<PAGE>
Form 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 0-9129
DESIGN AUTOMATION SYSTEMS, INC.
Exact name of Registrant as specified in its charter
TEXAS 75-1657943
State of Incorporation IRS Employer Identification Number
SUITE 370
3200 WILCREST
HOUSTON, TEXAS 77042-3366
713-783-2374
Address and telephone number of principal executive offices
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
The number of shares of common stock of the Registrant outstanding at
November 5, 1999 was 22,683,986.
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 1-4
Item 2 Management's Discussion and Analysis or Plan of Operation 6
PART II OTHER INFORMATION
Item 2 Changes of Securities and Use of Proceeds 10
Item 6 Exhibits and Reports on Form 8-K 10
</TABLE>
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September December
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,287 $ 850,925
Account receivable - trade, no allowance for doubtful accounts 3,367,854 4,020,385
Net assets - discontinued operations 135,136 -
Other assets 413,361 144,579
-------------- --------------
Total current assets 3,923,638 5,015,889
PROPERTY AND EQUIPMENT, net 267,290 71,480
Goodwill, net 7,301,871 -
-------------- --------------
Total assets $ 11,492,799 $ 5,087,369
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable $ 2,362,975 $ 1,031,483
Accounts payable 2,361,285 3,649,398
Accounts payable to affiliate 22,980 50,419
Accrued expenses and other current liabilities 662,884 386,488
-------------- --------------
Total current liabilities 5,410,124 5,117,788
SHAREHOLDERS' EQUITY (DEFICIT) :
Common stock, par value $ .01; 50,000,000 shares authorized;
21,583,986 and 16,560,000 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 215,840 165,600
Additional paid -in capital 6,943,215 -
Accumulated Deficit (1,076,380) (196,019)
-----------------------------
Total shareholders' equity (deficit) 6,082,675 (30,419)
-------------- --------------
Total liabilities and shareholders' equity (deficit) $ 11,492,799 $ 5,087,369
============== ==============
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
1
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
REVENUES $ 4,862,888 $ 3,835,663 $ 19,234,615 $ 14,605,097
OPERATING EXPENSES:
Cost of revenues 4,226,029 3,429,215 16,997,202 12,947,112
Selling, general and administrative 1,418,284 521,752 3,159,835 1,497,060
-------------- -------------- -------------- --------------
5,644,313 3,950,967 20,157,037 14,444,172
-------------- -------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS (781,425) (115,304) (922,422) 160,925
OTHER INCOME (EXPENSE):
Interest expense (22,445) (15,170) (23,092) (43,154)
Interest income 2,600 22,470 31,078 35,304
Other income (expense) (1,680) 52,150 27,495 126,544
-------------- -------------- -------------- --------------
(21,525) 59,450 35,481 118,694
-------------- -------------- -------------- --------------
Income (loss) before income taxes and
discontinued operations (802,950) (55,854) (886,941) 279,619
Income taxes (6,040) - (5,000) -
-------------- -------------- -------------- --------------
Income from continuing operations (808,990) (55,854) (891,941) 279,619
Discontinued Operations (60,448) - (106,926) -
-------------- -------------- -------------- --------------
Net income (loss) $ (869,438) $ (55,854) $ (998,867) $ 279,619
============== ============== ============== ==============
BASIC EARNINGS (LOSS)PER COMMON SHARE:
Continuing operations $ (.04) $ - $ (.04) $ .02
Discontinued operations $ - $ - $ - $ -
Net income $ (.04) $ - $ (.05) $ .02
WEIGHTED AVERAGE SHARES OUTSTANDING 21,483,986 14,400,000 20,812,836 14,400,000
-------------- -------------- -------------- --------------
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
2
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DESIGN AUTOMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (998,867) $ 279,619
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Discontinued operations 106,926 -
Depreciation 28,000 10,062
Amortization 267,195 -
Changes in assets and liabilities, net of assets acquired in
acquisitions of businesses
Accounts receivable 1,157,953 740,524
Accounts payable (1,365,425) 632,604
Accrued expenses and other current liabilities (288,863) 850,564
Other, net (223,206) (250,225)
--------------- ---------------
Net cash (used in) provided by operating activities (1,316,287) 2,263,148
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (161,803) (40,970)
Net cash used in acquisitions of business (497,040) -
Advances to Related Party - (414,151)
-------------- ---------------
Net cash used in investing activities (658,843) (455,121)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from and payment on notes payable, net 1,131,492 (1,784,526)
Advances from shareholder, net - 137,808
-------------- ---------------
Net cash provided by (used in) financing activities 1,131,492 (1,646,718)
-------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (843,638) 161,309
CASH AND CASH EQUIVALENTS, at beginning of period 850,925 354,551
-------------- --------------
CASH AND CASH EQUIVALENTS, at end of period $ 7,287 $ 515,860
============== ==============
SUPPLEMENTAL DISCLOSURES - interest paid $ 23,042 $ 61,060
============== ==============
- income taxes paid $ 72,600 $ -
============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of stock in business combinations $ 6,868,600 $ -
Net assets acquired in business combinations 203,426 -
Goodwill (7,569,066) -
-------------- --------------
Net cash used in business combinations $ (497,040) $ -
=============== ==============
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
3
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED ENDED SEPTEMBER 30, 1999 AND 1998
PART 1
FINANCIAL INFORMATION
(1) PRESENTATION OF INTERIM INFORMATION
The unaudited consolidated financial statements and related notes are
presented as permitted by Form 10-QSB, and do not contain certain
information included in the Company's audited consolidated financial
statements and notes for the fiscal year ended December 31, 1998. The
information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented. The results
of operations for interim periods are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31, 1999.
The accompanying unaudited condensed consolidated financial statements and
related notes should be read in conjunction with the audited consolidated
financial statements on the Form 10-K of Design Automation Systems, Inc.
(the "Company") and notes thereto, for its fiscal year ended December 31,
1998.
(2) BUSINESS COMBINATION
Effective January 1, 1999, Loch Exploration, Inc. (Loch), a Texas
corporation, acquired all of the stock of the Company in a "reverse
merger," whereby the Company is the acquiror for accounting purposes. In
connection with the acquisition, Loch (effectively a shell corporation)
issued the Company's shareholders 16,560,000 shares of authorized but
unissued common stock, $.01 par value, valued at approximately $ 4.3
million. The transaction was funded January 4, 1999. The amount of
consideration was negotiated through an arms-length transaction. The
transaction was accounted for in a manner similar to a pooling of
interests, whereby no goodwill resulted from this transaction. As a result
of the transaction, the Company is taxed as a C Corporation; however, at
the date of the transaction, no significant basis differences existed
between tax and financial reporting purposes that would result in deferred
tax balances. Net assets and operations as presented herein as discontinued
operations are $ 135,136 and ($ 106,926) respectively.
Effective January 1999, prior to the merger, the Board of Directors of the
Company approved five-year employment agreements with three key employees
for an aggregate minimum base salary and bonus compensation of $ 925,000.
(3) ACQUISITIONS
On March 31, 1999, the Company acquired all of the issued and outstanding
stock of COAD Solutions, Inc. (COAD) an information technology consulting
firm in an arms-lengths transaction between the Company and the
shareholders of COAD. The consideration for the acquisition was (1) 600,000
shares of Company common stock, (2) $ 200,000 cash, payable $ 100,000 at
closing, and $ 100,000 payable in quarterly installments of $25,000
beginning 90 days from the closing date, and (3) for a period of 24 months
each COAD stockholder will receive a 20% royalty on gross revenues of
SQLACE products. The stockholders of COAD were granted employment
agreements with COAD, a wholly owned subsidiary of the company which
expire on December 31, 2004 and will continue thereafter on a year to
year basis and include a non-compete provision for the term of the
agreement and one year thereafter. However, the Company can provide no
assurance the non-compete will be enforceable. The transaction has been
accounted for as a purchase and resulted in goodwill of approximately $
2,900,000, which will be amortized over a period of ten years.
4
<PAGE>
On May 28, 1999, the Company acquired all of the issued and outstanding
stock of Dynamic Professional Services, LLC, (Dynamic) an information
technology consulting firm in an arms-lengths transaction between the
Company and the shareholders of Dynamic. The consideration for the
acquisition was: (1) 524,000 shares of Company common stock, (2) $ 200,000
cash, payable $ 100,000 at closing, and $ 100,000 payable in quarterly
installments of $ 25,000 beginning 90 days from the closing date, and (3)
additional stock consideration if on June 1, 2000 the closing price for the
Company common stock for the prior 15 business days is less than $ 5.15 per
share in an amount equal to 5,340 shares for each $0.01 below $ 5.15. The
Company has reserved 2,750,000 shares of Company common stock for the
additional consideration. Certain stockholders of Dynamic entered into
employment agreements with the companies' wholly owned subsidiary COAD,
which will continue on a year to year basis and include a non-compete
provision for the term of the agreement and one year thereafter. However,
the Company can provide no assurance the non-compete will be enforceable.
This transaction has been accounted for as a purchase and resulted in
goodwill of approximately $ 2,800,000, which will be amortized over a
period of ten years.
On July 30, 1999, the Company acquired all of the issued and outstanding
stock of Connected Software Solutions, Inc. (Connected), an
electronic-business consulting and training firm, in an arms-length
transaction between the Company and the members of Connected. The
consideration for the acquisition was: (1) 300,000 shares of Company
common stock, (2) $ 300,000 cash payable in six quarterly installments of
$ 50,000 beginning 90 days from the closing date, and (3) additional stock
consideration if on August 1, 2000 the closing price for the Company
common stock for the prior 15 business days is less than $ 5.15 per share
in an amount equal to 3000 shares for each $0.01 below $5.15. The Company
has reserved 1,500,000 shares of Company common stock for the additional
consideration. The shareholders of Connected entered into employment
agreements with the Company's wholly-owned subsidiary, COAD, which will
continue on a year-to-year basis and include a non-compete provision for
the term of the agreement and one year thereafter. However, the Company
can provide no assurance the non-compete can be enforceable. This
transaction has been accounted for as a purchase, and resulted in goodwill
of approximately $ 1,800,000, which will be amortized over a period of ten
years.
The earnings of each acquired entity are included in the Company's
consolidated operations from each respective acquisition date. The
following unaudited pro forma condensed results of operations for the nine
months ended September 30, 1999 and 1998 have been prepared as if the
transactions had occurred on January 1, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 4,912,263 $ 4,937,929 $ 21,321,436 $ 17,911,895
Income (loss) from $ (884,630) $ (212,856) $ (1,059,968) $ 5,196
continuing operations
Net (loss) $ (948,353) $ (166,660) $ (1,171,894) $ (131,992)
Loss Per Common Share $ (.04) $ (.01) $ (.06) $ (.01)
</TABLE>
5
<PAGE>
(4) SUBSEQUENT EVENT
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statement
This Quarterly Report on Form 10-QSB contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation,
failure of the Company to implement its business plan, competitive pressures
in the ASP industry and the Company's response thereto, the Company's ability
to obtain capital in favorable terms and conditions, and general conditions
in this economy.
OVERVIEW
THE FOLLOWING ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, OF THE COMPANY CONTAINED
ELSEWHERE IN THIS FORM 10-QSB.
Design Automation Systems, Inc., doing business as "EpicEdge" (the "Company")
engages in the business of enabling Global 1000 and dot com companies to meet
their business goals through implementation of e-business strategies
utilizing Enterprise Portal Solutions that allow anytime, anywhere,
device-independent sharing of applications, information, and communication
tools between trading communities. The Company's services assist customers in
dealing with issues during the entire life cycle of their projects; including
system architecture and design, product acquisition, configuration and
implementation, ongoing operational support, and evolutions in technology.
The Company provides solutions to complex information technology problems
focusing on enabling it's clients to take advantage of the evolving internet
economy.
In March 1999, the Company acquired all of the issued and outstanding stock
of COAD Solutions, Inc. ("COAD"), which provides the Company with a highly
experienced team of consultants specializing in PeopleSoft HRMS
implementations, custom development and upgrades. COAD also specializes in
Siebel Customer Relationship Management Solutions, Internet/Intranet
development, and project management services.
In May 1999, the Company acquired all of the issued and outstanding stock of
Dynamic Professional Services, LLC. ("Dynamic") and merged Dynamic into COAD.
Dynamic increases the Company's PeopleSoft HRMS practice, and expands the
COAD involvement into the public sector.
6
<PAGE>
In July 1999, the Company acquired all of the issued and outstanding stock of
Connected Software Solutions, Inc. ("Connected") and merged Connected into
COAD. Connected solidifies the Company's e-business practice with an
established and reputable track record of success developing tailored
e-business solutions for Global 1000 clients.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
For the nine months ended September 30, 1999, as compared to the nine months
ended September 30, 1998, revenues to $ 19,234,615 from $ 14,605,097, an
increase of $ 4,629,518 or 32% primarily due to internal growth of sales and the
expanding consulting services.
For the nine months ended September 30, 1999, gross profit increased to
$ 2,237,413, as compared to the nine months ended September 30, 1998, of
$ 1,657,985, due to greater sales volume, and new consulting services being
added that have not previously existed. The gross profit percentage for the
nine months ended September 30, 1999, was 12% compared to 11% for the nine
months ended September 30, 1998, as a result of higher margins in consulting
services and lower margins in hardware. Selling, general, and administrative
expenses increased to $ 3,159,835 for the nine months ended September 30,
1999, from $ 1,497,060 for the nine months ended September 30, 1998, an
increase of $1,662,775 or 111%, primarily due to an increase in personnel
costs to service increased revenues, increased professional fees related
primarily to being a public entity and an increase of amortization of
goodwill related to the acquisitions in 1999. This resulted in a loss from
operations of $ 922,422 for the nine months ended September 30, 1999, as
compared to income from operations of $ 160,925 for the nine months ended
September 30, 1998.
For the nine months ended September 30, 1999, net loss was $ 998,867 as
compared to a net income of $ 279,619 for the nine months September 30, 1998,
primarily as a result of increase of operating expenses, non-cash expenses
related to the acquisitions of 1999, and the discontinued operations.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998.
For the three months ended September 30, 1999, as compared to the three
months ended September 30, 1998, revenues increased to $ 4,862,888 from
$ 3,835,663, an increase of $ 1,027,225 or 27% primarily due to an increase in
consulting services. The acquisitions of Dynamic, COAD, Connected have
increased the consulting revenues of the Company for the three months ended
September 30, 1999, over the comparable period in 1998.
For the three months ended September 30, 1999, gross profit increased to
$ 636,859 or 57% as compared to the three months ended September 30, 1998, of
$ 406,448 primarily due to higher profits from consulting services. The gross
profit percentage for the three months ended September 30, 1999, was 13%
compared to 11% for the three months ended September 30,1998, as a result of
higher margins from consulting services and lower margins in hardware.
Selling, general, and administrative expenses increased to $ 1,418,284 for
the three months ended September 30, 1999, from $ 521,752 for the three
months ended September 30, 1998, an increase of $ 896,532 or 63%, primarily
due to an increase in professional fees related to being a public entity, and
acquisitions which include approximately $ 172,172 in amortization cost. For
the three months ended September 30, 1999, this resulted in a loss from
operations of $ 781,425, as compared to $ 115,304 loss from operations for
the three months ended September 30, 1998.
7
<PAGE>
For the three months ended September 30, 1999, net loss was $869,438 as
compared to a net loss of $ 55,854 for the three months September 30, 1998,
primarily as a result of increased operating expenses, and non-cash expenses
related to the 1999 acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's primary sources of liquidity were
cash and cash equivalents of $7,287, $3,367,854 accounts receivable, and
$109,740 of available and unused funds in the Company's line of credit. The
Company had a working capital deficit of $ 1,486,486 as of September 30, 1999.
Net cash used in operating activities was $ 1,316,287 for the nine months
ended September 30, 1999, as compared to net cash provided by operating
activities of $ 2,263,148 at September 30, 1998, the difference was primarily
due to accounts payable, timing of payments to vendors, and a related party
accounts payable in 1998 that was eliminated at December 31, 1998.
Net cash used in investing activities was $ 658,843 for the nine months ended
September 30, 1999, as compared to $ 455,121 for the nine months ended
September 30, 1998, primarily due to the increase of property, and equipment
in 1999 and cash used in the aforementioned acquisitions of COAD, Dynamics,
and Connected in 1999.
Net cash provided by financing activities was $ 1,131,492 for the nine months
ended September 30, 1999, as compared to net cash used in financing
activities $ 1,646,718 for the nine months ended September 30, 1998, the
result of an increase in the Company's line of credit.
As of October 31, 1999 the Company had $ 168,751 in cash and cash
equivalents. Management believe that the Company's line of credit, current
assets and cash generated from operations will be sufficient to accommodate
the Company's current operations through fiscal year 1999.
The Company's capital requirements in connection with its business plans will
be significant. The Company believes that net proceeds of future anticipated
debt or equity financing, and giving effect to revenues which are projected
to be realized from operations, should be sufficient to fund ongoing
operations and its business plan. Notwithstanding, there is no assurance that
such anticipated financing will be undertaken, and if undertaken, will be
successful or that such proceeds derived therefrom, will in fact be
sufficient to fund operations and meet the needs of the Company's business
plans. Lower than expected earnings resulting from adverse economic
conditions or otherwise, could restrict the ability of the Company to expand
its business as planned, and if severe enough may shorten the period in which
the current working capital may be expected to satisfy the Company's
requirements, force curtailed operations, or cause the Company to sell assets.
DISCONTINUED SEGMENT RESULTS OF OPERATIONS
REVENUES AND OPERATING EXPENSES:
Total revenue for the third quarter of 1999 amounted to $ 133,634, and lease
operating expenses amounted to $71,488. The third quarter net loss of
$ 60,448 is mainly due to the increased operating expenses. The revenue for
8
<PAGE>
the nine months ended September 30, 1999, amounted to $ 332,378, and lease
operating expenses amounted to $209,100. The net loss for the nine months
ended September 30, 1999, is due to the overall market decline in oil and gas
price and operating expenses.
YEAR 2000 COMPLIANCE ISSUES
The year 2000 poses certain issues for business and consumer
computing, particularly the functionality of software for two-digit storage
of dates and special meanings for certain dates such as 9/9/99. The year 2000
is also a leap year, which may also lead to incorrect calculations,
functions, or system failure. The problem exists for many kinds of software,
including software for mainframes, PCs, and embedded systems.
In assessing the effect of the year 2000 problem on the Company,
management has identified, and is currently evaluating, the following three
general areas:
- Internal infrastructure;
- Supplier/third-party relationships;
- Contingency plans.
A discussion of the three general areas as well as management's
ongoing and planned actions with regard to each is set forth below:
INTERNAL INFRASTRUCTURE. The Company is in the process of verifying
that all of its personal computers, servers, and software are Year 2000
compliant. The Company intends to replace or upgrade all items that are found
not to be year 2000 compliant. The Company intends to determine if the
software vendors of all of its critical applications have represented that
their products are year 2000 compliant. The Company will obtain certification
from its vendors that these systems are year 2000 compliant. The costs
related to these efforts have not been nor are they expected to be material
to the Company's business, financial condition, or results of operations.
SUPPLIERS/THIRD-PARTY RELATIONSHIPS. The Company has been gathering
information from vendor Web sites and available compliance statements to
identify and, to the extent possible, resolve issues involving the year 2000
problem. The Company relies on outside vendors for water, electrical, and
telecommunications services as well as climate control, building access, and
other infrastructure services. The Company does not intend to independently
evaluate the year 2000 compliance of the systems utilized to supply these
services. The Company has received no assurance of compliance from the
providers of these services. There can be no assurance that these suppliers
will resolve any or all year 2000 problems with these systems before the
occurrence of a material disruption to the Company's business. Any failure of
these third parties to resolve year 2000 problems with their systems in a
timely manner could have a material adverse effect on the Company's business,
financial condition, or results of operation.
SOFTWARE RESOLD BY THE COMPANY. The Company resells software that
has been developed outside the Company. Reliance is placed upon the software
vendor and distributor to address the year 2000 problem. Prior to taking on a
software for resell, the Company is provided documentation from the software
developer and the distributor of the software regarding its year 2000
compliance.
CONTINGENCY PLANS. The Company has not currently developed a formal
contingency plan to be implemented as part of its efforts to identify and
correct year 2000 problems affecting its internal systems. However, if the
Company deems it necessary, it may take the following actions:
. Accelerated replacement of affected equipment or software;
. Short to medium-term use of backup equipment and software;
. Wholesale backup of existing computerized data prior to January 1,
2000;
9
<PAGE>
. Increased work hours for Company personnel; and/or
. Other similar approaches.
If the Company is required to implement any of these contingency
plans, such plans could have a material adverse effect on the Company's
business, financial condition, or results of operations.
Based on the actions taken to date as discussed above, the Company
is reasonably certain that it has or will identify and resolve all year 2000
problems that could materially adversely affect its business and operations.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 30, 1999, the Company issued 300,000 shares of common stock
to the members of Connected Software Solutions, Inc. This common stock issued
was part of the consideration given for the acquisition of Connected Software
Solutions, Inc. The Company believes this transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as an isolated
transaction by an issuer not involving a public offering. Through the due
diligence process the investor had access to the inner workings of the
company, which would provide it with the same kind of information as would be
included in a registration statement.
On October 6, 1999, the Company issued 1,100,000 shares of common
stock to Optimization Group, LLC for services to be rendered to the Company.
The Company believes this transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act as an isolated transaction by an issuer
not involving a public offering. Through the due diligence process the
investor had access to the inner working s of the company, which would
provide it with the same kind of information as would be included in a
registration statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
2.1 (1) Exchange Agreement by and between Loch
Exploration, Inc. and Design Automation Systems
Incorporated
2.2 (2) Exchange Agreement by and between Loch
Exploration, Inc. and COAD Solutions, Inc.
2.3 (2) Acquisition Agreement of Cherokee Methane
Corporation
2.4 (2) Plan of Merger between the Company and Design
Automation Systems Incorporated
10
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2.5 (6) Exchange Agreement between the Company and Dynamic
Professional Services, LLC
2.6 (7) Exchange Agreement between the Company and
Connected Software Solutions, Inc.
3.1 (3) Articles of Incorporation
3.2 (4) Amended Articles of Incorporation
3.3 (3) By-laws
4.1 (3) Common Stock Specimen
10.1 (4) 1999 Employee Stock Option Plan
10.2 (2) Employment Agreement with Carl Rose
10.3 (2) Employment Agreement with Charles Leaver
10.4 (5) Employment Agreement with Kelly Knake
10.5 (2) Lease Agreement
10.6 (2) Indirect Reseller Agreement between the Company,
Hewlett-Packard Company and Hall-Mark Computer
Products
10.7 (2) Indirect Reseller Agreement between the Company,
Hewlett-Packard Company and Client Systems, Inc.
10.8 (2) Indirect Value Added Reseller Agreement between
the Company and Sun Microsystems Computer
Corporation
10.9 (2) IBM Business Partner Agreement for Solution
Providers
10.9 (8) 1999 Line of Credit with FINOVA Capital
Corporation
10.10 (2) Line of Credit with Finova Corporation
10.11 (9) Agreement for Services with Optimization Group,
LLC
21.1 (2) List of Subsidiaries of the Registrant
27. (8) Financial Data Schedule
</TABLE>
-------------------------
(1) Filed as an exhibit to the Company's Current Report on Form
8-K dated January 15, 1999 and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's 10-KSB for the year
ended December 31, 1998 and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's Registration Statement
on Form S-1 dated September 7, 1979 and incorporated herein
by reference.
(4) Filed as an exhibit to the Company's Definitive Information
Statement filed March 9, 1999 and incorporated herein by
reference.
(5) Filed as an exhibit to the Company's 10-QSB for the quarter
ended March 31, 1999 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form 8-K filed June 14,
1999 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 8-K filed August
11, 1999 and incorporated herein by reference.
(8) Filed as an exhibit to the Company's 10-QSB for the quarter
ended June 30, 1999 and incorporated herein by reference
(b) REPORTS ON FORM 8-K
Form 8-K/A filed June 14, 1999
Form 8-K/A filed August 11, 1999
Form 8-K/A filed October 13, 1999
11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Design Automation Systems, Inc.
Date: November 15 , 1999
By /s/ ROBERT E. NELSON
-------------------------------------
Robert E. Nelson
Chief Financial Officer and Director
12
<PAGE>
AGREEMENT FOR SERVICES
THIS AGREEMENT FOR SERVICES (this "AGREEMENT") dated and effective as of
the 5th day of October, 1999, is by and between DESIGN AUTOMATION SYSTEMS,
INC., a Texas corporation (the "CUSTOMER") and OPTIMIZATION GROUP, LLC, a
North Carolina limited liability company (the "COMPANY").
RECITALS:
A. The Customer operates as a systems integrator, custom programmer
and dealer of security solutions.
B. The Customer desires, on the terms and conditions stated herein,
to retain the Company to provide the services and provide the duties
described herein.
C. The Company desires, on the terms and conditions stated herein,
to provide such services to the Customer.
NOW, THEREFORE, in consideration of the foregoing recitals, and of the
promises, covenants, terms and conditions contained herein, the Customer and the
Company hereby agree as follows:
1. SERVICES TO BE PROVIDED .
During the term of this Agreement, the Company agrees to provide the
following services to The Customer:
(i) The development of a new brand, visual identity and tagline
for the Customer;
(ii) Assisting in defining the Customer's business model;
(iii) Refining the Customer's story and creating a concise and
effective mission statement or purpose for the Customer;
(iv) Drive the process of web site creation;
(v) Assist in the creation of an offering memorandum;
(vi) Create a detailed business plan;
(vii) Development of a detailed public relations campaign and
execution of such campaign throughout the various industry segments
including, publications focused on industry analysts, Wall Street and
the Customer's clients;
(viii) Assisting with setting goals and mapping out short and
long-term objectives for the Customer;
(ix) Direct the formation of an Advisory Board and placement of
members who will add significant value to the Customer both in terms
of experience and press placement;
(x) Building of a strong management team and Board of Directors;
(xi) Facilitate all aspects of Merger and Acquisition activities,
including identifying prospects, negotiating deals and coordinating
closing activities; and
(xii) Derive immediate financing solutions and participate and
counsel for on-going financing activities.
2. TERM.
The initial term of this Agreement shall begin on the date hereof and
shall continue for a period of three (3) years thereafter.
13
<PAGE>
3. COMPENSATION.
As compensation for services to be provided by the Company pursuant to
the terms of this Agreement, the Customer will deliver to the Company, on the
date hereof, 1,100,000 shares of the common stock of the Customer, no par
value (the "SHARES"). The Customer represents and warrants to the Company
that (i) it has all necessary power and authority to enter into, and has
taken all action required to execute, deliver and perform, this Agreement,
and to issue and deliver the Shares, and (ii) upon the issuance and delivery
of the Shares to the Company in accordance with the terms hereof, the Shares
will be validly issued, fully-paid and nonassessable, and will be free and
clear of all liens, charges, restrictions, claims and encumbrances of any
kind, subject only to restrictions on transfer under federal and state
securities laws.
4. INCIDENTAL REGISTRATION.
(a) If the Customer at any time proposes to register any of its
shares of common stock under the Securities Act of 1933, as amended (the
"ACT") (other than by a registration on Form S-8 or any successor or
similar forms), whether for its own account or for the account of the
holder or holders of any other shares of the Customer's common stock, it
will at each such time give prompt, written notice to the Company of its
intention to do so and of the Company's rights under this Paragraph 4.
Upon the written request of the Company made twenty (20) days after the
receipt of any such notice (which request shall specify the Shares intended
to be disposed of by the Company and the intended method of disposition
thereof), the Customer will use its best efforts to effect the registration
under the Act of all Shares that the Customer has been so requested to
register by the Company, to the extent requisite to permit the disposition
(in accordance with the intended methods thereof as aforesaid) of the
Shares to be so registered, by inclusion of such Shares in the registration
statement which covers the securities which the Customer proposes to
register. The Customer will pay all expenses incurred in connection with
each such registration of Shares pursuant to this Paragraph 4.
(b) If the Customer at any time proposes to register any of its
shares of common stock under the Act as contemplated by this Paragraph 4
and such shares are to be distributed by or through one or more
underwriters, the Customer will use its best efforts to arrange for such
underwriters to include all Shares to be offered and sold by the Company
among the securities to be distributed by such underwriters, PROVIDED,
that if the managing underwriter of such underwritten offering shall
inform the Customer and the Company in writing of its belief that inclusion
of such distribution of all or a specified number of such shares proposed
to be distributed by such underwriters would interfere with the successful
marketing of those shares being distributed by such underwriters (such
letter to state the basis of such belief and the approximate number of
Shares and other shares of common stock proposed to be so registered which
may be distributed without such effect), then the Customer may, upon
written notice to the Company, reduce pro rata (if and to the extent stated
by such managing underwriter to be necessary to eliminate such effect) the
number of Shares and other shares of common stock the registration of which
shall have been requested so that the resultant aggregate number of Shares
still included in such registration, together with the number of securities
to be included in such registration for the account of the Customer, shall
be equal to the number of shares stated in such managing underwriter's
letter.
5. EXPENSES. The Customer will reimburse the Company for all
reasonable out-of-pocket expenses related to travel, entertainment, dining
and lodging incurred by the Company in connection with the performance of
services pursuant to this Agreement, subject to the Customer's requirements
with respect to reporting and documentation of such expenses.
6. INVESTMENT OF INTENT; RESTRICTED SECURITIES.
(a) The Company represents and warrants that the Shares are being
required solely for the Company's own account, for investment and are not
being purchased with a view to the resale or
14
<PAGE>
distribution thereof. The Company does not have any present plans to enter
into any contract, undertaking, agreement or arrangement contemplating the
resale or disposition of any or all of the Shares.
(b) The Company understands that the Shares will be deemed to be
"restricted securities" under the Act and cannot be resold absent
registration or an exemption therefrom. The Company agrees not to make any
sale, transfer or other disposition of any such Shares unless either (i)
the Shares first shall have been registered under the Act and all
applicable state's securities laws, or (ii) the exemption from such
registration is available.
(c) Throughout the term of this Agreement, the Company understands,
represents and warrants that it will not engage in any hedging transactions
with regard to the equity securities of the Company, including, without
limitation, engaging in any short selling.
7. ASSIGNABILITY.
This Agreement and the rights and duties created hereunder shall not be
assignable or delegable by either party hereto without the prior written
consent of the other party.
8. WAIVER.
The failure of a party to enforce any term, provision or condition of this
Agreement at any time or times shall not be deemed a waiver of that term,
provision or condition for the future, nor shall any specific waiver of a term,
provision or condition at one time be deemed a waiver of such term, provision or
condition for any future time or times.
9. BINDING EFFECT.
This Agreement shall be binding upon, and shall inure to the benefit of,
the parties hereto and their heirs, personal representatives, legal
representatives, and proper successors and assigns, as the case may be.
10. GOVERNING LAW.
The validity, interpretation and performance of this Agreement shall be
governed the laws of the State of North Carolina, without giving effect to
choice of law rules. Each party hereto agrees to submit to the personal
jurisdiction and venue of the state and federal courts having jurisdiction
over Charlotte, North Carolina for a resolution of all disputes arising in
connection with the interpretation, construction, and enforcement of this
Agreement, and hereby waives the claim or defense therein that such courts
constitute an inconvenient forum.
11. ENTIRE AGREEMENT; COUNTERPARTS; FACSIMILES.
This Agreement constitutes the entire agreement between the parties
hereto concerning the subject matter hereof, and supersedes all prior
agreements, memoranda, correspondence, conversations and negotiations all of
which are hereby terminated. This Agreement may be executed in any number of
counterparts with the same effect as if all of the parties had signed the
same document. Such executions may be transmitted to the parties by facsimile
and such facsimile execution shall have the full force and effect of an
original signature. All fully executed counterparts, whether original
executions or facsimile executions or a combination, shall be construed
together and shall constitute one and the same agreement.
12. AMENDMENT.
This instrument may not be changed orally but only by an agreement in
writing signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.
15
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
CUSTOMER:
DESIGN AUTOMATION SYSTEMS, INC.
By:________________________________________________________________________
Name:______________________________________________________________________
Title:_____________________________________________________________________
COMPANY:
OPTIMIZATION GROUP, LLC
By:________________________________________________________________________
Name:______________________________________________________________________
Title:_____________________________________________________________________
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1999 CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,287
<SECURITIES> 0
<RECEIVABLES> 3,367,854
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,923,638
<PP&E> 427,523
<DEPRECIATION> (160,233)
<TOTAL-ASSETS> 11,492,799
<CURRENT-LIABILITIES> 5,410,124
<BONDS> 0
0
0
<COMMON> 215,840
<OTHER-SE> 5,866,835
<TOTAL-LIABILITY-AND-EQUITY> 11,492,799
<SALES> 19,234,615
<TOTAL-REVENUES> 19,234,615
<CGS> 16,997,202
<TOTAL-COSTS> 20,157,037
<OTHER-EXPENSES> 58,573
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (23,092)
<INCOME-PRETAX> (886,941)
<INCOME-TAX> (5,000)
<INCOME-CONTINUING> (891,941)
<DISCONTINUED> (106,926)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (998,867)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
