As filed with the Securities and Exchange Commission on November 29, 2000
Registration No. 333- _____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
_________________________
DATAWORLD SOLUTIONS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 5065 11-2816128
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification
Number)
920 Conklin Street
Farmingdale, New York 11735
Telephone : (631) 293-1610
(Address and Telephone Number of Principal Executive Offices)
(Address of Principal Place of Business or Intended Principal Place of Business)
_________________________
Daniel McPhee
Chief Executive Officer
DATAWORLD SOLUTIONS, INC.
920 Conklin Street
Farmingdale, New York 11735
Telephone: (631) 293-1610
(Name, Address and Telephone Number of Agent for Service)
_________________________
Copies of all communications and notices to:
Ronald A. Fleming, Jr.
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004
Telephone: (212) 858-1000
Telecopier: (212) 858-1500
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering:
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering:
If this form is a post-effective amendment pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering:
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box:
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Amount to be Offering Price Aggregate Offering Amount of
Title of Each Class of Securities to be Registered Registered (1) per Share (2) Price (2) Registration Fee
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share 22,743,871 $.4025 $9,154,408 $ 2,417
</TABLE>
(1) For purposes of estimating the number of shares of our common stock to be
included in this registration statement, we included (where applicable,
without regard to any limitations on exercise) (a) 10,322,581 shares,
representing 200% of the number of shares of common stock issuable upon
conversion of our outstanding Series B 8% Convertible Preferred Stock,
determined as if the Series B 8% Convertible Preferred Stock were converted
in full at the assumed exercise price of $.31, excluding accrued dividends,
(b) 1,238,710 shares, representing 100% of the number of shares of common
stock issuable in lieu of cash dividends payable on our outstanding
Series B 8% Convertible Preferred Stock, assuming a dividend conversion
price of $.31, the applicable dividend conversion price, (c) 200,000 shares,
representing 200% of the number of shares of common stock issuable upon
exercise of certain outstanding warrants issued in connection with the
Series B 8% Convertible Preferred Stock (d) 10,322,581 shares, representing
200% of the number of shares of common stock issuable upon exercise of an
option to purchase additional common stock issued in connection with the
Series B 8% Convertible Preferred Stock and (e) 660,000 shares, representing
the number of shares of common stock issuable upon exercise of certain other
warrants issued in connection with the Series B 8% Convertible Preferred
Stock. Pursuant to Rule 416 promulgated under the Securities Act, the
number of shares of common stock to be registered hereunder also includes an
indeterminate number of shares which may become issuable upon conversion or
exercise of, or otherwise with
2
respect to, the Series B 8% Convertible Preferred Stock, the warrants or the
option as the result of any stock split, stock dividend or similar
transaction.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) under the Securities Act, based on the average of the high
and low price per share for the common stock as quoted on the OTC Bulletin
Board on November 28, 2000.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
3
SUBJECT TO COMPLETION, DATED NOVEMBER 29, 2000.
PROSPECTUS
________________
22,743,871 Shares
DataWorld Solutions, Inc.
COMMON STOCK
This prospectus relates to 22,743,871 shares of our common stock that may
be sold from time to time by the selling securityholders, including their
transferees, pledges, or donees or their successors. The selling
securityholders may acquire the common stock by converting shares of our
Series B 8% Convertible Preferred Stock or exercising warrants or an option
issued in connection with the Series B 8% Convertible Preferred Stock.
We are registering the shares to permit the selling securityholders to sell
the shares from time to time in the public market. The selling securityholders
may sell the common stock through ordinary brokerage transactions, directly to
market-makers of our shares or through other means set forth in the "Plan of
Distribution." We cannot assure you that the selling securityholders will
sell all or any portion of the common stock offered under this prospectus.
Our common stock is traded over-the-counter and quoted on the Over-the-Counter
Bulletin Board under the symbol "DWLD". On November 28, 2000, the last
reported sale price for the common stock was $.38.
We will not receive any proceeds from the sale of the common stock by the
selling securityholders under this prospectus. However, we may receive up to
approximately $2,482,250, assuming the exercise for cash of certain warrants
and an option (based on an assumed expercise price of our common stock of
$.31 per share) by the selling securityholders. We have paid the fees and
expenses to prepare this prospectus and the related registration statement.
Investing in our common stock involves a high degree of risk. You should
carefully read the "Risk Factors" beginning on page 9, along with the rest
of this prospectus, before investing in the common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
The date of this prospectus is , 2000.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY.................................................... 2
RISK FACTORS.......................................................... 9
FORWARD-LOOKING STATEMENTS............................................ 21
AVAILABLE INFORMATION................................................. 22
USE OF PROCEEDS....................................................... 22
DIVIDEND POLICY....................................................... 22
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............. 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................... 25
DESCRIPTION OF OUR BUSINESS........................................... 31
DESCRIPTION OF PROPERTY............................................... 38
LEGAL PROCEEDINGS..................................................... 39
MANAGEMENT............................................................ 39
EXECUTIVE COMPENSATION................................................ 41
PRINCIPAL AND SELLING STOCKHOLDERS.................................... 42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 45
DESCRIPTION OF CAPITAL STOCK.......................................... 46
DESCRIPTION OF CERTAIN INDEBTEDNESS................................... 51
SHARES ELIGIBLE FOR FUTURE SALE....................................... 52
PLAN OF DISTRIBUTION.................................................. 52
LEGAL MATTERS......................................................... 55
EXPERTS............................................................... 55
INDEX TO FINANCIAL STATEMENTS......................................... 56
__________________________
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information that is different from
that contained in this prospectus. This prospectus may only be used where
it is legal to sell these securities. The information contained in this
prospectus may only be accurate on the date of this prospectus.
i
PROSPECTUS SUMMARY
This is only a summary and does not contain all the information that may be
important to you. You should read the more detailed information, including
our financial statements and related notes, appearing elsewhere in this
prospectus.Each prospective investor is urged to read this prospectus in its
entirety.
DataWorld Solutions
Our Company
We manufacture and distribute specialized electronic cable assemblies and other
interconnection products. Our value-added services include customized
connecting of electronic devices and peripheral components from different
vendors.
Manufacturing and Assembly
We design, engineer, manufacture and assemble high performance copper and
fiber optic cables for a variety of telecommunication applications. Such
applications range from simple cross-connection between multiple devices to
custom fiber optic splice kits for distribution and interconnection between
telecommunication providers or end-users.
Through our predecessor companies, we have over 30 years' experience
manufacturing and assembling high quality (IS0 9002 certified) interconnection
products. We are approved to manufacture assemblies in compliance with the
standards of Bellcore, Underwriters Laboratories and the Canadian Standards
Association. We supply several large original equipment manufacturers (OEMs)
with numerous fiber optic and copper cable assembly products.
Our manufacturing and assembly operations are based in Farmingdale, New York,
with additional operations in Long Island City, New York and San Jose,
California. We also maintain a sales office in Boston, Massachusetts.
Distribution and Logistics
We distribute structured cabling systems, components and cable management
solutions to information technology contractors, telecommunication cabling
installers and end-users to support enterprise communication networks.
We coordinate the sale and distribution of products from world-class cabling
infrastructure manufacturers, including Corning Cabling Corporation (formerly
SIECOR), 3M, ITT Network Systems & Services, NORDX/CDT and Damac. We
closely monitor the market for state-of-the-art products that we believe
will enhance our product offering and improve our ability to service existing
and future customers.
2
We employ technical support and inside sales personnel to support our
outside sales force. All personnel are trained and certified
on all products that we distribute.
Our distribution and logistics operations are based in Long Island City, New
York, with additional operations in our other offices.
We believe that our success depends heavily on our ability to continue to
competently manufacture and distribute innovative products. We continuously
seek to improve our manufacturing processes by adding new capabilities that
increase efficiency and opportunities. The dynamic nature of the
communications industry requires us to closely monitor trends to insure that
the infrastructure products we carry in our distribution portfolio are
reliable and responsive to our customers' needs. We seek to take advantage
of the following industry trends:
- The rapid expansion of the Internet, which is placing unprecedented
demand on the fiber optics industry.
- The convergence of communications services (voice, data and video)
into a single or reduced number of circuits. We expect that this trend
will place significant bandwidth demand on Internet and traditional
communication providers, resulting in ongoing rebuilding and
re-engineering of their fiber optic networks.
- The expanding trend toward contract manufacturing. We seek to expand
our market share to address opportunities for cable assembly work in the
fiber optic and copper industries.
See "Description of Our Business."
A predecessor commenced operations in 1970 as Vertex Electronics, Inc. We
were incorporated as VTX Electronics Corp. in 1986 to acquire Vertex
Electronics and we completed our initial public offering in 1986. In January
1998, we emerged from the protection of Chapter 11 of the United States
Bankruptcy Code pursuant to a bankruptcy case we filed in January 1997. On
December 17, 1998, we completed a "reverse acquisition" transaction with a
privately held distributor ("Old Data World"). Following the reverse
acquisition, the two principal shareholders of Old DataWorld, which became
our subsidiary, owned approximately 66% of our common stock. In May 1999,
we merged with DataWorld and we changed our name to Old DataWorld Solutions,
Inc.
Our Offices
Our executive offices are located at 920 Conklin Street, Farmingdale, New York
11735 and our telephone number is (631) 293-1610. Our address on the World Wide
Web is http://www.dataworlddirect.com. The information on our Website is not
a part of this prospectus.
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating us and our business.
3
The Offering
------------
Common Stock outstanding (1)......... 29,044,000
Common Stock Offered by the Selling
Securityholders (2).................. 22,743,871
Common Stock to be Outstanding
After the Offering................... 51,787,871
Use of Proceeds...................... We will not receive any of the proceeds
from the sale of common stock being
offered by the selling securityholders
under this prospectus. However, we
may receive up to approximately $2,482,250
assuming the cash exercise of certain
warrants and an option (based on an
assumed exercise price of our common
stock of $.31 per share) held by
certain selling securityholders.
Risk Factors......................... An investment in our common stock
involves a high degree of risk, and
should be considered only by persons who
can afford the loss of their entire
investment. See "Risk Factors."
OTC Bulletin Board Market
Symbol.............................. "DWLD"
_________________
(1) Does not include shares of common stock issuable upon conversion of our $6
Senior Cumulative Convertible Preferred Stock or our Series B 8% Convertible
Preferred Stock, or upon the exercise of issued and outstanding options and
warrants.
(2) Represents shares issuable to the selling securityholders:
- upon the conversion of shares of our Series B 8% Convertible Preferred
Stock;
- upon the exercise of warrants or an option issued in connection with our
sale of Series B 8% Convertible Preferred Stock; and
- upon the payment of common stock dividends in lieu of cash in accordance
with the terms of the Series B 8% Convertible Preferred.
We are registering the common stock covered by this prospectus in order to
fulfill obligations we have under agreements with the selling securityholders.
The number of shares indicated as being issuable upon conversion of, or
otherwise with respect to, the Series B 8% Convertible Preferred Stock and
offered hereby represents a good faith estimate of the number of shares of
common stock that may be issued upon conversion of, or otherwise with respect
to, 1,600 shares of Series B 8% Convertible Preferred Stock by reason of a
floating rate conversion price mechanism included in the Certificate of
Designation for the Series B 8% Convertible Preferred Stock. The estimate is
based on 200% of the number of
4
shares of common stock issuable at a conversion price of $.31 per share.
The actual number of shares of common stock issuable upon conversion of the
Series B 8% Convertible Preferred Stock is determined by a formula based on
the market price at the time of conversion, and is therefore subject to
adjustment and could be materially less or more than such estimated number
depending on factors which we cannot predict. See "Principal and Selling
Stockholders."
The actual number of share of common stock issuable upon exercise equals
the number of shares of common stock issued upon conversion of the Series B 8%
Convertible Preferred Stock. As discussed above, that number, in turn, is
determined by a formula based on the market price at the time of conversion and
is therefore subject to adjustment.
The number of shares offered hereof as being issuable upon the exercise of
the option represents a good faith estimate of the number of shares of common
stock that may be issued upon exercise of the option. The estimate is based
on 200% of the number of shares of common stock issuable at an assumed exercise
price of $.31 per share.
5
Summary Financial Information
The following summary financial information has been derived from our financial
statements included elsewhere in this prospectus. This financial data
represents historical financial information that is not necessarily
indicative of future results. The information should be read in conjunction
with our financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus.
Statement of Operations Data:
Quarter Ended Fiscal Year Ended
September 30, June 30,
---------------------- --------------------
2000 1999 2000 1999
----------- ----------- -------- ----------
(Unaudited) (Unaudited)
Net sales................... $3,661,356 $3,280,912 $13,368,206 $5,912,343
Cost of goods sold ......... 2,726,180 2,600,933 10,277,127 4,586,563
------------ ---------- ---------- ---------
Gross profit ............... 935,176 679,979 3,091,079 1,325,780
Selling, general and
administrative expenses .... 817,160 572,178 2,881,715 2,045,601
------------ ---------- ---------- ---------
Income (loss) before interest
and depreciation and
amortization ............. 118,160 107,801 209,364 (719,821)
Interest expense ........... 129,543 100,257 513,061 164,487
---------- --------- --------- ----------
(Loss) income before
depreciation and
amortization ............... (11,383) 7,544 (303,697) (884,308)
Depreciation and
amortization................ 79,747 75,526 323,810 166,448
---------- --------- ---------- ----------
Net loss ................... (91,130) (67,982) (627,507)(1,050,756)
Deemed and accrued
dividends on preferred stock (41,748) - (649,446) -
---------- --------- ---------- ----------
Net loss applicable to
common stockholders......... $ (132,878) $ (67,982) $(1,276,953)(1,050,756)
============ ========== ============ ==========
Net loss per common share
(basic and diluted) ........ $ (.01) $ (.01) $ (.04) $ (.04)
============ ========== ============ ==========
6
Quarter Ended Fiscal Year Ended
September 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Weighted average number of
shares of common stock
outstanding (basic and
diluted).................. 29,044,000 26,824,000 29,044,000 26,824,000
7
Balance Sheet Data:
As of As of
September 30, June 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- ---------- ---------- ---------
(Unaudited) (Unaudited)
Cash .................... $ - $ 11,606 $ 51,153 $ -
Working capital.......... 1,627,042 148,998 1,413,128 330,880
Total assets ............ 9,303,356 8,274,958 8,812,484 7,178,328
Total current liabilities 3,737,355 4,164,473 3,407,395 3,477,970
Long-term debt(including
current portion)......... 4,033,872 3,731,134 3,744,939 3,293,248
----------- ---------- ----------- -----------
Total stockholders' equity $1,190,174 $ 202,033 $ 1,313,302 $ 215,015
----------- ---------- ----------- -----------
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RISK FACTORS
Before you buy shares of common stock from the selling securityholders, you
should be aware that an investment in the common stock involves various risks,
including those described below. You should consider carefully these risk
factors, together with all other information in this prospectus, before you
decide to purchase shares of our common stock.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial condition
or operating results could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose part or all of
your investment.
We have not had significant past revenue. We and our predecessors have
incurred substantial losses and negative cash flow since the early 1990s,
recently emerged from a bankruptcy reorganization proceeding and may continue
to incur losses for the foreseeable future. Our revenues for the quarter ended
September 30, 2000 and 1999 were $3.7 million and $3.3 million, respectively.
Our revenues for the years ending June 30, 2000 and 1999 were $13.4 million
and $5.9 million, respectively. During the quarters ending September 30, 2000
and 1999, we experienced net losses of $91,130 and $67,982. During the years
ending June 30, 2000 and 1999, we experienced net losses of $627,507 and
$1,050,756, respectively. We believe that, for the foreseeable future, we
will incur substantial operating losses and negative cash flow. We cannot
predict the length of time such operating losses will continue or the impact
such operating losses will have on our financial condition and results of
operations. There can be no assurance that our technology and products will
be able to compete successfully in the marketplace or generate significant
revenue, or that our business will be able to operate profitably. Our ability
to become profitable depends on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels.
If we do achieve profitability, we cannot be certain that we would be able
to sustain or increase profitability on a quarterly or annual basis in the
future.
We require additional capital to finance our operations. We have
obtained only limited funds to date from the issuance of our capital stock.
We will continue to require substantial additional funds for working capital
and related expenses in pursuit of our business strategy, including the
acquisition of other companies to expand our product line, customer base and
market share. The timing and amount of this spending is difficult to predict
accurately and will depend upon many factors. We can provide no assurance that
we will be able to obtain commitments for additional financing on terms
acceptable to us, or at all, nor provide assurance that we will have sufficient
trade credit with our suppliers if demand for our products increase.
We may seek additional funds through public offerings or private placements
of our debt or equity securities. Most of these public offerings or private
placements will not require the prior approval of the stockholders. If we
raise additional funds by issuing equity or debt securities, further dilution
to our stockholders could occur. Additionally, we may grant registration
rights to investors purchasing equity or debt securities. Debt financing, if
available, may involve pledging some or all of our assets. If we raise
additional funds through the issuance of debt, we
9
will be required to service that debt and be likely to be subject to restrictive
covenants and other restrictions contained in the instruments governing the
debt, which may limit our operational flexibility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Our results may fluctuate significantly from quarter to quarter
Our quarterly operating results have, in the past, varied and may in the
future vary significantly, depending on facts such as size, timing and
recognition of revenue from significant sales and system integration activity,
the timing of new product releases and the market acceptance of these new
releases, and increases in operating expenses. Due to the relatively fixed
nature of certain of our costs throughout each quarterly period, including
personnel and facilities costs, the decline of revenues in any quarter
typically results in lower profitability in that quarter. There can be no
assurance that we will become profitable or avoid losses in any future period.
It is difficult to predict the seasonal pattern of our sales and the impact
of such seasonality on our business and financial results. In the future,
our seasonal sales patterns may become more pronounced, may strain our
personnel and warehousing and order shipment activities and may cause a
shortfall in net sales as compared to expenses in a given period. For more
details, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our independent auditors have expressed doubt over our ability to continue as a
going concern. The report of independent certified public accountants in our
June 30, 2000 financial statements includes an explanatory paragraph stating
that our net loss and our dependence on a shareholder for continued financial
support, among other factors, raise substantial doubt as to our ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Issuance of preferred stock, particularly the Series B 8% Convertible Preferred
Stock, and the $6 Cumulative Convertible Preferred Stock, may adversely affect
holders of our common stock. Our Board of Directors has the authority, without
any further vote or action by the stockholders, to issue up to 5,000,000 shares
of preferred stock with such rights, preferences and limitations as the Board
determines in its discretion.
Such an issuance will dilute your ownership percentage. Some events over which
you have no control could result in the issuance of additional shares of our
stock, including:
- to raise additional capital or finance acquisitions,
- upon the exercise or conversion of outstanding options, warrants and shares
of convertible preferred stock, or
- in lieu of cash payment of dividends.
An issuance of preferred stock could result in a class of outstanding securities
that would have preferences with respect to voting rights, dividends and in
liquidation over the common
10
stock and could, upon conversion or otherwise, have all of the rights of our
common stock. Our Board of Directors' authority to issue preferred stock
could discourage potential takeover attempts and could delay or prevent a change
in control of our company through merger, tender offer, proxy contest or
otherwise by making these attempts more difficult or more costly to achieve.
At present, the Board of Directors has designated 20,000 shares of preferred
stock as $6 Senior Cumulative Convertible Preferred Stock, of which 6,500
shares are issued and outstanding, and 3,000 shares of preferred stock as
Series B 8% Convertible Preferred Stock, of which 1,600 shares are issued and
outstanding.
The conversion of and the payment of dividends in shares of common stock in lieu
of cash on, the Series B 8% Convertible Preferred Stock or the $6.00 Cumulative
Convertible Preferred Stock, and the exercise of the related warrants and
option, may result in substantial numbers of additional shares being issued
if our market price declines. The Series B 8% Convertible Preferred Stock
converts at a floating rate and may be converted by Augustine Fund (one of
the selling securityholders), either in whole or in part, at any time
at the conversion price per share of common stock equal to the lower of
(i) 106% of the lowest of the closing bid prices of the common
stock on the OTC Bulletin Board for the five trading days immediately preceding
the closing date ($1.03) (subject to adjustment for stock splits
or stock combinations), and (ii) 71% of the market price, subject to further
reduction as described below. Because the registration statement of which
this prospectus is part was not declared effective by September 30, 2000,
the conversion percentage has decreased by two percent for each month or
partial month since September 30, and will be further decreased for each
month or partial month in which this registration statement has not been
declared, or does not remain, effective. If this registration statement
has not been declared, or does not remain, effective on or after May 31, 2001
and until the Series B 8% Convertible Preferred Stock
has been converted in full, then the conversion percentage will be 50%. As a
result, the lower the price of our common stock at the time of conversion,
the greater the number of shares the holder will receive. For additional
information regarding the number of additional shares that may be issued at
various assumed conversion prices, see "Description of Capital Stock."
As of the date hereof, other than the Series B 8% Convertible Preferred Stock,
and the related option, warrants issued to the holders of Series B 8%
Convertible Preferred Stock and the other selling securityholders,
there were outstanding options to acquire an aggregate of 50,000 shares of
common stock and outstanding $6 Senior Cumulative Convertible Preferred Stock
(with a "floating" conversion rate) convertible into shares of common stock.
If exercised, these securities will dilute your percentage ownership of common
stock. These securities, unlike the common stock, provide for anti-dilution
protection upon the occurrence of stock splits, redemptions, mergers,
reclassifications, reorganizations and other similar corporate transactions.
If one or more of these events occur, the number of shares of common stock
that may be acquired upon conversion or exercise would increase. In addition,
the number of shares that may be issued upon conversion of or payment of
dividends in lieu of cash on the Series B 8% Convertible Preferred Stock, or
exercise of the related option could increase substantially if the
market price of our common stock decreases during the period the Series B 8%
Convertible Preferred Stock is outstanding.
For example, the number of shares of common stock that we would be required to
issue upon conversion of all 1,600 shares of Series B 8% Convertible Preferred
Stock, excluding
11
shares issued as accrued dividends and shares issued upon
exercise of the related option, would increase from approximately 10,322,581
million shares, based on the applicable conversion price of $.31
per share as of November 28, 2000 to approximately:
13,763,441 shares (23% of our outstanding common stock) if the
applicable conversion price decreased 25%;
20,645,161 shares (28% of our outstanding common stock) if the
applicable conversion price decreased 50%; or
41,290,323 shares (35% of our outstanding common stock) if the
applicable conversion price decreased 75%.
A decline in the market price of our stock could encourage short sales, placing
further downward pressure on the price of our stock. The sale of large amounts
of our common stock upon conversion of the Series B 8% Convertible Preferred
Stock or the $6.00 Cumulative Convertible Preferred Stock, or the payment of
dividends in lieu of cash on the Series B 8% Convertible Preferred Stock or the
$6.00 Cumulative Convertible Preferred Stock, and the exercise of the related
option could result in a decline in the market price of the common stock.
In addition, the sale of a large number of common stock upon the exercise of
existing warrants (including those issued to the selling securityholders and
option) could also result in a decline in the price of the common stock. A
decline in the price of the common stock could encourage short sales or margin
calls, which could place further downward pressure on the price of our common
stock.
We do not currently have sufficient number of shares of common stock authorized
for issuance upon conversion of the Series B 8% Preferred Stock and the exercise
of the related option and warrants held by the selling securityholders, in
violation of our obligations under such instrument, to at all times have
sufficient number of shares so authorized and reserved for the purpose of
issuance. In order to comply with these obligations, we intend to seek
stockholder approval to increase our authorized common stock at our next
stockholder meeting.
We may be required to pay substantial penalties to the holders of the Series B
8% Cumulative Preferred Stock and related warrants if specific events occur.
In accordance with the terms of the documents relating to the issuance of the
Series B preferred shares we are required to pay substantial penalties to a
holder of the Series B preferred shares under specified circumstances,
including, among others:
- our failure to deliver shares of our common stock upon conversion of the
Series B 8% Cumulative Preferred Stock or after a proper request or
- a registration statement relating to the Series B Cumulative Preferred Stock
and related warrants has not been declared effective by the SEC on or before
September 30, 2000, or after being declared effective, is unavailable to
cover the resale of the shares of common stock underlying such securities,
as a result of which the conversion percentage has already declined by 4%
and will further decrease by 2% per partial month in which it is not
declared effective, and shall decline to 50% if not declared effective by
May 31, 2001.
12
Future sales of additional shares of our common stock into the market may
depress the market price of our common stock. As of November 29, 2000, we
had 29,044,000 shares of common stock issued and outstanding and 822,500
shares were issuable upon exercise or conversion of outstanding convertible
stock, warrants and options. Substantially all of these shares of common
stock are either eligible for sale pursuant to Rule 144 or have been registered
under the Securities Act for resale by the holders, including the common stock
covered by this prospectus. This will permit the sale of registered shares of
common stock in the open market or in privately negotiated transactions without
compliance the requirements of Rule 144. We are unable to estimate the amount,
timing or nature of future sales of outstanding common stock. Sales of
substantial amounts of the common stock in the public market may hurt our
stock's market price.
In general, under Rule 144, if a period of at least one year has elapsed since
the later of the date the "restricted securities" were acquired from us or the
date they were acquired from an affiliate, then the holder of such restricted
securities is entitled to sell a number of shares of common stock equal to 1%
of the issued and outstanding shares of common stock. The holder may only
sell such shares of common stock through unsolicited brokers' transactions or
directly to market makers. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales
and the availability of current public information about us. Affiliates may
sell shares of common stock not constituting restricted stock in accordance
with the foregoing volume limitations and other requirements but without
regard to the one-year holding period.
Under Rule 144(k), if a period of at least two years has elapsed since the later
of the date restricted shares of common stock were acquired from us or from an
affiliate, as applicable, a holder of such restricted stock who is not an
affiliate at the time of the sale and has not been an affiliate for at least
three months prior to the sale would be entitled to sell the shares of common
stock immediately without regard to the volume limitations and other
conditions described above.
We cannot make any predictions as to the effect, if any, that sales of stock
or the availability of stock for sale will have on the market price prevailing
from time to time. Nevertheless, sales of significant amounts of our common
stock in the public market, or the perception that such sales may occur,
could adversely affect prevailing market prices.
Prospective investors should be aware that the possibility of resales by the
selling securityholders, as well as our other stockholders, may have a material
depressive effect on the market price of our shares of common stock in any
market which may develop. See "Principal and Selling Stockholders."
Our recent emergence from bankruptcy may prevent us from negotiating favorable
commercial terms. We emerged from bankruptcy in January 1998. Our experience
in and recent emergence from bankruptcy may affect our ability to negotiate
favorable trade terms with manufacturers and other vendors. Our experience
in bankruptcy could also have an adverse impact on our ability to secure new
purchase orders with current and prospective customers. The failure to
obtain favorable terms from suppliers or new business from current and
prospective customers could have a material adverse effect on our operations,
business or financial condition.
13
We may not have the ability to honor our obligations owed to unsecured creditors
under our bankruptcy plan of reorganization. In June 2000, after failing to
make certain required payments under our bankruptcy reorganization plan dated
October 1997, a class of unsecured creditors and our Company reached an
agreement to modify the treatment of the balance remaining under the bankruptcy
reorganization plan. We paid the creditors approximately $100,000 in two
payment and are obligated to pay on a monthly basis approximately $10,500 a
month for 30 months. In addition, we have the option, until March 31, 2001, to
pay the balance then due plus an additional $25,000 to the Class 7 creditors.
In the event we do not exercise this option, we will be obligated to pay the
Class 7 Creditors a percentage of the Company's cumulative cash flow, as
defined, through September 2002, as originally specified in the Bankruptcy Plan
of Organization. We cannot provide any assurance
that we will be able to fulfill our obligations to these creditors, nor provide
assurance that we will be able negotiate amendments or modifications if
necessary in the future. A default in our obligations could have a material
adverse affect on our business, financial condition or results of operations.
See "Description of Our Business."
We may not have the ability to honor our obligations owed to holders of notes
or remain in compliance with the terms of our revolving credit facility.
From time to time, we have been unable to meet our financial obligations to
holders of outstanding promissory notes or to remain in compliance with the
terms of our revolving credit facility. Although we have been able to
negotiate amendments and payment agreements in the past, we cannot provide any
assurance that we will be successful in doing so in the future. A default in
our obligations could have a material adverse affect on our business,
financial condition or results of operations.
All aspects of our business are highly competitive. We compete with several
national, regional and local distributors, many of which have greater
financial or marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships than
we do.
We can provide no assurance that we will be able to compete successfully
against current or future competitors. Further, in response to competition,
we may make pricing, service or marketing decisions that could have a
material adverse affect on our business, financial condition or results of
operations. Some of these competitors also carry product lines, which we do
not carry and provide services, which we do not provide. Competitive pressure
from these companies may materially adversely affect our business and
financial condition in the future. In the event that more competitors begin
to carry products, which we carry and price competition with respect to our
products significantly increases, competitive pressures could force us to
reduce the prices of our products, which would result in reduced profit
margins. Prolonged price competition would have a material adverse effect
on our operating results and financial condition. A variety of other potential
actions by our competitors, including increased promotion and accelerated
introduction of new or enhanced products, could have a material adverse effect
on our results of operations. See "Description of Our Business-Competition."
14
We may not be able to successfully acquire complementary companies or strategic
assets, and we may not successfully integrate them into our operations. We
intend to identify and pursue acquisitions of complementary companies and
strategic assets, such as customer bases, products and technology. Increased
competition for acquisition candidates may develop, in which event there may
be fewer acquisition opportunities available to us as well as higher
acquisition prices. There can be no assurance that we will be able to
identify acquisition opportunities.
If any such opportunity involves the acquisition of a business, we cannot be
certain that:
- we will successfully integrate the operations of the acquired business with
ours,
-all the benefits expected from such integration will be realized,
-management's attention will not be diverted or divided, to the detriment of
current operations,
-amortization of acquired intangible assets will not have a negative effect
on our operating results or other aspects of our business,
-delays or unexpected costs related to the acquisition will not have a
detrimental effect on our combined business, operating results and
financial condition,
-customers dissatisfaction with, or performance problems at, an acquired
company will not have an adverse effect on our reputation, or
-our respective operations, management and personnel will be compatible.
In most cases, acquisitions will be consummated without seeking and obtaining
stockholder approval, in which case stockholders will not have an opportunity
to consider and vote upon the merits of such an acquisition. Although we
will endeavor to evaluate the risks inherent in a particular acquisition, we
can provide no assurance that we will properly ascertain or assess such risks.
See "Description of Our Business-Business Strategy."
We rely on key employees whose absence could adversely affect our ability to
execute our business strategy. We are highly dependent upon the experience,
abilities and continued efforts of our senior management, especially Daniel
McPhee, our Chairman of the Board, President, Chief Executive Officer and
Director. We do not presently maintain employment contracts or "key man"
life insurance with respect to the members of our senior management. The
loss of the services of one or more of the key members of our senior
management could have a material adverse affect on our business, financial
condition or results of operations.
Our success is also dependent upon our ability to hire and retain qualified and
talented executive, technical and marketing personnel. There is always intense
competition for qualified personnel in our business and our inability to
recruit qualified personnel could have a material adverse impact on our
business, financial condition and results of operation. There can be no
assurance that we will be able to retain the members of our current management
or personnel, that establishing such management or personnel will be cost
effective or that we will be able to successfully attract and retain
qualified management, technical and sales or other personnel in the future.
Our potential growth could impose significant challenges on our management. We
anticipate a period of growth as a result of the development of our business,
which is expected to
15
place a strain on our administrative, financial and
operational resources. Our ability to manage any growth effectively will
require us to continue to improve our operational, financial and
management controls, reporting systems and procedures, install new
management information and control systems, and train, motivate and manage
our employees. There can be no assurance that we will install such management
information and control systems in an efficient and timely manner or that the
new systems will be adequate to support our operations. In addition, many of
the challenges of growth may be unforeseeable and beyond our control. If
we are unable to manage growth effectively, such that our sales and marketing
efforts exceed our capacity to design, develop, install, maintain and service
our products, or if new employees are unable to achieve adequate performance
levels, our business, operating results and financial condition could be
adversely affected.
Control by existing management and stockholders may have certain anti-takeover
considerations. Our directors, executive officers and certain principal
stockholders and their affiliates beneficially own approximately 72% of our
currently issued and outstanding common stock. The voting power of these
holders may discourage or prevent any proposed takeover of our company
unless the terms thereof are approved by such holders. Pursuant to our
Certificate of Incorporation, we may issue preferred stock in the future
without stockholder approval and upon such terms as the Board of Directors
may determine. The rights of the holders of common stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
shares that may be issued in the future. The issuance of preferred stock
could have the effect of discouraging a third party from acquiring a majority
of our outstanding common stock, and therefore may prevent stockholders from
realizing a premium on their common stock. See "Principal and Selling
Stockholders" and "Description of Capital Stock."
It may be difficult for us to stay current with new technology and products.
Our products may become obsolete. The markets for our products are
characterized by evolving industry requirements, rapid technological change
and frequent new product introductions which may result in product or
technology obsolescence. Certain companies may be developing technologies
or products of which we are unaware which may be functionally similar, or
superior, to some or all of those that we offer. As a result, our ability
to compete will depend on our ability to adapt, enhance and improve our
existing products and technology and, if necessary, to develop and introduce
new products and technology to the marketplace in a timely and cost-competitive
manner. There can be no assurance that we will be able to compete successfully,
that our competitors or future competitors will not develop technologies or
products that render our technology obsolete or less marketable, or that we
will be able to successfully enhance our products or technology or adapt
them satisfactorily.
New product development efforts are subject to all of the risks inherent in the
development of new technology and products including unanticipated delays,
expense and technical problems or difficulties, as well as the possible
insufficiency of funding to complete development. There can be no assurance
as to when, or whether, new products will be successfully developed. In
addition, no assurance can be given that additional technologies can be
developed within a reasonable development schedule, if at all. Further,
there can be no assurance the we would have sufficient economic or human
resources to complete such development in a timely manner, if at all, or
that we could enter into economically reasonable arrangements for the
completion of such products by third parties.
16
Following the development of additional products, we must successfully
complete a testing program for the products before they can be marketed.
Although we believe that our testing program is adequate, unforseen technical
problems arising out of such testing could significantly and adversely affect
our ability to produce and market a commercially acceptable product. In
addition, our success will depend upon our current and proposed technologies
and product meeting acceptable cost and performance criteria in the
marketplace. There can be no assurance that the technologies and products
will meet acceptable price or performance objectives or that unanticipated
technical or other problems will not occur which would result in increased
costs or material delays. Also, there can be no assurance
that we will develop new technologies in the future. If superior technology
is developed by our competitors, such products may render our present products
obsolete, and thus would have a materially negative impact on us.
We face significant inventory risk because demand can change for products
between the time that we order products and the time that we receive them.
We carry a significant level of inventory. As a result, the rapidly changing
trends and developments in Information Technology, subject us to significant
inventory risks. It is critical to our success that we accurately predict
these trends and do not overstock unpopular products. The demand for
specific products can change between the time the products are ordered or
manufactured and the date of receipt.
In the event that one or more products do not achieve widespread market
acceptance, we may be required to take significant inventory markdowns,
which could reduce our net sales and gross margins. We believe that this
risk will increase as we enter new product categories due to our lack of
experience in purchasing products for these categories. In addition, to the
extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any such increase would subject us to additional
inventory risks.
Because we do not have long-term or exclusive vendor
contracts, we may not be able to get sufficient quantities of popular
products in a timely manner. As a result, we could lose customers. If we
are not able to offer our customers sufficient quantities of products in a
timely manner, we could lose customers and our net sales could be below
expectations. Our success depends on our ability to purchase products in
sufficient quantities at competitive prices. As is common in the industry,
we do not have long-term or exclusive arrangements with any vendor or
distributor that guarantee the availability of products. Therefore, we do
not have a predictable or guaranteed supply of products.
An increase in interest rates will increase our cost of capital. The interest
rate payable under our revolving credit facility is based on a floating rate
indexed to the U.S. Prime Rate, plus 2.5 % per annum. The effective rate
increases or decreases by one quarter of one percent (1/4 of 1 %) per annum
for each increase or decrease, respectively, of one quarter of one percent
(1/4 of 1%) per annum in the Prime Rate. Accordingly, any movement in the
U.S. Prime Rate will impact our interest expense. The outstanding balance
under the facility on October 31, 2000 was $4,585,000. Based on this balance,
a hypothetical 1-point increase of the U.S. Prime Rate would result in an
increase in annual interest expense of approximately $45,850. We have has not
historically used interest rate swaps in connection with our floating rate
debt. Consequently, increases in interest rates could have a material
adverse effect on our future results and financial
17
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
We have placed limitations on directors' liability. Our Restated Certificate of
Incorporation provides, pursuant to Delaware law, that our directors shall not
be personally liable to us or to our stockholders for monetary damages for
breach of fiduciary duty as a director, with certain exceptions. These
provisions may discourage stockholders from bringing suit against a director
for breach of fiduciary duty and may reduce the likelihood of derivative
litigation brought by stockholders on our behalf against any director. In
addition, our By-Laws provide that any person who is made a party to an action
by reason of the fact that such person is or was a director, officer, advisor,
employee or agent of our company shall be indemnified by us to the fullest
extent authorized by Delaware law. See "Description of Capital Stock-
Limitation on Liability of Directors; Indemnification."
We have never paid any dividends on our common stock and we do not intend to do
so for the foreseeable future. Holders of our common stock are entitled to
dividends only when, as and if declared by the Board of Directors out of
funds legally available. We have not declared or paid any dividends in the
past and do not currently anticipate declaring or paying any dividends in
the foreseeable future. We intend to retain earnings, if any, to finance the
development and expansion of our business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent
upon future earnings, if any, our financial condition, capital requirements,
general business conditions and other factors. Therefore, there can be no
assurance that any dividends of any kind will ever be paid to holders of our
common stock.
Holders of our $6 Senior Cumulative Convertible Preferred Stock
are entitled to receive, subject to the dividend rights of our Series B 8%
Convertible Preferred Stock, when and as declared by the Board of Directors,
out of funds legally available, quarterly dividends payable in cash on
December 1, March 1, June 1, and September 1 of each year, commencing on
March 1, 2000, in an amount equal to $1.50 per share, per dividend payment.
Dividends are cumulative from December 1, 1999. Whenever dividends due on
this series are in arrears, we may not pay dividends on or make distributions
to any stock ranking junior to the $6 Senior Cumulative Convertible Preferred
Stock or pay dividends on or make distributions on any stock ranking on a
parity to the $6 Senior Cumulative Convertible Preferred Stock, except
dividends paid ratably with all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts owed to each of the
respective holders of preferred stock.
Our Series B 8% Convertible Preferred stockholders are entitled to receive
dividends at the stated dividend rate of 8% on the stated value of $1,000 on
each Series B 8% Convertible Preferred Stock share. Dividends are cumulative
from the date of issue, whether or not declared, for any reason. The Series
B Convertible Preferred Stock ranks prior to any of our other capital stock
and thus must be paid any accrued and unpaid dividends prior to any dividend
payments to our common stock holders. See "Dividend Policy" and "Description
of Capital Stock."
Intellectual property claims against us can be costly and could impair our
business. Other parties may assert infringement or unfair competition claims
against us. We have received notices of infringement in the past and we expect
to receive other notices from other third parties in the future. We cannot
predict whether third parties will assert claims of infringement against
18
us, or whether any past or future assertions or prosecutions will harm our
business. If we are forced to defend against any such claims, whether they
are with or without merit or are determined in our favor, then we may face
costly litigation, diversion of technical and management personnel, or
product shipment delays. As a result of such a dispute, we may have to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may be unavailable on terms
acceptable to us, or at all. If there is a successful claim of product
infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, it could
impair our business.
If the protection of our trademarks and proprietary rights is inadequate, our
brand and reputation could be impaired and we could lose customers. The steps
we take to protect our proprietary rights may be inadequate. We regard our
copyrights, service marks, trademarks, trade dress, trade secrets and similar
intellectual property as critical to our success. We rely on trademark and
copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. The relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is
unclear. Therefore, we may be unable to prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the
value of our trademarks and other proprietary rights.
"Penny Stock" regulations may impose certain restrictions on marketability of
securities. The Securities and Exchange Commission (the "SEC") has adopted
regulations which generally define "penny stock" to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. Our common stock is presently subject to rules that impose
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination
for the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated
by the SEC relating to the penny stock market. The broker-dealer must also
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-
dealer is the sole market maker, the broker-dealer must disclose this fact
and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny
stocks. Consequently, the "penny stock" rules may restrict the ability of
broker-dealers to sell our common stock and may affect the ability of
purchasers in this Offering to sell our shares of common stock in the
secondary market as well as the price at which such purchasers can sell any
such common stock.
The market price of our common stock may be volatile, which could result in
substantial losses for individual securityholders. The market price for our
common stock has been and is likely to continue to be highly volatile and
subject to wide fluctuations in response to factors including the following,
some of which are beyond our control:
19
-actual or anticipated variations in our quarterly operating results;
-announcements of technological innovations, increased cost of operations or
new products or services by us or our competitors;
-changes in financial estimates by securities analysts;
-conditions or trends in the technology industry;
-changes in the economic performance or market valuations of technology and
telecommunications companies;
-volatility in the stock markets, particularly with respect to technology
stocks, and decreases in the availability of capital for technology
related businesses;
-announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
-additions or departures of key personnel;
-transfer restrictions on our outstanding shares of common stock or sales of
additional shares of common stock; and
-potential litigation.
In the past, following periods of volatility in the market price of their
securities, many companies have been the subject of securities class action
litigation. If we were sued in a securities class action, it could result
in substantial costs and a diversion of management's attention and resources
and would cause the prices of our common stock to fall.
20
FORWARD-LOOKING STATEMENTS
In addition to the other information contained in this prospectus, investors
should carefully consider the risk factors disclosed in this prospectus,
including those described under "Risk Factors." This prospectus contains
forward-looking statements as that term is defined in the federal securities
laws. All statements other than statements of historical fact are "forward-
looking statements" for purposes of those provisions, including statements
relating to business plans or strategies, projected or anticipated benefits
or other consequences of our plans or strategies, projected or anticipated
benefits from acquisitions to be made by us, projections involving anticipated
revenues, earnings or other aspects of our operating results and projections
of future economic conditions and performance. The words "may," "will,"
"expect," "believe," "anticipate," "project," "plan," "intend," "estimate,"
"continue," their opposites and similar expressions are intended to identify
forward-looking statements. We caution readers that these statements are not
guarantees of future performance or events and are subject to a number of
uncertainties, risks and other influences, many of which are beyond our
control, that may influence the accuracy of the statements and the projections
upon which the statements are based, including but not limited to the factors
discussed in the risk factors described above. Any one or more of these
uncertainties, risks and other influences could materially affect our results
of operations and whether forward-looking statements made by us ultimately
prove to be accurate. Our actual results, performance and achievements could
differ materially from those expressed or implied in these forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether from new information, future events or
otherwise.
21
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy our filings at the SEC's
public reference rooms in Washington, D.C., New York, New York or Chicago,
Illinois. Please call 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings are also available
to the public from commercial document retrieval services and free of charge
on the Internet web site maintained by the SEC at "http://www.sec.gov."
We have filed with the SEC a registration statement on Form SB-2 to register
the shares of our common stock to be sold by the selling securityholders.
This prospectus is part of that registration statement and, as permitted by
the SEC's rules, does not contain all of the information set forth in the
registration statement. For further information with respect to us or our
common stock, you may refer to the registration statement and its exhibits.
You can review a copy of the registration statement and its exhibits at the
public reference room maintained by the SEC, and on the SEC's web site, as
described above. Statements contained in this prospectus concerning the
contents of any contract or any other document are not necessarily complete and
reference is made to such contract or other document filed with the SEC as an
exhibit to the Registration Statement.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the common stock by
the selling securityholders under this prospectus and all proceeds will go
to the selling securityholders to be used for their own purposes. However,
we may receive up to approximately $2,482,250, assuming the cash exercise
of the warrants held by the selling securityholders and the exercise of the
option granted to one of the selling securityholders (determined at an
assumed option exercise price of $.31).
DIVIDEND POLICY
Except for dividends paid in common stock on our preferred stock, we have not
declared or paid any dividends in the past and do not currently anticipate
declaring or paying any dividends in the foreseeable future. We intend to
retain earnings, if any, to finance the development and expansion of our
business. Future dividend policy will be subject to the discretion of
the Board of Directors and will be contingent upon future earnings, if any,
our financial condition, capital requirements, general business conditions,
rights of preferred stock holders and debt holders and other factors.
Therefore, there can be no assurance that any dividends of any kind will
ever be paid to holders of our common stock.
Under the terms of our revolving credit facility, we are not permitted to pay
or declare any dividends or otherwise make any distribution of capital.
22
Holders of our $6 Senior Cumulative Convertible Preferred Stock are entitled to
receive, subject to the rights of the holders of the Series B 8% Convertible
Preferred Stock, when and as declared by the Board of Directors, out of funds
legally available, quarterly dividends of $1.50 per share, payable in cash on
December 1, March 1, June 1, and September 1 of each year, commencing March
1, 2000. Dividends are cumulative from December 1, 1999. If dividend
payments are in arrears (as they are currently), we may not pay dividends or
make any other distributions on any stock ranking junior to the $6 Senior
Cumulative Preferred Stock.
Holders of our Series B 8% Convertible Preferred Stock are entitled to
receive dividends at the stated dividend rate of 8% on the stated value of
$1,000 on each Series B 8% Convertible Preferred Stock share.
Dividends are cumulative from the date of issue, whether or not
declared, for any reason. The Series B 8% Convertible Preferred Stock shares
rank prior to any of our other capital stock and must be paid any accrued and
unpaid dividends prior to any dividend payments to holders of our common stock
or $6 Senior Cumulative Convertible Preferred Stock.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading over-the-counter on September 15, 1995 and is
quoted on the OTC Bulletin Board on a limited and sporadic basis under the
symbol "DWLD." Prior to March 23, 2000, our common stock traded under the
symbol "VCCP". There is no assurance that our common stock will continue to
be quoted or that any liquidity exists or will exist for our common stock.
The reported high and low bid prices are shown below for the period from July 1,
1998 through November 28, 2000, as reported on the OTC Bulletin Board. The
prices presented are bid and ask prices, rounded to the nearest one
thousandth, which represent prices between broker-dealers and do not include
retail mark-ups or mark-downs or any commissions to the broker-dealer. The
prices may not necessarily reflect actual transactions:
BID
Period High Low
-------- -------- ---------
Fiscal 2001
First Quarter .969 .53
Second Quarter (through November 29, 2000) .81 .25
Fiscal 2000
Fourth Quarter ended June 30, 2000 2.6250 .75
Third Quarter ended March 31, 2000 4.25 .1875
Second Quarter ended December 31, 1999 .225 .19
First Quarter ended September 30, 1999 .24 .21
23
Fiscal 1999
Fourth Quarter ended June 30, 1999 .22 .20
Third Quarter ended March 31, 1999 .26 .20
Second Quarter ended December 31, 1998 .08 .42
First Quarter ended September 30, 1998 .16 .08
_______________________
* Effective March 23, 2000, the Company's OTC Bulletin Board Symbol changed
from "VCCP" to "DWLD"
On November 28, 2000, the last reported bid price of our common stock was
$.38 and the last reported ask price was $.43. As of November 28, 2000
there were approximately 275 stockholders of record of our common stock.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Old DataWorld was incorporated on January 7, 1998 and commenced operations on
March 1, 1998. In December 1998, we completed a "reverse acquisition"
transaction with Old Data World. For the purposes of additional comparative
analysis, we have included in our discussion of results of operations, pro
forma comparative results that include the historical results of Vertex
Electronics (July 1, 1998 through December 17, 1998) for all periods presented.
Results of Operations Quarter Ended September 30, 2000
Net sales for the quarter ended September 30, 2000 were approximately
$3,661,000. Net sales for the quarter ended September 30, 1999 were
approximately $3,281,000. This growth in net sales was due to the addition
of new customers, increased sales to certain existing strategic
customers and expanded product lines with our vendors.
Gross profit for the quarter ended September 30, 2000 was approximately
$935,000. Gross profit as a percentage of sales was 25.5% for the quarter
ended September 30, 2000. Gross profit for the quarter ended September 30,
1999 was approximately $680,000. Gross profit as a percentage of sales was
20.7% for the quarter ended September 30, 1999. The growth in gross profit
and gross profit percentage was due to increased sales volume, which provides
for the absorption of fixed costs and further afforded us the
opportunity to obtain more favorable pricing of purchased components.
Selling, general and administrative expenses were approximately $817,000 or
22.3% of sales for the quarter ended September 30, 2000. For the quarter ended
September 30, 1999 selling, general and administrative expenses were
approximately $572,000 or 17.4% of sales. The increase was principally due
to the combination of the following: a provision for accounts receivable was
recorded for approximately $15,000, an increase in office salaries of
approximately $60,000, an increase in insurance costs of approximately $37,000,
an increase in computer expenses of approximately $20,000, an increase in sales
related expenses of
25
approximately $44,000, an increase in stockholder reporting fees of
approximately $34,000 and an increase in bank charges relating to an increases
in our credit facility of approximately $16,000.
Interest expense for the quarter ended September 30, 2000 was approximately
$130,000. For the quarter ended September 30, 1999 interest expense was
approximately $100,000. This increase of approximately $30,000 is a result
of an increase in borrowings under our revolving credit facility.
Results of Operations Years Ended June 30, 2000 and 1999
Net sales for the year ended June 30, 2000 were approximately $13,368,000.
Net sales for the period ended June 30, 1999 were approximately $5,912,000.
Pro forma net sales for the year ended June 30, 1999 were approximately
$8,553,000. The increase of $4,815,000 or 56.3% over pro forma of the prior
period net sales was due to the addition of new customers, increased sales
to certain existing strategic customers and an expanded product line.
Gross profit for the year ended June 30, 2000 was approximately $3,091,000.
Gross profit as a percentage of sales was 23.1% for the year ended June 30,
2000. For the period ended June 30, 1999 gross profit was approximately
$1,326,000. Pro forma gross profit for the year ended June 30, 1999 was
approximately $1,503,000 or 17.6% of pro forma sales. The growth in gross
profit and gross profit percentage was due to increased sales volume, which
provided for the absorption of fixed costs and further, afforded us
the opportunity to obtain more favorable pricing of purchased components.
Included in cost of goods sold for the year ended June 30, 2000 is a provision
for slow-moving and obsolete inventory of approximately $46,000
(see Note L to the financial statements).
Selling, general and administrative expenses were approximately $2,882,000 or
21.6% of sales for the year ended June 30, 2000. For the period ended June
30, 1999 selling, general and administrative expenses were approximately
$2,046,000. Pro-forma selling, general and administrative expenses for the
year ended June 30, 1999 were approximately $3,243,000. The decrease resulted
from new management reducing headcounts and various administrative expenses
in an effort to increase profitability. Included in selling, general and
administrative expenses for the year ended June 30, 2000 are accruals of
approximately $65,000 for lease settlement costs, $60,000 for employee
bonuses, approximately $54,000 for non cash stock issued for setting up our
website and approximately $37,000 for provision for doubtful accounts (see
Note L to the financial statements).
Interest expense for the year ended June 30, 2000 was $513,000. For the period
ended June 30, 1999 interest expense was approximately $164,000. Pro-forma
interest expense for the year ended June 30, 1999 was approximately $357,000.
The increase was primarily due to our borrowings under our revolving credit
facility. Also included in interest expense is approximately $51,000 for the
issuance of warrants to a non-affiliate of the Company in connection with the
issuance of debentures.
26
Depreciation and amortization increased by approximately $157,000 to $324,000
for the year ended June 30, 2000 primarily due to the amortization of goodwill
resulting from the reverse acquisition of Vertex.
The net loss of $628,000 for the year ended June 30, 2000 decreased from
$1,051,000 for the year ended June 30, 1999. The pro-forma net loss for the
year ended June 30, 1999 was
approximately $2,148,000, which includes the accounts of Vertex as if the
acquisition of Vertex occurred on July 1, 1998.
The net loss applicable to common stockholders increased to $1,277,000
primarily due to the deemed dividend associated with the beneficial
conversion feature of the Series B Convertible Preferred Stock issued in May
2000.
Years Ended June 30, 1999 and 1998
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 our increase in customers and product lines as
well as the added revenues generated from Vertex after the merger (see Note
A-2 to the financial statements).
Pro-forma net sales for the year ended June 30, 1999 were approximately
$8,553,000, which include 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. Gross profit for the period ended June 30, 1998 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 from our sale of
products at competitive prices in an effort to grow our 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
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 achieved
from sales by management.
Selling, general and administrative expenses were approximately
$2,046,000 or 34.6% of sales for the year ended June 30, 1999 and approximately
$29,000 for the period ended June 30, 1998. The increase is a result of
merging our operations with Vertex whereby the corporate and branch expenses
of Vertex were added to our operations.
27
Pro-forma selling, general and administrative expense 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.
Interest expense for the year ended June 30, 1999 was $164,000. This interest
was primarily incurred by us under our revolving credit facility and our
outstanding Subordinated Debentures.
Pro-forma interest expene for the year ended June 30, 1999 was approximately
$357,000.00 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 September 30, 2000
We had net working capital of approximately $1,627,000 at September 30, 2000.
The working capital at September 30, 2000 is not sufficient to meet our current
liquidity needs. We also are exploring opportunities to increase operating
efficiencies and intend to make a concerted effort to decrease the average days
sales in accounts receivable in order to increase our cash position. Management
is also working to obtain additional sources of working capital. However, there
can be no assurances that management will be successful in increasing operating
efficiencies or obtaining additional sources of working capital.
During the quarter ended September 30, 2000, we used approximately $412,000 in
cash from operating activites. Net cash used during the quarter was primarily
due to an increase in accounts receivable of approximately $480,000 and an
increase in inventory of approximately $87,000, offset by an increase in
accounts payable of approximately $194,000. This increase in receivables gave
us additional borrowing under our revolving credit facility, which enabled us to
to decrease the average days outstanding for our payables.
Investing activities used net cash of approximately $26,000 during the quarter
ended September 30, 2000. The principal use was for purchases of additional
computer equipment needed for our new system implemented in January 2000.
Financing activities provided cash of approximately $388,000. The cash provided
by financing activites was funded by increased borrowings under our revolving
credit facility.
During fiscal 2000, the Company used approximately $1.7 million in cash from
operating activities. Net cash used during the year resulted primarily from
the net loss from operations of
approximately $628,000, an increase in accounts receivable of approximately
$944,000 and an increase in inventory of approximately $808,000. This
increase in receivables increased our borrowing ability under our revolving
credit facility, which enabled us to decrease the average days outstanding
for our trade accounts payables.
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Investing activities used net cash of approximately $270,000 during the year
ended June 30, 2000. The principal use was for the purchase of our new
computer system in January 2000.
Financing activities provided cash of approximately $2,061,000. The cash
provided by financing activities was funded by increased borrowing and equity
transactions we entered into throughout the year.
On May 31, 2000, we issued 1,600 shares of newly created Series B 8% Convertible
Preferred Stock ("8% Preferred Stock"), $.01 par value, with a stated value of
$1,000 per share, 3,000 shares authorized, to accredited investors pursuant to
Regulation D under the Securities Act of 1933 for net cash proceeds of
approximately $1,435,000. The 8% Preferred Stock has no voting rights and is
convertible into common stock of our Company at an effective conversion price
of the lower of (i) 75% of the market price or (ii) 110% of the lowest closing
bid of our common stock for the five trading days immediately preceding the
closing date, May 31, 2000, as defined in the Certificate of Designation of the
8% Preferred Stock. In addition, the investors were granted five-year warrants
to purchase 160,000 shares of common stock at a purchase price equal to 120%
of the lowest of the closing bid prices for our common stock for the five
trading days prior to May 31, 2000. We recorded a deemed dividend of $638,780
for the year ended June 30, 2000, representing the discount resulting from the
allocation of the proceeds to the beneficail conversion feature and the fair
value of the underlying warrrants. Such deemed dividend was recognized on the
of issuance since the 8% Preferred Stock was immediately convertible. In
connection with this transaction, we issued five-year warrants to the broker/
finder to purchase an aggregate of 100,000 shares of our common stock at 120%
of the lowest closing bid prices for our common stock for the five trading days
preceding the closing date, May 31, 2000. These warrants were fair valued at
$105,000. In addition the Company issued 500,000 warrants to a
consultant.
On December 16, 1999, we issued to a non-affiliated party a
Convertible Debenture 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 holder was granted warrants, which permit
the holder to purchase up to a maximum of 300,000 shares of common stock at
$.50 per share. In March 2000, the debentures were automatically converted to
common stock after the average bid price exceeded $1.50 for 30 consecutive
business days per the agreement as defined above.
Management plans to continue to increase revenues, which will increase our
borrowing ability under our revolving credit facility. We have been repaying
cash collateral under the credit facility on a monthly basis beginning June
15, 2000 of approximately $15,000 per month. In an effort to continue to
grow the Company, we plan to seek additional sources of capital investments.
Our continuing existence as a going concern is dependent on our ability to
obtain profitable operations, generate sufficient cash flow to meet our
obligations on a timely basis,
comply with the terms and covenants of our financing agreement and to obtain
additional financing as may be required.
29
Inflation
For the last three fiscal years, we have not been significantly
affected by inflation.
This Management's Discussion and Analysis of Financial Condition and Results 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. See "Forward-Looking Statements."
30
DESCRIPTION OF OUR BUSINESS
Overview
We manufacture and distribute specialized electronic cable assemblies and other
interconnector products. Our value-added services include customized
connecting of electronic devices and peripheral components from different
vendors.
Manufacturing and Assembly
We design, engineer, manufacture and assemble high performance copper and fiber
optic cables for a variety of telecommunication applications. Such
applications range from simple cross-connection between multiple devices to
custom fiber optic splice kits for distribution and interconnection between
telecommunication providers or end-users.
Through our predecessor companies, we have over 30 years of experience
manufacturing and assembling high quality (IS0 9002 certified) products.
We are approved to manufacture assemblies in compliance with the standards
of Bellcore, Underwriters Laboratories and the Canadian Standards Association.
We supply several large OEMs with numerous fiber optic and
copper cable assembly products.
Our manufacturing and assembly operations are based in Farmingdale, New York,
with additional operations in Long Island City, New York and San Jose,
California. We also maintain a sales office in Boston, Massachusetts.
Distribution and Logistics
We distribute structured cabling systems, components and cable management
solutions to information technology contractors, telecommunication cabling
installers, and end-users to support enterprise communication networks.
We coordinate the sale and distribution of products from world-class cabling
infrastructure manufacturers, including Corning Cabling Corporation (formerly
SIECOR), 3M, ITT Network Systems & Services, NORDX/CDT and Damac. We closely
monitor the market for state-of-the-art products that we believe will enhance
our product offering and improve our ability to service existing and future
customers.
We employ technical support and inside sales personnel to support our outside
sales force. All personnel are trained and certified on all products that we
distribute.
Our distribution and logistics operations are based in Long Island City, New
York, with additional operations in our other offices.
We believe that our success relies heavily on our ability to continue to
competently manufacture and distribute innovative products. We continuously
seek to improve our manufacturing processes by adding new capabilities that
increase efficiency and opportunities. The dynamic nature of the
communications industry requires us to closely monitor trends to
31
insure that the infrastructure products we carry in our distribution portfolio
are reliable and responsive to our customers' needs. We seek to take advantage
of the following industry trends:
-The rapid expansion of the Internet, which is placing unprecedented demand on
the fiber optics industry.
-The convergence of communications services (voice, data and video) into a
single circuit or reduced number of circuits. We expect that this trend
will place significant bandwidth demand on Internet and traditional
communication providers, resulting in ongoing rebuilding and re-engineering
of their fiber optic networks.
-The rapidly expanding trend toward contract manufacturing. We seek to expand
our market share to address opportunities for cable assembly work in the
fiber optic and copper industries.
Our History
A predecessor commenced operations in 1970 as Vertex Electronics, Inc. We were
incorporated as VTX Electronics Corp. in 1986 to acquire Vertex Electronics
and we completed our initial public offering in 1986.
Our Bankruptcy Reorganization
On January 10, 1997 we filed a voluntary petition for reorganization under
Chapter 11 of the Federal Bankruptcy Code in the Eastern District of the
State of New York, and consummated our Plan of Reorganization on January 12,
1998 after obtaining exit financing from Congress Financial Corporation for our
bankruptcy proceedings.
Under our Second Amended Joint Plan of Reorganization, dated September 24,
1997, which was confirmed by the Bankruptcy Court, Eastern District on
October 30, 1997, we completed the following transactions:
-Our wholly owned subsidiary, Vertex Computer Cable and Products, Inc., was
merged with and into us on November 20, 1997;
-We changed our name from VTX Electronics Corp. to Vertex Computer Cable and
Products, Inc. as of November 20, 1997;
-All of our outstanding preferred stock was cancelled and the holder of the
preferred stock, TW Cable, L.L.C., received common stock representing 90%
of our issued and outstanding common stock. The principal owner of TW
Cable, Edward Goodstein, served as our Chairman of the Board and Chief
Executive Officer from January 1997 through October 1998 and remains a
Director;
-We declared a one-for-five reverse stock split of our common stock, effective
December 29, 1997.
32
As of January 10, 1997, our authorized capital stock consisted of 40 million
shares of common stock and 5 million shares of preferred stock. After all
issuances of common stock under the plan of reorganization, including the
issuance to TW Cable, L.L.C. and the reverse stock split, 25,304,000 shares
of common stock were outstanding and no shares of preferred stock were
outstanding.
Under the terms of our Plan of Reorganization, the Class 7 Unsecured Creditors
were to receive four payments of approximately $200,000 plus a percentage of
our future income for up to five years. We made the payments due to the
Class 7 Creditors on November 15, 1998 and February 15, 1999, but failed to
make the payments due on May 15, 1999 and August 15, 1999.
The treatment of the Class 7 Creditors under the Second Amended Joint Plan of
Reorganization was modified in March 2000 in several respects.
As a result, the Class 7 Creditors will receive a total of $779,000 in full
satisfaction of their claims, $500,000 of which had been paid and the balance
(with simple interest of 8% per annum accruing from February 15, 2000),
payable in thirty (30) installments of $10,449.05 each commencing June 15,
2000. To date we have paid them approximately $142,000. We may prepay the
entire outstanding balance, plus interest to date of payment, at any time
without penalty.
If we pay the $279,000 plus interest by March 30, 2001, we have the option of
paying an additional $25,000 by that date to release our obligation to pay
the Class 7 Creditors a percentage of future income.
Sale of Assets
In June 1997, we sold our distribution business product lines and all assets
used in connection therewith for $500,000 to TW Cable LLC. Under the asset
purchase agreement, TW Cable, LLC was permitted to purchase approximately
$1,500,000 of our distribution inventory for an amount equal to 82.5% of the
book value over the following twelve months. Pursuant to the agreement TW
Cable, LLC also agreed to assume certain leases. TW Cable, LLC assumed three
locations, including all employees of these locations.
Sale of our Maryland Facility
In October 1998, we entered into a Purchase and Sale of Assets agreement
whereby we sold certain assets, principally inventory and fixed assets, of
our Maryland facility to an unrelated party for $200,000. In connection with
our agreement, we agreed to sublease the facility to the purchaser under the
terms of our lease, subject to cancellation upon thirty days notice to us.
The agreement provided that upon notice of cancellation, the purchaser would
bear fifty percent of any net loss resulting from the vacancy of the building.
We also:
-granted the purchaser the use of the "Vertex" name through April 30, 1999 and
-granted reciprocal non-compete arrangements as follows:
-they or their affiliates will not conduct or manage any business operation
substantially similar to our product line, either as owner, consultant,
manager,associate, employee, partner, agent, principal or otherwise, in
33
the states of California, New York, New Jersey, Pennsylvania and all New
England States through October 20, 2008.
-We or our affiliates will not conduct or manage any business substantially
similar to their product line either as owner, consultant, manager,
associate, employee, partner, agent, principal or otherwise, in the states
of Maryland, Virginia, Delaware, the District of Columbia through October 20,
2008.
The purchaser subsequently cancelled the sublease, and we are party to a
lawsuit with the landlord and are pending resolution. See "Legal Proceedings."
Reverse Acquisition and Merger
On December 16, 1998, we entered into an agreement with Old DataWorld (a
privately held distributor), Daniel McPhee and Christopher Francis (Old
DatwWorld's principal stockholders), TW Cable, LLC. and Edward Goodstein
(our then Chairman and principal stockholder). Pursuant to the agreement:
-We acquired all of the outstanding common and preferred stock of Old
DataWorld in exchange for the issuance of 1,500,000 shares of our common
stock,
-TW Cable LLC forgave approximately $2,400,000 in principal face amount of
secured subordinated debt and accrued interest;
-TW Cable LLC 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 our creditors to be released to such creditors as payment on
our behalf in exchange for 6,000 shares of our newly issued $6 Senior
Cumulative Convertible Preferred Stock having a stated value of $100 per
share;
-We acknowledged a debt owed to Edward Goodstein in the amount of $200,000,
evidenced by a note payable providing for 36 equal monthly installments
commencing July 1, 1999. This note payable was personally guaranteed by
Daniel McPhee and Christopher Francis; and
-Messrs. McPhee and Francis purchased 17,000,000 shares of our common stock
from TW Cable LLC for $200,000.
As a result of the above, Messrs. McPhee and Francis collectively owned
approximately 66% of our common stock and effective December 18, 1998, Mr.
McPhee became the Chairman of the Board, Chief Executive Officer, President
and Director, and Mr. Francis became Chief Operating Officer and Director,
and DataWorld became our wholly-owned subsidiary. In May 1999, we merged
with this subsidiary, and changed our name to DataWorld Solutions, Inc. In
June 1999, our certificate of incorporation was amended to reflect a change
in par value of our common stock from $.10 to $.001 per share.
Refinancing of our Credit Agreement
We recently amended our revolving credit financing agreement with a financial
institution. The amended agreement provided for maximum borrowings of
$5,000,000 through January 2002. See "Description of Certain Indebtedness."
34
Recent Financings
In February 1999, we issued and sold 1,020,000 shares of our common stock to 13
investors, at a purchase price of $.10 per share, for an aggregate price of
$102,000.
In March 1999, we issued and sold 500 shares of our $6 Senior Cumulative
Convertible Preferred Stock to TW Cable LLC.
In December 1999, we issued a convertible debenture with a principal amount of
$250,000. The debenture holder was also granted warrants to purchase up to a
maximum of 300,000 shares of our common stock at $.50 per share. In March
2000, the debentures were automatically converted into 250,000 shares of
common stock after the average bid price exceeded $1.50 for 30 consecutive
business days, consistent with the terms of the agreement.
In January 2000, we issued 1,800,000 non-forfeitable shares of common stock, in
exchange for services valued at $360,000, to be provided in connection with the
development of our Web site. Through June 30, 2000, we recognized $54,000 of
expense relating to the initial design of the Web site. Unamortized Web site
development costs have been classified as a component of stockholders' equity
in the accompanying financial statements and will be recognized as services
are provided.
In May 2000, we issued and sold 152,905 shares of our common stock and a
common stock purchase warrant to purchase 12,500 shares of our common stock
for an aggregate price of $125,000. We intend to use the capital to fund
working capital and to finance acquisitions.
In May 2000, we issued and sold 1600 shares of our Series B 8% Convertible
Preferred Stock, par value $.01, and 160,000 common stock purchase warrants
for an aggregate price of $1,600,000 in a private placement transaction with
the Augustine Fund, L.P. We intend to utilize the capital to fund working
capital and to finance acquisitions.
Business Strategy
Our business strategy is to develop a value-added distribution network through
internal growth and acquisitions, with a focus on connectivity solutions for
data and telecommunications. Management plans to continue to:
-introduce new connectivity solutions,
-improve operating efficiencies through a more efficient organizational
structure, eliminate duplicated activities and integrate manufacturing
capabilities between our two manufacturing facilities,
-achieve critical mass in order to develop stronger relationships with, and
obtain improved terms from, key suppliers,
-distribute to and service large national and international customers.
Our relationships with customers focus 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 to address these needs. In addition, we continue to service our
customers with components and assemblies as their systems grow. We believe
35
that manufacturers of products generally choose to build relationships with
distributors capable of offering advisory services, technical support and
other services, such as manufacturing custom-made electronic cable assemblies.
We believe that we are perceived as a value-added manufacturer by both
suppliers and customers as a result of our technical skills, knowledge of
the marketplace, access to and understanding of product capabilities, and
technical design and manufacturing capabilities for custom-made electronic
cable assemblies. We have been a value-added reseller for 3M since 1998.
As a value-added reseller, we receive daily orders for single mode fiber
cable assemblies directly from 3M and we ship such assemblies directly to
3M's customers. We also sell single-mode fiber cable assemblies to our
customers.
Effective with our transaction with Old DataWorld in December 1998, we became a
distributor of connectivity products. This enables us to provide our customers
with many of the additional product lines they require.
Growth Through Acquisition
We are in the process of identifying potential acquisitions to expand our
business. We plan to seek capital investment to finance these acquisitions.
We believe that acquisitions could provide an expanded customer base
necessary to increase sales volume. There can be no assurances, however,
that we will be successful in identifying suitable acquisition candidates,
obtaining the required investment capital to finance acquisitions or
consummating such acquisitions on favorable terms, or at all. We have
retained a consultant to assist us in identifying potential merger or
acquisition targets and to advise us on possible debt or equity financing to
facilitate our business plan objectives.
Products and Services
Our 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. We employ design,
engineering and technical support personnel to develop alternative
connectivity solutions and manufacture custom-made electronic cable assemblies.
Principal Suppliers
Management believes that we are not dependent on any particular supplier. For
the fiscal years ended June 30, 2000 and 1999, none of our suppliers accounted
for more than 10% of our purchases.
We work from manufacturers' lead times. Deliveries range from one week to
approximately 90 days. We have a fully integrated on-line computer system
that enables us to determine immediate inventory availability of our stocking
facilities. We monitor and maintain manufacturers' delivery schedules to
ensure "on-time" delivery for our customers and to maintain our inventory
levels. We seek to minimize lead times for our customers without financing
excess stock levels or risking technological obsolescence. Several
manufacturers have provided us with an expedited shipping function in order
to better service our customers.
36
Sales and Marketing
We offer 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. We operate through
three locations in the Northeast and Western regions of the United States.
Each of the locations operates as a sales office, manufacturing facility and
warehouse. These operations support the design and manufacture of
custom-made and standard cable assembly requirements for our entire business.
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. We generally do not
participate in the design of computer applications but rather participate in
the design and implementation of the connectivity solutions required for
data communications.
Our 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 advertising
and promotional efforts. Our advertising and promotion program consists of:
-exhibits at national and regional trade shows;
-company-sponsored seminars and product demonstrations in regional areas;
-advertisements in trade publications; and
-direct mail campaigns to targeted market niches.
Major Customers
Our net sales are not dependent on any particular customer. During the fiscal
years ended June 30, 2000 and 1999, no customer accounted for 10% or more of
our net sales. Our customer base consists primarily of telecommunication
companies, financial institutions, original equipment manufacturers and
general contractors.
Competition
All aspects of our business are highly competitive. We compete with several
national distributors, most of which have greater financial and other
resources than we have available. We also compete with numerous distributors
on a local and regional basis.
We believe that our ability to design and manufacture custom cable assemblies
and to provide technical support differentiates us from some of our primary
competitors and provides a competitive advantage. There can be no assurance
that we will be able to successfully exploit such advantage.
37
Product Liability Insurance
We maintain 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 $10,000,000, which we believe to be
adequate coverage.
Employees
As of September 1, 2000, we had 98 full-time employees. Of these, 15 are sales
and marketing personnel; 5 are design, engineering and technical support
personnel; 10 are purchasing, warehouse and inventory control personnel; 49
are cable assembly manufacturing personnel; 6 are quality control personnel;
and 13 are accounting, data processing and other administrative personnel.
Thirty-three employees are covered by a collective bargaining agreement at
our Farmingdale facility. We consider our labor relations to be generally
satisfactory.
DESCRIPTION OF PROPERTY
We lease all of our facilities and do not own any real property. Our corporate
headquarters are located at 920 Conklin Street, Farmingdale, New York, where we
lease approximately 21,000 square feet, consisting of approximately 3,500
square feet of office space and 17,500 square feet of manufacturing/warehouse
space. This location also serves as a sales office, manufacturing facility
and warehouse. Our lease agreement commenced February 10, 1999 and expires
in March 2002. Our base monthly net rent is $7,700 from April 1, 2000
through March 31, 2002 and $7,938.33 from April 1, 2001 through March 31,
2002, not including real estate taxes, insurance premiums, cost of removal
of commercial refuse and utilities. We have an option to renew our lease for
a term to begin on April 1, 2002 through March 31, 2003 and April 1, 2003
through March 31, 2004, with base monthly rent due during each period of
$8,176.87 and $8,415.00, respectively. We are currently subleasing
approximately 7,500 square feet of space at our headquarters to an unaffiliated
company on a month-to-month basis, terminable upon 3 months written notice by
either party.
We lease 5,500 square feet in Long Island City, New York for use as a sales
office and warehouse. Our lease agreement commenced on August 27, 1999 and
expires on August 31, 2001. Our current base monthly net rent is $6,354.33,
not including real estate taxes, insurance premiums, cost of removal of
commercial refuse and utilities.
We lease approximately 9,950 square feet in San Jose, California, for use as a
sales office, manufacturing facility and warehouse site. Our lease agreement
commenced on June 2, 1997 and expires in May 2002. Our base monthly rent is
$10,224 for the twelve months beginning June 1, 2000, and $10,603 for the
twelve months beginning June 1, 2001, not including real estate taxes,
insurance premiums, cost of removal of commercial refuse and utilities.
38
We believe that our existing facilities are adequately covered by insurance and
are adequate for the foreseeable future.
LEGAL PROCEEDINGS
You should read the description of certain matters related to our recent
bankruptcy discussed at "Risk Factors" and "Description of our Business-
Second Amended Plan of Reorganization" and " Modification of Second Amended
Plan of Reorganization".
MANAGEMENT
Executive Officers and Directors
The following table sets forth the name, age and position of our directors and
executive officers:
Name Age Positions Held
----------------- ------ ------------------
Daniel McPhee 37 Chairman of the Board, President, Chief
Executive Officer and Director (Principal
Executive Officer)
Christopher Francis 38 Chief Operating Officer and Director
Edward Goodstein 53 Director
Nicholas T. Hutzel 31 Vice President, Controller and Secretary
(Principal Financial and Accounting Officer)
Abraham Mendez 33 Vice President of Manufacturing Sales
__________
Daniel McPhee
Daniel McPhee has served as Chairman of the Board of Directors, President,
Chief Executive Officer and Director since December 17, 1998. Prior thereto,
Mr. McPhee served as 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. 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.
39
Christopher Francis
Christopher Francis has served as Chief Operating Officer and Director since
December 17, 1998. Prior thereto, Mr. Francis co-founded Old DataWorld with
Mr. McPhee and served as a Director and Chief Operating Officer since its
inception in 1998. Prior thereto, Mr. Francis was employed by Elcan
Technologies Corp. from May 1985 until May 1998. At Elcan, 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.
Edward Goodstein
Edward Goodstein has served as a Director of the Company since January 1997.
Mr. Goodstein is also the owner of TW Cable LLC, a major holder of our $6
convertible preferred shares and common stock. Mr. Goodstein was formerly
President and majority stockholder of TW Communications, a privately held
company, which he sold in December 1997. TW Communications was a distributor
of telecommunication wire, cable, fiber-optics and installation supplies.
-The following Executive Officers are not Directors:
Nicholas T. Hutzel
Nicholas Hutzel has served as Vice President and Controller of DataWorld since
February 1997. Mr. Hutzel has also been Corporate Secretary since March 1997.
Mr. Hutzel joined us 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.
Abraham Mendez
Abe Mendez has served as Vice President of Manufacturing Sales since August
1997, and has been with us since 1985. Prior to becoming Vice President of
Manufacturing Sales, Mr. Mendez was Vice President of Operations and Sales
Manager for the New York facility.
Committees of the Board of Directors
We do not have any committees at this time. All Board functions are performed
by the Board of Directors as a whole.
Directors' and Officers' Terms and Directors' fees
Our Board of Directors consists of 3 members. Each Director is elected for a
period of one year and serves until his or her successor is elected and
qualified. Executive officers serve at the pleasure of the Board of Directors.
40
Our By-laws provide that the Board of Directors have the authority to set
director's fees and reimburse directors for expenses associated with
attendance of Board meetings. The Board has resolved that no such fees will
be payable until further Board action.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, for the fiscal year indicated, all compensation
awarded to, earned by or paid to all individuals serving as our Chief Executive
Officer or acting in a similar capacity and the most highly compensated
executive officers.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
Name and Principal Fiscal Salary Bonus Other Annual Number of All Other
Position Year ($) ($) Compensation Options Compensation
($) ($)
<S> <C> <C> <C> <C> <C> <C>
Daniel McPhee,
Chairman of the Board,
President, Chief 1998 $ 25,000 $ - $ - - $ -
Executive Officer and 1999 $ 74,000 $ - $ - - $ -
Director (1) 2000 $125,000 $ 25,000 $ - - $ -
Christopher Francis, 1998 $ 25,000 $ - $ - - $ -
Chief Operating Officer 1999 $ 74,000 $ - $ - - $ -
and Director (1) 2000 $125,000 $ 25,000 $ - - $ -
Abraham Mendez 1998 $ - $ - $ - - $ -
Vice President of 1999 $ 42,734(5) $ - $ - - $ -
Manufacturing Sales1998 2000 $ 82,740 $ 10,000 $ - 25,000(2) $ -
Nicholas Hutzel 1998 $ - $ - $ - - $ -
Vice President 1999 $ 35,154(5) $ - $ - - $ -
of Finance 2000 $ 66,000 $ - $ - 25,000(2) $ -
Edward Goodstein 1998 $ - $ - $ - - $ -
Director(3) 1999 $ - $ - $ - - $ -
2000 $ - $ - $ - - $ -
</TABLE>
(1) Began to serve at these executive positions during fiscal 1999, pursuant to
an agreement dated December 17, 1998.
(2) Options granted on December 13, 1999, $.20 exercise price, vesting 1/3 per
year on December 1st of each year.
(3) Served as Chairman of the Board and Chief Executive Officer from January
1997 to December 1998.
(4) For the period of April 1, 1998 to June 30, 1998.
(5) For the period of December 18, 1998 through June 30, 1999
We currently have no pension plan for employees not subject to collective
bargaining arrangements.
Stock Option Plan
We do not have a stock option plan at this time.
41
Stock Option Grants; Warrants
On December 13, 1999, the Board of Directors granted options to purchase 25,000
shares of our common stock to each of Nicholas T. Hutzel and Abraham Mendez.
The exercise price of the options is $.20 per share and the options vest 1/3
per year on December 1st of each year and may be exercised until December 1,
2005.
Employment Agreements
We have no written employment or similar agreements with any of the Named
Executive Officers or employees, except for a collective bargaining agreement
with the employees of our Farmingdale, New York facility.
PRINCIPAL AND SELLING STOCKHOLDERS
The selling securityholders are offering to sell up to 22,743,871 shares of
our common stock covered by this prospectus. The following table lists:
-the number of shares of common stock beneficially owned by the selling
securityholders prior to this offering;
-the maximum number of shares of common stock the selling securityholders may
sell under this prospectus;
-each person who owned of record, or was known to beneficially own, more than
five percent (5%) of our outstanding shares of common stock;
-each of our directors, our chief executive officer and our other most highly
compensated executive officers during 1999; and
-all of our current directors and executive officers as a group.
In the case of the shares of common stock underlying the Series B 8% Convertible
Preferred Stock, the number of shares offered for sale hereby represents an
estimate of the number of shares of common stock issuable upon conversion of,
or otherwise with respect to, the Series B 8% Convertible Preferred Stock and
the related option, based on 200% of the number of shares of common stock
issuable at an assumed conversion price of $.31 per share. In the case of the
shares underlying the warrants, the number of shares offered for sale hereby
represents an estimate of the number of shares of common stock issuable upon
the exercise of warrants based on 200% of the number of shares of common
stock issuable at an assumed exercise prices of $.31 per share. Pursuant to
Rule 416 under the Securities Act of 1933, as amended, the selling stockholder
may also offer and sell shares issued with respect to the Series B 8%
Convertible Preferred Stock, or the warrants and option, as a result of
stock splits, stock dividends or similar transactions. This is not intended
to constitute a prediction as to the number of shares into which the Series B
8% Convertible Preferred Stock will be converted or the warrants or options
will be exercised.
42
<TABLE>
<CAPTION>
Name and Address of Number of Shares Number of Shares Number of Shares of Percentage of Class
Beneficial Owner of Common Stock of Common Stock Common Stock
Beneficially Offered Hereby Beneficially Owned
Owned Before the After the Offering Before After
Offering Offering Offering
------------------- ---------------- ---------------- ------------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Daniel McPhee (1) 8,585,000 0 8,585,000 30% 17%
Christopher Francis (1) 8,585,000 0 8,585,000 30% 17%
TW Cable LLC (2) 3,464,389 0 3,464,389 12% 7%
All directors and officers
as a group 20,634,389 0 20,634,389 71% 40%
E-Start Limited(5) 1,800,000 0 1,800,000 6% 3%
Name and Address of
Selling Securityholder
Augustine Fund, L.P. 22,083,871 22,083,871 - 43% -
(3)(7)(8)(9)
Delano Group Securities, 160,000 160,000 - - -
LLC (4)(9)
Crossroad Ventures LLC 160,000 500,000 - 1 -
(6)(9)
</TABLE>
__________
(1) The address for Messrs. McPhee and Francis is 920 Conklin Street,
Farmingdale, NY 11735.
(2) The address for TW Cable LLC is 81 Executive Blvd., Farmingdale, NY 11735.
(3) The address for Augustine Fund, L.P. is 141 West Jackson Blvd., Suite 2182,
Chicago, Illinois 60604. Augustine Fund, L.P. is not a registered broker-
dealer. Augustine may be deemed to be an affiliate of Delano Group
Securities, LLC., a registered broker-dealer and one of the selling
securityholders, due to a minority equity ownership in Delano held by the
principles of Augustine Fund, L.P..
(4) The address for Delano Group Securities, LLC is 141 West Jackson Blvd.,
Suite 2176, Chicago, Illinois 60604. Delano Group Securities, LLC is a
registered broker-dealer and may be deemed to be an affiliate of Augustine
Fund, L.P. due to a minority equity ownership in Delano held by the
principals of Augustine Fund, L.P..
(5) The address for E-Start Limited is 2519 N. Ocean Boulevard, Suite 511, Boca
Raton, Florida 33431.
(6) The address for Crossroad Ventures LLC is 220 Sunrise Avenue, Suite 205,
Palm Beach, Florida 33480
(7) The shares of common stock listed will be acquired by the selling
securityholder:
-upon the conversion of shares of our Series B 8% Convertible Preferred Stock;
-upon the exercise of warrants issued in connection with our sale of Series B
8% Convertible Preferred Stock;
-upon the exercise of an option granted in connection with our sale of Series
B 8% Convertible Preferred Stock; and
-upon payment of dividends by us in lieu of cash on the Series B 8%
Convertible Preferred Stock.
(8) The "Number of Shares of Common Stock Offered Hereby" for the selling
securityholders includes an estimate of the number of shares of common
stock that would be issuable upon conversion of, or otherwise with respect
to, the Series B 8% Convertible Preferred Stock based on 200% of the number
of shares of common stock that would be issuable at an assumed conversion
price of $.31 per share (10,322,581 shares) or the exercise of the option
pursuant to Section 6.2(d) of the Certificate of Designation of Series B 8%
Convertible Preferred Stock or in lieu of cash dividends on the Series B
Preferred. The actual number of shares of common stock issuable upon
conversion of the Series B 8% Convertible Preferred Stock is based, in
43
part, by a formula based on the market price at the time of conversion,
and is therefore subject to adjustment and could be materially less or
more than such estimated number depending on factors which we cannot
predict. Specifically, at the holder's option, the shares of Series B 8%
Convertible Preferred Stock may be converted, either in whole or in part,
into shares of common stock, any time or from time to time, at a conversion
price per share of common stock equal to the lesser of (i) 106% of the
lowest of the closing bid prices for the common stock on the OCT Bulletin
Board for the five trading days immediately preceding May 31, 2000
(subject to adjustment for any stock-split or stock combination to occur)
and (ii) 71% of the average of the closing bid prices of the shares of common
stock as reported on the OTC Bulletin Board, subject to further downward
adjustment as discussed elsewhere in this Prospectus, for the three trading
days on which the three lowest closing bid prices are reported during the 30
trading days preceding the conversion date, subject
to certain restrictions and adjustments. Further, Augustine shall have the
option to purchase one additional share of our common stock for each for
each share of common stock issuable as a result of the conversion the Series
B 8% Convertible Preferred Stock, at an exercise price per share equal to
the conversion price. In no event shall we have the obligation, nor the
holder the right, to convert all or any portion of the Series B 8%
Convertible Preferred Stock or exercise the option if and to the extent
the issuance of shares of common stock upon such conversion or exercise
of the option would result in the holder being deemed a beneficial owner
of more than 5% of the then outstanding shares of our common stock within
the meaning of 13(d) of the Exchange Act and the rules promulgated
thereunder.
(9) The "Number of Shares of Common Stock Offered Hereby" for the selling
securityholder includes an estimate of the number of shares of common
stock that would be issuable upon the exercise of common stock purchase
warrants to purchase 160,000 shares (in the case of Augustine), 100,000
shares (in the case of Delano) and 500,000 shares (in the case of
Crossroad) of our common stock based on the number of shares (200% of such
numbers in the case of Augustine) of common stock that would be issuable at a
conversion price of $.96875 per share, as calculated by 120% of the lowest
closing bid price for the 5 trading days preceding May 31, 2000. The actual
number of shares of common stock issuable upon exercise of the warrants is
based, in part, by the extent the selling securityholder exercises his
warrants and adjustments made for stock splits, stock combinations,
dividend payments or asset distribution.
To our knowledge, the selling securityholders have not had any position, office
or other material relationship with us or any of our affiliates during the past
three years (other than as a holder of our securities), except that Delano
Group Securities, LLC has provided us with placement agent and advisory
services;.
We are required to pay all fees and expense to register the common stock whether
or not the registration statement is filed or becomes effective and whether or
not any registerable securities are sold pursuant to the registration statement.
We have agreed to indemnify one of the selling securityholders and its
affiliated parties against specified liabilities, including liabilities under
the Securities Act, in connection with this offering. The selling
securityholder has agreed to indemnify us and our directors and officers, as
well as any persons controlling our company, against liabilities, severally,
and not jointly, including liabilities under the Securities Act, relating to
information supplied by them for use in this prospectus. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
our directors or officers, or persons controlling the company, we have been
advised that in the opinion of the SEC this kind of indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 10, 1997, TW Cable LLC concluded a transaction with the holders of
our stock and subordinated debentures pursuant to the terms of a securities
purchase agreement. The owner of TW Cable was Edward Goodstein, who is
currently a director of our company and formerly served as our Chairman and
Chief Executive Officer from January 1997 through December 1998. As a result
of that transaction, TW Cable acquired all of our issued and outstanding
preferred stock and $2,615,000 principal face amount of debentures, together
with warrants to purchase 53,350,000 shares of common stock. The preferred
stock was convertible into 4,950,000 shares of common stock. Each share of
preferred stock was entitled to 1,500 votes on all matters other than the
election of directors. The holders of the preferred stock, as a class, were
entitled to elect 75% of the members of the Board of Directors (see October
30, 1997 event below).
On May 7, 1997 we entered into an asset purchase agreement with TW Cable,
subject to Bankruptcy Court approval, pursuant to which TW Cable acquired our
distribution business product lines and all of its related assets for $500,000.
In addition, the agreement entitled TW Cable to purchase approximately
$1,500,000 of our distribution inventory for an amount equal to 82.5% of the
book value over the next twelve months. The Bankruptcy Court approved the sale
on June 17, 1997, and a closing occurred on June 26, 1997. TW Cable assumed
three locations and their leases, including all of our employees based at
these locations.
On October 30, 1997, our second amended plan of reorganization and disclosure
statement was confirmed by the United States Bankruptcy Court in Westbury,
New York. The confirmed plan was to be effective on the date we secured exit
financing. On January 12, 1998, we secured exit financing with a lender,
effectuating the plan. The plan called for an initial distribution to Class
7 unsecured creditors with claims greater than $1,000 to receive 13.5% of
their claim and future distributions based on cash flow over the next five
years. Class 6 unsecured creditors with claims less than $1,000 received a
distribution of 20% of their claim. The initial distribution payments and
certain other administrative claims were guaranteed by TW Cable LLC. Under
the plan, our wholly owned subsidiary, Vertex Technologies, Inc., merged
into us, and we changed our name to Vertex Computer Cable & Products, Inc.
Under the plan, 25.3 million of our 40 million authorized shares of common
stock were issued and outstanding. Effective December 29, 1997, holders of
our outstanding 12,652,000 common stock shares received 2,530,400 post-
reorganization shares following a 5-to-1 reverse stock split. Further, the
preferred stockholders (TW Cable) surrendered and exchanged outstanding
preferred stock and forgave accrued dividends in exchange for 21,508,400 post-
bankruptcy shares of common stock, or 85% of the post-reorganization
outstanding common stock.
On January 12, 1998, pursuant to an exchange offer between TW Cable (whose
owner, Mr. Goodstein, was our principal stockholder through ownership of the
preferred stock cancelled and exchanged for common stock issued under the
plan), subordinated debenture holders and holders of another $400,000 in
debentures, TW Cable purchased $307,367 in debentures for cash and common
stock held by TW Cable. The terms of all outstanding subordinated debentures
were modified pursuant to the plan to an interest rate of 8% per annum,
payable semi-annually
45
with the principal due on January 12, 2005. In
addition, TW Cable 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 by an adjustment to Paid-in Capital.
Subsequent to June 30, 1998, TW Cable 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 us to make our
payments required under the plan and TW Cable paid $300,000 in additional
cash collateral for an aggregate amount of $1,268,000 to our credit
facility in an effort to increase working capital. Under the terms of the
collateral agreement, TW Cable has the right to draw down on such collateral
beginning January 2000 and began to do so on June 15, 2000.
On December 16, 1998, we completed the reverse acquisition described above
under "Description of our Business."
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 40,000,000 shares of common stock,
par value $.001 per share, and 5,000,000 shares of preferred stock, par value
$.01. The following summary of provisions applicable to our common stock and
preferred stock is subject to, and qualified in its entirety by, our Amended
and Restated Certificate of Incorporation, our By-Laws and by the provisions
of applicable law.
Common Stock
As of November 29, 2000, 29,044,000 shares of common stock were issued and
outstanding and held by approximately 275 holders of record.
Each holder of shares of common stock is entitled to one vote for each share
held at all meetings of stockholders (and written actions in lieu of meetings).
The common stock does not have cumulative voting rights, which means that
holders of more than 50% of the shares of common stock are able to elect all
of our directors and, in this event, the holders of the remaining shares of
common stock would not be able to elect any directors.
Each share of common stock is entitled to participate equally in dividends, if,
as and when declared by our Board of Directors, and in the distribution of
assets in the event of liquidation, dissolution or winding up, whether
voluntary or involuntary, subject in all cases to any prior rights of
creditors and outstanding preferred stock. We have never declared or paid
dividends on our common stock and it is our present intention not to pay any
cash dividends on our common stock but to reinvest our earnings, if any (See
"Dividend Policy." The shares of common stock have no preemptive, conversion or
other subscription rights and there are no redemption or sinking fund provisions
applicable to the common stock. The outstanding shares of common stock are, and
all shares of common stock offered by this prospectus will be, upon issuance and
sale, duly authorized, validly issued, fully paid and nonassessable. We do not
currently have a sufficient number of shares of common stock authorized for
issuance upon conversion of the Series B 8% Preferred Stock and the exercise
of the related option and the
46
warrants held by the selling security holders in violation of our obligation
under such instruments. Accordingly, we intend to seek stockholder approval
to increase our authorized common stock at our next stockholders meeting.
Preferred Stock
Our Board of Directors may, without stockholder approval and subject to the
rights of the holders of our existing preferred stock, establish and issue
shares of one or more classes of preferred stock having the designations,
dividend rates, liquidation preferences, redemption provisions, sinking fund
provisions, conversion rights, voting rights and other rights, preferences
and limitations that our Board may determine. The Board may authorize the
issuance of preferred stock with voting, conversion and economic rights senior
to the common stock so that
the issuance of the preferred stock could adversely affect the market value of
the common stock. The creation of one or more seriesof preferred stock may
adversely affect the voting power or other rights of the holders of common
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes could,
among other things and under some circumstances, have the effect of delaying,
deferring or preventing a change in control of our company without any action by
stockholders.
As of the date of this prospectus our issued and outstanding preferred stock
consisted of the following:
-6,500 shares of $6 Senior Cumulative Convertible Preferred Stock;
-1,600 shares of Series B 8% Convertible Preferred Stock.
Each series of preferred stock ranks prior to the common stock and the Series
B 8% Convertible Preferred Stock ranks prior to the $6 Senior Cumulative
Convertible Preferred Stock, with respect to the payment of dividends and
the right to share in our assets upon liquidation.
$6 Senior Cumulative Convertible Preferred Stock
The series of preferred stock designated as $6 Senior Cumulative Convertible
Preferred Stock consists of 20,000 shares, with a stated value of $100 per
share, par value $.01, of which 6,500 shares are outstanding as of the date
of this prospectus. The $6 Senior Cumulative Convertible Preferred Stock
shares rank prior to any of our common stock and subject to the dividend,
liquidation preference and voting rights of the Series B 8% Convertible
Preferred Stock.
The $6 Senior Cumulative Convertible Preferred Stock and cumulative but unpaid
dividends thereon are convertible, at the option of the holder, into shares of
our common stock as long as the market price of our common stock is $1.50 or
greater. The number of shares of common stock resulting from the conversion
will be calculated by dividing the stated value of the $6 senior Cumulative
Convertible Preferred Stock, plus the cumulative but unpaid dividends
by the conversion price. The conversion price of the $6 Senior Cumulative
Convertible Preferred Stock will be 75% of the per share market price of our
common stock.
47
Holders of our $6 Senior Cumulative Convertible Preferred Stock are
entitled to receive, subject to the rights of the holders of the Series
B 8% Convertible Preferred Stock, when and as declared by the Board of
Directors, out of funds legally available, quarterly dividends of $1.50 per
share, payable in cash on December 1, March 1, June 1 and September 1 of each
year, commencing on March 1, 2000. Dividends are cumulative from December 1,
1999. In the event that dividend payments are in arrears, we may not pay
dividends or make any other distributions on any stock ranking junior to the
$6 Senior Cumulative Preferred Stock. Further, we may not pay dividends or
make other distributions on stock ranking in parity with the $6 Senior
Cumulative Preferred Stock, except if paid ratably.
We are required to redeem our then outstanding $6 Senior Cumulative Convertible
Preferred Stock on December 1, 2003, at a price determined by the stated value
plus any accrued and unpaid dividends on December 1, 2003. Payment may be
made by either a check in the amount of the stated value plus accrued unpaid
dividends or such number of shares of our common stock as determined by dividing
the market value of our common stock as of December 1, 2003 into the stated
value plus accrued and unpaid dividends.
The voting rights of holders of our $6 Senior Cumulative Convertible Preferred
Stock is limited to instances where we:
-wish to alter or change the designations, powers, preferences, rights,
qualifications, limitations or restrictions on, or increase the number of
authorized shares of, the $6 Senior Cumulative Convertible Preferred Stock in
any manner; or
-issue any preferred stock or other equity securities senior to, or pari passu
with, the $6 Senior Cumulative Convertible Preferred Stock whether as to
dividends, distribution, liquidation or otherwise.
In each instance, we are required to receive the affirmative consent of 75% of
the holders of our $6 Senior Cumulative Convertible Preferred Stock to
accomplish any of the above actions.
Series B 8% Convertible Preferred Stock
The series of preferred stock designated as Series B 8% Convertible Preferred
Stock consists of 3,000 shares, with a stated value of $1,000 per share, par
value $.01, of which 1,600 shares are outstanding as of the date of this
prospectus and are held by Augustine Fund, one of the selling securityholders
hereunder. The Series B 8% Convertible Preferred Stock shares rank prior to
any of our other capital stock.
The Series B 8% Convertible Preferred stock is convertible, at the option of
the holder, and shall be mandatorily converted on May 26, 2003 into shares of
common stock at a conversion price equal to the stated value (plus accrued and
unpaid dividends (whether or not earned or declared, whether or not there were
funds legally available for the payment of dividends and whether or not a
dividend payment due date has occurred since the last dividend payment)) of
each Series B 8% Convertible Preferred Stock, into shares of common stock
registered for resale in open market transactions on the registration statement.
The Series B 8% Convertible Preferred stock may be converted prior to the
mandatory conversion date by the holder, either in whole or in part, at any
time or from time to time,
48
at the conversion price per share of common stock
equal to the lower of: (i) 106% of the lowest of the closing bid prices of
the common stock on the OTC Bulletin Board for the five trading days
immediately preceding the closing date ($1.03) (subject to adjustment for
stock splits or stock combinations) and (ii) 71% of the market price, subject to
further reduction as described below. Because the registration statement of
which this prospectus is a part was not declared effective by September 30,
2000, the conversion percentage has decreased by 2% for each month or
partial month since September 30, 2000, and will be further decreased for
each month or partial month in which the registration statement has not been
declared, or does not remain, effective; if such registration statement has not
been declared, or does not remain, effective on or after the date which is one
year after the closing date and until the Series B 8% Convertible Preferred
Stock has been converted in full, then the conversion percentage shall be 50%.
At our option, the amount of unpaid and accrued dividends as of the conversion
date shall not be subject to conversion, but instead may be paid in cash as of
the conversion date; if we elect to convert the amount of such accrued and
unpaid dividends at the conversion date into common stock, the common stock
issued shall be valued at the applicable conversion price.
The number of shares of common stock issuable upon conversion of Series B 8%
Convertible Preferred Stock shall be the number of shares of Series B 8%
Convertible Preferred Stock to be converted, multiplied by the stated value
plus accrued and unpaid dividends, to the extent that we do not elect to pay
such accrued and unpaid dividends in cash, and divided by the applicable
conversion price. Upon any conversion, the holder has an option to purchase
one additional share of common stock for each share of common stock issuable as
a result of such conversion, at an exercise price equal to the applicable
conversion price. In no event shall we have the obligation, nor the holder
the right, to convert all or any portion of the Series B 8% convertible
Preferred Stock or exercise the option if and to the extent the issuance of
shares of common stock upon such conversion or exercise of the option would
result in the holder being deemed a beneficial owner of more than 5% of the
then outstanding shares of our common stock within the meaning of 13(d) of
the Securities Exchange Act of 1934, as amended, and the rules promulgated
thereunder.
Holders of Series B 8% Convertible Preferred stock are entitled to receive,
when and if declared by the Board of Directors, out of funds legally available
for the payment of dividends, dividends at the Dividend Rate of 8% on the
Stated Value of $1,000, for each share of Series B 8% Convertible Preferred
Stock. Dividends on the Series B 8% Convertible Preferred Stock are
cumulative from the date of issue, whether or not declared for any reason.
Each dividend shall be payable in equal semi-annual amounts on each Dividend
Payment Date, commencing on June 30, 2000. At our option, dividends may be
paid in cash or through the issuance of shares of common stock valued at 100%
of the then applicable conversion price.
Holders of our Series B 8% Convertible Preferred Stock may have their shares
redeemed, at the option of the Company, at any time until the mandatory
conversion date. The value of the shares redeemed will be calculated as
125% of the stated value, plus all accrued and unpaid dividends (whether or
not earned or declared, whether or not there were funds legally available
for the payment of dividends and whether or not a dividend payment due date
has occurred since the last dividend payment) thereon to the date of
redemption; provided, however, that we may only redeem the Series B 8%
Convertible Preferred Stock if the current market price is less than 200% of
the current market price on the issue date.
49
Holders of the Series B 8% Convertible Preferred Stock have no voting power,
except as otherwise provided by the General Corporation Law of the State of
Delaware, or prior to the occurrence of the following:
-a change of the rights, preferences or privileges of the Series B 8%
Convertible Preferred Stock;
-the creation of any new series of capital stock having a preference over the
Series B 8% Convertible Preferred Stock as to distribution of our assets
upon liquidation, dissolution or winding up or the alteration or change
the rights, preferences or privileges of any Senior Securities so as to
affect adversely the Series B 8% Convertible Preferred Stock;
-an increase in the authorized number of Series B 8% Convertible Preferred
Stock; or
-any act or thing not authorized or contemplated by the Certificate of
Designation of Series B 8% Convertible Preferred Stock which would result
in taxation of the holders of the Series B 8% Convertible Preferred Stock
under Section 305 if the Internal Revenue Code of 1986, as amended.
In all of such circumstances, we will require a majority vote of the Series B
8% Convertible Preferred Stock Holders.
Warrants
In connection with the issuance of the Series B 8% Convertible Preferred Stock,
we granted five-year warrants to Augustine Fund with an exercise price of
$.96875. We also issued similar warrants to another selling securityholder,
Delano Group Securities, LLC, for 100,000 shares and a warrant to Crossroad
Ventures, a consultant and another Selling Securityholder, for 500,000 shares
to a consultant.
Delaware Anti-Takeover Law
We are governed by the provisions of Section 203 of the General Corporation Law
of Delaware. In general, Section 203 prohibits a Delaware public corporation
from engaging in a "business combination" with an "interested stockholder"
for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless it is approved in a prescribed
manner. As a result of Section 203, potential acquirors may be discouraged
from attempting to effect acquisition transactions with us, thereby possibly
depriving holders of our securities of certain opportunities to sell or
otherwise dispose of such securities at above-market prices pursuant to such
transactions.
Limitation on Liability of Directors; Indemnification
Our Restated Certificate of Incorporation, as amended, eliminates, in certain
circumstances, the liability of our directors for monetary damages for breach
of their fiduciary duties as directors unless the breach involves:
-a director's duty of loyalty to us or our stockholders,
-acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law,
50
-liability for unlawful payments of dividends, unlawful stock purchases or
redemptions or
-a transaction from which a director derived an improper personal benefit.
In addition, our By-Laws provide that any person who is made party to an action
by reason of the fact that such person is or was a director, officer, advisor,
employee or agent of our company, shall be indemnified by us to the fullest
extent authorized by Delaware law, which indemnification shall not be deemed
exclusive of any other rights to which any indemnified person may be entitled
under any By-Law, agreement, vote of stockholders or disinterested directors
or otherwise.
The effect of the foregoing is to require us, to the extent permitted by law,
to indemnify our officers, directors, employees and agents for any claim
arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or
not opposed to our best interest and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
DESCRIPTION OF CERTAIN INDEBTEDNESS
In connection with our emergence from bankruptcy in January 1998, we entered
into a revised credit facility with our existing lender, Congress Financial
Corp. ("Congress"). Congress in effect extended its debtor-in-possession
credit facility, which had matured on January 10, 1998, for a period of
three months. TW provided additional cash collateral of $500,000 in order
for us to fund the plan.
In July 1998, we refinanced the revolving credit financing agreement with a new
lending institution. The new agreement provided for maximum borrowings of
$3,000,000 through July 31, 2000. We recently amended the agreement to
increase maximum borrowings of $5,0000,000 and to extend the term until
January 2002. Borrowings, at the lender's 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%. Borrowings under the
agreement are secured by all our assets. Pursuant to the agreement, as
amended, we are required to maintain a deficiency in tangible net worth of
not more than $3,500,000 and a deficiency in working capital
51
of not more than $3,800,000, as defined. We believe we are currently in
compliance with the terms of the revolving credit facility.
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 2000, we had 29,044,000 shares of common stock issued and
outstanding and 22,743,871 shares were issuable upon exercise or conversion of
outstanding convertible stock, warrants and options. Substantially all of
these shares of common stock are either eligible for sale pursuant to Rule
144 or have been registered under the Securities Act for resale by the holders,
including the common stock covered by this prospectus. This will permit
the sale of registered shares of common stock in the open market or in
privately negotiated transactions without complying with the requirements of
Rule 144. We are unable to estimate the amount, timing or nature of future
sales of outstanding common stock. Sales of substantial amounts of our common
stock in the public market may hurt our stock's market price.
In general,under Rule 144, if a period of at least one year has elapsed since
the later of the date the restricted securities were acquired from us or the
date they were acquired from an affiliate, then the holder of such restricted
securities is entitled to sell a number of shares of common stock equal to 1%
of the issued and outstanding shares of common stock. The holder may only
sell such shares of common stock through unsolicited brokers' transactions or
directly to market makers. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales
and the availability of current public information about us. Affiliates may
sell shares of common stock not constituting restricted stock in accordance
with the foregoing volume limitations and other requirements but without
regard to the one-year holding period.
Under Rule 144(k), if a period of at least two years has elapsed between the
later of the date restricted shares of common stock were acquired from us or
the date they were acquired from an affiliate, as applicable, a holder of
such restricted stock who is not an affiliate at the time of the sale and has
not been an affiliate for at least three months prior to the sale would be
entitled to sell the shares of common stock immediately without regard to the
volume limitations and other conditions described above.
We cannot make any predictions as to the effect, if any, that the availability
of stock for sale will have on the market price prevailing from time to time.
Nevertheless, sales of significant amounts of the common stock in the public
market, or the perception that such sales may occur, could adversely affect
prevailing market prices.
PLAN OF DISTRIBUTION
We are registering shares of common stock held by the selling securityholders,
to permit the resale of such shares from time to time after the date of this
prospectus. We will not receive any of the proceeds from the sale by the
selling securityholders of the shares of common stock. We will bear all fees
and expenses incident to our obligation to register the shares of common
stock.
52
Each selling securityholders may sell all or a portion of the common stock
beneficially owned by it and offered hereby from time to time directly
through one or more underwriters, broker-dealers, or agents. If the common
stock is sold through underwriters or broker-dealers the selling securityholder
will be responsible for underwriting discounts or commissions or agent's
commissions. The common stock may be sold in one or more transactions at
fixed prices, at prevailing market prices at the time of the sale, at varying
prices determined at the time of sale, or at negotiated prices. These sales
may be effected in transactions, which may involve crosses or block
transactions,
1. on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale,
2. in the over-the-counter market,
3. in transactions otherwise than on these exchanges or systems or in over-
the-counter market,
4. through the writing of options, whether such options are listed on an
options exchange or otherwise, or
5. through the settlement of short sales.
In connection with sales of the common stock or otherwise, the selling
securityholders may enter into hedging transactions with broker-dealers,
which may in turn engage in short sales of the common stock in the course of
hedging in positions they assume. The selling securityholders may also sell
shares of common stock short and deliver shares of common stock to close out
short positions, or loan or pledge shares of common stock to broker-dealers
that in turn may sell such shares. If the selling securityholders effect
such transactions by selling shares of common stock to or through underwriters,
broker-dealers or agents, such underwriters, brokers-dealers or agents may
receive commissions in the form of discounts, concessions or commissions from
the selling securityholder or commissions from purchasers of the shares of
common stock for whom they may act as agent or to whom they may sell as
principal (which discounts, concessions or commissions as to particular
underwriters, brokers-dealers or agents may be in excess of those customary
in the types of transactions involved.
Each selling securityholder may pledge or grant a security interest in some or
all of the shares of common stock owned by it and if it defaults in the
performance of the secured obligations, the pledgees or secured parties may
offer and sell the shares of common stock from time to time pursuant to the
prospectus. A selling securityholder also may transfer and donate
the shares of common stock in other circumstances in which case the
transferees, donees, pledgees or other successors in interest will be the
selling beneficial owners for purposes of the prospectus.
The selling securityholders and any broker-dealer participating in the
distribution of the shares of common stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commissions paid, or any
discounts or concessions allowed to any such broker-dealer may be deemed to
be underwriting commissions or discounts under the Securities Act. At the
time a particular offering of the shares of common stock is made, a prospectus
53
supplement, if required, will be distributed which will set forth the
aggregate amount of shares of common stock being offered and the terms of
the offering, including the name or names of any broker-dealer or agents,
any discounts, commissions and other terms constituting compensation from the
selling securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to broker-dealers. In addition, upon our being notified by a
named selling securityholder that a donee or a pledgee intends to sell more
than 500 shares, a supplement to this prospectus will be filed.
Under the securities laws of some states, the shares of common stock may be
sold in such states only through registered or licensed brokers or dealers.
In addition, in some states the shares of common stock may not be sold unless
such shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
There can be no assurance that the selling securityholders will sell any or
all of the shares of common stock registered pursuant to the shelf
registration statement of which this prospectus forms a part.
The selling securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation,
Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the shares of common stock by the selling
securityholders and any other participating person. Regulation M may also
restrict the ability of any person engaged in the distribution of the shares
of common stock to engage in market-making activities with respect to the
shares of common stock. All of the foregoing may affect the marketability of
the shares of common stock and the ability of any person or entity to engage
in market-making activities with respect to the shares of common stock.
We will pay all expenses of the registration of the shares of common stock
pursuant to the registration rights agreement estimated to be $65,000 in
total, including, without limitation, SEC filing fees and expenses of
compliance with state securities or "blue sky" laws; provided that the
selling securityholders will pay all underwriting discounts and selling
commissions, if any. We will indemnify the selling securityholders against
liabilities, including some liabilities under the Securities Act, in
accordance with the registration rights agreement or the selling
securityholders will be entitled to contribution. We will be indemnified by
the selling securityholders against civil liabilities, including liabilities
under the Securities Act that may arise from any written information furnished
to us by the selling securityholders for use in this prospectus, in accordance
with the related registration rights agreement or will be entitled to
contribution.
Once sold under the shelf registration statement, of which this prospectus
forms a part, the shares of common stock will be freely tradable in the hands
of persons other than our affiliates.
54
LEGAL MATTERS
The validity of the common stock being offered hereby will be passed upon for
us by Winthrop, Stimson, Putnam & Roberts, New York, New York.
EXPERTS
The financial statements as of June 30, 2000 and 1999 and for the two years
then ended of DataWorld included in this prospectus have been audited by
Grant Thornton LLP, independent certified public accountants, to the extent
and for the periods set forth in their report appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
Transfer Agent
The transfer agent for our shares of common stock is American Stock Transfer &
Trust Company.
55
DATAWORLD SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Balance Sheets as of September 30, 2000 and June 30, 2000............F-2
Statements of Operations for the quarters ended
September 30, 2000 and 1999..........................................F-3
Statement of Changes in Stockholders' Equity
for the quarter ended September 30, 2000.............................F-4
Statements of Cash Flows for the quarters ended
September 30, 2000 and 1999..........................................F-5
Notes to Financial Statements for the quarter ended
September 30, 2000..................................................F-6 - F-9
Report of Independent Certified Public Accountants.................. F-10
Balance Sheets as of June 30, 2000 and 1999..........................F-11
Statements of Operations for the years ended
June 30, 2000 and 1999 .............................................F-12
Statement of Changes in Stockholders' Equity
for the years ended June 30, 2000 and 1999.......................... F-13
Statements of Cash Flows for the years ended
June 30, 2000 and 1999 ..............................................F-14
Notes to Financial Statements for the years ended June 30, 2000
and 1999.............................................................F-15 - F-30
F-1
DATAWORLD SOLUTIONS, INC.
BALANCE SHEETS
September 30, June 30,
2000 2000
(Unaudited)
------------- ----------
ASSETS
CURRENT ASSETS:
Cash............................................... $ - $ 51,153
Accounts receivable, net of allowance for doubtful
accounts of $71,000 and 56,000 as of September 30,
2000 and June 30, 2000, respectively............. 3,524,037 3,058,572
Inventories, net................................... 1,767,671 1,680,577
Prepaid expenses and other current assets.......... 72,689 30,221
---------- ----------
TOTAL CURRENT ASSETS............................... 5,364,397 4,820,523
PROPERTY, PLANT AND EQUIPMENT, net................... 459,589 466,139
GOODWILL............................................. 3,391,020 3,437,472
OTHER ASSETS......................................... 88,350 88,350
----------- ----------
TOTAL ASSETS......................................... $ 9,303,356 $ 8,812,484
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt.................. $ 17,114 $ 22,972
Current portion Notes payable - Affiliate.......... 66,666 66,666
Cash overdraft..................................... 141,211 -
Accounts payable................................... 2,344,130 2,211,220
Accrued expenses and other........................ 908,731 815,537
Bankruptcy distributions payable................... 259,503 291,000
---------- ----------
TOTAL CURRENT LIABILITIES.......................... 3,737,355 3,407,395
LONG-TERM DEBT, NET OF CURRENT PORTION............... 4,016,758 3,721,967
SUBSCRIPTIONS RECEIVED............................... 217,000 217,000
NOTES PAYABLE - AFFILIATE, net....................... 55,556 66,667
SECURED SUBORDINATED DEBENTURES, net................. 86,513 86,153
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
8% Series B Convertible Preferred Stock, $.01
par value, stated value $1,000 per share;
Redemption value $2,000,000, authorized,
3,000 shares; 1,600 shares issued and outstanding. 1,600,000 1,600,000
$6 Senior Cumulative Convertible Preferred stock,
stated value $100 per share; authorized 5,000,000
shares; 6,500 issued and outstanding................ 682,500 672,750
Common stock, par value $.001 per share; authorized
40,000,000 shares; 29,044,000 issued and outstanding
at September 30, 2000 and June 30, 2000........... 29,044 29,044
Additional paid in capital.......................... 773,020 773,020
Accumulated deficit................................. (1,894,390) (1,761,512)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.......................... 1,190,174 1,313,302
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.............................................$ 9,303,356 $ 8,812,484
=========== ============
The accompanying notes are an integral part of these financial statements.
F-2
DATAWORLD SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
2000 1999
----------- -------------
Net sales.......................................... $ 3,661,356 $ 3,280,912
Cost of goods sold................................. 2,726,180 2,600,933
---------- ------------
Gross profit....................................... 935,176 679,979
Selling, general and administrative expenses....... 817,016 572,178
---------- ------------
Earnings before interest and
depreciation and amortization................... 118,160 107,801
Interest expense................................... 129,543 100,257
---------- ----------
Earnings before depreciation and amortization...... (11,383) 7,544
Depreciation and amortization...................... 79,747 75,526
---------- ----------
Net loss........................................... (91,130) (67,982)
Accrued dividends on preferred stock............... 41,748 -
---------- ----------
Net loss applicable to common stockholders......... $ (132,878) $ (67,982)
============ ==========
Share Information
Basic and diluted loss per share................... $ (.01) $ (.01)
=========== ==========
Weighted average number of common shares
outstanding....................................... 29,044,000 26,824,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
DATAWORLD SOLUTIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
8% $6.00 Retained Total
Preferred Preferred Common Paid- earnings stock-
stock stock Common stock in (accumulated) holder's
amount amount shares amount capital deficit) equity
------ -------- ---------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 1,
2000 $1,600,000 $672,750 29,044,000 $29,044 $773,020 $(1,761,512) $1,313,302
Accrued dividends
on 8% Preferred
stock (31,998) (31,998)
Accrued dividends
on $6 Preferred
stock 9,750 (9,750) -
Net loss (91,130) (91,130)
========== ======== ========== ========== ========== ============ ===========
Balance September
30, 2000 $1,600,000 $682,500 29,044,000 $29,044 $773,020 $(1,894,390) $1,190,174
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
DATAWORLD SOLUTIONS, INC.
STATEMENTS OF CASHFLOWS
(Unaudited)
Three Months Ended
September 30,
2000 1999
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (91,130) $ (67,982)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization..................... 79,747 69,751
Provision for doubtful accounts....................... 15,000 -
Change in operating assets and liabilities:
Increase in accounts receivable................... (480,465) (621,481)
Increase in inventories........................... (87,094) (494,756)
Increase in prepaid expenses and other current assets(42,468) (38,536)
Increase in other assets.......................... - (2,100)
Increase in accounts payable and accrued expenses. 194,106 676,633
---------- ---------
Net cash used in operating activities............. (412,304) (478,471)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................ (26,385) -
---------- ---------
Net cash used in investing activities............... (26,385) -
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under debt and loan agreements...... 288,933 417,077
(Repayment) borrowings from affiliate.............. (11,111) 73,000
Cash overdraft..................................... 141,211 -
Decrease in bankruptcy distributions payable....... (31,497) -
--------- ---------
Net cash provided by financing activities............. 387,536 490,077
--------- ---------
NET (DECREASE) INCREASE IN CASH....................... (51,153) 11,606
CASH at beginning of period........................... 51,153 -
--------- ---------
CASH at end of period............................ $ - $ 11,606
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest..................................... $ 127,689 $ 100,257
=========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 balance sheet as of September 30, 2000 and the related statements of
operations, statement of changes in stockholders' equity and cash flows for
the three months ended September 30, 2000 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flows at September 30, 2000
and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principals
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Annual Report on Form 10-KSB for the year ended June 30, 2000 filed by
the Company. The results of operations for the period ended June 30, 2000 and
1999 are not necessarlly indicitive of the operating results for the respective
full years.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which assumes the realization of assets and
settlement of liabilities in the normal course of business. For the three
months ended September 30, 2000, the Company incurred a net loss from operations
of $91,130 and working capital of $1,627,042, which is not sufficient to fund
the Company's operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management is currently
seeking additional sources of working capital, although no assurances can be
given that management will be successful in receiving additional capital.
F-6
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
2. INVENTORIES
Inventory consists principally of products held for sale. 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 September 30, 2000 and June
30, 2000, the allowance for obsolete and slow-moving inventory was approximately
$532,000, respectively.
September 30, June 30,
2000 2000
------------ -------------
Raw Materials $ 1,350,924 $ 1,590,577
Work in Process 402,159 90,000
Finished Goods 14,588 -
------------ --------------
Inventories, net $ 1,767,671 $ 1,680,577
============ ==============
3. LONG-TERM DEBT
Long-term debt consists of the following:
September 30, June 30,
2000 2000
------------- ------------
Revolving asset-based loan (a)......... $ 3,956,747 $ 3,657,677
Capitalized lease obligations(b)....... 77,125 87,262
------------- -----------
4,033,872 3,744,939
------------- -----------
Less current portion of long-term debt. 17,114 22,972
------------- -----------
$ 4,016,758 $ 3,721,967
============= ============
F-7
DATAWORLD SOLUTIONS, INC
NOTES TO FINANCIAL STATEMENTS
3. LONG-TERM DEBT (CONTINUED)
a. The Company has a financing agreement ("Agreement") with a financial
institution that, as amended, provides for revolving loans and letters of
credit subject to maximum borrowings of $5,000,000 through January 31, 2002.
Total borrowings are limited to 85% of eligible accounts receivable
(constituting those amounts outstanding 90 days or less), 50% of eligible
accounts receivable outstanding between 91 and 120 days, 40% of regular
inventories, 10% of slow moving inventory and the amount of collateral deposited
by TW Cable LLC, a related entity ("TW"). The Company is required to pay
interest at prime plus 2 1/2% (12% at September 30, 2000) and a commitment
fee of 1% per annum. At September 30, 2000, there were $75,000 outstanding
letters of credit issued for inventory purchases. Borrowings under the Agreement
are collateralized by all of the assets of the Company. In connection with the
Agreement, TW agreed to deposit approximately $1,268,000 as additional
collateral for borrowings under the Agreement. Under the terms of the
Agreement, TW has the right to draw down on such collateral beginning January
2000 and has begun to do so on June 15, 2000. The Agreement, as amended,
requires, among other things, 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.
b. The Company leases certain computer equipment, which are accounted for as
capital leases. The obligation for the computer equipment requires the Company
to make monthly payments of $1,426 through March 2005.
4. NET LOSS PER COMMON SHARE
Stock options and warrants to purchase 822,500 shares have been excluded from
the calculation of diluted loss per share, as their effect would have been
antidilutive.
F-8
DATAWORLD SOLUTIONS, INC
NOTES TO FINANCIAL STATEMENTS
5. CONTINGENCIES
a. LITIGATION MATTERS
The Company is a party to legal matters arising in the general conduct of
business. Management believes the ultimate outcome of such matters is not
expected to have a material adverse effect on the Company's results of
operations or financial position.
b. BANKRUPTCY DISTRIBUTIONS
On March 24, 2000, the Company agreed with the Official Committee of Unsecured
Creditors ("the Committee") as to the modification of the treatment of the
Class 7 Unsecured Creditors ("the Class 7 Creditors") under the Company's
confirmed Chapter 11 plan of reorganization, as previously modified ("the
Plan"). Pursuant to such agreement, in satisfaction of the claims of the
Class 7 Creditors, the Company paid the Class 7 Creditors, $400,000 from an
escrow account (see Note A-2) and $100,000 from the Company on or about April
24, 2000. As of September 30, 2000 the balance due to the Class 7 Creditors
is approximately $259,000. This amount is payable in 30 monthly installments
of approximately $11,000 at 8% interest beginning on June 15, 2000. In
addition, the Company has the option, until March 31, 2001, to pay the then
balance due plus an additional $25,000 to the Class 7 creditors. In the event
the Company does not exercise this option, the Company is obligated to pay the
Class 7 Creditorsa percentage of the Company's cumulative cash flow, as defined,
through September 2002, as originally specified in the Plan.
F-9
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
DataWorld Solutions, Inc.
We have audited the accompanying balance sheets of DataWorld Solutions, Inc.
as of June 30, 2000 and 1999, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. 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 auditing standards generally accepted
in the United States of America. 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 financial position of DataWorld Solutions, Inc. as of
June 30, 2000 and 1999 and the results of its operations and its cash flows for
years then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred net losses
of $627,507 and $1,050,756 for the years ended June 30, 2000 and 1999,
respectively, and is dependent upon a shareholder for continued financial
support. These factors, as described in Note A-3 to the financial statements
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans, in regard to these matters, are also described in
Note A-3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
GRANT THORNTON LLP
Melville, New York
September 13, 2000
F-10
DATAWORLD SOLUTIONS, INC.
BALANCE SHEETS
June 30,
ASSETS 2000 1999
CURRENT ASSETS ----------- ------------
[S] [C] [C]
Cash $ 51,153 $ -
Accounts receivable, net of allowance for
doubtful accounts of $56,000 and $67,000
at June 30, 2000 and 1999,respectively 3,058,572 2,151,604
Inventories, net 1,680,577 918,474
Prepaid expenses and other current assets 30,221 77,012
------------ ------------
TOTAL CURRENT ASSETS 4,820,523 3,147,090
PROPERTY, PLANT AND EQUIPMENT, net 466,139 333,114
GOODWILL 3,437,472 3,623,280
DEFERRED CHARGES AND OTHER ASSETS 88,350 74,844
------------ ------------
TOTAL ASSETS $ 8,812,484 $ 7,178,328
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ - $ 26,120
Current portion of long-term debt 22,972 51,261
Current portion notes payable -
affiliate, net 66,666 66,666
Accounts payable 2,211,220 2,262,166
Accrued expenses and other 815,537 680,757
Bankruptcy distributions payable 291,000 391,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,407,395 3,477,970
LONG-TERM DEBT, NET OF CURRENT PORTION 3,721,967 3,241,987
SUBSCRIPTIONS RECEIVED 217,000 55,000
NOTES PAYABLE - AFFILIATE, net 66,667 103,643
SECURED SUBORDINATED DEBENTURES, net 86,153 84,713
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
8% Series B Convertible Preferred Stock, $.01
par value, stated value $1,000 per share;
Redemption value $2,000,000, authorized,
3,000 shares; 1,600 shares issued and
outstanding at June 30, 2000 1,600,000 -
$6 Senior Cumulative Convertible Preferred
Stock, stated value $100 per share;
authorized, 5,000,000 shares; 6,500
shares issued and outstanding at June 30,
2000 and 1999 672,750 650,000
Common stock, par value $.001 per share;
authorized, 40,000,000 shares;
29,044,000 and 26,824,000 shares
issued and outstanding,
June 2000 and June 1999, respectively 29,044 26,824
Additional paid in capital 773,020 -
Accumulated deficit (1,761,512) (461,809)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,313,302 215,015
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,812,484 $ 7,178,328
============ =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-11
DATAWORLD SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
Years
ended
June 30,
2000 1999
------------ ----------
[S] [C] [C]
Net sales $13,368,206 $5,912,343
Cost of goods sold 10,277,127 4,586,563
------------ -----------
Gross profit 3,091,079 1,325,780
Selling, general and administrative expenses 2,881,715 2,045,601
------------ -----------
Earnings (loss) before interest and
depreciation and amortization 209,364 (719,821)
Interest expense 513,061 164,487
------------ -----------
Loss before depreciation and
amortization (303,697) (884,308)
Depreciation and amortization 323,810 166,448
------------ ------------
Net loss (627,507) (1,050,756)
Deemed and accrued dividends on preferred
stock (649,446) -
------------ ------------
Net loss applicable to common
stockholders $(1,276,953) $(1,050,756)
============ ============
Net loss per common share -
(basic and diluted) $ (.04) $ (.04)
============ ===========
Weighted average number of shares
outstanding - (basic and diluted) 29,044,000 26,824,000
============ ============
F-12
DATAWORLD SOLUTIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 and 1999
<TABLE>
<CAPTION>
8% $6.00 Retained Total
Preferred Preferred Common Paid- earnings stock-
stock stock Common stock in (accumulated) holder's
amount amount shares amount capital deficit) equity
------ -------- -------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 1, 1998 - - 4,000,000 4,000 16,000 38,165 58,165
Issuance of preferred
stock - 650,000 650,000
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
Net loss (1,050,756) (1,050,756)
-------- -------- ----------- ---------- -------- ---------- -----------
Balance June 30,
1999 $ - $650,000 26,824,000 $26,824 $ - $ (461,809) $ 215,015
Issuance of common
stock in exchange
for website
development services 1,800,000 1,800 358,200 360,000
Deferred website
development costs (306,000) (306,000)
Issuance of 8%
Preferred Stock,
net of fees 1,600,000 - (240,000) 1,360,000
Deemed and accrued
dividends on 8%
Preferred Stock 638,780 (649,446) (10,666)
Accrued dividends
on $6 Preferred
stock 22,750 (22,750) -
Issuance of common
stock in settlement
for accounts
payable 170,000 170 21,290 21,460
Warrants issued in
connection with
issuance of
debenture 51,000 51,000
Conversion of debenture
to common stock 250,000 250 249,750 250,000
Net loss (627,507) (627,507)
---------- -------- ---------- ------- -------- ------------ -----------
Balance June 30,
2000 $1,600,000 $672,750 29,044,000 $29,044 $773,020$ (1,761,512) $1,313,302
========== ======== ========== ======= ======== ============ ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENTS.
F-13
DATAWORLD SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
Years
ended
June 30, June 30,
2000 1999
----------- -----------
[S] [C] [C]
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................... $ (627,507) $(1,050,756)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization...... 323,810 166,448
Provision for doubtful accounts.... 37,000 -
Provision for slow-moving and
obsolete inventory................ 46,000 -
Non cash interest expense.......... 51,000 -
Stock issued for services.......... 75,461 -
Change in operating assets and
liabilities, net:
Increase in accounts receivable.... (943,968) (1,057,823)
Increase in inventories............ (808,103) (202,773)
Decrease(increase) in prepaid and
other assets..................... 33,285 (24,162)
Increase in accounts payable and
accrued expenses................. 73,527 939,711
------------ -----------
Net cash used in operating
activities............................(1,739,495) (1,229,355)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................ (269,947) (15,317)
Acquisition of Vertex, net of cash
acquired........................... - (74,795)
----------- -----------
Net cash used in investing
activities.......................... (269,947) (90,112)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under debt and
loan agreements.................... 451,691 639,219
(Repayment) borrowings from affilate.. (36,976) 170,309
Proceeds from issuance of preferred
stock, net......................... 1,360,000 450,000
Proceeds from issuance of debenture.. 250,000 -
Subscriptions received............... 162,000 55,000
Decrease in bankruptcy distributions
payables........................... (100,000) -
Cash overdraft........................ (26,120) (15,061)
----------- -----------
Net cash provided by financing
activities............................ 2,060,595 1,299,467
----------- -----------
NET INCREASE (DECREASE) IN CASH......... 51,153 (20,000)
CASH at beginning of period............. - 20,000
------------ -----------
CASH at end of period................... $ 51,153 $ -0-
============ ==========
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest.......................... $ 454,645 $ 164,487
=========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-14
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
NOTE A - BASIS OF PRESENTATION
1. NATURE OF BUSINESS
DATAWORLD SOLUTIONS, INC., (the "Company") operates 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.
2. BUSINESS COMBINATION
On December 17, 1998, the Company, formerly known as
Vertex Computer Cable & Products, Inc. ("Vertex"),
entered into an agreement with a privately-held distributor,
DataWorld Solutions, Inc. ("Old DataWorld"), the principal
shareholders of Old DataWorld, who were Daniel McPhee
and Christopher Francis, TW Cable, LLC., ("TW") 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 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. Further 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 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 statement of operations for the year ended
June 30, 1999 includes the results of operations of Old
DataWorld and the results of Vertex from the date of
acquisition.
F-15
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
2. BUSINESS COMBINATION (CONTINUED)
The following table summarizes the assets acquired and
liabilities assumed from Vertex:
[S] [C]
Current assets $(1,651,000)
Fixed assets (383,000)
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
---------------
[S] [C]
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 financial statements have been prepared
assuming that the Company will continue as a going
concern in the normal course of business. The Company
has incurred a net loss of $627,507 for the year ended June
30, 2000, has used $1,739,495 of cash in operating
activities and is dependent upon a shareholder and director
for continued financial support. 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 financial statements do
not include any adjustments that might result from the
outcome of this uncertainty.
F-16
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
During the year ended June 30, 2000, the Company
obtained approximately $1,772,000 in equity financing
which was used to fund current operations. Management is
currently exploring additional sources of working capital.
However, there can be no assurances that management will
be successful in 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.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies applied in the
preparation of the financial statements follows:
1. INVENTORIES
Inventories, consisting principally of 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.
3. GOODWILL
Goodwill is recorded at cost, less accumulated
amortization. The excess of purchase price over the fair
value of identifiable tangible assets acquired is being
amortized on a straight-line basis over 20 years. The
Company periodically evaluates the recoverability of the
carrying value of its intangible assets and the related
amortization periods. The Company assesses the
recoverability of unamortized goodwill based on the
undiscounted projected future earnings of the related
businesses. To date, the Company has not recognized any
goodwill impairment charges.
4. REVENUE RECOGNITION
The Company recognizes revenue on the date the product is
shipped and title passes to the customer.
F-17
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
5. 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.
6. NET LOSS PER COMMON SHARE
Basic and diluted loss per share is calculated by dividing
the net loss, after consideration of the deemed and accrued
dividends on preferred stock, by the weighted average
number of shares of common stock outstanding during each
period. Stock options and warrants to purchase 1,122,500 shares have been
excluded from the calculation of diluted loss per share, as their effect
would have been antidilutive.
7. USE OF ESTIMATES
In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
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.
8. 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.
9. EMPLOYEE STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation
utilizing the "intrinsic value method". Accordingly, no
compensation expense has been recognized concerning
stock options granted to key employees with exercise prices
greater than or equal to the fair market value of the
Company's common stock on the date of grant.
F-18
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
10. ADVERTISING COSTS
Advertising costs are charged to operations when the
advertising first takes place. The Company's advertising
for the years ended June 30, 2000 was paid entirely by its
vendors under their co-operative programs. Advertising
expense for the year ended June 30, 1999 was
approximately $12,900.
11. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin No.
101 (SAB 101), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. In June
2000, the SEC issued Staff Accounting Bulletin No. 101B
(SAB 101B), which extends the effective date of SAB 101
to the Company's fourth quarter of fiscal 2001. Although
the Company has not fully assessed the implications of
SAB 101, management does not believe the adoption of the
statement will have a significant impact on the Company's
financial position, results of operations or cash flows.
12. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
the current year presentation.
NOTE C - INVENTORIES
Inventory consists primarily of 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, 2000 and 1999, the
allowance for obsolete and slow-moving items was
approximately $532,000 and $647,000, respectively.
Inventory consists of the following:
June 30,
2000 1999
----------- --------------
[S] [C] [C]
Raw materials $ 1,590,577 $ 869,506
Work in process 90,000 32,563
Finished goods - 16,405
----------- ------------
Inventories, net $ 1,680,577 $ 918,474
=========== ============
F-19
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE D - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of the following:
Asset lives June 30,
(years) 2000 1999
---------- ------------ ------------
[S] [C] [C] [C]
Building improvements 2-5 $ 51,845 $ 51,845
Machinery and equipment 10 234,073 232,074
Computer equipment 5 308,092 -
Furniture and Fixtures 5-10 75,064 115,208
------------ -----------
669,074 399,127
Less accumulated depreciation
and amortization (202,935) (66,013)
------------ -----------
$ 466,139 $ 333,114
=========== ===========
Depreciation and amortization of property, plant and equipment was
$136,921, and $66,013 for the years ended June 30, 2000 and 1999.
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
2000 1999
---------- ----------
[S] [C] [C]
Revolving asset-based loan (1) $3,657,677 $3,236,129
Capitalized lease obligations (2) 87,262 57,119
---------- ----------
3,744,939 3,293,248
Less current portion of long-term debt 22,972 51,261
---------- ----------
$3,721,967 $3,241,987
========== ==========
F-20
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE E - LONG-TERM DEBT (Continued)
1. The Company has a financing agreement ("the
Agreement") with a financial institution that, as amended,
provides for revolving loans and letters of credit subject to
maximum borrowings of $5,000,000 through January 31,
2002. Total borrowings are limited to 85% of eligible accounts
receivable (constituting those amounts outstanding 90 days or
less), 50% of eligible accounts receivable outstanding between
91 and 120 days, 40% of regular inventories, 10% of slow
moving inventories and the amount of collateral deposited by
TW. The Company is required to pay interest at prime plus 2
1/2% (12% at June 30, 2000) and a commitment fee of 1% per
annum. At June 30, 2000, there were $75,000 outstanding
letters of credit issued for inventory purchases. Borrowings
under the Agreement are collateralized by all of the assets of the
Company. In connection with the Agreement, TW agreed to
deposit approximately $1,268,000 as additional collateral for
borrowing under the Agreement. Under the terms of the
Agreement, TW has the right to draw down on such collateral
beginning January 2000 and has begun to do so on June 15,
2000. The Agreement, as amended, requires among other things, 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 manufacturing and computer
equipment, which are accounted for as capital leases. The
obligation for the computer equipment required the Company
to make monthly payments of $1,426 through March 2005.
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:
Year ending
June 30, Total
-------- -----------
[S] [C] [C]
2001 22,972
2002 3,674,791
2003 17,114
2004 17,114
2005 12,948
----------
$3,744,939
==========
F-21
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE F - STOCKHOLDER'S EQUITY
1. SECURED SUBORDINATED DEBENTURES AND PREFERRED STOCK
The subordinated debentures of approximately $86,000 and
$84,700 at June 30, 2000 and 1999, respectively, 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 at 8% are payable semi-annually
and mature in January 2004.
2. $6 SENIOR CUMMULATIVE CONVERTIBLE PREFERRED STOCK
As a result of the Business Combination (see Note A-2), the
Company issued to TW 6,000 shares of $6 Senior Cumulative
Convertible Preferred Stock ("$6 Preferred Stock") having a stated
value of $100 per share. Beginning December 1, 1999, the
dividends accrue, when and as declared by the Board of
Directors at the rate of $6 per share, and are payable
quarterly beginning March 1, 2000. The holders of the $6
Preferred Stock have the right to convert the $6 Preferred Stock
into the Company's common stock anytime after December 31,
1999 provided that the market price of the Company's common
stock is greater than $1.50. In the event the holders of the $6
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 $6
Preferred Stock is redeemable at the option of the holder anytime
after December 1, 2003 at the 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.
In March 1999, TW contributed $50,000 to the Company for
working capital in exchange for an additional 500 shares of the
Company's $6 Preferred Stock.
F-22
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
3. 8% SERIES B CONVERTIBLE PREFERRED STOCK
On May 31, 2000, the Company issued 1,600 shares of newly
created 8% Series B Convertible Preferred Stock ("8% Preferred
Stock"), $.01 par value, with a stated value of $1,000 per share, redemption
value at 125% of the stated value, to accredited investors pursuant
to Regulation D under the Securities Act of 1933 for net cash proceeds of
approximately $1,435,000. The 8% Preferred Stock has no voting rights and is
convertible into common stock of the Company at an effective conversion price
of the lower of (i) 75% of the market price or (ii) 110% of the lowest
closing bid of the Company's common stock for the five trading
days immediately preceding the closing date, May 31, 2000, as
defined in the Certificate of Designation of the 8% Preferred Stock
provided that, if the Company's Registration Statement on Form SB-2
has not been declared effective on or before September 30, 2000, then
the conversion percentage shall decrease 2% for each month or
partial month in which the Registration Statement has not been
declared or does not remain effective. If the Registration
Statement has not been declared and does not remain effective
on and after one year from May 31, 2000 and until the 8% Preferred
Stock has been converted in full, then the conversion percentage
shall be 50%.
Holders of the 8% Preferred Stock are entitled to receive dividends
at the stated dividend rate of 8% on the stated value of $1,000
on each 8% Preferred Stock share. Dividends are cumulative from the date
of issue, whether or not declared, for any reason. The Company has
accrued dividends on its 8% Preferred Stock of approximately $11,000 at
June 30, 2000. In addition, the investors were granted five-year warrants to
purchase 160,000 shares of common stock at a purchase price
equal to 120% of the lowest of the closing bid prices for the
Company's common stock for the five trading days prior to May
31, 2000. The Company recorded a deemed dividend of $638,780
for the year ended June 30, 2000, representing the discount
resulting from the allocation of the proceeds to the beneficial
conversion feature and the fair value of the underlying warrants.
Such deemed dividend was recognized on the date of issuance
since the 8% Preferred Stock was immediately convertible. In
connection with this transaction, the Company issued five-year
warrants to the broker/finder to purchase an aggregate of 100,000
shares of the Company's common stock at 120% of the lowest of
the closing bid prices for the Company's common stock for the
five trading days preceding the closing date, May 31, 2000. These
warrants have an estimated fair value of $105,000. In addition the
Company issued 500,000 warrants to a consultant (see Note I-3).
F-23
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
4. COMMON STOCK
In July, 1999, the Company's Board of Directors unanimously
approved a change in the Company's common stock par value
from $.10 to $.001, which has been reflected in the accompanying
financial statements.
5. CONVERTIBLE DEBT
On December 16, 1999, the Company issued to a non-affiliated
party a Convertible Debenture 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 holder was granted warrants, which permit the holder to
purchase up to a maximum of 300,000 shares of the Company's
common stock at $.50 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 automatically be
converted into fully paid and non-assessable shares of common
stock of the Company at a conversion price of $1.00 per share. In
March 2000, the debentures were automatically converted pursuant
to the above terms. Further, the Company, pursuant to the
debenture agreement, has given the warrant holder notice that the
warrants expire on October 28, 2000.
6. SUBSCRIPTIONS RECEIVED
During fiscal 2000 and 1999 the Company received an aggregate
of $227,000 in exchange for agreeing to issue 1,172,905 shares of
the Company's common stock. Further, in connection with one of
these subscriptions, the Company agreed to issue warrants to the
subscriber to purchase 12,500 shares of the Company's
common stock at $1.25 per share, expiring on May 17, 2003.
7. WEB SITE DEVELOPMENT COSTS
In January 2000, the Company issued 1,800,000 non-forfeitable shares
of its common stock, in exchange for services valued at $360,000 to be
provided in connection with the development of the Company's
Web site. Through June 30, 2000 the Company recognized
$54,000 of expense relating to the initial design of the Web site.
Unamortized Web site development costs have been classified has
a component of stockholders' equity in the accompanying financial
statements and will be recognized as services are provided.
F-24
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE G - STOCK OPTIONS
In December 1999, the Company agreed to grant options to two
employees to each purchase 25,000 shares of the Company's
common stock at $.20 per share. These options expire five years
from the date of grant and vest ratably over three years. At June
30, 2000 none if these options were exercisable. These
50,000 options were not granted pursuant to a stock option plan.
If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for these options -
consistent with the methodology prescribed by SFAS 123, the
Company's pro forma net loss applicable to common stockholders
would have been approximately $1,278,000 in fiscal 2000 and the
pro forma net loss per common share have been $.04.
The weighted average fair value of options issued in fiscal 2000
was $.17 and was estimated at the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions
for the options issued in fiscal 2000; expected volatility of 160%;
risk-free interest rate of 6.24%; and expected option life of 3 years.
F-25
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE H - INCOME TAXES
As a result of the Company's fiscal 2000 and 1999 losses and
inability to realize tax benefits, the Company recorded no tax
benefit for the years ended June 30, 2000 and 1999.
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 for the years ended June 30,
2000 1999
------------ ------------
[S] [C] [C]
Tax benefit at statutory federal
income tax rates $ (213,352) $ (357,257)
Respective year's net operating
loss not currently utilizable 213,352 357,257
------------ ------------
$ - $ -
============ ============
The tax effects of temporary differences and loss carryforwards
giving rise to deferred tax (assets) and liabilities are as follows:
June 30,
2000 1999
------------ ------------
[S] [C] [C]
Net operating loss carryforwards $(4,743,000) $(4,697,000)
Other deferred assets
Allowance for bad debts (10,000) (29,000)
Inventory reserves (185,000) (182,000)
Inventory capitalization (16,000) (10,000)
Other deferred assets (41,000) (18,000)
------------ ------------
Gross deferred tax asset (4,995,000) (4,936,000)
Depreciation 40,000 40,000
Other deferred costs 3,000 3,000
------------ ------------
Net deferred tax asset (4,952,000) (4,893,000)
Deferred tax asset valuation allowance 4,952,000 4,893,000
------------ ------------
Net deferred tax asset $ - $ -
============ ============
F-26
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE H- 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.
As of June 30, 2000, the Company's net operating loss
carryforwards aggregate approximately $12,483,000, which expire
during fiscal 2006 through 2020.
NOTE I - COMMITMENTS AND CONTINGENCIES
1. LEASES
The Company's minimum annual lease commitments under
non-cancelable operating leases for premises at June 30,
2000 are as follows:
Years ending June 30: Total
----------
[S] [C] [C]
2001 $ 331,000
2002 292,000
2003 12,000
-----------
$ 635,000
===========
Rent expense, including related real estate taxes and other
operating charges, was approximately $289,000 and
$237,000 for the year ended June 30, 2000 and 1999,
respectively.
2. LITIGATION MATTERS
The Company is a party to legal matters arising in the
general conduct of business. Management believes the
ultimate outcome of such matters is not expected to have a
material adverse effect on the Company's results of
operations or financial position.
F-27
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE I - COMMITMENTS AND CONTINGENCIES (CONTINUED)
3. CONSULTING AGREEMENT
In March 2000, the Company entered into a two year
consulting agreement ("the Agreement") whereby the
consultants are to provide strategic and financial planning
services to the Company as defined in the Agreement.
Pursuant to this Agreement, upon the issuance of the 8%
Preferred Stock (See Note F-3), the Consultant was granted three-year
warrants to purchase 500,000 shares of common stock at a
purchase price equal to 100% of the closing bid price of the
common stock on May 30, 2000 ($1.16). These warrants
expire on May 30, 2003 and have an estimated value of
$515,000.
In addition, upon satisfying certain performance criteria, as defined in the
Agreement, the Company may be obligated to issue any or all of the following:
1. Upon the closing of a merger, acquisition, strategic
partnership, business combination, sale of assets
and/or a similar transaction, the Consultant will
receive 10% of the value of any transaction, as
defined above, in a combination of warrants to
purchase the Company's common stock and cash, at
the Consultants' option.
2. Upon the successful closing of another debt or
equity financing of a minimum amount of
$1,500,000 the Consultant will receive warrants to
purchase 500,000 shares of the Company's common stock at an
exercise price equal to 100% of the closing bid price
of the common stock on the business day
immediately preceding the closing date of the
transaction, as defined.
3. Upon the completion of any underwriting equity
offering of a minimum of $3,000,000, the
Consultant will receive warrants to purchase
500,000 shares of common stock at an exercise
price equal to 100% of the per share offering price.
All warrants to be issued pursuant to this Agreement will
have an exercise period of 36 months from the closing date
of the related transaction, as defined. At the request of the
consultant, the Company is obligated to extend a loan to the
consultant to enable the consultant to pay the exercise price
of such warrants. Any such loan will (i) be for a term of no
more than 30 days, (ii) bear interest at the then current prime
rate per annum, (iii) be secured by collateral other than the
common stock to be received upon exercise having a fair
market value at least equal to the amount of the loan, and (iv)
provide full recourse against the Consultant.
F-28
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE I - COMMITMENTS AND CONTINGENCIES (CONTINUED)
4. BANKRUPTCY DISTRIBUTIONS
On March 24, 2000, the Company agreed with the Official
Committee of Unsecured Creditors ("the Committee") as to
the modification of the treatment of the Class 7 Unsecured
Creditors ("the Class 7 Creditors") under the Company's
confirmed Chapter 11 plan of reorganization, as previously
modified ("the Plan"). Pursuant to such agreement, in
satisfaction of the claims of the Class 7 Creditors, the
Company paid the Class 7 Creditors, $400,000 from an
escrow account (see Note A-2) and $100,000 from the
Company on or about April 24, 2000. The balance of the
amount due to the Class 7 Creditors is $291,000. This
amount is payable in 30 monthly installments of
approximately $11,000 at 8% interest beginning on June 15,
2000. In addition, the Company has the option, until March
31, 2001, to pay the then balance due plus an additional
$25,000 to the Class 7 creditors. In the event the Company
does not exercise this option, the Company is obligated to
pay the Class 7 Creditors a percentage of the Company's
cumulative cash flow, as defined, through September 2002 as originally
specified in the Plan.
NOTE J - 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, 2000 and 1999, respectively was
$127,635 and $71,825. 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 under-funding, if any.
NOTE K - NOTES PAYABLE - AFFILIATE
Through June 30, 2000 the Company received an aggregate of
$273,000 from an individual who is a director of the Company
("the Affiliate") in the form of non-interest bearing notes. These
notes 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.
F-29
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
NOTE L - FOURTH QUARTER CHARGES (UNAUDITED)
During the fourth quarter of the year ended June 30, 2000, the
Company recorded the following:
[S] [C]
Provision of lease settlement costs $ 65,000
Website development costs 54,000
Warrants issued in connection with
issuance of debentures 51,000
Provision for officers and employee
bonuses 60,000
Provision for inventory obsolescence 46,000
Provision for bad debt 37,000
Other accruals 25,000
----------
Total $ 338,000
==========
F-30
22,743,871 Shares
DATAWORLD SOLUTIONS, INC.
Common Stock
PROSPECTUS
----------
___________
, 2000
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to
be made, parties to any threatened, pending or completed legal action, suit
or proceedings, whether civil, criminal, administrative or investigative
(other than action by or in the right of such corporation), by reason of the
fact that such person was an officer or director of such corporation, or is or
was serving at the request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided that such officer or director acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interest and, for criminal proceedings, had no reasonable
cause to believe his conduct was illegal. A Delaware corporation may indemnify
officers and directors in an action by or in the right of the corporation under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation in the performance of his duty. Where an officer or director is
successful on the merits or otherwise in the defense of any action referred
to above, the corporation shall indemnify him against the expenses which such
officer or director actually and reasonably incurred.
In accordance with the DGCL, our restated and amended Certificate of
Incorporation contains a provision that eliminates, in certain circumstances,
the liability of our directors for monetary damages for breach of their
fiduciary duties as directors unless the breach involves:
-a director's duty of loyalty to us or to our stockholders;
-acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law;
-liability for unlawful payments of dividends, unlawful stock purchases or
redemptions, under Section 174 of the DGCL; or
-a transaction from which a director derived an improper personal benefit.
In addition, our By-laws provide that any person who is made party to an action
by reason of the fact that such person is or was a director, officer, advisor,
employee or agent of our company shall be indemnified by us to the fullest
extent authorized by Delaware law, which indemnification shall not be deemed
exclusive of any other rights to which any indemnified person may be entitled
under any By-law, agreement, vote of stockholders or disinterested
directors or otherwise.
The effect of the foregoing is to require us, to the extent permitted by law,
to indemnify our officers, directors, employees and agents for any claim
arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or
not opposed to our best interest and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
II-1
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
SECURITIES ACT MAY BE PERMITTED TO DIRECTORS, OFFICERS OR
PERSONS CONTROLLING THE COMPANY PURSUANT TO THE FOREGOING
PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT, IN THE OPINION OF
THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND IS
THEREFORE UNENFORCEABLE.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses to be incurred by us in connection with the issuance and
distribution of the securities being registered are estimated as follows:
SEC Registration Fee $ 2,417
Accountant's Fees and Expenses 25,000
Legal Fees and Expenses 25,000
Printing Expenses 5,000
Transfer Agent and Registrar's Fees and Expenses 2,500
Miscellaneous Expenses 2,000
---------
Estimated Total $ 61,917
=========
The selling securityholders will pay any brokerage fees and commissions,
specified attorneys fees and other expenses to the extent applicable to it.
Item 26. Recent Sales of Unregistered Securities.
The following sets forth our sale of securities within the last three years,
which securities were not registered under the Securities Act:
On December 17, 1998, we issued (i) 1,500,000 shares of our common stock to
acquire all of the outstanding shares of DataWorld Solutions, Inc., making it
our wholly owned subsidiary and (ii) 6,000 shares of our $6 Senior Cumulative
Convertible Preferred Stock to TW Cable in exchange for certain debt
forgiveness, cash contributions and escrow funds.
During fiscal 2000 and 1999, we received an aggregate of $227,000 in exchange
for agreeing to issue 1,172,905 shares of our common stock. Further, in
connection with one of these issuances, we agreed to issue warrants to the
subscriber to purchase 12,500 shares of our common stock at $1.25 per share,
expiring on May 17, 2003.
In December 1999, we issued a convertible debenture in the principal amount of
$250,000. The debenture accrued interest at a rate of 2 1/4% over prime rate,
payable semi-annually commencing on June 1, 2000, with the entire principal
balance plus any accrued and unpaid interest payable at its maturity on
November 30, 2004. The debenture holder was also granted warrants to
purchase up to a maximum of 300,000 shares of our common stock at $.50 per
share. In January 2000, the debentures were automatically converted (at a
conversion price of $1.00 per share) into 250,000 shares of common stock
after the average bid price of our common stock exceeded $1.50 for 30
consecutive business days as per the terms of the agreement.
II-2
In December 1999, we issued 70,000 shares of our common stock to John Byers.
These shares were issued in exchange for a reduction of accounts payable by
$11,459.74.
In December 1999, we issued 100,000 shares of our common stock to
Wexler and Burkhart, P.C. These shares were issued in exchange for a
reduction of accounts payable by $10,000 for legal services rendered.
On January 25, 2000, we issued 1,800,000 shares of common stock, in exchange
for business consulting services in product development, distribution,
e-commerce site construction, e-commerce test and marketing, and the
procurement of internet traffic and strategic alliances in the e-commerce
industry. We subsequently registered these shares on Form S-8 on April 17,
2000.
In March 1999, we issued to an affiliated party 500 shares of our $6 Senior
Cumulative Convertible Preferred Stock for a purchase price of $50,000. We
intend to use the capital to fund working capital and to finance acquisitions.
In 2000, we issued options to Abraham Mendez and Nicholas Hutzel, two of our
executive officers.
In May 2000, we issued and sold 152,905 shares of our common stock and a
common stock purchase warrant to purchase 12,500 shares of our common stock
for an aggregate price of $125,000.
In May 2000, we issued and sold 1600 shares of our Series B 8% Convertible
Preferred Stock, par value $.01 (with a related option), and 160,000 common
stock purchase warrants for an aggregate price of $1,600,000 in a private
placement transaction with the Augustine Fund, L.P. In connection with this
placement, we also issued warrants to purchase 100,000 shares of common stock
to Delano Group Securities, LLC and 500,000 shares of common stock to
Crossroads Ventures.
These shares were all issued without registration under the Securities Act of
1933, as amended, by reason of the exemption afforded by the provisions of
Section 4(2) thereof as a transaction by an issuer not involving a public
offering, or Section 3(b) thereof. Each recipient of shares delivered
appropriate investment representations to us with respect thereto and
consented to the imposition of restrictive legends upon the certificates
evidencing the shares.
Item 27. Exhibits
The following exhibits are filed with this Registration Statement:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ------------------------------------------------------------------
II-3
2.1 Debtors' Second Amended Joint Plan of Reorganization Under Chapter 11
of the Bankruptcy Code, dated September 24, 1997 (incorporated by
reference to Exhibit 2.1 to the Company's current report on Form 8-K
dated February 5, 1998).
2.2 Debtors' Second Amended Joint Disclosure Statement, pursuant to Section
1125 of the Bankruptcy Code, Regarding Debtors' Second Amended Joint
Plan of Reorganization, dated September 24, 1997 (incorporated by
reference to Exhibit 2.2 to the Company's current report on Form 8-K
dated February 5, 1998).
2.3 Notice of Entry of Order Confirming Chapter 11 Plan of Reorganization
dated October 30, 1997 (incorporated by reference to Exhibit 2.3 to the
Company's current report on Form 8-K dated February 5, 1998).
2.4 Letter Agreement, dated March 24, 2000, between the Official Committee
of Unsecured Creditors and the Company, confirming modification of the
treatment of Class 7 Unsecured Creditors under the Company's confirmed
Chapter 11 Plan of Reorganization (incorporated by reference to Exhibit
99.1 to the Company's current report on Form 8-K dated June 15, 2000).
2.5 Certificate of Ownership and Merger dated November 20, 1997
(incorporated byreference to the Exhibit 3.1(d) to the Company's
current report on Form 8-K dated February 5, 1998).
2.6 Certificate of Ownership and Merger and change of name dated April 30,
1999 (incorporated by reference to Exhibit 2.5 of the Company's annual
report on Form 10-KSB dated October 13, 2000).
2.7 Certificate of Correction dated February 18, 2000 to the Certificate oF
Ownership and Merger dated April 30, 1999 (incorporated by reference to
Exhibit 2.6 of the Company's annual report on Form 10-KSB dated October
13, 2000).
3.1 Restated Certificate of Incorporation of DataWorld Solutions, Inc.,
f/k/a Vertex Computer Cable & Products, Inc., f/k/a VTX Electronics
Corp., filed on May 24, 2000 (incorporated by reference to Exhibit 3.1
to the Company's annual report on Form 10-KSB dated October 13, 2000).
3.2 By-Laws of the Company. (incorporated by reference to Exhibit 3(b) to
Form S-18 Registration Statement No. 33-7693-NY).
3.3 Certificate of Designation, Preferences and Rights of Senior Cumulative
Convertible Preferred Stock of Vertex Computer Cable & Products, Inc.,
dated December 17, 1998 (incorporated by reference to Exhibit 1.2 to
the Company's current report on Form 8-K/A dated January 7, 1999).
3.4 Certificate of Designation of Series B 8% Convertible Preferred Stock
of DataWorld Solutions, Inc., dated May 26, 2000 (incorporated by
reference to Exhibit 4.5 to the Company's annual report on Form 10-KSB
dated October 13, 2000).
II-4
4.1* Common Stock Purchase Warrant to purchase the Common Stock of DataWorld
Solutions, Inc., dated May 18, 2000, and issued to John Morin.
4.2* Common Stock Purchase Warrant to purchase the Common Stock of DataWorld
Solutions, Inc., dated September 28, 2000, and issued to James
Kotsopolous.
4.3* DataWorld Solutions, Inc. Warrant to purchase the Common Stock of
DataWorld Solutions, Inc. dated May 31, 2000, and issued, to Delano
Group Securities, LLC.
4.9* Stock Option Agreement, Abraham Mendez.
4.10* Stock Option Agreement, Nicholas T. Hutzel.
4.11* Convertible Debenture Agreement, dated November 16, 1999, between the
Company and James Kotsopoulos.
5.1* Opinion of Winthrop, Stimson, Putnam & Roberts regarding the legality
of the securities being registered.
10.1 Asset Purchase Agreement, dated May 7, 1997, by and between TW Cable,
LLC and Vertex Technologies, Inc. (incorporated by reference to
Exhibit. 10.17 to the Company's annual report on Form 10-K dated
February 17, 1999).
10.2 Securities Purchase Agreement, dated as of May 26, 2000, by and between
DataWorld Solutions, Inc and the Augustine Fund, L.P. (incorporated by
reference to Exhibit 4.4 to the Company's annual report on Form 10-KSB
dated October 13, 2000).
10.3* Purchase and Sale of Assets Agreement, dated October 20, 1998, by and
between Vertex Computer Cable & Products, Inc. and Custom Cable
Solutions, Inc.
10.4 Securities Purchase Agreement, dated January 10, 1997, by and among TW
Cable, LLC and Owners of Secured Subordinated Debentures (incorporated
by reference to Exhibit 10.16 to the Company's annual report on Form
10K dated February 17, 1999).
10.5 Agreement by and among Vertex Computer Cable & Products, Inc, Daniel
McPhee/Christopher Francis, TW Cable, LLC, Edward Goodstein and
DataWorld Solutions, Inc. (incorporated by reference to Exhibit 1.1
to the Company's current report on Form 8-K dated December 18, 1998).
10.6* Financing Agreement, dated July 10, 1998, between the Company and
Rosenthal& Rosenthal, Inc.
10.7* Promissory Note, dated December 17, 1998, between the Company and
Edward Goodstein for $200,000.
10.8* Authorized Cable Assembler Supply Agreement, effective February 7,
2000, by and between the Company and Minnesota Mining and Manufacturing
Company.
II-5
10.9* Distribution Agreement, dated February 10, 1999, by and between the
Company and ITT Cannon International, Inc.
10.11* Agreement, dated January 25, 2000, by and between the Company and
E-Start Limited, Inc.
10.12* Agreement, dated April 18, 2000, by and between the Company and Delano
Group Securities, LLC.
10.13* Agreement, dated March 1, 2000, by and between the Company and
Crossroad Ventures, Inc.
10.14* Lease, dated August 27, 1998, between 50th Avenue Associates and the
Company
10.15* Lease, dated June 2, 1997, between Northwestern Mutual Life Insurance
Company, d/b/a Commerce Park, and the Company.
10.16* Lease, dated February 10, 1999, between MCS Realty Co. and the Company
23.1 Consent of Grant Thornton LLP
23.2* Consent of Winthrop, Stimson, Putnam & Roberts (see Exhibit 5.1)
24.1 Power of Attorney (included in the signature page hereof).
__________
* To be filed by amendment.
II-6
Item 28. Undertakings.
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-
effective amendment to this Registration Statement: (i) to include any
prospectus required by section 10(a)(3) of the Securities Act; (ii) to
reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) (Section
230.424(b) of this chapter) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against liabilities (other than the
payment of the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant
II-7
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the Company certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
County of Suffolk, State of New York, on November 30, 2000.
DATAWORLD SOLUTIONS, INC.
By: /s/ Daniel McPhee
-----------------------
Name: Daniel McPhee
Title: Chief Executive Officer and
President
II-9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Daniel McPhee with full power to act as his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, and each of his substitutes, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent, and each of his substitutes, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
---------- ------- --------
/s/ Daniel McPhee
----------------- Chairman of the Board, November 30, 2000
Daniel McPhee President, Chief Executive
Officer (Principal Executive
Officer) and Director
/s/ Christipher Francis
----------------- Chief Operating Officer November 30, 2000
Christopher Francis and Director
/s/ Edward Goodstein
----------------- Director November 30, 2000
Edward Goodstein
/s/ Nicholas Hutzel
----------------- Vice President, Controller November 30, 2000
Nicholas Hutzel and Secretary (Principal
Financial and Accounting
Officer)
II-10
