SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 1-9263
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DATAWORLD SOLUTIONS, INC.
(formerly Vertex Computer Cable & Products, Inc.)
(Exact name of registrant as specified in its charter)
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Delaware 11-2816128
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
920 Conklin Street, Farmingdale, New York 11735
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (631) 293-1610
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes X No ____
State issuer's revenues for its most recent fiscal year $13,368,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 15, 2000 was approximately $7,358,409.
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes X No ____
On September 15, 2000, 29,044,000 shares of common stock, $.001 par value
were outstanding.
This report consists of 38 consecutively numbered pages (including this cover
page).
DATAWORLD SOLUTIONS, INC.
TABLE OF CONTENTS
Page Number
[S] [C]
PART I
Item 1. Business............................. 3
Item 2. Properties........................... 8
Item 3. Legal Proceedings.................... 8
Item 4. Submission of Matters to a Vote of Security
Holders............................... 8
PART II
Item 5. Market for the Common Equity and Related
Stockholder Matters..................... 9
Item 6. Management's Discussion and Analysis or Plan
of Operations........................... 10
Item 7. Financial Statements ................... 14
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.. 14
PART III
Item 9. Directors and Executive Officers of the
Company................................ 15
Item 10. Executive Compensation................. 17
Item 11. Security Ownership of Certain Beneficial Owners
and Management.................... 19
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits and Reports on Form 8-K........ 21
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PART I
ITEM ONE - BUSINESS
Certain statements contained in this Annual Report on Form 10-KSB, including,
without limitation, statements using words such as "believe", "expect",
"anticipate", "intend", "estimate", "plan", and words and expressions of
similar import, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements involve risks and
uncertainties, and the Company's actual results could differ from those
anticipated in such statements as a result of these risks and uncertainties.
In addition to the uncertainties stated elsewhere in this report, the factors
which could affect these forward-looking statements include, but are not limited
to, adverse changes in general economic conditions, including adverse changes in
the specific markets for our products, adverse business conditions, increased
competition, pricing pressures, lack of success in marketing our products and
services, and other factors. These forward-looking statements speak only as of
the date of this report and readers are cautioned not to place undue reliance
upon such statements.
THE COMPANY
DATAWORLD SOLUTIONS, INC., (the "Company") was incorporated on
January 7, 1998 and commenced operations on March 7, 1998. The Company is a
recognized multi-regional value-added specialty distributor of electronic cable
assemblies used in providing connectivity solutions for customers operating a
wide range of data systems. This includes linking or connecting standardized or
proprietary electronic devices and peripheral components from different vendors
to provide solutions for various customer requirements.
The Company adds value by providing connectivity solutions which may include
distributed sales of passive components (electronic connectors, electronic wire
and cable, cabinets and racks, and patch panels), and active components (hubs,
bridges, routers, gateways and modems). The Company provides the highest
quality (ISO 9002 Certified) products with a high average on-time delivery yield
rate (98.0%) at competitive prices for interconnection requirements including
Fiber Optics, CAT 5, Telco, V.35, Wire Harnesses, Ethernet, Fast Ethernet, Token
Ring, Flat Ribbon and Coax cables. The Company is approved to manufacture
assemblies utilizing Bellcore, Underwriters Laboratories ("UL"), and Canadian
Standards Association ("CSA") approval and has certification for the manufacture
of 3M fiber optic assemblies.
Management believes that the Company's technical ability for providing
connectivity solutions between the data system capabilities of many
manufacturers and the specific connectivity needs of its customers, along with
its reputation for providing manufactured, custom-made electronic cable
assemblies that are subject to 100% quality control testing, will be the
principal factors on which the Company will plan its future growth.
The Company expects internal growth to be enhanced by what the Company
perceives to be two continuing trends: (i) the increasing demand for data
communications to provide timely information in the office environment and
factory floor that requires connectivity solutions; and (ii) the growing number
of alternatives available to organizations of all sizes in all types of
industries to increase productivity through improved or upgraded computer data
communications.
The Company's executive offices are located at 920 Conklin Street, Farmingdale,
New York 11735 and its telephone number is (631) 293-1610. The Company's
address on the World Wide Web is www.dataworlddirect.com. Unless the context
requires otherwise, all references herein to the Company and DataWorld mean
DataWorld Solutions, Inc.
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RECENT DEVELOPMENTS
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, 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 ("the Registration Statement") 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 shll be 50%.
Holders of the 8% Preferred Stock are entitled to receive divedends 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 to the financial statements).
On December 16, 1999, the Company issued to a non-affiliated party a
Convertible Debentures for a principal amount of $250,000. The debenture
accrues interest at a rate of 2 1/4% over prime rate and is payable semi-
annually commencing on June 1, 2000. The entire principal balance plus any
accrued and unpaid interest shall be payable on November 30, 2004 (the "Maturity
Date").
The debenture 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 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 will 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 was 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.
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
the Vertex's newly issued $6 Senior Cumulative Convertible Preferred Stock
having a stated value of $100 per share, and (iv) Messrs. McPhee and Francis
purchased 17,000,000 shares of the Vertex common stock from TW for $200,000.
As a result of the above, Messrs. McPhee and Francis collectively owned
approximately 69% of Vertex common stock and effective December 18, 1998 Messrs.
McPhee and Francis became the Company's Chief Executive Officer and Chief
Operating Officer, respectively. Thereafter in May 1999, Vertex, the surviving
entity, merged with Old DataWorld and changed its name to DataWorld Solutions,
Inc. Thereafter in July 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.
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RECENT DEVELOPMENTS (CONTINUED)
The acquisition of the DataWorld shares by Vertex was treated as a tax-free
exchange of stock pursuant to Internal Revenue Code Section 368 (a)(1)(B).
On July 28, 1998 the Company refinanced a revolving credit financing 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 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.
BUSINESS STRATEGY
The Company's business strategy is to develop a value-added distribution network
through internal growth with a focus on connectivity solutions for data and
telecommunications. Management believes it will continue to (i) introduce new
connectivity solutions, (ii) improve operating efficiencies through a more
efficient organizational structure, eliminate duplicated activities, and
integrate manufacturing capabilities between the two separate manufacturing
facilities located in the United States, (iii) derive the benefits of critical
mass through the opportunity to develop stronger relationships with, and obtain
improved terms from key suppliers, and (iv) derive the benefits of critical mass
through the ability to distribute to and service large national and
international customers. In its relationship with its customers, the Company
focuses on providing connectivity solutions. Such solutions include advising
customers on the options available to meet their specific needs, and
manufacturing custom-made electronic cable assemblies for the customers.
In addition, the Company continues to service the customers with components and
assemblies as the customer's system grows. Management believes that
manufacturers of products generally choose to build relationships with
distributorships capable of offering advisory services,
technical support, and other services such as manufacturing custom-made
electronic cable assemblies. The Company believes it is perceived as a value-
added manufacturer by both suppliers and customers as a result of its technical
skills and knowledge of the marketplace, access to and understanding of the
product capabilities, and technical design and manufacturing capabilities for
custom-made electronic cable assemblies.
In fiscal 1998, 3M approved the Company as one of their six Value-Added
Reseller's ("VAR"). The Company was required to purchase certain
manufacturing equipment necessary to produce Single-Mode fiber cable
assemblies. As a VAR, the Company receives daily orders directly from 3M and
will ship product directly to 3M's customers. The Company is permitted to sell
Single-Mode fiber cable assemblies to any of its customers.
Effective with the transaction with Old DataWorld in December 1998, the
Company is also a distributor of connectivity products. This gave the Company
the ability to provide its customers with the additional product lines they
require.
-5-
BUSINESS STRATEGY (CONTINUED)
The Company is in the process of identifying potential acquisitions to grow the
business. The Company will seek capital investment to finance these
acquisitions. The Company believes that acquisitions could provide an
additional customer base necessary to increase sales volume, however, there can
be no assurances that the Company will be successful in marketing suitable
acquisition candidates or obtain the required investment capital to finance
acquisitions.
PRODUCTS AND SERVICES
The Company's products and services consist principally of the design and
manufacture of custom-made electronic cable assemblies and harnesses used as
solutions for connectivity requirements in data communications.
PRODUCTS AND SERVICES (CONTINUED)
The Company employs design, engineering, and technical support personnel to
develop alternative connectivity solutions and manufacture of custom-made
electronic cable assemblies.
PRINCIPAL SUPPLIERS
Management believes that the Company is not dependent on any particular
supplier. For the fiscal years ended June 30, 2000 and 1999, the Company's
suppliers each accounted for less than 10% of the Company's purchases.
The Company works from manufacturers' lead times. Deliveries range from one
week to approximately 90 days. The Company has a fully integrated on-line
computer system that enables it to determine immediate inventory availability of
the Company's entire inventory at its stocking facilities. The Company monitors
and maintains manufacturers' delivery schedules to ensure "on-time" delivery for
customers and to maintain proper inventory levels for the Company.
The Company's objective is to minimize lead times for its customers without
financing excess stock levels or risking technological obsolescence. Several
manufacturers have provided the Company with an expedited shipping function in
order to better service the Company's customers.
SALES AND MARKETING
The Company offers a broad range of custom-made cable assemblies and
harnesses used as connectivity solutions to end-users, professionals who install
and service data communications, and original equipment manufacturers (OEM's).
The Company operates through three locations in the Northeast and Western
regions of the United States. All of the locations operate as a sales office,
manufacturing facility and warehouse. These operations support the design and
manufacture of custom-made and standard cable assembly requirements for the
entire Company.
In order to effectively meet each customer's needs, the sales force first gains
an understanding of the customer's system connectivity requirements before
recommending one or more possible solutions. The Company generally does not
participate in the design of computer applications but rather participates in
the design and implementation of the connectivity solutions required for data
communications.
The field sales force is supported by inside sales personnel, who handle
incoming customer calls, perform sales estimates, provide responses to customer
questions and assist in sales prospecting.
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SALES AND MARKETING (CONTINUED)
Sales leads are typically generated by ongoing interaction with existing
customers, sales calls to companies not currently customers, referrals from
suppliers, and by advertising and promotional efforts. The advertising and
promotion program for the Company consists of: (i) exhibits at national and
regional trade shows; (ii) Company-sponsored seminars and product
demonstrations in regional areas; (iii) advertisements in trade publications;
and (iv) direct mail campaigns to targeted market niches.
COMPANY LOCATIONS
The Company's locations, which all are leased, are as follows:
Farmingdale, New York
Long Island City, New York
San Jose, California
MAJOR CUSTOMERS
The Company's net sales are not dependent on any particular customer. During
the fiscal years ended June 30, 2000 and 1999, there were no customers of the
Company that accounted for 10% or more of its net sales.
COMPETITION
All aspects of the Company's business are highly competitive. The Company
competes with several national distributors, which have greater financial and
other resources than the Company. The Company also competes with numerous
distributors on a local or regional basis. The Company is ISO-9002 certified
and therefore more attractive to a customer who requires this industry
certification of quality.
The Company believes that its ability to design and manufacture custom cable
assemblies as well as making available technical support, differentiates the
Company's from its primary competitors and gives the Company a competitive
advantage. There can be no assurance the Company will be able to successfully
exploit such advantage.
PRODUCT LIABILITY INSURANCE
The Company maintains a comprehensive general liability insurance policy in the
amount of $2,000,000, with an umbrella policy, including products liability,
providing coverage in the aggregate amount of $20,000,000, which it believes to
be adequate coverage.
EMPLOYEES
As of September 1, 2000, the Company 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 (33) employees are covered by a collective bargaining agreement in
the Company's Farmingdale facility. The Company considers its labor relations
to be generally satisfactory.
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ITEM TWO - PROPERTIES
The location and size of each of the Company's facilities at June 30, 2000, the
principal use of each facility and lease expiration date are summarized below:
Lease Square
Location Footage Use Date
------------------------- -------- ------------------------------ --------
[S] [C] [C] [C]
Farmingdale, New York (1) 21,000 Executive Office, Sales Office, Mar.2002
Manufacturing and Warehouse
San Jose, California 9,950 Sales Office, Manufacturing May 2002
and Warehouse
Long Island City, New York 5,500 Sales Office and Warehouse Aug. 2002
(1) The Company's Headquarters are located in Farmingdale, New York. These
premises consist of approximately 3,500 square feet of office space and
approximately 17,500 square feet of manufacturing/warehouse space. The
Company leases this facility. The Company presently subleases
approximately 7,500 square feet of warehouse space to a non-affiliated
company on a month-to-month basis. Either party can terminate the
agreement with 90 days written notice.
ITEM THREE - LEGAL PROCEEDINGS
The Company is a party to legal matters arising in the general conduct of
business. 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.
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None, during the fourth quarter of fiscal 2000.
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PART II
ITEM FIVE - MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Current symbol - DWLD
The Company's common stock trades on the Over-The-Counter Electronic
Bulletin Board. The symbol originally was VCCP and on March 23, 2000 the
symbol was changed to DWLD. The following table shows the quarterly range of
the high and low closing sale prices for the Common Stock on the Over-The-
Counter Electronic Bulletin Board since September 1, 1998, for the periods
indicated.
Common Stock
Period High Low
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[S] [C] [C]
FISCAL 2000
First Quarter ended September 30, 1999 .25 .20
Second Quarter ended December 31, 1999 .23 .20
Third Quarter ended March 31, 2000 3.88 .19
Fourth Quarter ended June 30, 2000 2.69 .75
FISCAL 1999
First Quarter ended September 30, 1998 .09 .09
Second Quarter ended December 31, 1998 .26 .25
Third Quarter ended March 31, 1999 .30 .22
Fourth Quarter ended June 30, 1999 .25 .20
Recordholders
As of June 12, 2000, there were approximately 275 holders of record of the
Company's common stock.
Dividends
The Company has never paid a cash dividend on its common stock and the
Company does not anticipate paying any dividends on the common stock in the
foreseeable future. Pursuant to the terms of its revolving credit facility, the
Company is not permitted to pay or declare any dividends or otherwise make any
distribution of capital.
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ITEM SIX - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
Old DataWolrd Solutions, Inc. wsa incorporated on January 7, 1998 and
commenced operations on March 1, 1998, therefore the Company can provide
limited comparative financial information with respect to the separate results
of Old DataWorld and Vertex. For the purposes of additional comparative
analysis, the Company has included in its discussion of results of
operations, pro-forma comparative results that include the historical
results of Vertex for all periods presented.
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 the Company
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 the
Company's 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 the Company's borrowings under its
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.
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.
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ITEM SIX - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999 (CONTINUED)
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
Old DataWorld Solutions, Inc. was incorporated on January 7, 1998 and
commenced operations on March 1, 1998, therefore the Company can provide
limited comparative financial information with respect to the separate results
of Old DataWorld and Vertex. For the purposes of additional comparative
analysis, the Company has included in its discussion of results of operations,
pro-forma comparative results that include the historical results of Vertex for
all periods presented.
Net sales for the year ended June 30, 1999 were approximately $5,912,000. For
the period ended June 30, 1998 net sales were approximately $237,000. For the
period ended June 30, 1998 the sales were for a four-month period and cannot
be compared to the annual net sales for fiscal 1999. The growth in net sales
resulted from a combination of DataWorld's increase in customers and product
lines as well as the added revenues generated from Vertex after the merger (see
Note A-2 to the financial statements).
Pro-forma net sales for the year ended June 30, 1999 were approximately
$8,553,000, which includes approximately $2,641,000 for Vertex prior to the
merger. Vertex's net sales for the year ended June 30, 1998 were approximately
$7,901,000. The increase in sales is a result of additional sales from the
merger with DataWorld in December 1998.
Gross profit for the year ended June 30, 1999 was approximately $1,326,000.
Gross profit as a percentage of sales was 22.4% for the year ended June 30,
1999. For the period ended June 30, 1998 gross profit was approximately
$68,000 or 28.8%. The growth in gross profit is primarily due to a higher
volume of sales. The decrease in gross profit percentage is a result of the
Company selling products at competitive prices in an effort to increase its
customer base and revenues.
Pro-forma gross profit for the year ended June 30, 1999 was approximately
$1,503,000 or 17.6%, which includes approximately $177,000 for Vertex prior
to the merger. Vertex's gross profit for the year ended June 30, 1998 was
approximately $488,000. The increase in gross profit is a result of the
increased sales from the merger with DataWorld in December 1998, as well as a
focus on gross profit dollars achieved from sales by management.
Selling, general and administrative expenses were approximately $2,046,000 or
34.6% for the year ended June 30, 1999. For the period ended June 30, 1998
selling, general and administrative expenses were approximately $29,000. The
increase is a result of the Company merging its operations with Vertex whereby
the corporate and branch expenses of Vertex were added to the Company's
operations.
-11-
ITEM SIX - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Pro-forma selling, general and administrative expenses for the year ended June
30, 1999 was approximately $3,243,000 which includes approximately
$1,081,000 for Vertex prior to the merger. Vertex's selling, general and
administrative expenses for the year ended June 30, 1998 was approximately
$3,001,000. The increase in pro-forma selling, general and administrative
expense is due to merging Old DataWorld salaries into Vertex in December
1998.
Interest expense for the year ended June 30, 1999 was $164,000. This interest
was primarily incurred by to the Company's revolving credit facility and for the
Company's outstanding Subordinated Debentures.
Pro-forma interest expense for the year ended June 30, 1999 was approximately
$357,000. Vertex's interest expense for the year ended June 30, 1998 was
approximately $387,000. The lower interest expense relates to the decrease in
outstanding Subordinated Debentures and its related interest and amortization.
LIQUIDITY AND FINANCIAL CONDITION
AS OF JUNE 30, 2000
Current assets at June 30, 2000 were approximately $4,821,000. The Company
had net working capital of approximately $1,413,000 at June 30, 2000. The
working capital at June 30, 2000 is not sufficient to meet the Company's
current liquidity needs. The Company is exploring opportunities to further
reduce operating costs and to obtain additional sources of working capital.
However, there can be no assurances that new management will be successful
in further reducing operating costs or obtaining additional sources of working
capital.
During fiscal 2000, the Company used approximately $1.7 million in cash from
operating activities. Net cash used during the year was primarily due to 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 gave the Company
additional borrowing ability under its revolving credit facility, which enabled
the Company to decrease the average days outstanding for its trade accounts
payables.
Investing activities used net cash of approximately $270,000 during the year
ended June 30, 2000. The principal use was for the purchase of the Company's
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 entered into by the Company throughout the year.
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, 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 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 ("the Registration
Statement") 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
-12-
ITEM SIX - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND FINANCIAL CONDITION
AS OF JUNE 30, 2000 (CONTINUED
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 were fair valued at $105,000. In addition the Company issued
500,000 warrants to a consultant (See note I-3 to the financial
statements.).
Management's plans are to continue to increase revenues of the Company,
which will provide additional borrowings under its revolving credit facility.
The Company has 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, the management will seek
additional sources of capital investments. The Company plans to file a
Registration Statement before December 31, 2000 and seek additional sources
to obtain equity financing.
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 shall
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 will 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 to
common stock after the average bid price exceeded $1.50 for 30 consecutive
business days per the agreement as defined above.
The Company's continuing existence as a going concern is dependent on its
ability to obtain profitable operations, generate sufficient cash flow to meet
its obligations on a timely basis, comply with the terms and covenants of its
financing agreement and to obtain additional financing as may be required.
-13-
ITEM SIX - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INFLATION
For the last three fiscal years, the Company has not been significantly affected
by inflation.
This Management's Discussion and Analysis of Financial Condition and
Result of Operations contains forward-looking statements, which are based
upon current expectations and involve certain risks and uncertainties. Under
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, readers are hereby cautioned that these statements may be impacted by
several factors, and, consequently, actual results may differ materially from
those expressed herein.
ITEM SEVEN - FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to the Financial
Statements are attached as part of this report.
ITEM EIGHT - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
a) Not applicable
b) Not applicable.
-14-
PART III
ITEM NINE - DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY
The Directors of the Company and certain information concerning them as of June
30, 2000 are set forth below:
Year
Became
Name Position With The Company Age Director
------------------ -------------------------- ---- --------
[S] [C] [C] [C]
Daniel McPhee Chairman of the Board, 37 1998
President, Director and
Chief Executive Officer
Christopher Francis Chief Operating Officer 38 1998
and Director
Edward Goodstein Director 53 1997
Executive Officers of the Company who are not Directors are set forth below:
Name Position With The Company Age
-------------------- ----------------------------------- ----
[S] [C] [C]
Nicholas T. Hutzel Vice President, Controller 31
and Secretary (Principal Financial
and Accounting Officer)
Abraham Mendez Vice President of Manufacturing
of Sales 33
Mr. Daniel McPhee has been 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. ("ETC") as senior sales representative and was
promoted to Executive Vice President in early 1997. From 1988 to 1992, Mr.
McPhee was employed by United Datacom & Cable, Inc. as a salesman and Vice
President. From 1985 to 1988, Mr. McPhee was a project manager with Forest
Electric Corp. In 1985, Mr. McPhee received a bachelors degree in Business
Administration from Adelphi University. Mr. McPhee is a member of the
Communication Managers Association.
Mr. Christopher Francis has been Chief Operating Officer and Director since
December 17, 1998. Prior thereto Mr. Francis co-founded with Mr. McPhee Old
DataWorld where he was a Director and Chief Operating Officer . Prior thereto,
and from May 1985 until 1998, Mr. Francis was with ETC. At ETC, Mr. Francis
held various positions including Vice President of Operations. In such capacity,
Mr. Francis' responsibilities included purchasing and inventory management. Mr.
Francis attended Seton Hall University where he majored in Business
Administration.
-15-
ITEM NINE - (CONTINUED)
Mr. Edward Goodstein has served as a Director of the Company since January
1997. Mr. Goodstein served as Chairman of the Board of Directors of the
Company from June 1997 through December 17, 1998. Mr. Goodstein is also
owner of TW Cable LLC, a major stockholder of the Company's $6 Preferred
Stock and common stock. Mr. Goodstein was formerly President and major
stockholder of TW Communications, a privately held company, which he sold in
December 1997. TW Communications was a distributor of telecommunication
wire, cable, fiber-optic and installation supplies.
The following Executive Officers of the Company are not Directors:
Mr. Nicholas Hutzel has served as Vice President and Controller of the Company
since February 1997. Mr. Hutzel has also been Corporate Secretary since March
1997. Mr. Hutzel joined the Company in June 1993, and continued service until
July 1996. From July 1996 through February 1997, Mr. Hutzel was employed as
a Controller for a private sign manufacturer that handled major commercial
accounts throughout the United States.
Mr. Abraham Mendez has served as Vice President of Manufacturing Sales
since August 1997, and has been with the Company since 1985. Prior to
becoming Vice President of Manufacturing Sales, Mr. Mendez was Vice President
of Operations and also Sales Manager for the New York facility.
-16-
ITEM TEN - EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year indicated, all compensation
awarded to, earned by or paid to all individuals serving as the Company's Chief
Executive Officer ("CEO") or acting in a similar capacity and the most highly
compensated executive officer of the Company.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
Other ----------------------
Annual All Other
Compen- Number Compen-
Name and Fiscal Salary Bonus sation of sation
Principal Position Year ($) ($) ($) Options ($)
--------------------- ----- --------- -------- ------- ------- ----------
[S] [C] [C] [C] [C] [C] [C]
Daniel McPhee 2000 $125,000 $25,000 $ - - $ -
Chief Executive 1999 $74,000 $ - $ - - $ -
Officer
Christopher Francis 2000 $125,000 $25,000 $ - - $ -
Chief Operating 1999 $74,000 $ - $ - - $ -
Officer
Abraham Mendez 2000 $82,740 $10,000 $ - 25,000(2) $ -
Vice President 1999 $42,734(1) $ - $ - - $ -
of Mfg. Sales
Nicholas Hutzel 2000 $66,030 $ - $ - 25,000(2) $ -
Vice President 1999 $35,154(1) $ - $ - - $ -
of Finance
(1) For the period December 18, 1998 through June 30, 1999.
(2) Options granted by the Board Resolution on December 13, 1999, $.20
exercise price, vesting 1/3 per year on December 1st of each year.
The Company currently has no pension plan for employees not subject to
collective bargaining arrangements.
DIRECTORS' COMPENSATION
In fiscal 2000 and 1999, all directors who were not employees of the Company,
waived fees until further notice.
-17-
ITEM TEN - EXECUTIVE COMPENSATION (CONTINUED)
STOCK OPTION TABLE
The following table provides further information with respect to the options
granted to the Executive Officers as of the fiscal year ended June 30, 2000.
Options Granted in Last Fiscal Year
----------Individual Grants ------------------------
% of Total
Options
Granted to Exercise
Employees or Base Expir-
Options in Fiscal Price ation
Name Granted Year ($/Sh) Date
--------------- ------- ---- ------ --------
[S] [C] [C] [C] [C]
Abraham Mendez 25,000 50% $.20 12/04
Nicholas Hutzel 25,000 50% $.20 12/04
The following table provides information with respect to options exercised and
option values as of the fiscal year ended June 30, 2000.
Aggregated Options Exercised in Last Fiscal Year and
Fiscal Year-End Option Values
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options Options at
on Value at 6/30/00 6/30/00($)(1)
Exercise Realized Exercisable/ Exercisable/
Name # $ Unexercisable Unexercisable
-------- -------- ---------- ---------------- ----------------
NONE
(1) The dollar value of unexercised options is calculated by determining the
difference between the fair market of the Company's Common Stock, which
underlies the option at June 30, 2000, and the exercise price of the options.
- 18 -
ITEM ELEVEN - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 30, 2000, certain information
regarding beneficial ownership of the Common Stock held by each person known by
the Company to own beneficially more than 5% of the Common Stock, each of the
Company's directors, each of the executive officers named in the Summary
Compensation Table, and all of the Company's executive officers and directors as
a group.
Beneficial Ownership
Name and Address Shares %
-------------------- -------------- ------
[S] [C] [C]
Daniel McPhee 8,585,000 30%
920 Conklin Street
Farmingdale, NY 11735
Christopher Francis 8,585,000 30%
920 Conklin Street
Farmingdale, NY 11735
TW Cable LLC 3,464,389 12%
81 Executive Blvd.
Farmingdale, N.Y. 11735
Augustine Fund 1,800,000 6%
141 West Jackson Blvd.
Suite 2182
Chicage, IL 60604
All directors and officers as a 20,634,389 71%
group
ITEM TWELVE - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
On January 10, 1997, TW Cable LLC, ("TW") whose owner is a director of the
Company and was Chairman of the Board and Chief Executive Officer from
January 1997 through December 1998, concluded a transaction with the holders of
the Company's preferred stock and Subordinated Debentures pursuant to the
terms of a certain Securities Purchase Agreement (the "Securities Purchase
Agreement"). As a result of that transaction, TW acquired all of the issued and
outstanding preferred stock (12,375 shares) and $2,615,000 principal face amount
of debentures, together with warrants to purchase 53,350,000 shares of common
stock. The preferred stock is convertible into 4,950,000 shares of common stock
at a conversion rate equal to 400 common shares for each share of preferred
stock that is converted. Each share of preferred stock is entitled to 1,500
votes on all matter other than the election of directors. The holders of the
preferred stock, as a class, are entitled to elect 75% of the members of the
Board of Directors (see January 12, 1998 event below).
On October 30, 1997, the Company's second amended plan of reorganization and
disclosure statement (the "Plan"), was confirmed by the United States Bankruptcy
Courts in Westbury, New York. The confirmed Plan
-19-
ITEM TWELVE - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
is effective on the date the Company secures exit financing. On January 12,
1998, the Company secured exit financing with lender, effectuating the Plan.
The Plan called for an initial distribution to unsecured creditors with claims
greater than $1,000 ("Class 7") to receive 13.5% of their claim and future
distributions based on cash flow (as defined) over the next five years.
Unsecured creditors with claims less than $1,000 ("Class 6") received a
distribution of 20% of their claim. The initial distribution payments and
certain other administrative claims are guaranteed by TW. Under the Plan, the
Company's wholly owned subsidiary, Vertex Technologies, Inc., merged into the
Company, and the Company changed its name to Vertex Computer Cable & Products,
Inc. Under the Plan, 25.3 million of the Company's 40 million authorized shares
of common stock were issued and outstanding. Effective December 29, 1997, each
five shares of the Company's common stock outstanding were exchanged for one
share of the surviving entity. As a result, holders of the Company's
outstanding 12,652,000 common stock shares received 2,530,400 post-
reorganization shares. Further, the preferred shareholders (TW) exchanged such
outstanding preferred stock and forgave accrued dividends for 21,508,400 common
stock shares, representing 85% of the post-reorganization outstanding common
stock.
In July 12, 1998, pursuant to an Exchange Offer between TW and holders of
another $400,000 in debentures, TW purchased $307,367 of the debentures for
cash and common stock of the Company held by TW. The terms of all
outstanding subordinated debentures had been modified, pursuant to the Plan, to
an interest rate of 8% per annum, payable semi-annually with the principal due
on January 12, 2005. In addition, TW forgave $115,000, exclusive of the related
debt discount of $14,800, of the $2,423,000 in debentures held. The forgiveness
was accounted for as a capital contribution as an adjustment to Paid-in-Capital.
Subsequent to June 30, 1998, TW paid additional cash as escrow of $185,000 to
the Class 7 distribution creditors committee, for an aggregate amount of
$389,000, in exchange for an extension of time for the Company to make its
payments required under the Plan and TW paid $300,000 in additional cash
Collateral for an aggregate amount of $1,268,000 to the Company's credit
facility in an effort to increase working capital. Under the terms of the
collateral agreement, TW has the right to draw down on such collateral starting
in January 2000 and they started to do so as of June 15, 2000.
On December 17, 1998, the Company, formerly known as Vertex Computer Cable
& Products, Inc., entered into an agreement with a privately held distributor,
DataWorld Solutions, Inc. ("Old DataWorld"), the principal shareholders of Old
DataWorld. who were Daniel McPhee and Christopher Francis, TW Cable, LLC.
and Edward Goodstein, the Company's then chairman and principal shareholder.
Pursuant to the agreement, (i) Vertex acquired all the outstanding shares of Old
Dataworld in exchange for the issuance of 1,500,000 shares of Vertex common
stock (ii) TW forgave approximately $2,300,000 in principal face amount of
secured subordinated debt and all accrued interest relating thereto, (iii) TW
forgave $280,000 of indebtedness, contributed $400,000 cash and arranged for
approximately $400,000 of TW funds held in escrow for the benefit of Vertex's
creditors to be released to such creditors as payment on behalf of Vertex in
exchange for 6,000 shares of the Vertex's newly issued $6 Senior Cumulative
Convertible Preferred Stock having a stated value of $100 per share (in March
1999, TW contributed $50,000 to the Company for working capital in exchange
for 500 shares of the Company's $6 Preferred Stock.), and (iv)
Messrs. McPhee and Francis purchased 17,000,000 shares of the Vertex common
stock from TW for $200,000. As a result of the above, Messrs. McPhee and
Francis collectively owned approximately 69% of Vertex common stock and
effective December 18, 1998 Messrs. McPhee and Francis became the Company's
Chief Executive Officer and Chief Operating Officer, respectively. Thereafter
in May 1999, Vertex, the surviving entity, merged with Old DataWorld and changed
its name to DataWorld Solutions, Inc. Thereafter in June 1999, the Company's
certificate of incorporation was amended to reflect a change in the Company's
par value for common stock from $.10 to $.001 per share.
-20-
ITEM THIRTEEN - EXHIBITS AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
See index to financial statements.
(b) Form 8-K Reports
Form 8-K dated June 15, 2000
(c) EXHIBITS
2.1 Second Amended Joint Plan of Reorganization dated September
24, 1997 (incorporated by reference to Exhibit 2.1 to the
registrant's current report on Form 8-K dated February 5, 1998)
2.2 Second Amended Joint Disclosure Statement dated September 24,
1997 (incorporated by reference to Exhibit 2.2 to the registrant's
current report on Form 8-K dated February 5, 1998)
2.3 Order of United States Bankruptcy Court, Eastern District of New
York dated October 30, 1997(incorporated by reference to Exhibit
2.3 to the registrant's current report on Form 8-K dated February 5,
1998)
2.4 Certificate of Ownership and Merger dated November 20,
1997 (incorporated by reference to Exhibit
3.1(d) to the registrant's current report on Form 8-K dated
February 5,1998)
2.5 Certificate of Ownership and Merger and change of name
dated April 30, 1999
2.6 Certificate of Correction dated February 18, 2000 to the
Certificate of Ownership and Merger dated April 30, 1999
3.1 Restated Certificate of Incorporation dated May 24, 2000
3.2 By-Laws (incorporated by reference to Exhibit 3(b) of Form
S-18 Registration Statement No. 33-7693-NY)
4.1 Certificate of Designation, Preferences and Rights of Senior
Cumulative Convertible Preferred Stock (incorporated by
reference to Exhibit 1.2 to the registrant's report on Form 8-
KA dated December 18, 1998)
4.2 Subordinated Debenture Agreement dated December 16,
1999 between the Company and a non-affiliate (incorporated
by reference to Exhibit 4.2 to the registrant's report on Form
10-KSB dated January 13, 2000)
4.3 Agreement by and among Vertex Computer Cable &
Products, Inc. and Daniel McPhee and Christopher Francis
and TW Cable LLC and Edward Goodstein and DataWorld
Solutions, Inc. Dated December 18, 1998 (incorporated by
reference to Exhibit 1.1 to the registrant's report on Form 8-
K dated December 18, 1998)
-21-
ITEM THIRTEEN - EXHIBITS AND REPORTS ON FORM 8-K
(c) EXHIBITS (CONTINUED)
4.4 Securities Purchase Agreement between the Company and
Augustine Fund LP dated May 26, 2000
4.5 Certificate of Designation of Series B 8% Convertible
Preferred Stock
23 Consent of Certified Public Accountants. Included with the
Company's Financial Statements.
-22-
DATAWORLD SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
[S] [C]
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets as of June 30, 2000 and 1999 F-3
Statements of Operations for the years ended
June 30, 2000 and 1999 F-4
Statement of Changes in Stockholders' Equity
for the years ended June 30, 2000 and 1999 F-5
Statements of Cash Flows for the years ended
June 30, 2000 and 1999 F-6
Notes to Financial Statements F-7 - F-20
F-1
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-2
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-3
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
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
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-5
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-6
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-7
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.
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.
F-8
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
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.
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.
F-9
DATAWORLD SOLUTIONS, INC
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
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.
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.
F-10
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 2000 and 1999
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
=========== ============
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.
F-11
DATAWORLD SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
========== ==========
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-12
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.
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-13
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-14
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-15
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-16
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-17
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-18
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-19
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-20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on the
13th day of October 2000.
DATAWORLD SOLUTIONS, INC.
By: /s/ Daniel McPhee
---------------------------
Daniel McPhee,
President,
Chief Executive
Officer and Chairman
of the Board
By: /s/ Nicholas T. Hutzel
---------------------------
Nicholas T. Hutzel,
Vice President,
Controller
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below, on October 13, 2000, by the following
persons, in the capacities indicated:
/s/ Daniel McPhee Chairman of the Board
---------------------------- President and Chief Executive
Daniel McPhee Officer and Director
/s/ Christopher Francis Chief Operating Officer and Director
----------------------------
Christopher Francis
/s/ Edward Goodstein Director
---------------------------
Edward Goodstein
/s/ Nicholas Hutzel Vice President, Controller
--------------------------- and Secretary
Nicholas Hutzel
