SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999 COMMISSION FILE NUMBER 1-9263
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DATAWORLD SOLUTIONS, INC.
(formerly Vertex Computer Cable & Products, Inc.)
(Exact name of registrant as specified in its charter)
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Delaware 11-2816128
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
920 Conklin Street, Farmingdale, New York 11735
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (631) 293-1610
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.10 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 No X
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 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.
Yes X No ____
State issuer's revenues for its most recent fiscal year $5,912,000
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of December 1, 1999 was approximately $1,166,153.
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 X No ____
On December 1, 1999, 26,824,000 shares of common stock, $.001 par value were
outstanding. This report consists of 37 consecutively numbered pages (including
this cover page).
DATAWORLD SOLUTIONS, INC.
TABLE OF CONTENTS
Page Number
PART I
Item 1. Business......................................... 3
Item 2. Properties....................................... 7
Item 3. Legal Proceedings................................ 8
Item 4. Submission of Matters to a Vote of Security Holders..... 8
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters.. 9
Item 6. Management's Discussion and Analysis or Plan of Operations.... 10
Item 7. Financial Statements ........................................ 12
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure................................................... 12
PART III
Item 9. Directors and Executive Officers of the Company................ 13
Item 10. Executive Compensation......................................... 15
Item 11. Security Ownership of Certain Beneficial Owners and Management... 17
Item 12. Certain Relationships and Related Transactions................... 17
Item 13. Exhibits and Reports on Form 8-K................................. 19
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PART I
ITEM ONE - BUSINESS
THE COMPANY
DATAWORLD SOLUTIONS, INC., (the "Company") was incorporated on January 7, 1998
and commenced operations on March 7, 1998. The Company is a recognized multi-
regional value-added specialty distributor of electronic cable assemblies used
in providing connectivity solutions, which includes system intergration, for
customers operating a wide range of data systems. This includes linking or
connecting standard or proprietary electronic devices and peripheral components
from different vendors to provide solutions for various customer requirements.
The Company adds value by providing connectivity solutions which may include
distributed sales of passive components (electronic connectors, electronic wire
and cable, cabinets and racks, and patch panels), and active components (hubs,
bridges, routers, gateways and modems). The Company provides the highest
quality (ISO 9002 Certified) products with a high average on-time delivery
yield rate (98.0%) at competitive prices for interconnection requirements
including Fiber Optics, CAT 5, Telco, V.35, Wire Harnesses, Ethernet, Fast
Ethernet, Token Ring, Flat Ribbon and Coax cables. The Company is approved
to manufacture assemblies utilizing Bellcore, Underwriters Labortories ("UL"),
and Canadian Standards Association ("CSA") approval and
has certification for the manufacture of 3M fiber optic assemblies.
Management believes that the Company's technical ability for providing
connectivity solutions between the data system capabilities of many
manufacturers and the specific connectivity needs of its customers, along with
its reputation for providing manufactured, custom-made electronic cable
assemblies that are subject to 100% quality control testing, will be the
principal factors on which the Company will plan its future growth.
The Company expects internal growth to be enhanced by what the Company
perceives to be two continuing trends: (i) the increasing demand for data
communications to provide timely information in the office environment and
factory floor that requires connectivity solutions; and (ii) the growing
number of alternatives available to organizations of all sizes in all types of
industries to increase productivity through improved or upgraded computer data
communications.
The Company's executive offices are located at 920 Conklin Street, Farmingdale,
New York 11735 and its telephone number is (631) 293-1610. Unless the context
requires otherwise, all references herein to the Company and DataWorld mean
DataWorld Solutions, Inc.
RECENT DEVELOPMENTS
On December 17, 1998, the Company, formerly known as Vertex Computer Cable &
Products, Inc., entered into an agreement with a privately held distributor,
DataWorld Solutions, Inc. ("Old DataWorld"), the principal shareholders of
DataWorld Solutions, Inc. who were Daniel McPhee and Christopher Francis, TW
Cable, LLC. and Edward Goodstein ("TW"), the Company's then chairman and
principal shareholder. Pursuant to the agreement, (i) Vertex acquired all the
outstanding shares of Old Dataworld in exchange for the issuance of 1,500,000
shares of Vertex common stock (ii) TW forgave approximately $2,300,000 in
principal face amount of secured subordinated debt and all accrued interest
relating thereto, (iii) TW forgave $280,000 of indebtedness, contributed
$400,000 cash and arranged for approximately $400,000 of TW funds held in
escrow for the benefit of Vertex's creditors to be released to such creditors
as payment on behalf of Vertex in exchange for 6,000 shares of the Vertex's
newly issued $6 Senior Cumulative Convertible Preferred Stock having a stated
value of $100 per share, and (iv) Messrs. McPhee and Francis purchased
17,000,000 shares of the Vertex common stock from TW for $200,000. As a
result of the above, Messrs. McPhee and Francis collectively owned approximately
69% of Vertex common stock and effective December 18, 1998 Messrs. McPhee and
Francis became the Company's Chief Executive Officer and Chief Operating Officer
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RECENT DEVELOPMENTS - (continued)
respectively. Thereafter in May 1999, Vertex, the surviving entity, merged
with Old DataWorld and changed its name to DataWorld Solutions, Inc.
Thereafter in June 1999, the Company's certificate of incorporation was
amended to reflect a change in the Company's par value for common stock from
$.10 to $.001 per share.
The acquisition of the DataWorld shares by Vertex is to be treated as a tax
free exchange of stock pursuant to Internal Revenue Code Section 368 (a)(1)(B).
The provisions of Section 108 of the Internal Revenue Code regarding the
reduction of the net operating losses by the amount of debt forgiven will also
apply to the Company's net operating loss for the year ended June 30,
1999. After reduction for the debt forgiven, as of June 30, 1999, the
Company's net operating loss carryforward is approximately $12,360,000.
On October 20, 1998, the Company entered into a Purchase and Sale of Assets
agreement the "Sale Agreement" whereby the Company sold certain assets,
principally inventory and fixed assets, of its Maryland facility to an
unrelated party for $200,000. In connection to the Sale Agreement, the
Company agreed to sublease the aforementioned facility to the purchaser under
the terms of the Company's lease, subject to cancellation with thirty days
notice to the Company. Upon notice of cancellation, the purchaser shall bear
fifty percent (50%) of the net loss, if any, resulting from the vacancy of the
building. Further, in connection with the Sale Agreement, the Company agreed
to 1) grant the purchaser the use of the "Vertex" name through April 30, 1999
and 2) grant non-compete arrangements, as defined. Subsequent to October 20,
1998 the purchaser cancelled the sublease and the Company made arrangements
with the landlord to take back the facility.
On July 28, 1998 the Company refinanced a revolving credit financing agreement
(see Note F to the Company's fiscal 1998 financial statements) with a financial
institution. The new agreement provides for a maximum borrowing of $3,000,000
through July 31, 2000. Borrowings, at the lenders' discretion, are limited to
85% of eligible accounts receivable (constituting receivables outstanding 90
days or less), 50% of eligible accounts receivable outstanding between 91 and
120 days, 40% of eligible inventories and the lesser of $700,000 or 10% of
slow moving inventory, as defined. Under the terms of the refinancing, the
Company is required to pay interest at prime plus 2 1/2% but not less than
$15,000 per month in minimum charges and an initial commitment fee of 1.25%
and 1% per annum for the second year. The interest rate shall increase or
decrease by one quarter of one percent (1/4 of 1%) per annum for each increase
or decrease, respectfully of one-quarter of one percent in the prime rate,
however that no decrease shall decrease the rate to less than the prime rate
plus 2.50% and the minimum prime rate will be 6%. Borrowing under the agreement
is all collateralized by all assets of the Company. Pursuant to the agreement,
the Company was required to maintain a deficiency in tangible net worth of not
more than $750,000 and a deficiency in Working Capital of not more than
$500,000, as defined. The lender, due to the Company's non compliance, has
waived all financial covenant requirements of the Company through September
30, 1999. Currently the Company is not in compliance with these covenants
although, the lender continues to provide borrowings under this Agreement,
and the Company is requesting further amendments to the Agreement. However
no assurances can be given that the Company will be able to successfully
amend the Agreement.
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BUSINESS STRATEGY
The Company's business strategy is to develop a value-added distribution network
through internal growth with a focus on connectivity solutions for data and
tele-communications. Management believes it will continue to (i) introduce
new connectivity solutions, (ii) improve operating efficiencies through a more
efficient organizational structure, eliminate duplicated activities, and
integrate manufacturing capabilities between the two separate manufacturing
facilities located in the United States, (iii) derive the benefits of critical
mass through the opportunity to develop stronger relationships with, and obtain
improved terms from key suppliers, and (iv) derive the benefits of critical
mass through the ability to distribute to and service large national and
international customers.
In its relationship with its customers, the Company focuses on providing
connectivity solutions. Such solutions include advising customers on the
options available to meet their specific needs, and manufacturing custom-made
electronic cable assemblies for the customers. In addition, the Company
continues to service the customers with components and assemblies as the
customer's system grows. Management believes that manufacturers of products
generally choose to build relationships with distributorships capable of
offering advisory services, technical support, and other services such as
manufacturing custom-made electronic cable assemblies. The Company believes
it is perceived as a value-added manufacturer by both suppliers and customers
as a result of its technical skills and knowledge of the marketplace, access
to and understanding of the product capabilities, and technical design and
manufacturing capabilities for custom-made electronic cable assemblies.
In fiscal 1998, 3M approved the Company as on of their six Value-Added
Reseller ("VAR"). The Company was required to purchase certain manufacturing
equipment necessary to produce Single-Mode fiber cable assemblies. As a VAR,
the Company receives daily orders directly from 3M and will ship product
directly to 3M's customers. The Company is permitted to sell Single-Mode
fiber cable assemblies to any of its customer.
Effective with the transaction with Old DataWorld in December 1998, the
Company is also a distributor of connectivity products. This will give the
Company the ability to provide its' customers with the additional product
lines they require.
The Company is in the process of identifying potential acquisitions to grow
the business. The Company will seek capital investment to finance these
acquisitions. The Company believes that acquisitions could provide an
additional customer base necessary to increase sales volume, however, there
can be no assurances that the Company will be successful in marketing suitable
acquisition candidates or obtain the required investment capital to finance
acquisitions.
PRODUCTS AND SERVICES
The Company's products and services consist principally of the design and
manufacture of custom-made electronic cable assemblies and harnesses used as
solutions for connectivity requirements in data communications.
The Company employs design, engineering, and technical support personnel to
develop alternative connectivity solutions and manufacture of custom-made
electronic cable assemblies.
PRINCIPAL SUPPLIERS
Management believes that the Company is not dependent on any particular
supplier. For the fiscal years ended June 30, 1999 and 1998, the Company's
suppliers each accounted for less than 10% of the Company's purchases.
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PRINCIPAL SUPPLIERS (continued)
The Company works off manufacturers' lead times. Deliveries range from one
week to approximately 90 days. The Company has a fully integrated on-line
computer system that enables it to determine immediate inventory availability
of the Company's entire inventory at its stocking facilities. The Company
monitors and maintains manufacturers' delivery schedules to ensure "on-time"
delivery for customers and to maintain proper inventory levels for the Company.
The Company's objective is to minimize lead times for its customers without
financing excess stock levels or risking technological obsolescence. Several
manufacturers have provided the Company an expedited shipping function in order
to better service the Company's customers.
SALES AND MARKETING
The Company offers a broad range of custom-made cable assemblies and harnesses
used as connectivity solutions to end-users, professionals who install and
service data communications, and original equipment manufacturers (OEM's).
The Company operates through three locations in the Northeast, Mid Atlantic,
and Western regions of the United States. All of the locations operate as a
sales office, manufacturing facility and warehouse. These operations support
the design and manufacture of custom-made and standard cable assembly
requirements for the entire Company.
In order to effectively meet each customer's needs, the sales force first
gains an understanding of the customer's system connectivity requirements
before recommending one or more possible solutions. The Company generally
does not participate in the design of computer applications but rather
participates in the design and implementation of the connectivity solutions
required for data communications.The field sales force is supported by inside
sales personnel who handle incoming customer calls, perform sales estimates,
provide responses to customer questions and assist in sales prospecting.
Sales leads are typically generated by ongoing interaction with existing
customers, sales calls to companies not currently customers, referrals from
suppliers, and by advertising and promotional efforts. The advertising and
promotion program for the Company consists of: (i) exhibits at national and
regional trade shows; (ii) Company-sponsored seminars and product demonstrations
in regional areas; (iii) advertisements in trade publications; and (iv) direct
mail campaigns to targeted market niches.
COMPANY LOCATIONS
The Company's locations, which all are leased, are as follows:
Farmingdale, New York
Long Island City, New York
San Jose, California
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MAJOR CUSTOMERS
The Company's net sales are not dependent on any particular customer. During
the fiscal year ended June 30, 1999 and 1998, there were no customers of the
Company that accounted for 10% or more of its net sales.
COMPETITION
All aspects of the Company's business are highly competitive. The Company
competes with several national distributors, which have greater financial and
other resources than the Company. The Company also competes with numerous
distributors on a local or regional basis. The Company is ISO-9002 certified
and therefore more attractive to a customer who requires this industry
certification of quality.
The Company believes that its ability to design and manufacture custom cable
assemblies as well as making available technical support, differentiates the
Company's from its primary competitors and gives the Company a competitive
advantage. There can be no assurance the Company will be able to successfully
exploit such advantage.
PRODUCT LIABILITY INSURANCE
The Company maintains a comprehensive general liability insurance policy in the
amount of $2,000,000, with an umbrella policy, including products liability,
providing coverage in the aggregate amount of $20,000,000, which it believes
to be adequate coverage.
EMPLOYEES
As of October 1, 1999, the Company had 74 full-time employees. Of these, 16 are
sales and marketing personnel; 6 are design, engineering, and technical
support personnel; 11 are purchasing, warehouse and inventory control personnel;
27 are cable assembly manufacturing personnel; 5 are quality control personnel;
and 9 are accounting, data processing and other administrative personnel.
Twenty-five (25) employees are covered by a collective bargaining agreement
in the Company's Farmingdale facility
ITEM TWO - PROPERTIES
The location and size of each of the Company's facilities at June 30, 1999,
the principal use of each facility and lease expiration date are summarized
below:
Lease Square Expiration
Location Footage Use Date
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Farmingdale, New York (1) 21,000 Executive Office, Sales Office, Mar.2002
Manufacturing and Warehouse
San Jose, California 9,950 Sales Office, Manufacturing June 2000
and Warehouse
Long Island City, New York 5,500 Sales Office and Warehouse Aug. 2002
(1) The Company's Headquarters are located in Farmingdale, New York. These
premises, which consist of approximately 3,500 square feet of office space and
approximately 17,500 square feet of manufacturing and warehouse space, is
leased by the Company. The Company presently subleases approximately 7,500
square feet of warehouse space to a non-affiliated company for an initial term
of three months commencing December 1, 1999 and on a month to month lease,
thereafter.
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ITEM THREE - LEGAL PROCEEDINGS
The Company has received notice from TW Cable LLC, regarding a default in
payment by the Company to the Unsecured Creditors. Management of the Company
has contacted the head of the Unsecured Creditors committee and is working to
amend the payment schedule.
The Company has three lawsuits filed against it from two material vendors and
one administrative vendor of the Company. These lawsuits are immaterial to
the Company and are in the process of being settled.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal year, the Company merged with Old DataWorld and changed its
name and during July 1999, the Company changed its common stock par value from
$.10 to $.001. The holders of approximately 77% agreed to the changes by
written consent as permitted by the provisions of Delaware laws. No meetings
were held or proxy's solicited.
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PART II
ITEM FIVE - MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock had been trading on the American Stock Exchange
under the symbol VTX since September 17, 1986, its initial public offering
date. On September 15, 1995, the Company's Common Stock was delisted from the
American Stock Exchange, as it no longer satisfied all the financial
requirements, and has since traded on the Over-The-Counter Electronic
Bulletin Board under the symbol VCCP. The following table shows the quarterly
range of the high and low closing sale prices for the Common Stock on the
American Stock Exchange prior to September 15, 1995 and on the Over-The-Counter
Electronic Bulletin Board since September 15, 1995, for the periods indicated.
Common Stock
Period High Low
FISCAL 1998
First Quarter ended September 30, 1997 .08 .04
Second Quarter ended December 31, 1997 .06 .02
Third Quarter ended March 31, 1998 .31 .02
Fourth Quarter ended June 30, 1998 .44 .13
FISCAL 1999
First Quarter ended September 30, 1998 .09 .09
Second Quarter ended December 31, 1998 .26 .25
Third Quarter ended March 31, 1999 .30 .22
Fourth Quarter ended June 30, 1999 .25 .20
As of February 16, 1999, there were approximately 275 holders of record of the
Company's Common Stock.The Company has never paid a cash dividend on its Common
Stock and the Company does not anticipate paying any dividends on the Common
Stock in the foreseeable future. Pursuant to the terms of its revolving credit
facility, the Company is not permitted to pay or declare any dividends or
otherwise make any distribution of capital.
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ITEM SIX - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
Old DataWorld Solutions, Inc. was incorporated on January 7, 1998 and
commenced operations on March 1, 1998, therefore the Company can provide
limited comparative financial information with respect to the separate
results of Old DataWorld and Vertex. For the purposes of additional
comparative analysis, the Company has included in its discussion of results
of operations, pro-forma comparative results which include the historical
results of Vertex for all periods presented.
Net sales for the year ended June 30, 1999 were approximately $5,912,000. For
the period ended June 30, 1998 net sales were approximately $237,000. For the
period ended June 30, 1998 the sales were for a four month period and cannot be
compared to the annual net sales for fiscal 1999. The growth in net sales
resulted from a combination of DataWorld's increase in customers and product
lines as well as the added revenues generated from Vertex after the merger
(see Note A-2).
Pro-forma net sales for the year ended June 30, 1999 were approximately
$8,553,000 which includes approximately $2,641,000 for Vertex prior to the
merger. Vertex's net sales for the year ended June 30, 1998 were approximately
$7,901,000. The increase in sales is a result of additional sales from the
merger with DataWorld in December 1998.
Gross profit for the year ended June 30, 1999 was approximately $1,326,000.
Gross profit as a percentage of sales was 22.4% for the year ended June 30,
1999. For the period ended June 30, 1998 gross profit was approximately $68,000
or 28.8%. The growth in gross profit is primarily due to a higher volume of
sales. The decrease in gross profit percentage is a result of the Company
selling products at competitive prices in an effort to increase its customer
base and revenues.
Pro-forma gross profit for the year ended June 30, 1999 was approximately
$1,503,000 or 17.6% which includes approximately $177,000 for Vertex prior to
the merger. Vertex's gross profit for the year ended June 30, 1998 was
approximately $488,000. The increase in gross profit is a result of the
increased sales from the merger with DataWorld in December 1998, as well as a
focus on gross profit dollars acheived from sales by management.
Selling, general and administrative expenses were approximately $2,162,000 or
36.6% for the year ended June 30, 1999. For the period ended June 30, 1998
selling, general and administrative expenses were approximately $29,000. The
increase is a result of the Company merging its operations with Vertex whereby
the corporate and branch expenses of Vertex were added to the Company's
operations.
Pro-forma selling, general and administrative expenses for the year ended June
30, 1999 was approximately $3,243,000 which includes approximately $1,081,000
for Vertex prior to the merger. Vertex's selling, general and administrative
expenses for the year ended June 30, 1998 was approximately $3,001,000. The
increase in pro-forma selling, general and administrative expense is due to
merging Old DataWorld salaries into Vertex in December 1998.
Aborted offering and acquisition costs consist of legal and other professional
fees directly related to the Company's aborted private placement memorandum
(approximately $24,700) and due diligence costs (approximately $11,800)
relating to the investigation of an acquisition target.
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ITEM SIX - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense for the year ended June 30, 1999 was $164,000. This interest
was primarily incurred by to the Company's revolving credit facility and for
the Company's outstanding Subordinated Debentures.
Pro-forma interest expense for the year ended June 30, 1999 was approximately
$357,000. Vertex's interest expense for the year ended June 30, 1998 was
approximately $387,000. The lower interest expense relates to the decrease in
outstanding Subordinated Debentures and its related interest and amortization.
LIQUIDITY AND FINANCIAL CONDITION
AS OF JUNE 30, 1999
Current assets at June 30, 1999 were approximately $3,147,000. The Company
had net working capital deficiency of approximately $331,000 at June 30, 1999.
The working capital at June 30, 1999 is not sufficient to meet the Company's
current liquidity needs. Under the Vertex Plan of Reorganization, the Company
is required to pay the unsecured creditors under a payment arrangement.
Currently, the Company has not made any payment and is working to extend or
modify the payment terms. The Company is also exploring opportunities to
further reduce operating costs and to obtain additional sources of working
capital. However, there can be no assurances that new management will be
successful in further reducing operating costs or obtaining additional sources
of working capital.
The Company's revolving credit facility is providing availability based on
combined accounts receivable and inventory of the merged entities. As of June
30,1999,the Company was not in compliance with the original financial covenants,
however, on January 13, 2000, the Company's lender amended the revolving credit
facility and as of such date is in compliance with the terms of the agreement.
The Company's continuing existence as a going concern is dependent on its
ability to obtain profitable operations, generate sufficient cash flow to
meet its obligations on a timely basis, comply with the terms and covenants of
its financing agreement and to obtain additional financing as may be required.
On December 16, 1999, the Company issued to a non affiliated party, Convertible
Debentures for a principal amount of $250,000. The debenture accrues interest
at a rete of 2 1/4% over prime rate and is payable semi-annually commencing on
June 1, 2000. The entire principal balance plus any accrued and unpaid interest
shall be payable on November 30, 2004 (the "Maturity Date"). The debenture
holder was granted warrants which shall permit the holder to purchase up to a
maximum of three hundred thousand (300,000) shares of the Company's common stock
at fifty ($.50) cents per share. If at anytime prior to the Maturity Date, the
common stock of the Company reaches or exceeds an average bid price of $1.50
per share over a period of thirty (30) consecutive business days, as quoted on
any exchange or electronic market on which the stock is regularly quoted, then
the principal amount of the debenture then outstanding shall automatically be
converted into fully paid and nonassessable shares of common stock of the
Company at a conversion price of $1.00 per share.
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ITEM SIX - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Currently, management is exploring opportunities to further reduce operating
costs and to obtain additional sources of working capital. However, there
can be no assurances that new management will be successful in further reducing
operating costs or obtaining additional sources of working capital and that the
Company will be able to raise such additional financing to fund ongoing
operating shortfalls or complete other plans.
YEAR 2000
The Year 2000 issue is the result of computer programs which were written
using two digits rather than four to define the applicable year. For example,
date-sensitive software may recognize a date using "00" as the Year 1900 rather
than the Year 2000. Such misrecognition could result in system failures, or
miscalculations causing disruptions of operations, including, among others, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
The Company has evaluated its programs to prepare computer systems and
applications for the Year 2000. The Company has replaced its internal systems
by acquiring a Year 2000 compliant system. The Company estimates the
replacement of hardware and software to cost approximately $175,000. This
cost will be accounted for as a capital lease in the fiscal year ended June
30, 2000. The replacement project is in its final stages, notwithstanding
the late arrival of Year 2000 compliant software, the Company anticipates
being Year 2000 compliant by December 31, 1999 and has provided stand alone
software for its bill of material (a detailed list of parts needed to build
an end product) manufacturing operations. The Company's manufacturing
equipment is not data-sensitive and therefore will not have any lapse in
processing time. The Company expects to incur additional internal staff costs
as well as consulting and other expenses related to any enhancements of the
systems. Management believes that the additional costs to enhance such
applications will not be material to the Company.
In addition, the Company has inquired with its major suppliers, including
insight about their progress in identifying and addressing problems related
to the Year 2000. The Company is currently unable to determine the extent
to which the Year 2000 issues will affect its suppliers, or the extent to
which it would be vulnerable to the suppliers' failure to remediate any of
their Year 2000 problems. Although no assurance can be given, the Company
believes that Year 2000 problems will not be significant.
INFLATION
For the last three fiscal years, the Company has not been significantly
affected by inflation.This Management's Discussion and Analysis of Financial
Condition and Result of Operations contains forward-looking statements which
are based upon current expectations and involve certain risks and uncertainties.
Under the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995, readers are hereby cautioned that these statements may be impacted
by several factors, and, consequently, actual results may differ materially
from those expressed herein.
ITEM SEVEN - FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying Index to the
Consolidated Financial Statements are attached as part of this report.
ITEM EIGHT - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
a) Not applicable
b) Not applicable.
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PART III
ITEM NINE - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors of the Company and certain information concerning them as of
June 30, 1999 are set forth below:
First Year
Became
Name Position With The Company Age Director
Daniel McPhee Chairman of the Board and 36 1998
Chief Executive Officer
Christopher Francis Chief Operating Officer 37 1998
Edward Goodstein Director 52 1997
Albert Roth Director/Consultant 64 1995
Executive Officers of the Company who are not Directors are set forth below:
Name Position With The Company Age
Nicholas T. Hutzel Vice President, Controller 30
and Secretary
Abraham Mendez Vice President of Sales 32
Mr. Daniel McPhee has been Chairman of the Board of Directors and Chief
Executive Officer since December 17, 1998, prior thereto Mr. McPhee was a
Director and Chief Executive Officer of Old DataWorld since its inception in
1998. Prior thereto, and since 1992, Mr. McPhee was associated with Elcan
Technologies Corp. ("ETC") as senior sales representative and was promoted to
Executive Vice President in early 1997. From 1988 to 1992, Mr. McPhee was
employed by United Datacom & Cable, Inc. as a salesman and Vice President.
From 1985 to 1988, Mr. McPhee was a project manager with Forest Electric Corp.
In 1985, Mr. McPhee received a bachelors degree in Business Administration from
Adelphi University. Mr. McPhee is a member of the Communication Managers
Association.
Mr. Christopher Francis has been Chief Operating Officer since December 17,
1998, prior thereto Mr. Francis co-founded with Mr. McPhee Old DataWorld
where he was a Director and Chief Operating Officer . Prior thereto, and
from May 1985 until 1998, Mr. Francis was with ETC. At ETC, Mr. Francis held
various positions including Vice President of Operations. In such capacity,
Mr. Francis' responsibilities included purchasing and inventory management.
Mr. Francis attended Seton Hall University where he majored in Business
Administration.
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ITEM NINE - (CONTINUED)
Mr. Edward Goodstein had been a Director of the Company from June 1997 through
December 17, 1998 and director since January 1997. Mr. Goodstein was formerly
President and major stockholder of TW Communications, a privately held company,
which was acquired in December 1997. TW Communications was a distributor of
telecommunication wire, cable, fiber-optics and installation supplies.
Mr. Albert Roth has been a director since December 1995 and was Chairman and
Chief Executive Officer of the Company from December 1995 through May 1997.
For the five years prior thereto, Mr. Roth was independently employed as a
business consultant as a principal of GPR Eastwood Inc. Mr. Roth has held
several senior management and executive positions at various electronic
distribution companies during the thirty years prior to becoming self-employed.
The following Executive Officers of the Company are not Directors:
Mr. Nicholas Hutzel has been Vice President and Controller of the Company since
February 1997. Mr. Hutzel has also been Corporate Secretary since March 1997.
Mr. Hutzel joined the Company in June 1993, and continued service until July
1996. From July 1996 through February 1997, Mr. Hutzel was employed as a
Controller for a private sign manufacturer that handled major commercial
accounts throughout the United States.
Mr. Abe Mendez has been Vice President of Sales since August 1997. Mr. Mendez
has been with the Company since 1985. Prior to becoming Vice President of
Sales Mr. Mendez was Vice President of Operations and also Sales Manager for
the New York facility.
-14-
ITEM TEN - EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year indicated, all compensation
awarded to, earned by or paid to all individuals serving as the Company's Chief
Executive Officer ("CEO") or acting in a similar capacity and the most highly
Compensated Executive Officer of the Company.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
Other ----------------------
Annual All Other
Compen- Number Compen-
Name and Fiscal Salary Bonus sation of sation
Principal Position Year ($) ($) ($) Options ($)
- ------------------- ------ ------ ------ ------ --------- -------
Daniel McPhee 1999 $ 74,000 $ - $ - - $ -
Chief Executive
Officer
Christopher Francis 1999 $ 74,000 $ - $ - - $ -
Chief Operating
Officer
Abraham Mendez 1999 $ 42,734(1) $ - $ - - $ -
Vice President
of Sales
Nicholas Hutzel 1999 $ 35,154(1) $ - $ - - $ -
Vice President
of Finance
(1) For the period December 18, 1998 through June 30, 1999.
Edward Goodstein 1998 $ - $ - $ - - $ -
Chief Executive 1997 - - - - -
Officer
The Company has no pension plan for employees not subject to collective
bargaining arrangements.
DIRECTORS' COMPENSATION
In fiscal 1999, all directors who were not employees of the Company waived fees
until further notice.
-15-
ITEM TEN - EXECUTIVE COMPENSATION (CONTINUED)
STOCK OPTION TABLE
The following table provides further information with respect to the options
granted to the Executive Officers as of the fiscal year ended June 30, 1999.
Options Granted in Last Fiscal Year
- ----------------------------Individual Grants --------------------------------
% of Total
Options
Granted to Exercise
Employees or Base Expir-
Options in Fiscal Price ation
Name Granted Year ($/Sh) Date
- ------- ---------- ----------- ----------- ---------
NO OPTIONS GIVEN
The following table provides information with respect to options exercised and
option values as of the fiscal year ended June 30, 1999.
Aggregated Options Exercised in Last Fiscal Year and
Fiscal Year-End Option Values
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options Options at
on Value at 6/30/99 6/30/99($)(1)
Exercise Realized Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable
- -------------- ---------- ---------- -------------- -------------
NONE
(1) The dollar value of unexercised options is calculated by determining the
difference between the fair market of the Company's Common Stock which
underlies the option at June 30, 1999, and the exercise price of the options.
- 16 -
ITEM ELEVEN - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of June 30, 1999, certain information
regarding beneficial ownership of the Common Stock held by each person known
by the Company to own beneficially more than 5% of the Common Stock, each of
the Company's directors, each of the executive officers named in the Summary
Compensation Table, and all of the Company's executive officers and directors
as a group.
Beneficial Ownership
Name and Address Shares %
- -------------------- -------------- ------
Daniel McPhee 8,585,000 32%
920 Conklin Street
Farmingdale, NY 11735
Christopher Francis 8,585,000 32%
920 Conklin Street
Farmingdale, NY 11735
TW Cable LLC 3,529,389 13%
81 Executive Blvd.
Farmingdale, N.Y. 11735
All directors and officers as a 10,000 Less than 1%
group (1 person)
ITEM TWELVE - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 10, 1997, TW Cable LLC, ("TW") whose owner is a director of the
Company and was Chairman of the Board and Chief Executive Officer from January
1997 through December 1998, concluded a transaction with the holders of the
Company's preferred stock and Subordinated Debentures pursuant to the terms of
a certain Securities Purchase Agreement (the "Securities Purchase Agreement").
As a result of that transaction, TW acquired all of the issued and outstanding
preferred stock (12,375 shares) and $2,615,000 principal face amount of
debentures, together with warrants to purchase 53,350,000 shares of common
stock. The preferred stock is convertible into 4,950,000 shares of common
stock at a conversion rate equal to 400 common shares for each share of
preferred stock that is converted. Each share of preferred stock is entitled
to 1,500 votes on all matter other than the election of directors. The holders
of the preferred stock, as a class, are entitled to elect 75% of
the members of the Board of Directors (see January 12, 1998 event below).
On October 30, 1997 the Company's second amended plan of reorganization and
disclosure statement (the "Plan") was confirmed by the United States
Bankruptcy Courts in Westbury, New York. The confirmed Plan is
-17-
ITEM TWELVE - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
effective on the date the Company secures exit financing. On January 12, 1998,
the Company secured exit financing with lender, effectuating the Plan (see Note
F). The Plan called for an initial distribution to unsecured creditors with
claims greater than $1,000 ("Class 7") to received 13.5% of their claim and
future distributions based on cash flow (as defined) over the next five years.
Unsecured creditors with claims less than $1,000 ("Class 6") received a
distribution of 20% of their claim. The initial distribution payments and
certain other administrative claims are guaranteed by TW. Under the Plan,
the Company's wholly owned subsidiary, Vertex Technologies, Inc., merged into
the Company, and the Company changed its name to Vertex Computer Cable &
Products, Inc. Under the Plan, 25.3 million of the Company's 40 million
authorized shares of common stock were issued and outstanding. Effective
December 29, 1997, each five shares of the Company's common stock outstanding
were exchanged for one share of the surviving entity. As a result, holders of
the Company's outstanding 12,652,000 common stock shares received 2,530,400
post-reorganization shares. Further, the preferred shareholders (TW) exchanged
such outstanding preferred stock and forgave accrued dividends for
21,508,400 common stock shares, representing 85% of the post-reorganization
outstanding common stock.
On January 12, 1998, pursuant to an Exchange Offer between TW, whose owner was
the Company's principal holder through ownership of the preferred stock
cancelled and exchanged for common stock issued under the Plan and subordinated
debenture holder, and holders of another $400,000 in debentures, TW purchased
$307,367 in debentures for cash and common stock held by TW. The terms of all
outstanding subordinated debentures were modified, pursuant to the Plan (see
Note 3) to an interest rate of 8% per annum, payable semi-annually with the
principal due on January 12, 2005. In addition, TW forgave $115,000,
exclusive of the related debt discount of $14,800, of the $2,423,000 in
debentures held. The forgiveness was accounted for as a capital contribution
as an adjustment to Paid-in-Capital.
Subsequent to June 30, 1998, TW paid additional cash as escrow of $185,000 to
the Class 7 distribution creditors committee, for an aggregate amount of
$389,000, in exchange for an extension of time for the Company to make its
payments required under the Plan and TW paid $300,000 in additional cash
Collateral for an aggregate amount of $1,268,000 to the Company's credit
facility in an effort to increase working capital. Under the terms of the
collateral agreement, TW has the right to draw down on such collateral
starting in January 2000. However, the Company is working with TW to extend
drawing down on such collateral.
On December 17, 1998, the Company, formerly known as Vertex Computer Cable &
Products, Inc., entered into an agreement with a privately held distributor,
DataWorld Solutions, Inc. ("Old DataWorld"), the principal shareholders of
DataWorld Solutions, Inc. who were Daniel McPhee and Christopher Francis, TW
Cable, LLC. and Edward Goodstein, the Company's then chairman and principal
shareholder. Pursuant to the agreement, (i) Vertex acquired all the
outstanding shares of Old Dataworld in exchange for the issuance of 1,500,000
shares of Vertex common stock (ii) TW forgave approximately $2,300,000 in
principal face amount of secured subordinated debt and all accrued interest
relating thereto, (iii) TW forgave $280,000 of indebtedness, contributed
$400,000 cash and arranged for approximately $400,000 of TW funds held in
escrow for the benefit of Vertex's creditors to be released to such creditors
as payment on behalf of Vertex in exchange for 6,000 shares of the Vertex's
newly issued $6 Senior Cumulative Convertible Preferred Stock having a stated
value of $100 per share, and (iv) Messrs. McPhee and Francis purchased
17,000,000 shares of the Vertex common stock from TW for $200,000. As a
result of the above, Messrs. McPhee and Francis collectively owned approximately
69% of Vertex common stock and effective December 18, 1998 Messrs. McPhee and
Francis became the Company's Chief Executive Officer and Chief Operating
Officer, respectively. Thereafter in May 1999, Vertex, the surviving entity,
merged with Old DataWorld and changed its name to DataWorld Solutions, Inc.
Thereafter in June 1999, the Company's certificate of incorporation was
amended to reflect a change in the Company's par value for common stock from
$.10 to $.001 per share.
-18-
ITEM THIRTEEN - EXHIBITS AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
See index to consolidated financial statements.
(b) Form 8-K Reports
Form 8-K dated December 18, 1998
From 8-K/A dated December 18, 1998
(c) EXHIBITS
2.1 Second Amended Joint Plan of Reorganization dated September 24,
1997 (incorporated by reference to Exhibit 2.1 to the registrant's current
report on Form 8-K dated February 5, 1998)
2.2 Second Amended Joint Disclosure Statement dated September 24,
1997 (incorporated by reference to Exhibit 2.2 to the registrant's current
report on Form 8-K dated February 5, 1998)
2.3 Order of United States Bankruptcy Court, Eastern District dated
October 30, 1997 (incorporated by reference to Exhibit 2.3 to the registrant's
current report on Form 8-K dated February 5, 1998)
3.1(a) Certificate of Incorporation (Exhibit 3(a) of Form S-18
Registration Statement No. 33-7693-NY)
3.1(b) Certificate of Incorporation, as amended (Exhibit 3.1(a) to
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1993, File No. 1-9263)
3.1(c) Certificate of Amendment of the Certificate of Incorporation
dated June 30, 1997
3.1(d) Certificate of Ownership and Merger dated November 20, 1997
(incorporated by reference to Exhibit 3.1(d) to the registrant's current
report on Form 8-K dated February 5, 1998)
3.1(e) Amendment to Registrant's Certificate of Incorporation dated
December 29, 1997 (incorporated by reference to Exhibit 3.1(d) to the
registrant's current report on Form 8-K dated February 5, 1998)
3.1(f) Certificate of Ownership and Merger and change of name dated
May 3, 1999
3.1(g) Certificate of Amendment of the Certificate of Incorporation
dated January 12, 1999
3.2 By-Laws (Exhibit 3(b) of Form S-18 Registration Statement No.
33-7693-NY)
-19-
4.1 Certificate of Designation, Preferences and rights of senior
cummulated convertible preferred stock (incorporated by reference to Exhibit
1.5 to the registrant's report on Form 8-KA dated December 18, 1998)
4.2 Subordinated Debenture Agreement dated December 16, 1999 between
the Company and a non affiliate
4.3 Form of senior subordinated note (incorporated by reference to
Exhibit 4.7 to the registrant's current report on Form 8-K dated March 27,
1996)
4.4 Form of Debenture (incorporated by reference to Exhibit 4.9 to
the registrant's current report on Form 8-K dated August 20, 1996)
4.5 Agreement by and among Vertex Computer Cable & Products, Inc. and
Daniel McPhee and Christopher Francis and TW Cable LLC and Edward Goodstein
and DataWorld Solutions, Inc. Dated December 18, 1998 (incorporated by
reference to Exhibit 1.1 to the registrant's report on Form 8-K dated December
18, 1998)
-20-
DATAWORLD SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets as of June 30, 1999 and 1998 F-3
Statements of Operations for the years ended
June 30, 1999 and 1998 F-4
Statement of Changes in Stockholders' Equity (Deficiency)
for the years ended June 30, 1999 and 1998 F-5
Statements of Cash Flows for the years ended
June 30, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-16
F-1
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
DataWorld Solutions, Inc.
We have audited the accompanying consolidated balance sheets of DataWorld
Solutions, Inc. as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficiency) and cash
flows for the year ended June 30, 1999 and for the period from January 7,
1998, inception, through June 30, 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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DataWorld
Solutions, Inc. as of June 30, 1999 and 1998 and the consolidated results of
their operations and their consolidated cash flows for year ended June 30,
1999 and for the period from January 7, 1998, inception, through June 30, 1999,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which assumes realization of
assets and settlement of liabilities. As shown in the financial statements, as
of June 30, 1999, the Company has a deficiency in working capital of $330,880,
and has incurred a net loss of $1,050,756 for the year ended June 30, 1999.
These factors, among others, as described in Note A-3 to the consolidated
financial statements raises substantial doubt about the Company's ability to
continue as a going concern. Management's plan in regard to these matters
are also described in Note A-3. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
GRANT THORNTON LLP
Melville, New York
November 24, 1999, except
for Note E-1, as to which the
date is January 13, 2000
F-2
DATAWORLD SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1999 1998
------------ -----------
CURRENT ASSETS
Cash $ - $ 20,000
Accounts receivable, net of allowance for
doubtful accounts of $67,000 at
June 30, 1999 2,157,254 209,640
Inventories, net 918,474 -
Prepaid expenses and other current assets 71,362 -
------------ ------------
TOTAL CURRENT ASSETS 3,147,090 229,640
PROPERTY, PLANT AND EQUIPMENT, net 333,114 -
GOODWILL 3,623,280 -
DEFERRED CHARGES AND OTHER ASSETS 74,844 -
------------ ------------
TOTAL ASSETS $ 7,178,328 $ 229,640
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ 26,120 $ -
Current portion of long-term debt 51,261 -
Current portion Notes payable -
Affiliate, net 66,666 -
Accounts payable and accrued expenses 2,942,923 171,476
Bankruptcy distributions payable 391,000 -
------------ ------------
TOTAL CURRENT LIABILITIES 3,477,970 171,476
LONG-TERM DEBT, NET OF CURRENT PORTION 3,241,987 -
NOTES PAYABLE - AFFILIATE, net 103,643 -
SECURED SUBORDINATED DEBENTURES, net 84,713 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Redeemable, cumulative, convertible,
preferred stock, stated value $100 per
share; authorized, 5,000,000 shares;
6,950 shares issued and outstanding
in 1999, net 705,000 -
Common stock, par value $.001 per shares;
authorized, 40,000,000 and 15,000,000
shares; issued and outstanding, 26,824,000
and 4,000,000 shares in 1999 and 1998,
respectively 26,824 4,000
Additional paid in capital - 16,000
Retained earnings (deficiency) (461,809) 38,164
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 270,015 58,164
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 7,178,328 $ 229,640
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
DATAWORLD SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
January 7, 1998
Year inception
ended through
June 30, June 30,
1999 1998
------------ ----------
Net sales $ 5,912,343 $237,117
Cost of goods sold 4,586,563 168,752
------------ ---------
Gross profit 1,325,780 68,365
Selling, general and administrative expenses 2,162,355 28,701
Aborted offering and acquisition costs 36,532 -
------------ ---------
Earnings (loss) before interest and
income taxes (873,107) 39,664
Interest expense 164,487 -
------------ ---------
(Loss)earnings before income taxes (1,037,594) 39,664
Income taxes 13,162 1,500
------------ ---------
Net income (loss) attributable to
common stockholders $(1,050,756) $38,164
============ =========
Basic and diluted income (loss) per share
attributable to common stock:
Net income (loss) $ (.04) $ .01
============ ==========
Weighted average number of shares
outstanding - basic and diluted 26,824,000 4,000,000
============ ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
DATAWORLD SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Year ended June 30, 1999 and period ended June 30, 1998
<TABLE>
<CAPTION>
Total
Pre- Preferred Common Paid- Retained stock-
ferred stock Common stock in earnings holder's
shares amount shares amount capital (deficiency) equity
------ -------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
January 7, 1998
Inception - $ - - $ - $ - $ - $ -
Issuance of Common
stock 4,000,000 4,000 16,000 20,000
Net earnings for
the period ended June
30,1998 38,164 38,164
Balance June 30, 1998 -0- -0- 4,000,000 4,000 16,000 38,164 58,164
Net loss attributable
to common stock-
holder's (1,050,756)(1,050,756)
Issuance of preferred
stock 7,050 705,000 705,000
Effect of shares issued
and exchanged in
connection with the
acquisition of vertex 14,500,000 1,846,000 (16,000) (2,104,794) (274,794)
Effect of change in
par value of common
stock (2,655,576) 2,655,576 -
As adjusted in conn-
ection with the
merger with Vertex 8,324,000 832,400 832,400
------- -------- ---------- ----------- -------- ----------- ---------
Balance June 30,
1999 7,050 $705,000 26,824,000 $ 26,824 $ -0- $ (461,809) $ 270,015
======= ======== ========== ========== ======== =========== =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT
F-5
DATAWORLD SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
January 7, 1998
Year inception
ended through
June 30, June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income..................................$(1,050,756) $ 38,164
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization................. 166,448 -
Change in operating assets and liabilities:
(Increase) in accounts receivable............. (1,057,823) (209,640)
(Increase) in inventories..................... (202,773) -
Decrease in other assets...................... (24,162) -
Increase in accounts payable and
accrued expenses............................ 939,711 171,476
Net cash used in operating activities.............. (1,229,355) - 1
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (15,317)
Acquisition of Vertex, net....................... (74,795) - 1
Net cash used in investing activities.............. (90,112) - 1
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under debt and loan agreements.... 809,528 -
Proceeds for issuance of common stock............ - 20,000
Proceeds from issuance of preferred stock........ 505,000 -
Cash overdraft................................... (15,061) - 1
Net cash provided by financing activities.......... 1,299,467 20,000 1
NET (DECREASE) INCREASE IN CASH.................... (20,000) 20,000
CASH at beginning of period........................ 20,000 - 1
CASH at end of period.............................. $ -0- $ 20,000
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest...................................... $ 146,580 $ -
=========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
NOTE A - BASIS OF PRESENTATION
1. NATURE OF BUSINESS
DATAWORLD SOLUTIONS, INC., (the "Company") operates primarily in one business
segment - assembly and distribution of electronic wire, cable and related
products used primarily for data communication and distribution. The principal
market for the Company's products is in the United States. The consolidated
financial statements include the accounts of DataWorld Solutions, Inc.
2. BUSINESS COMBINATION
On December 17, 1998, the Company, formerly known as Vertex Computer Cable &
Products, Inc., entered into an agreement with a privately held distributor,
DataWorld Solutions, Inc. ("Old DataWorld"), the principal shareholders of
DataWorld Solutions, Inc. who were Daniel McPhee and Christopher Francis, TW
Cable, LLC. and Edward Goodstein, the Company's then chairman and principal
shareholder. Pursuant to the agreement, (i) Vertex acquired all the
outstanding shares of Old Dataworld in exchange for the issuance of 1,500,000
shares of Vertex common stock (ii) TW forgave approximately $2,300,000 in
principal face amount of secured subordinated debt and all accrued interest
relating thereto, (iii) TW forgave $280,000 of indebtedness, contributed
$400,000 cash and arranged for approximately $400,000 of TW funds held in
escrow for the benefit of Vertex's creditors to be released to such creditors
as payment on behalf of Vertex in exchange for 6,000 shares of the Vertex's
newly issued $6 Senior Cumulative Convertible Preferred Stock having a stated
value of $100 per share, and (iv) Messrs. McPhee and Francis purchased
17,000,000 shares of the Vertex common stock from TW for $200,000.
As a result of the above, Messrs. McPhee and Francis collectively owned
approximately 69% of Vertex common stock and effective December 18, 1998
Messrs. McPhee and Francis became the Company's Chief Executive Officer and
Chief Operating Officer, respectively. Thereafter in May 1999, Vertex, the
surviving entity, merged with Old DataWorld and changed its name to DataWorld
Solutions, Inc. Thereafter in June 1999, the Company's certificate of
incorporation was amended to reflect a change in the Company's par value for
common stock from $.10 to $.001 per share.
The merger was accounted for under the purchase method of accounting as a
reverse acquisition of Vertex by Old DataWorld. Accordingly, the assets
acquired and liabilities assumed of Vertex were recorded at their estimated fair
values of approximately $2,070,000 and $4,958,000, respectively. On the date of
the merger the fair value of Vertex's liabilities (after considering the above
mentioned forgiveness and capital contributions) exceeded the fair value of net,
identifiable tangible assets by approximately $2,888,000. The consolidated
statement of operations for the year ended June 30, 1999 include the results of
operations of Old DataWorld and the results of Vertex from the date of
acquisition.
F-7
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and 1998
2. BUSINESS COMBINATION (CONTINUED
The following table summarizes the assets acquired and liabilities assumed from
Vertex:
Current Assets $ (1,651,000)
Fixed Assets ( 383,322)
Other Assets ( 36,000)
Liabilities assumed 4,958,000
Deemed common stock
issued 832,000
--------------
Goodwill $ 3,720,000
==============
The unaudited consolidated statement of operations on a pro-forma basis have
been presented below as though Vertex had been acquired as of the beginning of
July, 1998. This pro-forma information does not purport to be indicative of
what would have occurred had the acquisition been made as of July 1, 1998 or
of results which may occur in the future.
Year Ended
June 30, 1999
----------------------
Net sales $ 8,553,000
Cost of goods sold 7,050,000
Gross Profit $ 1,503,000
============
Net loss attributable
to common stock $(2,148,000)
============
Basic loss per share $ (.08)
============
3. GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which assumes realization of
assets and settlement of liabilities. As shown in the financial statements, as
of June 30, 1999, the Company has a deficiency in working capital of $330,880,
and has incurred a net loss of $1,050,756 for the year ended June 30, 1999.
These factors raise substantial doubt about the Company's ability to continue
as a going concern. Management's plan in regard to these matters are described
below. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Currently, new management is exploring opportunities to further reduce operating
costs and to obtain additional sources of working capital. However, there can
be no assurances that new management will be successful in further reducing
operating costs or obtaining additional sources of working capital and that
the Company will be able to raise such additional financing to fund
ongoing operating shortfalls or complete other plans.
F-8
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and 1998
3. GOING CONCERN (CONTINUED)
On December 16, 1999, the Company issued to a non affiliated party Convertible
Debentures for a principal amount of $250,000. The debenture accrues interest
at a rate of 2 1/4% over prime rate and is payable semi-annually commencing on
June 1, 2000. The entire principal balance plus any accrued and unpaid interest
shall be payable on November 30, 2004 (the "Maturity Date"). The debenture
holderwas granted warrants which shall permit the holder to purchase up to a
maximum of three hundred thousnad (300,000) shares of the Company's common stock
at fifty ($.50) cents per share. If at anytime prior to the Maturity Date, the
common stock of the Company reaches or exceeds an average bid price of $1.50
per share over a priod of thirty (30) consecutive business days, as quoted on
any exchange or electronic market on which the stock is regularly quoted, then
the principal amount of the debenture then outstanding shall automatically be
converted into fully paid and nonassessable shares of common stock of the
Company at a conversion price of $1.00 per share.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1. INVENTORIES
Inventories, consisting principally of finished goods which are purchased as
components to be used in the assembly of manufactured goods, are stated at the
lower of cost (first-in, first-out method) or market.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization computed on a straight-line basis over the estimated useful
lives of the respective assets. Building improvements are amortized over the
useful life of the improvement. Expenditures for maintenance, repairs and
betterments which do not materially extend the useful lives of the assets
are charged to operations as incurred. The cost and related accumulated
depreciation of assets retired or sold are removed from the respective accounts
and any gain or loss is recognized in operations. Goodwill, representing the
excess cost of identifiable assets acquired is being amortized on a straight
line basis over 20 years.
3. REVENUE RECOGNITION
The Company recognizes revenue on the date the product is shipped and title
passes to the customer.
4. INCOME TAXES
Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and loss carryforwards
for which income tax benefits are expected to be realized in future years. A
valuation allowance has been established to reduce the deferred tax assets as
it is more likely than not that all, or some portion, of such deferred tax
assets will not be realized.
F-9
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and 1998
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. NET INCOME (LOSS) PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding without consideration of potential common stock equivalents.
Diluted earnings per share are based on the weighted average number of common
and potential common shares outstanding. Diluted earning per share takes into
account the shares that may be issued upon exercise of stock options, reduced
by the shares that may be repurchased with the funds received from the exercise,
based on the average price during the period. All potential common shares have
been excluded from the computation of diluted loss per share as their effect
would be antidilutive in fiscal 1999 and 1998.
6. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
7. FINANCIAL INSTRUMENTS
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." Management of the Company believes that the fair value
of financial instruments, consisting of cash, accounts receivable, accounts
payable, notes payable - Affiliate, long-term debt and subordinated debentures
approximate carrying value due to the immediate or short-term maturity
associated with its cash, accounts receivable, and payables, and the interest
rates associated with its debt.
8. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
year presentation.
9. ADVERTISING COSTS
Advertising cost were expensed as incurred in 1999 and 1998.
10. STATEMENTS OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers highly liquid
cash investments with an original maturity of three months or less to be cash
equivalents
NOTE C - INVENTORIES
Inventory consists primarily of finished goods purchased as parts/components,
which are used in the assembly of manufactured goods. The Company regularly
reviews its inventory for obsolete and slow-moving items, which includes
reviews of inventory levels of certain product lines and an evaluation of the
inventory based on changes in technology and markets. As of June 30, 1999 and
1998, the reserve for obsolete and slow-moving items was approximately $647,000.
Inventory consists of the following at:
F-10
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and 1998
NOTE C - INVENTORIES (CONTINUED)
June 30,
1999
---------------
Raw materials $ 869,506
Work in process 32,563
Finished goods 16,405
---------------
Inventories, net $ 918,474
=========
NOTE D - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of the following:
Asset lives June 30,
(years) 1999
---------- --------------
Building improvements 2-5 $ 51,845
Machinery and equipment 10 232,074
Furniture and fixtures 5-10 115,208
--------------
399,127
Less accumulated depreciation
and amortization (66,013)
$ 333,114
========
Depreciation and amortization of property, plant and equipment was $66,013 for
the year ended June 30, 1999.
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
1999
--------------
Revolving asset-based loan (1) $3,236,129
Capitalized lease obligations (2) 57,119
--------------
3,293,248
Less current portion of long-term debt 51,261
--------------
$3,241,987
============
F-11
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and 1998
NOTE E - LONG-TERM DEBT (CONTINUED)
1. On July 28, 1998 the Company entered into a Loan and Security Agreement (the
"Loan Agreement") for its revolving credit financing agreement with a financial
institution. The Loan Agreement provided for a maximum borrowing of $3,000,000
through July 31, 2000. Borrowings, at the lenders' discretion, are limited to
85% of eligible accounts receivable (constituting receivables outstanding 90
days or less), 50% of eligible accounts receivable outstanding between 91
and 120 days, 40% of eligible inventories and the lesser of $700,000 or 10% of
slow moving inventory, as defined. Under the terms of the refinancing, the
Company is required to pay interest at prime plus 2 1/2% but not less than
$15,000 per month in minimum charges and an initial commitment fee of 1.25%
and 1% per annum for the second year. The interest rate shall increase or
decrease by one quarter of one percent (1/4 of 1%) per annum for each increase
or decrease, respectfully of one-quarter of one percent in the prime rate,
however that no decrease shall decrease the rate to less than the prime rate
plus 2.50% and the minimum prime rate will be 6%. Borrowing under the agreement
is all collateralized by all assets of the Company. The agreement, as amended
on January 13, 2000 provides for maximum borrowings of $5,000,000 through
January 31, 2001 and requires the Company to maintain a deficiency in tangible
net worth of not more than $3,500,000 and a deficiency in Working Capital of
not more than $3,800,000 as defined.
2. The Company leases certain warehouse and manufacturing equipment which is
accounted for as capital leases. The obligation for the warehouse equipment
required the Company to make monthly payments of $1,240 through May 2000.
The obligation for the manufacturing equipment requires the Company to make
monthly payments of $3,107 through August 2000.
The following is a summary of the aggregate annual maturities of long-term debt
and capital leases:
June 30, Total
-------- -------------
2000 3,287,053
2002 6,195
Less: Current maturites (51, 261)
--------------
$3,241,987
==============
F-12
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and 1998
NOTE F - SECURED SUBORDINATED DEBENTURES AND PREFERRED STOCK
The subordinated debentures of approximately $84,700, net of any discount,
remain secured by all of the Company's assets subordinated to all current and
future institutional loan facilities. These debentures accrue interest a 8%
and is payable semi-annually. The debenture mature in January 2004. In
addition, payments on account of the subordinated debentures shall be
subordinated to future cash distributions based on cash flows to the unsecured
(Class 7) creditors under the Vertex Plan of Reorganization.
As a result of the Merger, the Company issued to TW Cable 6,000 shares of $6
Senior Cumulative Convertible Preferred Stock ("Preferred Stock") having a
stated value of $100 per share. Beginning December 1, 1999, the dividends
accrue at the rate of $6 per share, and are payable quarterly beginning
March 1, 2000. The holders of the Preferred Stock have the right to convert
the Preferred Stock into the Company's common stock anytime after December 31,
1999 provided that market price of the Company's common stock is greater than
$1.50. In the event the holders of the Preferred Stock elect to convert, the
amount of shares received in conversion will be determined by dividing the
stated value, including accrued but unpaid dividends, by 75% of the market
price of the Company's Common stock, as defined. Further, the Preferred Stock
is redeemable at the option of the holder anytime after December 1, 2003 at
stated value plus any accrued but unpaid dividends. In the event the holders
seek redemption, the Company may either redeem such shares for cash or issue
shares of common stock with a market value equaling the redemption amount.
NOTE G - OTHER EQUITY TRANSACTIONS
During October 1998, the Company grnated options to purchase 100,000 shares of
the Company's common stock at $.05 to a consultnt of the Company.
NOTE H - COMMON STOCK
During July of 1999 the Board of Directors unanimously approved a change in
the Company's common stock par value from $.10 to $.001, which has been
reflected on the accompanying consolidated financial statements.
F-13
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and 1998
NOTE I - INCOME TAXES
As a result of the Company's fiscal 1999 and 1998 losses and inability to
realize tax benefits, the Company recorded no tax benefit for the years ended
June 30, 1999 and 1998.
Reconciliation between actual income tax benefit and the amount computed by
applying the statutory federal income tax rate to the pre-tax loss is as
follows:
1999 1998
--------------- ---------------
Tax expense (benefit) at statutory
federal income tax rates $ 123,848 $ 692,000
Permanent difference attributable to
cancellation of debt income (797,184) (1,743,500)
Respective years' net operating
loss not currently utilizable 673,336 1,051,500
--------------- ---------------
$ - $ -
=============== ===============
The tax effects of temporary differences and loss carryforwards giving rise to
deferred tax (assets) and liabilities are as follows:
June 30,
1999 1998
------------- ------------
Net operating loss carryforwards $(4,697,000) $(4,681,000)
Other deferred assets
Allowance for bad debts (29,000) (27,000)
Inventory reserves (182,000) (314,000)
Inventory capitalization (10,000) (12,000)
Other deferred assets (18,000) (18,000)
------------- ------------
Gross deferred tax (asset) (4,936,000) (5,052,000)
Depreciation (deferred liability) 40,000 94,000
Other deferred costs 3,000 92,000
------------- ------------
Net deferred tax (asset) (4,893,000) (4,866,000)
Deferred tax asset valuation allowance 4,893,000 4,866,000
------------- ------------
Net deferred tax asset $ - $ -
============= ============
F-14
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and 1998
NOTE I - INCOME TAXES (CONTINUED)
The Company anticipates that for the foreseeable future it will continue to be
required to provide a 100% valuation allowance for the tax benefit of its net
operating loss carryforwards and temporary differences.
At June 30, 1999, the Company's net operating loss carryforwards aggregate
approximately $12,360,000, which expires during fiscal 2006 through 2019.
NOTE J - COMMITMENTS AND CONTINGENCIES
1. FAILURE TO FILE TIMELY REPORTS
By letter dated October 21, 1999, the Securities and Exchange Commission (the
"Commission") advised the Company that it had failed to file its Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1999. In such letter, the
Company was advised by the Commission that it reserved the right to bring an
enforcement action, as appropriate, at any time.
This failure to file on a timely basis could expose the Company to enforcement
actions by the Securities and Exchange Commission, which could included civil
penalties against the Company for violations of the reporting requirements of
Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules thereunder. Pursuant to the Exchange Act, the amount of
the penalty shall be determined by the court in light of the facts and
circumstances; however, for each violation, the amount of the penalty, with
regard to a company, cannot exceed the greater of $50,000 or the gross amount
of pecuniary gain to the Company as a result of any violation. The Exchange
Act provides for substantially greater maximum penalties in the event the
violation involved fraud, deceit, manipulation, or deliberate or reckless
disregard of a regulatory requirement and/or such violation directly or
indirectly resulted in substantial losses or created a significant risk of
substantial losses to other persons.
The Company has also failed to file its Quarterly Report on Form 10-QSB for the
fiscal quarter ended September 30, 1999.
The Company intends to file its Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1999 and its Quarterly Reports on Form 10-QSB for the fiscal
quarter ended September 30, 1999 all on or before January 20, 2000. No
assurances can be given that, notwithstanding the Company's filing of the
aforementioned documents on or before the date set forth above, the Commission
will not seek to recover civil penalties from the Company. Any such action
taken by the Commission could have a material adverse effect on the Company's
financial position, liquidity and results of operation. As the Company cannot
presently predict, with any certainty, the ultimate outcome of this matter, no
amounts have been provided for in the accompanying consolidated financial
statements.
F-15
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and 1998
2. LEASES
The Company's minimum annual lease commitments under noncancellable operating
leases for premises at June 30, 1999 are as follows:
Total
------------
2000 $ 322,653
2001 327,223
2002 260,899
2003 99,216
------------
$1,009,991
============
Rent expense, including related real estate taxes and other operating charges,
was approximately $236,504 for the year ended June 30, 1999. For the fiscal
year ended June 30, 1998, the Company did not rent any facilities.
NOTE K - MAJOR CUSTOMER AND VENDORS
The Company's net sales are not dependent on any particular customer. During
the fiscal years ended June 30, 1999 and 1998, there were no customers of the
Company that accounted for 10% or more of its net sales.
Management believes that the Company is not dependent on any particular
supplier. For the fiscal years ended June 30, 1999 and 1998, the Company's
suppliers each accounted for less than 10% of the Company's purchases.
NOTE L - EMPLOYEE PENSION PLAN
The Company participates in a multi-employer, union-sponsored pension plan
covering all union employees pursuant to a negotiated labor contract. Pension
expense for the defined contribution plan for the years ended June 30, 1999
and 1998 was $71,825 and $25,000, respectively. In the event of the Company's
withdrawal from the multi-employer, union-sponsored plan, the Company could be
liable for a portion of the plan's underfunding, if any.
NOTE M - OTHER RELATED PARTY TRANSACTIONS
NOTES PAYABLE - AFFILIATE
As of June 30, 1999, amounts due to the affiliate have been discounted at an
interest rate of 10.75 per annum. The note requires the Company to pay the
affiliate $5,555 per month for 36 months commencing July 1, 1999.
F-16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 13th day of January 2000.
DATAWORLD SOLUTIONS, INC.
By: /s/ Daniel McPhee
---------------------------
Daniel McPhee,
Chief Executive Officer
By: /s/ Nicholas T. Hutzel
---------------------------
Nicholas T. Hutzel,
Vice President & Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on December 15, 1999 by the following persons in the
capacities indicated:
Chairman of the Board, CEO
- --------------------------
Daniel McPhee
CEO
- --------------------------
Christopher Francis
Director
- ---------------------------
Ed Goodstein
Director
- ---------------------------
Albert Roth
Vice President & Controller
- ---------------------------
Nicholas T. Hutzel
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