company's assets and mature in the years 2000 and 2003. The Company's
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CMI subsidiary has a line of credit of up to $3,000,000 that is used for
merchandise purchases, and is secured by accounts receivable and inventory. As
of June 30, 20000 the unused balance on the line of credit was approximately
$2,000,000. The Company is currently evaluating the replacement of these lines
with alternative asset financing.
On April 7, 2000, the Company completed a financing agreement with Birch Circle
LLC ("Birch"), a private investment banking firm, based in Connecticut and
raised $3,500,000 for the Company through the sale of shares of the Company's
Series A Convertible Preferred Stock ("Preferred Shares"). Approximately $1.9
million of the net proceeds (including commissions, accounting and attorneys'
fees) were utilized for the acquisition of CMI.
The Preferred Shares will pay dividends at the rate of 6% per annum, and the
dividend may be paid in cash or common shares of the Company, at the option of
the Company. If the Company elects to pay dividends on the Preferred Shares in
common shares, the number of common shares shall be determined by dividing the
cash amount of the dividend by the conversion price of the Preferred Shares. The
conversion price means the lower of: (a), the average closing bid price on the
day immediately preceding the closing of the transaction or (b), 80 % of the
5-day trading average closing bid price of the common shares prior the date of
conversion.
Within 45 days of the closing, the Company was required to file a registration
statement with the Securities & Exchange Commission (SEC) covering the resale of
the common shares upon conversion, to permit their resale without restriction.
The Company filed a Form SB-2 registration on June 22,2000 for 11,172,222 shares
of common stock issuable upon conversion of the 6% Convertible Preferred Stock
at a conversion price of $1.06 per share. The number of shares of common stock
registered were pursuant to the terms of a Registration Agreement that was a
part of the financing agreement and, is an approximation which is based on a
hypothetical conversion of such shares. The actual number of shares of common
stock that would be issuable upon conversion is determined by a conversion
formula, which, in part, cannot be determined on the date thereof. As of
September 21, 2000, the Company has received notices of conversion from the
preferred stock holder to convert $128,000, including accrued interest,
approximating 123,000 shares of common stock.
FACTORS AFFECTING OPERATING RESULTS
The Company's recent operations during the six month period ended June 30, 2000
and years ended December 31, 1999 and 1998 have consumed substantial amounts of
cash and have generated net losses of $3,195,341, $1,906,397 and $ 316,121,
respectively, and accumulated a deficit of$5,463,859 at June 30, 2000. The
Company believes that it will require additional cash infusions from a private
placement or other equity financing to meet the Company's projected working
capital and other cash requirements in 2001.
Since the Company recognizes IT services revenue only when personnel are engaged
on client projects, the relative utilization of such personnel directly affects
the Company's operating results. Variations in utilization of personnel may
materially affect the Company's IT services business or failure to obtain
additional engagements in its IT services business could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's acquisitions have placed, and are expected to continue to place, a
significant strain on its managerial and operational resources. To manage these
acquired businesses and others that may be acquired in the future, the Company
must continue to implement and improve its operational, management and financial
systems and to train and manage its employee base. As part of its business
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strategy, the Company may seek out additional business combinations with other
Internet or IT Services companies. To the extent that any of the companies that
the Company acquires fail, the Company could be required to write off the amount
of the investment.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Absent corrective
actions, programs with date sensitive logic may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The total cost associated with required modifications to become Year 2000
compliant has not been material to our financial position to date. Our internal
operations and business are also dependent upon the computer-controlled systems
of third parties such as our suppliers, clients and other service providers.
While problems may arise in the future and we cannot assure you that we will not
have a Year 2000 problem, we are unaware of any material impact on our business
caused by a Year 2000 problem either in our systems or those of third parties.
The above description of the Year 2000 issue contains forward-looking statements
including, without limitation, statements relating to our expectations that are
made pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned that forward-looking
statements contained in the Year 2000 Issue should be read in conjunction with
the Company's disclosures under the heading: "CAUTIONARY STATEMENT FOR THE
PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995" as stated in the forefront of this filing.
21
<PAGE>
Item 7.
INDEX TO FINANCIAL STATEMENTS
CELEXX CORPORATION and Subsidiaries
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statement of Stockholders' Equity (Deficit).....................F-5
Consolidated Statements of Cash Flows........................................F-6
Notes to Consolidated Financial Statements............................F-7 - F-19
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
CeleXx, Corporation
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of CeleXx
Corporation and Subsidiaries, as of June 30, 2000 and December 31, 1999, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the six months ended June 30, 2000 and the year ended
December 31, 1999 and the period July 10, 1998 (inception) through 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CeleXx Corporation and Subsidiaries, as of June 30, 2000 and December 31, 1999,
and the consolidated results of their operations and their cash flows for the
six months ended June 30, 2000, the year ended December 31, 1999 and for the
period July 10, 1998 (inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
/s/Feldman Sherb & Co., P.C.
Feldman Sherb & Co., P.C.
Certified Public Accountants
New York, New York
September 29, 2000
(October 17,2000 with
respect to Note 14)
<PAGE>
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- ---------------
ASSETS
--------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 522,471 $ 137,682
Accounts receivable 2,212,298 76,923
Inventory 422,744 -
Prepaid taxes 207,082 -
Other current assets 26,745 18,245
-------------- ---------------
TOTAL CURRENT ASSETS 3,391,340 232,850
-------------- ---------------
FURNITURE AND EQUIPMENT, net 291,780 39,575
MARKETABLE SECURITIES 437,000 -
GOODWILL, net 536,233 94,167
INTANGIBLE ASSETS, net 3,463,018 1,020,412
OTHER ASSETS 53,008 93,250
-------------- ---------------
$ 8,172,379 $ 1,480,254
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,347,472 $ 270,000
Note payable-related party 1,041,500 100,000
Line of credit - short term portion 1,093,811 178,247
Advances from shareholder 100,886 9,013
Deferred revenue 112,596 87,384
-------------- --------------
TOTAL CURRENT LIABILITIES 3,696,265 644,644
-------------- --------------
LINE OF CREDIT - long term portion 71,631 80,295
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock, $001 par value, 20,000,000 shares authorized;
350 shares of $10,000 stated value cumulative Series A issued and outstanding - -
Common stock, $.001 par value, 100,000,000 shares authorized;
15,619,696 and 10,907,058 shares issued and outstanding 15,620 10,907
Additional paid-in capital 12,547,805 3,216,926
Unamortized stock compensation (1,132,083) (250,000)
Other comprehensive loss - unrealized loss on marketable securities (1,563,000) -
Accumulated deficit (5,463,859) (2,222,518)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 4,404,483 755,315
-------------- --------------
$ 8,172,379 $ 1,480,254
================= ===============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 10, 1998
Six Months Ended Six Months Ended Year Ended (Inception) to
June 30, 2000 June 30, 1999 December 31, 1999 December 31, 1998
---------------- ---------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUE $ 3,565,274 $ 226,031 $ 680,989 $ -
COST OF REVENUE 2,533,929 94,196 353,140 -
--------------- --------------- ----------------- -----------------
GROSS PROFIT 1,031,345 131,835 327,849 -
OPERATING EXPENSES 3,699,639 822,533 2,074,292 316,121
--------------- --------------- ----------------- -----------------
LOSS FROM OPERATIONS (2,668,294) (690,698) (1,746,443) (316,121)
OTHER EXPENSES:
Interest expense 27,047 - 68,754 -
Provision for uncollectible loan receivable 500,000 - - -
Settlement of litigation - - 91,200 -
--------------- --------------- ----------------- -----------------
TOTAL OTHER EXPENSES 527,047 - 159,954 -
--------------- --------------- ----------------- -----------------
NET LOSS $ (3,195,341) $ (690,698) $ (1,906,397) $ (316,121)
Dividends on preferred stock 46,027 - - -
--------------- --------------- ----------------- -----------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (3,241,368) $ (690,698) $ (1,906,397) $ (316,121)
=============== =============== ================= =================
NET LOSS $ (3,195,341) $ (690,698) $ (1,906,397) $ (316,121)
OTHER COMPREHENSIVE LOSS:
Unrealized holding loss arising during the period
from marketable securities (1,563,000) - - -
--------------- --------------- ----------------- -----------------
COMPREHENSIVE LOSS $ (4,758,341) $ (690,698) $ (1,906,397) $ (316,121)
=============== =============== ================= =================
NET LOSS PER COMMON SHARE - basic $ (0.24) $ (0.10) $ (0.23) $ (0.07)
=============== =============== ================= =================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - basic 13,725,970 6,956,951 8,357,005 4,500,000
=============== =============== ================= =================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock
--------------------------- --------------- Additional
Number of Number of Paid-in
Shares Amount Shares Amount Capital
-------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance July 10, 1998 (Inception) - $ - 4,500,000 $ 4,500 $ (4,500)
Capital Contributions - - - - 216,121
Net loss - - - - -
-------- -------- ---------- -------- ----------
Balance, December 31, 1998 - - 4,500,000 4,500 211,621
Shares issued in conjunction with merger - - 200,000 200 (200)
Issuance of common stock for exchange - - 713,475 713 (160,342)
Acquisition of subsidiary - - 500,000 500 749,250
Retirement of related party debt - - 1,733,333 1,734 446,907
Shares issued for consulting services - - 500,000 500 124,500
Sale of common stock - - 860,250 860 859,390
Issuance of stock for cash and services - - 300,000 300 299,700
Shares issued for deferred financing services - - 400,000 400 249,600
Shares issued to retire debt - - 400,000 400 183,600
Shares issued in legal settlement - - 150,000 150 91,050
Shares issued for services - - 650,000 650 161,850
Net loss - - - - -
-------- -------- ---------- ------ ------------
Balance, December 31, 1999 - - 10,907,058 10,907 3,216,926
Shares issued for services - - 2,290,555 2,291 3,148,974
Sale of convertible preferred stock 350 - - - 2,634,327
Exchange of stock for marketable securities - - 1,000,000 1,000 1,999,000
Sale of common stock - - 22,083 22 9,978
Acquisition of subsidiary - - 1,400,000 1,400 1,538,600
Accrual of preferred stock dividend payable - - - - -
Unrealized loss on marketable securities - - - - -
Net loss - - - - -
-------- -------- ---------- -------- ----------
Balance, June 30, 2000 350 $ - 15,619,696 $15,620 $12,547,805
========= ====== ========== ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
<TABLE>
<CAPTION>
Unamortized Other Total
Deferred Stock Comprehensive Accumulated Stockholders'
Financing Compensation Loss Deficit Equity (Deficit)
-------- ------------ ---------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance July 10, 1998 (Inception) $ - $ - $ - $ - $ -
Capital Contributions - - - - 216,121
Net loss - - - (316,121) (316,121)
---------- ------------- ---------- --------- ----------------
Balance, December31, 1998 - - - (316,121) (100,000)
Shares issued in conjunction with merger - - - - -
Issuance of common stock for exchange - - - - (159,629)
Acquisition of subsidiary - - - - 749,750
Retirement of related party debt - - - - 448,641
Shares issued for consulting services - - - - 125,000
Sale of common stock - - - - 860,250
Issuance of stock for cash and services - - - - 300,000
Shares issued for deferred financing services (250,000) - - - -
Shares issued to retire debt - - - - 184,000
Shares issued in legal settlement - - - - 91,200
Shares issued for services - - - - 162,500
Net loss - - - (1,906,397) (1,906,397)
----------- -------------- ---------- ------------ ----------------
Balance, December 31, 1999 (250,000) - - (2,222,518) 755,315
Shares issued for services (260,400) (1,132,083) - - 1,758,782
Sale of convertible preferred stock 510,400 - - - 3,144,727
Exchange of stock for marketable securities - - - - 2,000,000
Sale of common stock - - - - 10,000
Acquisition of subsidiary - - - - 1,540,000
Accrual of preferred stock dividend payable - - - (46,000) (46,000)
Unrealized loss on marketable securities - - (1,563,000) - (1,563,000)
Net loss - - - (3,195,341) (3,195,341)
----------- -------------- ---------- ------------ ----------------
Balance, June 30, 2000 $ - $(1,132,083) $(1,563,000) $(5,463,859) $ 4,404,483
========= ============ =========== ============ ================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CELEXX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 10, 1998
Six Months Ended Six Months Ended Year Ended (Inception) to
June 30, 2000 June 30, 1999 December 31, 1999 December 31, 1998
--------------- ------------ --------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,195,341) $ (690,698) $ (1,906,397) $ (316,121)
--------------- ------------ --------------- ---------------
Adjustments to reconcile net loss to net cash
used in operations:
Amortization and depreciation 156,708 15,524 125,920 -
Common stock issued for interest - - 49,000 -
Common stock issued in legal settlement - - 91,200 -
Common stock issued for services 1,758,782 200,000 557,500 -
Provision for uncollectible loan receivable 500,000 - - -
Changes in assets and liabilities net of effects
from acquisition:
Accounts receivable 116,951 77,980 118,531 -
Inventory 187,951 - - -
Other current assets (8,500) (95,122) - -
Other assets - (96,000) (42,850) -
Accounts payable and accrued expenses 409,946 (11,477) (133,716) -
Deferred revenue 12,082 6,000 87,384 -
--------------- ------------ --------------- ---------------
3,133,920 96,905 852,969 -
--------------- ------------ --------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (61,421) (593,793) (1,053,428) -
--------------- ------------ --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition 533,159 8,251 8,251 -
Marketable securities - (51,000) - -
Loan receivable to third party (500,000) - - -
Cash utilized in acquisition (1,650,450) - - -
Acquisition of software marketing rights - - (112,554) -
Deferred acquisition costs - - (50,000) -
Capital expenditures (221,947) (40,986) (34,148) -
--------------- ------------ --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (1,839,238) (83,735) (188,451) -
--------------- ------------ --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 10,000 890,250 890,250 -
Net proceeds from sale of convertible preferred stock 3,144,727 - - -
Capital contributions - 197,365 - 216,121
Line of credit, net (848,570) (70,286) 14,902 -
Borrowings from related parties (58,500) - 492,654 100,000
Increase (decrease) in due to related parties 37,791 (56,225) (18,245) -
--------------- ------------ --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,285,448 961,104 1,379,561 316,121
--------------- ------------ --------------- ---------------
NET INCREASE IN CASH 384,789 283,576 137,682 -
CASH - beginning of period 137,682 - - -
--------------- ------------ --------------- ---------------
CASH - end of period $ 522,471 $ 283,576 $ 137,682 $ -
=================== =================== ================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 12,579 $ - $ 19,754 $ -
=================== =================== ================== ==================
Noncash investing and financing activities:
Note payable issued in acquisition $ 1,000,000 $ 100,000 $ 100,000 $ -
=================== =================== ================== ==================
Common stock issued for acquisitions $ 1,540,000 $ 500,000 $ 500,000 $ -
=================== =================== ================== =================
Conversion of debt to common Stock $ - $ - $ 583,640 $ -
=================== =================== ================== ==================
Fair value of assets acquired (accounts receivable,
property and equipment and customer lists)$ 3,450,360 $ 248,381 $ 248,381 $ -
=================== =================== ================== ==================
Liabilities assumed in acquisition
(accounts payable, and line of credit) $ 2,011,124 $ 487,727 $ 487,727 $ -
=================== =================== ================== ==================
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CELEXX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999 (UNAUDITED) AND THE YEAR ENDED DECEMBER
31, 1999 AND THE PERIOD JULY 10, 1998 (INCEPTION)
THROUGH DECEMBER 31, 1998
1. ORGANIZATION
CeleXx Corporation ("CeleXx" or the "Company") was originally
incorporated as Cobra Technologies International, Inc.
("International") as a Delaware corporation on July 10, 1998 to
acquire, develop, integrate and manage select private businesses that
produce, service, maintain or support the information technologies
industry.
On February 18, 1999, International was acquired by Spectrum Ventures,
Inc. ("Spectrum"), a Nevada corporation, for 4,500,000 shares of
Spectrum stock (the "Exchange"). The Exchange was completed pursuant to
the Agreement of Merger between International and Spectrum. The
Exchange has been accounted for as a reverse acquisition under the
purchase method for business combinations. Accordingly, the combination
of the two companies is recorded as a recapitalization of
International, pursuant to which International is treated as the
continuing entity. Subsequent to the Exchange, with the approval of the
Board of Directors, Spectrum changed its name to Cobra Technologies,
Inc. On August 3, 1999, Cobra Technologies, Inc. changed its name to
CobraTec, Inc. On November 4, 1999 CobraTec, Inc. changed its name to
CeleXx.
On February 18, 1999, prior to the merger with Spectrum, the Board of
Directors of Spectrum declared a 1:24 reverse stock split which
resulted in 713,475 shares outstanding. All periods presented have been
retroactively restated to give effect to this reverse stock split.
Additionally, on February 18, 1999 the Company issued 200,000 shares of
its common stock as part of the merger agreement with Spectrum in order
to receive a release from an acquisition agreement between Spectrum and
Commercial Computer Systems, Inc. These shares have been treated as a
cost of the merger with Spectrum.
On May 25, 1999 CeleXx acquired through its wholly owned subsidiary,
Pinneast.com, Inc. ("Pinneast"), all the outstanding shares of Pinnacle
East, Inc., a South Carolina Corporation, engaged in the development of
multimedia educational programs for industry and government. Pinneast
was acquired for 500,000 shares of CeleXx's common stock and a $100,000
note payable due in May 2000. Subsequent to the acquisition, Pinnacle
East, Inc. was liquidated.
F-7
<PAGE>
On April 14, 2000, CeleXx acquired Computer Marketplace, Inc. (`CMI"),
a Massachusetts company engaged in systems engineering, design and
maintenance of computer network systems. The consideration paid was
1,400,000 shares of the Company's common stock and $1,500,000 at
closing and a note payable for $1,000,000 bearing interest at 6% due in
two equal annual installments on the anniversary of the closing date.
The acquisitions of Pinneast and CMI were accounted for using the
purchase method of business combinations.
On June 9, 2000, the Board of Directors elected to change the
Company's fiscal year end from a year ending December 31 to a year
ending June 30. The decision was made to conform to industry group
standards and administrative purposes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of consolidation - The consolidated financial
statements include the accounts of the Company and its
subsidiaries. The accounts of Pinneast. and CMI have been
included from their dates of acquisitions of May 25, 1999 and
April 14, 2000, respectively. All material intercompany
transactions have been eliminated.
B. 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 revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
C. Cash and cash equivalents - The Company considers all highly
liquid temporary cash investments with an original maturity of
three months or less when purchased, to be cash equivalents.
D. Revenue recognition - Revenues are recognized as services are
provided. Deferred revenue arises from the proration of the
revenue provided by the services of the Company's Pinneast and
CMI subsidiaries. These contracts are generally completed in one
year or less.
E. Income taxes - Income taxes are accounted for under Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
F-8
<PAGE>
F. Stock based compensation - The Company accounts for stock
transactions in accordance with APB Opinion No. 25 "Accounting
for Stock Issued to Employees." Additionally, in accordance with
Statement of Financial Accounting Standards No. 123 "Accounting
for Stock Based Compensation," the Company has adopted the
proforma disclosure requirements of Statement No. 123.
G. Net loss per share - The Company has adopted Statement of
Financial Accounting Standard No. 128, "Earnings Per Share;"
specifying the computation, presentation, and disclosure
requirements of earnings per share information. Basic earnings
per share has been calculated based upon the weighted average
number of common shares outstanding. Stock opt ions and
convertible preferred stock have been excluded as common stock
equivalents in the diluted earnings per share because they are
either anti-dilutive, or their effect is not material.
H. Fair value of financial instruments - The carrying amounts
reported in the balance sheet for cash, receivables, accounts
payable and accrued expenses approximate fair value based on the
short-term maturity of these instruments.
I. Marketable securities - Investments in marketable securities are
classified as available-for-sale and are recorded at fair value
with any unrealized holding gains or losses included in other
accumulated comprehensive loss, which is a component of
stockholders' equity.
J. Intangibles assets - Intangibles assets prinapally acquired from
the acquisitions of Pinnacle East, Inc. and CMI represent
goodwill customer lists, trademarks and the acquirees' trade
names. These assets are amortized on a straight line basis over 7
10 years, . Additionally, the Company recorded the costs incurred
acquiring the marketing rights to certain software products. This
license is being amortized over 3 years.
K. Impairment of long-lived assets - The Company reviews long-lived
assets for impairment whenever circumstances and situations
change such that there is an indication that the carrying amounts
may not be recovered. At June 30, 2000, the Company believes that
there has been no impairment of its long-lived assets.
F-9
<PAGE>
3. ACQUISITIONS
The following table summarizes the acquisitions of Pinneast and CMI:
Purchase Price Pinneast CMI
-------------- -------- ---
Cash $ - $1,500,000
Common stock, 500,000 and 1,400,000
shares issued, respectively 750,000 1,540,000
Note Payable 100,000 1,000,000
Brokerage and legal costs - 200,940
Contingent consideration
(see Note 13) 226,000 -
------------ -----------
Total Purchase Price 1,076,000 4,240,940
Less: Fair Market value of
assets acquired (248,381) (3,450,360)
Liabilities assumed 487,727 2,011,124
------------ -------------
Cost in excess of net book value
of assets acquired $1,315,346 $ 2,801,704
========== ============
The cost in excess of the net book value of assets acquired include
goodwill lists, trademark and tradename:
The final allocation of the intangibles with respect to the CMI
acquisition is subject to the Company obtaining independent appraisals.
The following unaudited pro-forma information reflects the results of
operations of the Company as though the acquisitions had been
consummated as of January 1, 1998.
Six Months Ended June 30 Years Ended December 31
------------------------ -----------------------
2000 1999 1999 1998
---- ---- ---- ----
Revenue $7,586,276 $6,038,596 $16,980,192 $17,574,262
========== ========== =========== ===========
Net loss $(3,177,469) $(501,078) $(1,832,431)$ (173,767)
========== ========== =========== ===========
Net loss per share $ (0.21) $ (0.08) $ (0.19)$ (0.02)
========== ========== ============ ===========
F-10
<PAGE>
4. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
a. Cash - The Company maintains cash balances at several
commercial banks. Accounts at these financial institutions
are insured by the Federal Deposit Insurance Corporation up to
$100,000.
b. Accounts receivable - The concentration of credit risk in the
Company's accounts receivable is mitigated by the Company's
credit evaluation process, credit limits, monitoring
procedures and reasonably short term collections. Credit
losses have been within management's expectations and the
Company does not require collateral to support account
receivable. During the six months ended June 30, 2000, and
1999 and for the year ended December 31, 1999, two customers,
one customer and three customers, respectively accounted for
approximately 27%, 10% and 42%, respectively, of the Company's
revenue, respectively. These customers accounted for
approximately 22%, 10% and 34% respectively of the Company's
outstanding accounts receivable.
5. SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for reporting
information regarding operating segments in annual financial statements
and requires selected information for those segments to be presented in
interim financial reports issued to stockholders. SFAS also establishes
standards for related disclosures about products and services, and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker or
decision making group, in making decisions how to allocate resources
and assess performance. To date, the Company through its two
subsidiaries, has two principal segments, the development of multimedia
educational training programs for industry and government through
Pinneast, and the network systems and telephony consulting division
through CMI.
Segment information for the six months ended June 30, 2000 is as
follows:
Multimedia
Education Network Systems Total
------------ ---------------- --------------
Revenues $ 826,996 $ 2,738,278 $ 3,565,274
============ ================ ==============
Segment (Loss) Profit $ (71,447) $ 21,126 $ (50,321)
============ ================ ==============
Total Assets $ 1,096,341 $ 2,973,501 $ 4,069,842
============ ================ ==============
F-11
<PAGE>
6. RELATED PARTY TRANSACTIONS
As of June 30, 2000 and December 31, 1999 CeleXx owes $100,886 and
$9,013, respectively, in advances primarily from one shareholder of the
Company. The advances are non-interest bearing, uncollateralized and
have no specified date for repayment.
At June 30, 2000 and December 31, 1999, the Company has a short term
note due to the former shareholders of Pinnacle East, Inc. for
$41,500.and $100,000, respectively. This note was due in May 2000 and
the Company is presently renegotiating the terms of repayment with the
shareholders.
At June 30, 2000, the Company has a note due to the former shareholders
of CMI for $1,000,000. The note is due in two annual payments due on
the anniversary of the closing of the CMI acquisition and bears
interest at 6% per annum.
7. LINE OF CREDIT
The Company's Pinneast subsidiary has three credit lines with aggregate
availability of $300,000. As of June 30, 2000 Pinneast has $221,125 on
such lines of credit which expire between July 24, 2000 and November
10, 2003 and bear interest at 10.50% per annum. At December 31, 1999,
$258,542 was outstanding on the above lines of credit. The lines are
secured by substantially all the assets of Pinneast.
F-12
<PAGE>
The Company's CMI subsidiary has a line of credit in an amount up to
$3,000,000, which is used to purchase merchandise for resale. Interest
accrues at 1% above the prime interest rate from days 41-60. The
amounts outstanding under the line of credit are secured by accounts
receivable and inventory equal to 125 percent of the outstanding
balance. As of June 30, 2000 the outstanding balance on the line of
credit was $944,317.
9. STOCKHOLDERS' EQUITY
Common Stock Issuances:
During the year ended December 31, 1999 a related party, Edinburgh
Consulting, converted the $448,640 owed to it for 1,733,333 shares of
the Company's common stock. Pursuant to a consulting agreement between
CeleXx and Edinburgh Consulting, 1,333,333 of these shares were issued
at $0.10 per share or $133,333. The additional 400,000 shares were
issued at $0.78 per share or $315,307.
In November 1998, CeleXx entered into an agreement with an entity
partially owned by a Director of the Company for financial consulting
services. The Company paid such entity 500,000 shares of its common
stock and valued these shares at $0.25 per share and accordingly, has
recorded compensation expense of $125,000. In February 1999, the
Company entered into an agreement with a financial consultant and
issued 300,000 shares of its common stock for cash at $0.10 per share
aggregating $30,000 and recorded $270,000 in compensation expense for
services provided.
In 1999 the Company issued 860,250 shares in a private placement at
$1.00 per share for total proceeds of $860,250.
In November 1999, the Company issued 400,000 shares of its common stock
to a company which provides financial services. These services are to
include raising future equity on behalf of the Company. The Company
valued the shares at the fair market value on the date of issuance and
recorded deferred financing costs of $250,000. This financing cost will
be recorded as a reduction to additional paid-in capital pursuant to
the preferred stock offering in April 2000.
From November 1999 to December 1999, the Company issued 400,000 shares
of its common stock to a third party in order to satisfy its debt
obligations of $135,000. These shares were valued at $184,000 and the
Company recorded $49,000 in interest expense.
In November 1999, the Company issued 650,000 shares of its common stock
to two parties, each of which provided services to the Company in the
first quarter of 1999. The Company valued these shares $.25 and
recorded compensation expense of $162,500.
F-13
<PAGE>
In December 1999, the Company issued 150,000 shares of its common stock
to settle a judgement brought against the Company. The company recorded
$91,200 in expense regarding this settlement.
On January 26, 2000, the Company issued 450,000 shares of its
restricted common stock to a consultant for services rendered. The
Company recorded $252,000 in compensation expense or $0.56 per share,
which approximates the market value on the date of issuance.
In March 2000 the Company issued 635,555 shares of its restricted
common stock to three consultants for services rendered. The Company
recorded $1,174,866 in compensation expense to record these issuances.
On February 15, 2000 the Company issued 420,000 shares of its
restricted common stock to two consultants in relation to the preferred
stock offering (see Note 9). These shares were recorded at market
value, less a discount for the restrictions on trading, netted against
the gross proceeds from the shares issued.
On April 14, 2000 the Company issued 1,400,000 shares of its common
stock for the acquisition o f Computer MarketPlace, Inc. (see Note 3).
On April 11, 2000 the Company issued 22,083 shares of its common stock
to employees of its Pinneast subsidiary for proceeds of $10,000.
Additionally, the Company issued 110,000 shares of its common stock to
settle outstanding claims against Spectrum. The Company recorded
$209,000 of compensation expense to reflect such issuances.
Also, on April 11, 2000 the Company issued 650,000 restricted shares of
its common stock to three financial consultants. These consultants have
three-year agreements with the Company. The Company recorded deferred
compensation of $1,132,083 to reflect these issuances.
On April 13, 2000 the Company issued 1,000,000 shares to E-Pawn.com,
Inc. The Company received 1,000,000 shares of E-Pawn.com, Inc. common
stock in consideration for these shares. The investment was valued at
$2.00 per share of the Company's common stock or $2,000,000. (see Notes
12 and 15).
On June 7, 2000, the Company issued 25,000 shares of its restricted
common stock to a consultant for services rendered, the Company
recorded $20,000 in compensation for this issuance.
F-14
<PAGE>
In July 2000, the shareholders of the Company voted in favor of an
increase in the number of common shares authorized from 20,000,000
shares to 100,000,000 shares.
Preferred Stock Issuance:
On April 7, 2000, the Company issued 350 shares of 6% Series A
cumulative convertible preferred stock at $10,000 per share plus common
stock purchase warrants and received net proceeds of $3,144,727. The
preferred shares are convertible at the lower of the closing bid price
on the day preceding the closing of a common stock offering or 80% of
the five day common stock average price prior to the date of
conversion. The shares are convertible immediately upon the
effectiveness of a registration statement. The Company maintains a
redemption option at 125% of the common stock offering price.
In July 2000 the shareholders of the Company authorized an increase in
the number of preferred shares issuable from 1,000,000 shares to
20,000,000 shares, par value $.001, the terms of which may be
determined at the time of issuance by the Board of Directors without
further action by the shareholders.
9. EMPLOYMENT AGREEMENTS
The Company revised the employment agreement with its Chief Executive
Officer. The term of the agreement is for five years from June 1, 2000
with a base salary of $175,000 per annum. Additionally, the executive
shall be entitled to grants of the Company's common stock as determined
by the Board of Directors.
On June 1, 2000 the Company entered into a five-year employment
agreement with its Chief Financial Officer. The agreement stipulates a
base salary of $125,000 per annum. Additionally, the executive shall be
entitled to grants of the Company's common stock as determined by the
Board of Directors.
In connection with the CMI acquisition on April 11, 2000 the Company
entered into a three-year employment agreement with the former major
shareholder, as the Chief Executive Officer for CMI. The agreement
stipulates a base salary of $150,000 per annum plus participation in
Company benefits.
CMI and Pinneast have also extended employment agreements to various
key management personnel of CMI and Pinneast with terms of three (3)
years, aggregating $555,000 in annual base salary, renewable annually
thereafter.
F-15
<PAGE>
10. STOCK OPTION PLAN
On March 1, 1999 the Board of Directors (the"Board") adopted the CeleXx
Corporation 1999 stock option plan. The Board or CeleXx's compensation
committee is authorized to issue to eligible persons as defined a
maximum amount of 4,500,000 options under such plan. On July 8, 2000,
the shareholders of the Company approved an increase in the number of
options from 1,000,000 to 4,500,000. As of June 30, 2000, no options
had been issued pursuant to the above plan.
11. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carryforwards. SFAS 109 additionally requires the establishment
of a valuation allowance to reflect the likelihood of realization of
deferred tax assets.
The provision (benefit) for income taxes differs from the amounts
computed by applying the statutory federal income tax rate to income
(loss) before provision for income taxes is as follows:
December 31,
--------------------
June 30, 2000 1999 1998
------------- ---- ----
Taxes benefit computed
at statutory rate $ 1,280,000 $ 763,000 $ 107,000
Losses for which income tax benefit
not utilized (1,280,000) (763,000) (107,000)
------------ --------- ----------
Net income tax benefit $ - $ - $ -
============ ========= ==========
The Company has a net operating loss carryforward for tax purposes
totaling approximately $5,418,000 at June 30, 2000 expiring in the
years 2014 through 2020.
Listed below are the tax effects of the items related to the Company's
deferred tax asset:
December, 31
June 30, 2000 1999 1998
------------- --------- ---------
Taxes benefit of net operating loss
carryforward $ 1,280,000 $763,000 $ 107,000
Valuation Allowance (1,280,000) (763,000) (107,000)
------------ ---------- ---------
Net deferred tax asset recorded $ - $ - $ -
============ ========== =========
F-16
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
Commitments:
Operating Leases:
In May 1999 CeleXx entered into a five-year lease for office space at
an annual base rental of $92,500 for the initial year. Such base rental
shall increase by 4% each year. The lease is to commence when such
premises are available for occupancy. CeleXx is currently leasing
temporary office space from the same landlord at $5,900 per month. Rent
expense for the six months ended June 30, 2000 and years ended December
31, 1999 and 1998 was $33,505, $63,300 and $42,400, respectively.
The Company through its CMI subsidiary leases building space in
Tewksbury, Massachusetts from a related party, under a five-year lease.
The leases require minimum annual payments of $72,000 plus maintenance
and operating costs over the lease term. Total rent expenses (including
common area maintenance) for the period ended June 30, 2000 was
$20,489.
The Company through its Pinneast subsidiary leases building space in
Columbia, South Carolina under a three-year lease. The lease requires
minimum annual payments of $24,672 and expires on November 30, 2001.
Total rent expense for the six months ended June 30, 2000 was $12,706.
The Company has various leases for office furniture and equipment,
which expire between November 2000 through April 2004.
Minimum future lease commitments are as follows:
2001 $ 185,100
2002 102,749
2003 176,519
2004 148,597
2005 142,352
Thereafter 122,962
----------
$ 878,279
==========
Other Commitments:
On May 24, 2000 the Board of Directors resolved to issue 50,000 shares
of its common stock to its General Counsel pursuant to a retainer
agreement. Such shares are to be "locked-up" or unavailable for resale
over a five-year term. As of June 30, 2000, the Company had not issued
the above shares.
F-17
<PAGE>
The Company has accrued $226,000 as a contingent payment payable to the
former shareholders' of Pinnacle East, Inc. This accrual was recorded
pursuant to the stock purchase agreement between the Company and
Pinnacle East, Inc. which required as a contingent cost that the
Company's average stock price would be $2.50 for the year ending on the
anniversary of the closing of the acquisition.
Contingencies:
On August 1, 2000 the Company and its president were served in a
lawsuit filed by E-Pawn.com, Inc. ("E-Pawn") alleging causes of action
for breach of contract, fraud and breach of fiduciary duty. E-Pawn is
seeking damages, specific performance and an injunction. On or about
March 10, 2000, the Company's president signed an omnibus strategic
alliance agreement with E-Pawn whereby, under certain conditions: (a)
E-Pawn was to purchase 1,000,000 shares of CeleXx common stock at $5.00
per share in cash; (b) CeleXx would receive payments for management
fees as the appointed manager of E-Pawn; and (c) upon the final funding
of 1,000,000 shares of CeleXx Common Stock at $5.00 per share E-Pawn
would have the option to exchange $50 million in market value of E-Pawn
common stock for $50 million in market value of CeleXx common stock.
The closing of the above transactions was to occur on or before March
31, 2000. At E-Pawn's request, in April 2000 an amendment to the
agreement was signed to provide for the exchange of 1,000,000
restricted shares of CeleXx common stock for 1,000,000 shares of freely
trading common stock of E-Pawn to satisfy the cash payment for the
1,000,000 CeleXx shares. The option arrangement was also amended to be
completed with an exchange of 10 million shares of E-Pawn shares for 12
million shares of CeleXx common stock. Upon completion of this
exchange, the agreement also provided for an additional option for one
year to repeat the share exchange. CeleXx issued the 1,000,000 shares
of common stock to E-Pawn on April 13, 2000 and received 1,000,000
shares of free trading E-Pawn shares from a stockholder of E-Pawn.
CeleXx also loaned $500,000 to E-Pawn in the form of an unsecured,
short-term demand loan. The agreement and amendments were at all times
subject to various approvals, including the CeleXx Board of Directors.
The granting of the $50 million stock exchange would have represented a
change in control and, as a merger transaction, required CeleXx
shareholder approval.
F-18
<PAGE>
The Company's counsel has opined that the above transaction was void
ab initio (from the beginning). In response to the Company's action,
E-Pawn has commenced suit to enforce only those sections of the
agreement that the Company believes are favorable to E-Pawn. The
Company has moved to dismiss the lawsuit vigorously and defend the
action. CeleXx's counsel believes that the lawsuit is frivolous and is
of the opinion that the Company will prevail. E-Pawn has acknowledged
receiving from the Company $500,000. Accordingly, the Company recorded
a provision for potential uncollectibility of this loan to E-Pawn.
The Company is also party to two other matters of litigation and claims
which management believes are normal in the course of its operations.
While the results of such litigation and claims cannot be predicted
with certainty, The Company believes the final outcome of such matters
will not have a material adverse effect on its results of operations or
financial position.
13. SUBSEQUENT EVENTS
On July 26, 2000, the Board of Directors resolved to issue 7,650,000
shares of the Company's common stock to two executives. Such shares
were issued on September 1, 2000 pursuant to the executives employment
agreements and are restricted from resale during the term of these
agreements which are five years.
On August 23, 2000, the Board of Directors granted 363,225 options to
acquire shares of the Company's common stock to employees of the
Company's CMI subsidiary. These options were issued pursuant to the
Company's stock option plan (See Note 11).
On September 5, 2000, the Board of Directors authorized the grant of
2,650,000 options to acquire common stock of the Company to members of
its executive management. These options were issued pursuant to the
Company's stock option plan (See Note 11).
14. POTENTIAL BORROWINGS:
(1) On October 16, 2000, the Company's Chairman and principal
shareholder along with four other officers and/or shareholders
provided the Company with a letter of guarantee to jointly
consent to lend the Company up to $1,000,000 on an as needed
basis for a one year period ending in October 2001, repayment of
which will not be required before such date.
(2) On October 17, 2000, the Company received a $10 million secured
Revolving Credit Agreement ("Credit Agreement") maturing in
October 2003 from an asset-based lender. Availability under the
Credit Agreement is based on a formula of eligible accounts
receivable and inventory and allows for an increase in the credit
facility to consummate acquisition financing within the maximum
$10 million line. Borrowings bear interest at the Chase Bank rate
plus 1% per annum and are collateralized by essentially all
assets of the Company, such as accounts receivable, inventory,
and general intangibles, including its subsidiaries. The Credit
Agreement requires, among other conditions, compliance with
certain covenants. The consummation of the credit Agreement is
subject to the completion of the asset-based lender's due
diligence procedures.
15 SETTLEMENT OF LITIGATION (UNAUDITED)
On October 10, 2000, Celexx and E-Pawn agreed in principle to settle
the lawsuit that E-Pawn filed against Celexx and any claims that the
Companies may have with respect to each other. The settlement will
include unconditional releases and will be subject to documentation
and delivery of all considerations. The settlement includes, among
other things, the issuance of an additional 2,000,000 shares of Celexx
restricted common stock to E-Pawn (E-Pawn already has 1,000,000
shares). Celexx will also cancel the $500,000 debt that is due from
E-Pawn and return 1,000,000 freely tradable shares of E-Pawn that it
currently holds. Celexx in return will receive 5,250,000 restricted
shares of common stock of E-Pawn.
F-19
<PAGE>
Item 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Part III
Item 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the names, positions with the Company and ages of
the executive officers and directors of the Company. Directors will be elected
at the Company's annual meeting of shareholders and serve for one year or until
their successors are elected and qualify. Officers are elected by the Board and
their terms of office are, except to the extent governed by employment contract,
at the discretion of the Board.
Executive Officers and Directors
NAME AGE POSITION HELD
---- --- -------------
Douglas H. Forde 58 Chairman,President and CEO
David C. Langle 50 Director, Vice President Finance and CFO
Lionel Forde 56 Director, Vice President and Treasurer
Vincent Caminiti 48 Director and COO
Moty Hermon 58 Director
William Lerner 64 Director
David Burke 57 Director and CEO of CMI
John Straatsma 46 Secretary
DOUGLAS H. FORDE
Mr. Forde has been Chairman of the Board of Directors and President and Chief
Executive Officer since August 1999. From June 1998 until August 1999, he was
Director of Mergers and Acquisitions for the Company. From November 1996 until
June 1998, Mr. Forde was Vice President, Strategic Planning for Computer Access
International, Inc. Prior to November 1996, Mr. Forde had been a business
consultant to numerous companies, ranging from the Fortune 500 to smaller
entrepreneurial businesses. He is a graduate of the University of the Virgin
Islands, the University of Illinois, and the Bernard M. Baruch College of the
City University of New York and holds degrees in accounting, finance, and
taxation.
DAVID C. LANGLE
Mr. Langle is currently the Company's Vice President, Finance, and Chief
Financial Officer. Mr. Langle joined the Company in March 2000. Prior to joining
the Company, he was Vice President and CFO of Terra Telecommunications Corp.
since September 1997. Mr. Langle has also served in various senior management
capacities as Vice President, Chief Financial Officer and Director for three
Florida based NASDAQ and OTC companies. From 1982 to 1991 Mr. Langle was
employed by the Miami office of Spicer & Oppenheim, CPA's, an international
accounting and consulting firm where he concluded his tenure as an Audit
Partner. He is a CPA and has a Bachelor of Science Degree from the University of
Illinois in Chicago.
LIONEL FORDE
Mr. Forde is Vice President and Treasurer, and a Member of the Board of
Directors of the Company since February 1999. From November 1997 until February
1999 he was President of the international group at Computer Access
International, Inc., responsible for developing markets in the Caribbean and
Latin America. Prior to that, Mr. Forde was a senior manager in the Color Paper
22
<PAGE>
Products Division at Eastman Kodak Company. He holds an MBA (Honors) degree from
Long Island University and a BS degree in Business Administration from Eastern
Illinois University.
VINCENT A. CAMINITI
Mr. Caminiti is a Vice President, Chief Operating Officer and a member of the
Board of Directors of the Company since January of 1999. Since June of 1998 Mr.
Caminiti has devoted full time to the business development of CeleXx
Corporation. Beginning in 1994 through 1998 Mr. Caminiti was Managing Director
of Rendon International, Ltd. The Company, with offices in Denver, Los Angeles,
Hong Kong, Moscow and London, was active in business consulting for clients in
the Tele-communications and Information Technology fields. The business included
constructing strategic business alliances, identifying M&A candidates and
developing new market strategies for clients via consultative agreements, such
as CBS Television to distribute programming in the Asian markets.
MOTY HERMON
Mr. Hermon has been a Member of Board of Directors since February 1999. Mr.
Hermon has been an international investment banker and business consultant for
the past five years. From December 1979 to December 1986, he served as General
Manager of Elron, Inc., a New York Stock Exchange listed company. Elron is the
largest group of high tech companies in Israel with revenues of approximately
$1.5 billion. From December 1992 to November 1994, Mr. Hermon was the exclusive
representative and partner of Prudential Securities in Israel. He was also the
exclusive representative and partner of TA Associates from January 1986 to July
1988. TA Associates is a Boston based venture capital firm with over $1.5
billion under management. Mr. Hermon holds a BA in Economics and Political
Science from Tel-Aviv University.
WILLIAM LERNER
Mr. Lerner has been a member of the Board of Directors since February 1999.
Since 1994, Mr. Lerner has been in the private practice of corporate and
securities law with offices in Pennsylvania and Florida. Mr. Lerner is also
Counsel to the law firms of Sweeney & Associates (Pittsburgh) and Snow Becker
Krauss, PC (New York). He is a director of Seitel, Inc. (a NYSE listed oil and
gas producing company), Helm Resources, Inc. (an Amex listed company that
provides mezzanine financing to middle market companies), and
Micros-to-Mainframes, Inc. (a NASDAQ listed company and producer of high-
technology communications and computer services to Fortune 500 companies). Mr.
Lerner is a graduate of Cornell University (1955) and of the New York University
School of Law (1960). He is a member of the bars of New York and Pennsylvania.
He has served with the U.S. Securities and Exchange Commission, the American
Stock Exchange and as General Counsel to Hornblower, Weeks, Hemphill & Noyes, a
New York Stock Exchange brokerage/investment firm.
DAVID BURKE Sr.
Mr. Burke was recently appointed as a member of the Board of Directors of the
Company and CEO of Computer Marketplace, Inc. (CMI), a company he founded in
1983. Prior to CMI, Mr. Burke had fifteen years in a career that spanned several
management positions including technical supervisor, manufacturing engineering
manager, production manager, and international sales manager with the
Metrigraphics Division of Dynamics Research Corporation, a multinational
manufacturer and distributor of electro-optical products. Mr. Burke received his
technical and business education at Worchester Polytechnic, Lowell Technological
Institute and Boston University. He also received specialized training in
information systems from Novell, Microsoft, IBM, HP, Compaq and other "Tier One"
microcomputer and software producers. He is a Member of the American Production
& inventory Control Society. He co-authored "Metriform Fabrication, Electronic
Packaging and Production, "May 1981, Chaners Publishing.
23
<PAGE>
JOHN STRAATSMA
Mr. Straatsma has served as secretary since October of 1999. Since August of
1998, he has acted as a consultant to CeleXx for business development and
operations. In September 1995, Mr. Straatsma founded, and since has acted as
president of Consultants Ltd., a company that performs consulting work for
companies active in the IT industry. From January 1983 until August 1995, Mr.
Straatsma was president of Trinidad Computers Ltd., a company he helped to
found. His educational background includes a Bachelor of Commerce degree from
the University of Guelph, in Guelph, Ontario, Canada, and a Master of Science
degree in Management from Florida International University, Miami, Florida.
Item 10.
EXECUTIVE COMPENSATION
The following table sets forth information relating to the compensation paid by
CeleXx during the past fiscal year and for the six month period ended June 30,
2000 to its Chief Executive Officer and President. No options were granted to,
and no options were exercised by any of our executive officers or directors
during 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards Payouts
----------------------------------------------------------- ----------------------- -----------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
---------------- --------- ---------- --------- ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other All other
Annual Restricted compensation
Name & Compensation Stock Opinion/Sars LTIP ($)
Principal Salary Bonus ($) Award(s) (#) Payouts
Position Year ($) ($) ($) ($)
---------------- --------- ---------- --------- ----------- ------------ ---------- ----------- -----------
Doug Forde 2000* 75,000
President and 1999 34,900
CEO 1998 60,000
David Langle, 2000* 27,250
VP and CFO
Lionel Forde, 2000* 60,000
VP
</TABLE>
* Represents the six month period ended June 30, 2000
STOCK OPTIONS
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
At Assumed Annual Alternative
Rats of Stock Price to (j) and (k)
Individual Grants Appreciation for Option Price Grant Date Value
Grant Date
5% ($) 10%($) Present Value $
(j) (k) (l)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Doug Forde -0- -0- N/A N/A N/A
David Langle -0- -0- N/A N/A N/A
Lionel Forde -0- -0- N/A N/A N/A
</TABLE>
24
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise of
options to purchase shares of common stock during the fiscal year ended December
31, 1999, of each person named in the summary compensation table and the
unexercised options held as of the end of the 1999 fiscal year.
Aggregated Options/SAR Exercises in the last Fiscal year and Fiscal Year End:
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised Value of
Options/SARs at Unexercised In-The
Fiscal Year-End Money Options/SARs
Shares Acquired on Exercisable/ at Fiscal year-end
Exercise Value Realized Unexercisable Exercisable/Unexercisable
------------------ -------------- ------------- --------------------------
<S> <C> <C> <C> <C>
Name
Doug Forde N/A N/A N/A N/A
David Langle N/A N/A N/A N/A
Lionel Forde N/A N/A N/A N/A
</TABLE>
EMPLOYMENT AGREEMENTS
DOUGLAS H. FORDE, CHAIRMAN OF THE BOARD AND PRESIDENT
Under the terms of an employment agreement between the Company and Mr. Forde, in
consideration for his services to the Company, Mr. Forde will receive an annual
base salary of $150,000 as of January 1, 2000. Mr. Forde is also eligible to
participate in the Company's Incentive Stock Option Plan and stock grants as the
Board of Directors may grant from time to time. Effective June 1, 2000 the
employment agreement for Mr. Forde ,among other terms, was amended to increase
his annual base salary to $175,000 ,extended to five years and requiring Keyman
life insurance. On July 26, 2000 the Company's Board of Directors authorized the
grant of 7,000,000 shares of restricted Company common stock to Mr. Forde and
subject to a "lock-up" or resale restriction, pursuant to Mr. Forde's employment
agreement.
LIONEL FORDE, VICE PRESIDENT AND DIRECTOR
Under the terms of an employment agreement between the Company and Mr. Forde, in
consideration for his services to the Company, Mr. Forde will receive an annual
base salary of $120,000 as of January 1, 2000. Mr. Forde is also eligible to
participate in the Company's Incentive Stock Option Plan.
DAVID C. LANGLE, VICE PRESIDENT, FINANCE, CHIEF FINANCIAL OFFICER AND DIRECTOR
The Company entered into an employment agreement with David C. Langle dated as
of June 1, 2000 with a term of five (5) years. Mr. Langle serves as the Vice
President of Finance and Chief Financial Officer of the Company. His employment
agreement provides compensation in the form of an annual base salary in the
amount of $125,000 per year, participation in the Company's Incentive Stock
Option Plan, and stock grants as the Board of Directors may grant from time to
time. . On July 26, 2000 the Company's Board of Directors authorized the grant
of 650,000 shares of restricted Company common stock to Mr. Langle and subject
to a "lock-up" or resale restriction, pursuant to Mr. Langle's employment
agreement.
25
<PAGE>
DAVID BURKE,SR., CHIEF EXECUTIVE OFFICER OF CMI AND DIRECTOR
Pursuant to a three year employment agreement between the Company and Mr. Burke,
in consideration for his services to the Company, Mr. Burke will receive an
annual base salary of $150,000 as of April 11, 2000, annual performance reviews
and Company benefits. Mr. Burke is also eligible to participate in the Company's
Incentive Stock Option Plan.
The Company's subsidiaries have extended Employment Contracts to its various key
management personnel, aggregativly $555,000 annually with terms of three (3)
years, renewable annually thereafter.
1999 STOCK OPTION PLAN
On March 1, 1999 we adopted and implemented a Stock Option Plan (the "Plan").
The Plan increases the employees', advisors', consultants' and non-employee
directors' proprietary interest in us and aligns more closely their interests
with the interests of our shareholders. The Plan also maintains our ability to
attract and retain the services of experienced and highly qualified employees
and non-employee directors.
Under the Plan, we reserved an aggregate of 1,000,000 shares of common stock for
issuance pursuant to options granted under the Plan ("Plan Options"). In June
2000 the shareholders approved to amend the Company's 1999 Stock Option Plan to
increase the number of shares issuable under the Plan from 1,000,000 to
4,500,000 shares. Our Board of Directors or a Committee of the Board of
Directors (the "Committee") will administer the Plan including, without
limitation, the selection of the persons who will be granted Plan Options under
the Plan, the type of Plan Options to be granted, the number of shares subject
to each Plan Option and the Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended, or options that do not so qualify
("Nonqualified Options"). In addition, the Plan also allows for the inclusion of
a reload option provision ("Reload Option"), which permits an eligible person to
pay the exercise price of the Plan Option with shares of common stock owned by
the eligible person and receive a new Plan Option to purchase shares of common
stock equal in number to the tendered shares. Any Incentive Option granted under
the Plan must provide for an exercise price of not less than 100% of the fair
market value of the underlying shares on the date of such grant, but the
exercise price of any Incentive Option granted to an eligible employee owning
more than 10% of our common stock must be at least 110% of such fair market
value as determined on the date of the grant. The term of each Plan Option and
the manner in which it may be exercised is determined by the Board of the
Directors or the Committee, provided that no Plan Option may be exercisable more
than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of our common stock,
no more than five years after the date of the grant.
The exercise price of Nonqualified Options shall be determined by the Board of
Directors or the Committee.
The per share purchase price of shares subject to Plan Options granted under the
Plan may be adjusted in the event of certain changes in our capitalization, but
any such adjustment shall not change the total purchase price payable upon the
exercise in full of Plan Options granted under the Plan.
Our officers, directors, key employees and consultants and our subsidiaries (if
applicable in the future) will be eligible to receive Nonqualified Options under
the Plan. Only our officers, directors and employees who are employed by us or
by any subsidiary thereof are eligible to receive Incentive Options.
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All Plan Options are non-assignable and nontransferable, except by will or by
the laws of descent and distribution, and during the lifetime of the optionee,
may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of but is a member of our Board of
Directors and his service as a Director is terminated for any reason, other than
death or disability, the Plan Option granted to him shall lapse to the extent
unexercised on the earlier of the expiration date or 30 days following the date
of termination. If the optionee dies during the term of his employment, the Plan
Option granted to him shall lapse to the extent unexercised on the earlier of
the expiration date of the Plan Option or the date one year following the date
of the optionee's death. If the optionee is permanently and totally disabled
within the meaning of Section 22(c)(3) of the Internal Revenue Code of 1986, the
Plan Option granted to him lapses to the extent unexercised on the earlier of
the expiration date of the option or one year following the date of such
disability.
The Board of Directors or the Committee may amend, suspend or terminate the Plan
at any time, except that no amendment shall be made which (i) increases the
total number of shares subject to the Plan or changes the minimum purchase price
therefore (except in either case in the event of adjustments due to changes in
our capitalization), (ii) affects outstanding Plan Options or any exercise right
thereunder, (iii) extends the term of any Plan Option beyond ten years, or (iv)
extends the termination date of the Plan. Unless the Plan has been suspended or
terminated by the Board of Directors, the Plan shall terminate in approximately
10 years from the date of the Plan's adoption. Any such termination of the Plan
shall not affect the validity of any Plan Options previously granted thereunder.
On August 23, 2000 and September 5, 2000, the Company granted 363,225 incentive
stock options to various employees of CMI with a three (3) year vesting
schedule, and 2,650,000 to executive management of the Company, 500,000 options
that are immediately exercisable and the balance with a three (3) year vesting
schedule. All the foregoing options were granted at the fair market value of the
common stock covered by the options.
Section 16(a) Beneficial Ownership Reporting Compliance
COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, each
executive officer, director and beneficial owner of 10% or more of the Company's
Common Stock is required to file certain forms with the Securities and Exchange
Commission. A report of beneficial ownership of the Company's Common Stock on
Form 3 is due at the time such person becomes subject to the reporting
requirement and a report on Form 4 or 5 must be filed to reflect changes in
beneficial ownership occurring thereafter. During the year ended December 31,
1999 and as of June 30, 2000, none of the executive officers, directors, and
beneficial owners of 10% or more of the Company's Common Stock were current with
these filing requirements.
Item 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
shares ("Shares") of Common Stock, par value $.001, beneficially owned as of
September 21,2000 for:
Each shareholder known by the Company to be the beneficial owner of five (5%)
percent or more of the Company's outstanding Common Stock, each of the Company's
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executive officers and directors, and all executive officers and directors as a
group. In general, a person is deemed to be a "beneficial owner" of a security
if that person has or shares the power to vote or direct the voting of such
security, or the power to dispose of or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities to
which the person has the right to acquire beneficial ownership within sixty (60)
days. As of September 21,2000 there were 24,019,696 shares of Common Stock
outstanding.
No. of Shares
Shares Beneficially Percentage of Approximate
Name (1) Owned Outstanding Shares
--------------------- --------------------------------- ------------------
Douglas H. Forde(2)(5) 7,464,375 31.08%
Lionel Forde(3)(5) 1,025,000 4.27
Vincent Caminiti 250,000 1.04
David Langle 650,000 2.71
David Burke, Sr. 1,400,000 5.83
Moty Hermon 500,000 2.08
William Lerner
Michelle J. Michalow(4)(5) 575,000 2.39
John W. Straatsma 250,000 1.04
All Executive Officers and
Directors as a group (8 persons) 11,539,375 48.04%
(1) Unless otherwise indicated, the address of each of the persons set
forth above is 7251 West Palmetto Park Road, Boca Raton, FL 33433.
(2) Includes 375,000 shares owned by the spouse and daughter of Mr. Forde.
(3) Lionel Forde is the brother of Douglas H.Forde. Includes 800,000 shares
owned by the spouse and family of Mr. Forde.
(4) Ms. Michalow is a former officer of CeleXx. Includes 325,000 shares
owned by the mother of Ms. Michalow.
(5) Douglas H. Forde, Lionel Forde and Michelle J. Michalow have each
pledged 250,000 shares, 100,000 shares and 350,000, respectively,shares
of restricted Company stock as collateral to the holder of the Series A
Convertible Preferred Stock.
Item 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1998, we entered into an agreement with Girmon Investment Co.,
Limited, a company, which is 33% owned by Moty Hermon, a member of our board of
directors. The agreement is for corporate finance advisory services for an
initial period of 36 months. As consideration for business, advisory and other
consulting services performed on our behalf, Girmon Investment received 500,000
shares of our Common Stock. Each share was valued at $.25 for an aggregate value
of $125,000.
Since February 1998, Edinburgh Consulting, an entity that is wholly owned by
Michelle J. Michalow, a former officer of CeleXx, has loaned us $664,761. In
December 1998, Edinburgh contributed to capital $216,121. In February 1999,
pursuant to the terms of a consulting agreement between Edinburgh and CeleXx,
Edinburgh converted $133,333 of the outstanding debt into 1,333,333 shares of
our common stock at $.10 per share. Additionally, in March 1999 Edinburgh
converted the remaining $315,307 into 400,000 shares of our common stock at $.78
per share.
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In May 1999, we signed a merger agreement and took effective control of West
Columbia, SC-based Pinneast.com for a combination of cash and stock. In exchange
for all of the outstanding stock of Pinneast, an aggregate of 500,000 shares of
our common stock was issued to the Pinneast.com shareholders and a cash payment
of $100,000 (deferred for one year). The shares of common stock were valued at
$1.50 per share. Accordingly, the issuance of these securities was exempt from
registration requirements of the Act pursuant to Section 4(2) of the Act.
Our second acquisition, Computer Marketplace, Inc. (CMI) was completed on April
11, 2000, pursuant to an Agreement and Plan of Reorganization for a value of $
5,000,000. Payment consisted of 1,400,000 shares of our common stock and cash of
$1,500,000 at closing and a promissory note for $1 million at 6% per annum,
payable in equal installments at the first and second anniversaries. David Burke
Sr., and five (5) other key employees retained their positions in CMI pursuant
to 3-year employment contracts. CMI, located in Tewksbury, Massachusetts, is a
sixteen-year-old network solution and systems design company, founded in 1983.
CMI focuses on providing Fortune 1000 companies, government agencies and
educational institutions with networking solutions, systems integration, and
computer telephony integration.
During the six month period ended June 30, 2000 Douglas H. Forde provided the
Company with $100,804 in advances that are non-interest bearing,
un-collateralized and have no specified date for repayment.
Douglas H. Forde, Chairman and CEO was granted 7,000,000 shares of restricted
company common stock by the Board of Directors on July 26, 2000, pursuant to an
amended five-year employment agreement. The shares were issued on September
1,2000.
David C. Langle, CFO was granted 650,000 shares of restricted company common
stock by the Board of Directors on July 26, 2000, pursuant to an amended
five-year employment agreement. The shares were issued on September 1,2000.
Item 13.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The Exhibits listed below are filed or incorporated by reference herein.
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EXHIBIT INDEX
Exhibit
Number Description of Document
2.1 Plan of Reorganization and Agreement of Merger, dated
April 14,2000, by and between Computer Marketplace, Inc.,
David Burke, Sr., Betty Des Meules, Cobra Technologies, Inc.
and CMI Acquisition Corp.
3.1 By-Laws
3.2 Articles of Incorporation
3.3 Articles of Amendment of Articles of Incorporation
4.1 Stock Option Plan
10.1 Lease Agreement dated May 11, 1999, between Sawgrass Realty
Holdings, Inc. and Celexx Corporation (f/k/a Cobra
Technologies, Inc.)
10.2 Employment Agreement Lionel Forde
10.3 Employment Agreement Doug Forde
10.4 Merger Agreement by and between Pinneast.com, Inc. and Celexx
Corporation, dated May 25, 1999
*10.6 Amended Employment Agreement- Douglas H. Forde
*10.7 Employment Agreement - David C. Langle
*10.8 Series A Convertible Stock Purchase Agreement dated as of April 7,
2000 among Celexx Corporation and Birch Circle LLC
*10.8(a) Terms of Series A Convertible Preferred Stock
*10.8(b) Registration Rights Agreement pursuant to Convertible Preferred
Stock Purchase
*10.8( c ) Security Agreement pursuant to Convertible Preferred Stock
Purchase
*10.8(d) Intellectual Property Security Agreement pursuant to Convertible
Preferred Stock Purchase
*10.8(e) Stock Pledge Agreement
*10.8(f) Warrant Certificate
*21.1 Subsidiaries of the Company
*27 Financial Data Schedule
* Incorporated by reference
** Additional Exhibits to be provided
(b) Reports on Form 8-K.
On June 29, 2000 the Company filed a report on Form 8-K stating the Company's
change in fiscal year from a year ended on December 31, to the new fiscal year
end of June 30.
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On August 18, 2000 the Company filed a report on 8-K/A reporting an Investment
Agreement with E-Pawn.com, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: October 12, 2000 REGISTRANT:
CeleXx Corporation
By: /s/ Douglas H. Forde
-----------------------
Douglas H. Forde
President, Chairman of the Board,
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ Doug H. Forde
November 10, 2000
---------------------------------------------------
Doug H. Forde
President, Chairman of the Board,
and Chief Executive Officer
(principal executive officer)
By: /s/ David C. Langle
November 10, 2000
---------------------------------------------------
David C. Langle
Vice President Finance
And Chief Financial Officer
By: /s/
---------------------------------------------------
Director
By: /s/
---------------------------------------------------
Director
By: /s/
---------------------------------------------------
Director
A copy of the Company's Annual Report on Form 10-KBS for the fiscal period ended
June 30,2000 with exhibits, may be obtained by any stockholder of the Company,
without charge, by writing to: CELEXX CORPORATION, Attn: Investor Relations,7251
W. Palmetto Road, Suite 208, Boca Raton, FL 33433
