<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal quarter ended March 31, 1999
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _____________________ to _____________________
COMMISSION FILE NUMBER 0-14039
NUCLEUS, INC.
(Name of Small Business Issuer in its charter)
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
NEVADA 11-2714721
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
150 NORTH MICHIGAN AVENUE, SUITE 3610
CHICAGO, IL 60601
(Address of principal executive offices) (Zip Code)
Registrant telephone number, including area code: (312) 683-9000
Check whether the Registrant (l) filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act during the past 12 months
(or for such shorter periods 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 [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS
Check whether the Registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the Company's only class of common stock,
as of May 10, 1999 was 6,436,936 shares of its $.001 par value common stock.
Transitional Small Business Disclosure Format (check one) Yes [_] No [X]
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Balance Sheets as of March 31, 1999 and December 31, 1998
Statements of Operations for the three months ended March 31, 1999 and 1998
Statements of Cash Flows for the three months ended March 31, 1999 and 1998
Notes to Financial Statements
2
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NUCLEUS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------- --------------
UNAUDITED
<S> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------
Current assets:
Cash............................................................................... $ -- $ 1,126
Accounts receivable, trade......................................................... -- 10,000
Inventory.......................................................................... 34,489 34,690
Prepaid expenses................................................................... -- --
----------- -----------
Total current assets............................................................. 34,489 45,816
Property and equipment, net......................................................... 19,000 21,195
Goodwill, net....................................................................... 19,598 20,195
----------- -----------
Total assets........................................................................ $ 73,087 $ 87,206
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt.................................................. $ 4,138 $ 3,310
Due to shareholder................................................................. 200,104 175,000
Accounts payable................................................................... 171,385 169,135
Accrued expenses................................................................... 16,950 19,258
----------- -----------
Total current liabilities........................................................ 392,577 366,703
Long-term debt...................................................................... 8,314 9,142
Commitments and Contingencies
Stockholders' deficit:
Preferred stock, no stated value 8,000,000 shares authorized, no shares issued
and outstanding................................................................... --
Common stock, $.001 par value, 900,000,000 shares authorized, 1,129,827
Shares issued and outstanding (as of March 31, 1999 and December 31, 1998)........ 1,130 1,130
Additional paid-in capital......................................................... 2,779,527 2,779,527
Accumulated deficit................................................................ (3,108,461) (3,069,296)
----------- -----------
Total stockholders' deficit...................................................... (327,804) (288,639)
----------- -----------
Total Liabilities and Stockholders' Deficit......................................... $ 73,087 $ 87,206
=========== ===========
</TABLE>
3
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NUCLEUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
--------------------- ---------------------
UNAUDITED
<S> <C> <C>
Sales............................................... $ 11,787 $ 73,198
Cost of sales....................................... 13,136 53,138
---------- ----------
Gross profit (deficit).............................. (1,349) 20,055
Selling, general and administrative expenses........ 32,606 74,418
---------- ----------
Loss from operations................................ (33,955) $ (54,363)
Other expense....................................... (5,210) --
---------- ----------
Net loss............................................ $ (39,165) $ (54,363)
========== ==========
Basic and diluted loss per share $ (0.03) $ (0.05)
Weighted average common shares outstanding.......... 1,129,827 1,069,848
---------- ----------
</TABLE>
4
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NUCLEUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
--------------------- ---------------------
UNAUDITED
<S> <C> <C>
Net loss................................................................ $(39,165) $(54,363)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................... 2,792 1,939
Compensation expense related to issuance of equity securities...... -- 19,900
Stock issued for services.......................................... -- 1,445
Changes in assets and liabilities:
(Increase) decrease in accounts receivable...................... 10,000 (26,267)
Decrease in inventory........................................... 201 2,182
(increase) decrease in other assets............................. 0 198
Increase in accounts payable and accrued expenses............... 770 11,995
-------- --------
Total adjustments............................................... 13,763 11,392
-------- --------
Net cash provided (used) by operating activities................... (25,402) (42,971)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt........................................... (828) --
Proceeds from the sale of common stock................................ -- 105
Increase in officer loans............................................. 25,104 54,263
-------- --------
Net cash provided by financing activities.......................... 24,276 54,368
-------- --------
Increase (decrease) in cash............................................. (1,126) 11,397
Cash and cash equivalents, beginning of period.......................... 1,126 17,706
-------- --------
Cash and cash equivalents, end of period................................ $ -- $ 29,103
======== ========
</TABLE>
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NUCLEUS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB and Article 10
of Regulation S- X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1999. The condensed consolidated balance sheet
at December 31, 1998 has been derived from the audited consolidated financial
statements at that date, but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For additional information, refer to the consolidated
financial statements and footnotes for the year ended December 31, 1998 that are
included in our annual report on Form 10-K5B.
NOTE 2. COMPANY OPERATIONS
The Company was incorporated as American General Ventures, Inc. ("AGV") in
1984 to identify potential business opportunities, such as acquisition of
existing businesses. In 1987, AGV acquired ACI Micro Systems, Inc. ("ACI"), a
reseller of computer and peripheral equipment. Subsequent to the ACI
acquisition, AGV evolved into an Internet-based provider of computer systems
with an established local presence where consumers and businesses could purchase
computer and related products and receive service.
On December 8, 1998 the Company changed its name to Nucleus, Inc. and effected
a one share for ten shares reverse stock split. All share and per share data
included in the foregoing unaudited condensed consolidated financial statements
have been restated to give effect to the reverse stock split.
The Company sells computers and accessories which are manufactured by third
parties. The Company has had two vendor agreements with Wal-Mart. The first
agreement (entered into in August, 1995) was a resale agreement for Wal-Mart to
sell ACI computers in their retail stores and was terminated by mutual consent
in April, 1997. The second agreement (entered into in June, 1997) permitted ACI
to sell its computers from Wal-Mart's website, Wal-Mart Online and was
terminated on October 30, 1998 by mutual consent of both parties. As of this
date no new agreement has been consummated.
The Company intends to refocus its business strategy and has appointed new
management subsequent to the Merger which became effective April 15, 1999 (Note
3). Nucleus intends to reposition itself as a Convergent Solution Provider,
leveraging the Internet as the platform to deliver information technology and
communications to high growth, small and medium size businesses. The Company's
refined business strategy is intended to diversify its product and service
offerings to multiple customers, rather than focusing on one large client
account, such as Wal-Mart.
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NOTE 3. MERGER
On October 30, 1998 the Company entered into a merger agreement (Merger)
with Nucleus Holdings, Inc. (Holdings) whereby all of the outstanding shares of
Holdings would be exchanged for 5,307,109 newly issued Company shares. The
merger was intended to qualify as a tax-free reorganization within the meaning
of a statutory merger as described in Section 368(a)(1)(A) of the Code and to be
accounted for as a pooling-of-interests for financial reporting purposes.
Completion of the transaction was subject to the approval of the Company's
shareholders. The Company's shareholders formally approved and adopted the
Merger at the Special Shareholders' Meeting on April 15, 1999.
The following unaudited pro forma data presents the combined results of
operations of Nucleus and Holdings as if the Merger occurred at the beginning of
the periods presented. Such unaudited pro forma data do not reflect the effects
of any anticipated changes to be made by Nucleus in its operations from the
historical operations, are presented for informational purposes only and should
not be construed to be indicating (i) the results of operations or the financial
position of Nucleus that actually would have occurred had the Merger been
consummated as of the dates indicated or (ii) the results of operation or the
financial position of Nucleus in the future.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, ------------------------------------
1998 MARCH 31, 1999 March 31, 1998
---------------- ----------------- ----------------
<S> <C> <C> <C>
Sales..................................... $3,574,572 $ 632,343 $808,485
Loss from operations...................... (545,577) (253,871) (94,131)
Net loss.................................. (448,526) (259,081) (94,131)
Diluted loss per share.................... $ (0.07) $ (0.04) $ (0.02)
</TABLE>
NOTE 4. BUSINESS ACQUISITIONS
On April 29, 1999, Nucleus entered into and closed an agreement to acquire
Comp Pro Computer, Inc. ("Comp Pro"). Comp Pro is a Chicago-based provider of
information technology services to small and medium sized businesses, including
computers and peripheral equipment, network design, upgrade, and maintenance
services. The acquisition was effected pursuant to a Stock Purchase Agreement,
by and between Nucleus and Comp Pro and filed as a Current Report on Form 8-K
with the Securities and Exchange Commission on May 12, 1999.
On May 10, 1999, Nucleus signed a letter of intent to acquire Denver-based
information technology solution provider EDW Computers. Founded in 1986, EDW
designs, configures, and integrates computer networks for small and medium size
businesses. The transaction is expected to close during May, 1999.
7
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ITEM 2 -- Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Results of Operations
---------------------
Prior to the Merger discussed in the Notes to the Unaudited Condensed
Consolidated Financial Statements, Nucleus' primary business and source of
revenue was derived from the resale of computer systems and related products
which are manufactured and/or assembled by third parties. Nucleus has had two
vendor agreements with Wal-Mart. The first agreement (entered into in August,
1995) was a resale agreement for Wal-Mart to sell Nucleus computers in their
retail stores and was terminated by mutual consent in April, 1997. The second
agreement (entered into in June, 1997) permitted Nucleus to sell its computers
from Wal-Mart's website, Wal-Mart Online and was terminated on October 30, 1998
by mutual consent of both parties as Wal-Mart was concerned over the quality of
Nucleus' products and its customer service and Nucleus suspected violations of
customer return policies. As of this date a new agreement has not been
consummated.
The discontinuance of the Wal-Mart agreement, and loss of the associated
revenue, has had a severe adverse effect on Nucleus' results of operation,
liquidity and capital resources. Consequently, results of operations for any
previous period should not be relied upon as indicative of expected operating
performance for any future period.
Revenues for the three months ended March 31, 1999 decreased to $11,787
compared to $73,193 for the same period in 1998. The decrease in revenue was
primarily related to (i) the termination of the Wal-Mart agreement discussed
above and the Company suspending its advertising arrangements with Microsoft's
free email service, Hotmail which was intended to redirect Hotmail customers to
the Company's website (www.availpc.com) to purchase computer systems.
---------------
The primary component of cost of sales is purchased computer systems and
products from third parties. Nucleus does not currently maintain a contractual
relationship with any system provider, electing to submit individual purchase
orders to such system providers for price quotes upon receipt of a customer
order. Prices are generally established by a system provider from a price list
dependent upon the components and/or systems requested by a customer. Although
no contractual relationships exist, Nucleus has historically used Pony Computer
and Aberdeen Trading to fulfill its Internet generated orders. Nucleus does not
currently utilize the services of either of these suppliers.
Cost of sales for the three month period ended March 31, 1999 decreased to
$13,136 compared to $53,138 for the same period in 1998. The decrease in cost
of sales was primarily a function of decreased sales volume for the current
period as compared to the same period in 1998. In addition, the Company
experienced negative margins on its sales for the three months ended March 31,
1999, resulting from the sale of certain computer systems below the cost by
which such systems were purchased.
Selling, general, and administrative expense (S,G,&A) for the three month
period ended March 31, 1999 decreased to $32,606 compared to $74,418 for the
same period in 1998. The decrease in S,G,&A was primarily related to the
Company suspending its advertising on Hotmail as discussed above and a reduction
in the number of its employees.
Nucleus' net loss decreased to $39,165 (or $0.03 per share) for the three
month period ended March 31, 1999, compared to $54,363 (or $0.05 per share) for
the same period in 1998. The decrease in the loss was primarily related to the
decrease in S,G,&A expenses discussed above.
8
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Liquidity and Capital Resources
-------------------------------
Working capital at March 31, 1999 totaled ($358,088) compared to ($320,887) at
December 31, 1998. The change in working capital was primarily related to an
increase in a note due to the Company's President and CEO.
Nucleus has not derived any revenue from Wal-Mart subsequent to the
termination of their agreement on October 30, 1998. The loss of the Wal-Mart
agreement has had a severe adverse effect on the Company's liquidity.
The Company is refocusing its business strategy and has appointed new
management subsequent to the Merger (which became effective April 15, 1999).
Nucleus intends to reposition itself as a Convergent Solution Provider,
leveraging the Internet as the platform to deliver information technology and
communications to high growth, small and medium size businesses. The Company's
refined business strategy is intended to diversify its product and service
offerings to multiple customers, rather than focusing on one large client
account such as the Wal-Mart relationship. There can, however, be no guarantee
that management's strategy will prove viable and the revenues resulting from it
will fully replace those generated through the Wal-Mart agreement.
The satisfaction of Nucleus' cash requirements during 1999 and thereafter will
depend in large part on Nucleus' ability to successfully generate sales from its
refined business strategy and raise capital to fund operations. There can,
however, be no assurance that sufficient cash will be generated from operations
or that unanticipated events requiring the expenditure of funds will not occur.
As a result, Nucleus expects to aggressively seek additional sources of funds,
the form of which will vary depending upon prevailing market and other
conditions and may include short or long-term borrowing or the issuance of debt
or equity securities. There can be no assurance that Nucleus will be able to
obtain such funding, or if such funding is available, that it will be on
favorable terms.
Nucleus currently has no commitments for capital expenditures.
Year 2000 Compliance
The Company is in the process of a comprehensive assessment of all Year 2000
issues and how the business will be affected. Computer systems and computer-
controlled devices that can be potentially affected by the Year 2000 issue have
been reviewed. These include the following: Telephones and fax machines,
information technology, hardware, financial and financial reporting
applications, operations and operational support applications, scheduling
systems, and operating systems.
Preliminarily, upon review of each of the systems identified above, the
Company found that the Year 2000 issue did not have any significant potential
impact on future core business operations or financial reporting. The Company is
also reviewing the ability of key suppliers to continue to provide materials and
services. Based on a preliminary review, it appears that all key suppliers
either are compliant or have programs in place to be compliant by the Year 2000.
The Company plans to perform a comprehensive review of all systems identified
above to evaluate and test the Company's internal systems during the second
quarter of 1999. The Company has not incurred any costs from independent third
parties associated with such evaluation to date.
WORST-CASE SCENARIOS
The Company would be severely affected by transmission failures related to
Internet access and its ability to provide services to customers over the
internet. Specifically, if Nucleus' Internet service provider experienced
infrastructure failure or transmission problems and is unable to remedy such
problems on a timely basis, the Company's ability to transact business over its
9
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website would be severely impacted. Additionally, if Nucleus' primary suppliers
experienced problems with year 2000 issues, the Company's ability to resell
computer and related products would be affected.
CONTINGENCY PLANNING
The Company is developing a contingency plan that would enable it to continue
uninterrupted service to its customers in the event a critical supplier of
materials and/or services develops a problem in implementing Year 2000 plans.
SUMMARY
Based on the activities reviewed above, the Company expects to be fully
compliant with Year 2000 requirements by the end of the second quarter in 1999.
The Company does not believe that the Year 2000 issues will have a material
adverse effect on its financial condition or results of operations. It is
anticipated that the Year2000 issue is not substantial with respect to the
Company's property and equipment, though the Company is continuing to assess and
modify computer systems, facilities, and business processes to provide for their
continuing functionality. The Company believes that modification of existing
software and conversions to new software and systems will result in Year 2000
compliance.
However, given the complexity of the Year 2000 issue, and the massive changes
required of government agencies and large corporations, the impact on business
operations because of failure by the Company to achieve compliance, or failure
of external entities to achieve compliance, which the Company cannot control,
could adversely affect the Company's consolidated results of operations.
Information contained in this Year 2000 Compliance Summary other than
historical information, may be considered forward-looking in nature. As such, it
is based upon certain assumptions and is subject to various risks and
uncertainties, which may not be controllable by the Company. To the extent that
these assumptions prove to be incorrect, or should any of these risks or
uncertainties materialize, the actual results may vary materially from those
which were anticipated.
10
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PART -- II
ITEM 1 -- LEGAL PROCEEDINGS
The Company has disputes in the normal course of operations with a number of
its suppliers. Such matters typically relate to vendors requesting payment on
product delivered to the Company, which the Company believes is either defective
or product, which had not been ordered from such vendor.
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 -- OTHER INFORMATION
On May 10, 1999, Nucleus signed a letter of intent to acquire Denver-based
information technology solution provider EDW Computers. Founded in 1986, EDW
designs, configures, and integrates computer networks for small and medium size
businesses. The transaction is expected to close during May, 1999.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Stock Purchase Agreement, by and between Nucleus, Inc. and Comp
Pro Computer, Inc. dated April 29, 1999 (1)
2.2 Agreement and Plan of Merger dated October 30, 1998 by and
between the Company and Nucleus Holding Corporation (2)
2.3 Amendment to Agreement and Plan of Merger dated December 23,
1998 by and between the Company and Nucleus Holding Corporation
(2)
2.4 Second Amendment to Agreement and Plan of Merger dated January
20, 1999 by and between the Company and Nucleus Holding
Corporation (2)
2.5 Third Amendment to Agreement and Plan of Merger dated February
26, 1999 by and between the Company and Nucleus Holding
Corporation (2)
3.1 Certificate of Incorporation (3)
3.2 By-laws of the Registrant (3)
4.1 Specimen of Stock Certificate for the Registrant's common stock,
par value $.001 per shares (2)
10.1 Stock Option Plan of the Registrant (4)
11
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27.1 Financial Data Schedule
- ---------------
(1) Incorporated by reference from the Company's Current Report on Form 8-K
dated April 29, 1999, as filed with the Securities and Exchange Commission
on May 12, 1999.
(2) Incorporated by reference from the Company's Annual Report on Form 10-KSB/A
for the year ended December 31, 1998, as filed with the Securities and
Exchange Commission on March 29, 1999.
(3) Incorporated by reference from the Registrant's Registration Statement
(Registration Statement No. 002-95320-NY) filed with the Securities and
Exchange Commission on January 15, 1985.
(4) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Registration Statement No. 333-35959) filed with the Securities
and Exchange Commission on September 19, 1997.
(B) Reports on Form 8-K
None.
12
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SIGNATURE
In accordance with the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
NUCLEUS, INC.
Date: May 15, 1999 /s/ JOHN C. PAULSEN
----------------------------------
John C. Paulsen, President and
Chief Executive Officer
Date: May 15, 1999 /s/ J. THEODORE HARTLEY
----------------------------------
J. Theodore Hartley, Executive Vice President
and Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 34,489
<CURRENT-ASSETS> 34,489
<PP&E> 59,304
<DEPRECIATION> 40,304
<TOTAL-ASSETS> 73,087
<CURRENT-LIABILITIES> 392,577
<BONDS> 0
0
0
<COMMON> 1,130
<OTHER-SE> (328,934)
<TOTAL-LIABILITY-AND-EQUITY> 73,087
<SALES> 11,787
<TOTAL-REVENUES> 11,787
<CGS> 13,136
<TOTAL-COSTS> 32,606
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,210
<INCOME-PRETAX> (39,165)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,165)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
