<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended July 31, 1997
- --------------------------------------------------------------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
================================================================================
Commission file number: 1-12726
- --------------------------------------------------------------------------------
WIZ TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 33-0560855
- --------------------------------------------------------------------------------
STATE OR OTHER JURISDICTION OF INCORPORATION IRS EMPLOYER IDENTIFICATION
NUMBER
32951 Calle Perfecto, San Juan Capistrano, CA 92675
- --------------------------------------------------------------------------------
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES(ZIP CODE)
- --------------------------------------------------------------------------------
(714) 443-3000
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE
Securities Registered Under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
- --------------------------------------------------------------------------------
NONE
- --------------------------------------------------------------------------------
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO_______ Check if there is no 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. [ ]
State issuer's revenues for its most recent fiscal year: $ 2,729,000
------------
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act). $442,616.
based on closing bid of $.045 for the common stock on October 31, 1997.
<PAGE>
.Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date: 13,306,713 AT OCTOBER 31, 1997
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one):
Yes: No: X
----- -----
2
<PAGE>
WIZ TECHNOLOGY, INC.
INDEX TO FORM 10-KSB
July 31, 1997
PART I
Item 1 - Description of Business
Item 2 - Description of Property
Item 3 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of Security Holders
PART II
Item 5 - Market for Common Equity and Related Stockholder Matters
Item 6 - Management's Discussion and Analysis or Plan of Operation
Item 7 - Financial Statements
Item 8 - Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act
Item 10- Executive Compensation
Item 11- Security Ownership of Certain Beneficial Owners and Management
Item 12- Certain Relationships and Related Transactions
Item 13- Exhibits and Reports on Form 8-K
3
<PAGE>
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT: WIZ Technology, Inc., a Nevada corporation (the
"Company") began operations in January 1991. The Company markets low cost, high
quality computer software, including licensed commercial software and
"shareware," through portable displays in computer stores, grocery chains,
airport gift shops, discount stores and other retailers for IBM PCs and
compatibles. In March 1996, the Company acquired the net assets of Q & A Sales
And Marketing ("Q & A") in exchange for 299,994 shares of Company common stock
and 1,200,000 shares of Series B Preferred stock. Q & A was a competing company
in the inexpensive software business. Its software titles and customers were, by
and large, different from those of the Company. Additionally, Q & A held a
license agreement with Digital Systems Research, Inc. ("DSR") which, as
modified, was acquired by the Company and provided worldwide, exclusive rights
to sell an intranet software systems-application to retailers, wholesalers and
original equipment manufacturers. DSR retained the rights to sell the software
technology to the US Government and its agencies. DSR has alleged on October 27,
1997 that it was cancelling the license agreement based on DSR's evaluation that
the Company was not "aggressively marketing" the technology. Management believes
that the Q & A acquisition was strategically sound for the Company at the time
of the acquisition, but that it reoriented the Company away from selling budget
software to smaller retailers and directed Company resources to the intranet
business. In hindsight, Q & A was not the opportunity represented to the Company
and this acquisition was not beneficial.
(b) BUSINESS OF ISSUER: The Company has historically marketed its products
directly and through distributors. The Company's current product line of over
150 programs is designed for a wide range of personal computer users,
particularly small business and home users who may have limited technical
expertise. The Company selects software programs which it believes are most
suitable for general public use in the categories of games, utilities, education
and business, integrates these programs with user-friendly menu screens, and
packages the CD- ROMs in boxes or jewel cases and the 3.5" media in colorful
diskette envelopes. Independent programmers who sell the marketing rights to the
Company in exchange for royalty payments develop these software programs. The
royalty payments are typically equal to 10% of the net sales of the software and
are usually written for a duration of two years.
The Company intends to focus its business in two marketing areas: 1) continuing
its business of developing and selling inexpensive computer software for sales
to the smaller retail stores and, on a very select basis, to larger retailers.
The Company's experience is that larger computer software retailers do not pay
as promptly as smaller retailers, occasioning cash flow problems for the
Company; and, 2) develop a marketing strategy of selling computer software to
the Fundraising community. Fundraising is the selling of the Company's product
through non-profit organizations such as; public and private schools, Churches
and other non-profit and fraternal groups for the purpose of raising money.
Distributors, brokers etc. that currently sell such items as candy, cookies,
magazines subscriptions and other promotional items may be used to facilitate
this objective.
RESEARCH AND DEVELOPMENT
The Company is not involved in research and development activities.
COMPETITION
The market for the Company's products is very competitive and subject to rapid
change and the Company currently competes with many software distributors and
publishers. The Company believes that the principal competitive factors
affecting the market for its products include performance ease of use,
functionality, quality and price. The Company believes that it generally
competes favorably with respect to each of these factors. Competitive pressures
could result in price reductions, which could affect the Company's operating
results.
The Company also competes for access to its chosen channels of distribution.
Because of relatively low barriers to entry in the shareware market, numerous
shareware authors distribute their products through other distributors and
directly through electronic bulletin boards and advertising in industry oriented
publications. The Company believes that its existing infrastructure gives it a
competitive advantage over current and potential competitors. However, should a
competitor which is larger and better financed than the Company choose to
compete directly against the Company, such competition could have an adverse
affect on the Company. The Company has also experienced competition from other
distributors utilizing similar marketing displays as those used by the Company.
4
<PAGE>
EMPLOYEES
The Company has downsized considerably and as of October 31, 1997 has 15
employees. None of the Company's employees are subject to any collective
bargaining agreement. None of the employees acquired during the purchase of Q&A
remain with the Company. In addition, one of the three founding principals left
the company after fiscal 1997 to pursue other interests.
TRADEMARKS
The Company believes that the trade names and trademarks used by it in the
aggregate and specifically "$5 Computer Software Store" and High Impact
Promotions are important to its business. Applications are pending with the U.S.
Office of Patents and Trademarks for the trade name "Wiz Technology" and various
other trademarks and trademarks including "$5 Computer Software Store," and HIP
(High Impact Promotions). The Company successfully sued a former distributor for
misappropriation of trademarks and similar causes of action, and intends to
pursue any other infringing parties with vigor. Litigation to enforce these
rights can be protracted and expensive, and the outcome of any litigation may be
uncertain. If the Company is unable to defend ownership of its proprietary
rights, its operating results could be materially adversely affected due to
consumer confusion and sales lost to infringing competitors.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company leases 20,118 square feet of office and warehouse space at 32951
Calle Perfecto, San Juan Capistrano, California. The lease extends through March
31, 1998. The Company anticipates no problem renewing the current lease under
the renewal option clause or, if this space is larger than necessary, leasing a
smaller facility.
ITEM 3 - LEGAL PROCEEDINGS
Except as set forth below, no material proceedings to which the Company is a
party, or to which any of its properties are subject, are pending or are known
to be contemplated, and the Company knows of no material legal proceedings,
pending or threatened, or judgments entered against any director or officer of
the Company in his capacity as such.
On March 23, 1994 the Company had filed, a lawsuit against $5.99 Store, Craig
Larson and Andrea Larson, former distributors of the Company (collectively, the
"Defendants"), in the Supreme Court of British Columbia, Canada, for the debt
owed by the $5.99 Store to the Company, and breach of the distribution agreement
entered into by the Company and the Defendants. In the lawsuit, the Company
alleged that the Defendants continued to use the Company's trademarks and
represented themselves as the owners of such trademarks without the consent of
the Company. Furthermore, the Company alleged the breach of an agreement with
the Defendants, pursuant to which the Company agreed to extend credit to the
Defendants. The Company seeked damages in the amount of $477,418.75 (Can) for
the price of goods sold and delivered to the Defendants and for the financing
charges associated therewith. The lawsuit further alleged that the Defendants
failed to conduct their business affairs in a professional manner, in breach of
the distribution agreement. The Company terminated said distribution agreement
with the Defendants on February 10, 1994. The Company seeked an injunction
restraining and enjoining the Defendants from selling and distributing of the
Company's goods without the Company's consent. The Company obtained a judgment
in this litigation in the amount of $364,000 (Can). On August 15, 1997 the
Company accepted a settlement of $62,500 (Can).
On April 1, 1996, the Company was served with a lawsuit filed in Orange County
Superior Court by the underwriter of its 1994 public offering, Strausbourger
Pearson Tulcin Wolff Incorporated (the "Underwriter"). The Underwriter alleges
that the Company's sale of a private placement in November 1995 violated a
covenant in the underwriting agreement for the 1994 public offering not to sell
any of its securities until February 9, 1996 without the Underwriter's consent.
The Company has answered the complaint denying all allegations and has also
filed for arbitration with the NASD. The Company believes the lawsuit is without
merit. On May 24, 1996, the Underwriter filed an additional complaint in Orange
County Superior Court alleging that the Company had not complied with the
Underwriter's demand to file a registration statement with the Securities and
Exchange Commission to register the shares underlying the Underwriter's 182,000
Underwriter Warrants received in connection with the 1994 public offering. The
complaint seeks damages of not less than $1,000,000. The Company believes the
second lawsuit is also without merit and has filed an answer denying all
allegations. The Underwriter's legal counsel was disqualified by the court on
the basis of a conflict of interest and this litigation has been stayed.
5
<PAGE>
On October 29, 1996, Platinum Entertainment Partners, II, a Nevada general
partnership, filed in Clark County, Nevada District Court a complaint against
the Company asserting three causes of action based on an alleged breach of
contract. The complaint seeks unspecified damages, or specific performance in
which the Company should provide 240,000 units of the Company's product. The
Company intends to vigorously defend the allegations stated in the complaint, as
it believes such allegations are without merit. The Company has filed a cross
complaint in this matter in the amount of $700,000 alleging that Platinum
Entertainment failed to perform the advertising for which it received $700,000
in product.
On December 3, 1996 Ms. Jolson a former Wiz employee and later an independent
contractor, sued Wiz for Breach of Written Contract and later amended the
complaint to include retaliation. Wiz filed an answer and a cross-complaint
against Jolson for numerous causes of action, including conversion and fraud.
Discovery in this action is continuing, and Wiz feels that the Plaintiff's
action lacks merit and that Jolson cannot prove any damages.
There is no court date set for this case.
On March 4, 1997 a lawsuit was filed in the Orange County Superior Court of
California by shareholders alleging the "issuance of false financial statements
and other positive statements." The action seeks class action status for
purchasers of the Company stock between December 11, 1995 and November 11, 1996.
The complaint prays for relief as the court may deem just and proper. The
Company intends to vigorously defend the allegations stated in the complaint, as
it believes such allegations are without merit.
On May 8, 1997 the Company was notified that the Securities and Exchange
Commission is "conducting an informal inquiry concerning Wiz Technology, Inc. to
determine whether there have been violations of certain provisions of the
federal securities laws." The Company is cooperating fully in this process.
On May 28, 1997, ASR Recording Services of California, the Company's CD
duplicator, sued the Company for approximately $200,000 in accounts payable. The
Company and ASR have settled this litigation under an agreement by the Company
to continue the services of ASR and comply with a payment schedule on the past
due balance. As of October 1997 the amount remaining to ASR was $150,000.
On September 10, 1997, the Company was sued in Orange County Superior Court by 4
investors who loaned the Company a $500,000 bridge loan in August 1995. The
Company does not have the cash to repay the loan and is negotiating a settlement
of this litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
<PAGE>
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been delisted from the American Stock Exchange
Emerging Company Marketplace ("ECM") where it traded from February 1994 to
November 1996 under the symbol "WIZ" and has been trading on the Electronic
Bulletin Board under the symbol "WZTC" since January 5, 1997. The following
table sets forth the high and low bid prices for each quarter during the last
two fiscal years. All of the prices set forth below reflect inter-dealer prices,
without retail mark up, mark down or commission and may not reflect actual
transactions:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
OCT-95 JAN-96 APR-96 JUL-96 OCT-96 JAN-97 APR-97 JUL-97
5 3/8 4 5/16 6 9 1/8 6 3/16 1 5/8 2 3/8 .31
3 3/4 3 1/4 3 1/4 5 2 3/4 1 5/8 1/4 .05
</TABLE>
At October 31, 1997 there were approximately 196 shareholders of record. No
dividends have been declared and management does not foresee dividends being
paid in the near future.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS:
The Company's revenues for the year ended July 31, 1997 ("Fiscal 1997") were
$2,729,045, compared to $7,056,626 for the year ended July 31, 1996 ("Fiscal
1996"). The principal cause for the decline in the revenues is that revenues in
Fiscal 1996 included sales to several large retail chains. The Company acquired
the relationships with the large retailers with its acquisition of Q & A
Software in March 1996. In the Company's view, these large retailers did not
comply with the payment terms of the contracts, and the Company determined it
would not extend further credit. As a result these larger retailers ceased
ordering products under contract. The second reason for the sales decline was
the division of management's attention by numerous legal proceedings (see item 3
- - Legal Proceeding). In addition, lack of cash in Fiscal 1997 forced the Company
to downsize considerably. Management believes sales will remain at this level
for the next twelve months, until such time as any fundraising sales
materialize. Due to the indications from DSR that it has terminated the Intranet
technology license agreement, Management does not expect to generate any future
revenues from this technology except in connection with existing contracts.
Cost of sales in Fiscal 1997 was 75% of sales compared to 77% in Fiscal 1996.
The decrease was due to smaller customers paying a higher price for the
company's product. No cost of sales are attributable to intranet sales
contracts. Selling, general and administrative expenses increased in Fiscal 1997
not withstanding the downsizing in personnel, which commenced in the fourth
quarter. The Company's expenses of litigation accounted for a substantial part
of such expenses in Fiscal 1997.
Due to DSR's cancellation of its license agreement, the Company has written off
$3,018,757, the carrying value of the license as well as $437,000, the carrying
value of the covenant not to compete as of July 31, 1997. The Company believes
that DSR's cancellation is not justified since the Company has contracted with
former and current affiliates of DSR to market the technology and management is
considering its course of action with DSR.
Interest income decreased due to the lesser amount of cash on hand in Fiscal
1997, while interest expense increased due to the increased debt load.
FINANCIAL CONDITION:
As of July 31, 1997, the Company had $99,310 in cash. The Company is in default
on substantially all its loan agreements and is not aware of any alternate
sources of capital to repay these obligations. Management intends to negotiate
with all its major lenders and vendors satisfactory settlements for the
Company's liabilities. Management believes that cash generated from operations
will be sufficient for the Company's capital requirements for the next 12
months. The Company expects to increase sales thru aggressive fundraising
promotions and telemarketing to small retailers to generate enough cash flow to
pay current expenses which have been reduced considerably from last year.
7
<PAGE>
The Company has no plans for any major capital expenditure in that current
facilities are adequate for the foreseeable future. The Company also does not
expect to increase the number of employees in the foreseeable future. Foreign
currency fluctuations have not had a material effect on the Company's results of
operations.
ITEM 7 - FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company required to be
included in Item 7 are listed below:
Independent Accountants Report of Cacciamatta Accountancy Corporation
Consolidated Balance Sheet as of July 31, 1997
Consolidated Statements of Operations for the Years Ended July 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
July 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended July 31, 1997 and 1996
Notes to Consolidated Financial Statements
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As reported on Form 8-K dated August 24, 1996, the Company's independent
accountants, Coopers & Lybrand L.L.P. resigned. Coopers & Lybrand L.L.P. had
audited the Company's financial statements for the year ended July 31, 1995. The
Board of Directors approved the resignation of Coopers & Lybrand L.L.P. There
were no disagreements with the former accountant on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have caused it to make reference to the subject matter of
the disagreements.
The accountants' reports on the consolidated financial statements for the past
two years contained no adverse opinion nor disclaimer of opinion, nor were they
modified as to uncertainty, audit scope, or accounting principles.
As reported on Form 8-K dated September 23, 1996, the Company engaged Grant
Thornton, L.L.P. as its new independent accountants. Prior to the engagement of
Grant Thornton, L.L.P. the Company did not consult Grant Thornton, L.L.P. on the
application of accounting principles to a specific completed or contemplated
transaction or type of audit opinion that might be expressed on the Company's
financial statements.
As reported on Form 8-K dated December 17, 1996, Grant Thornton, L.L.P. resigned
as independent accountants and was replaced by Cacciamatta Accountancy
Corporation. From the date of engagement of Grant Thornton through the date of
resignation of Grant Thornton, there were no disagreements with Grant Thornton
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, except as follows: Grant Thornton
advised the Registrant that Grant Thornton had noted a pattern of events that
led Grant Thornton to conclude that Grant Thornton was no longer willing to be
associated with the financial statements prepared by the Registrant. The events
which were mentioned to the Registrant by Grant Thornton included the
Registrant's lack of preparation for the audit, the issuance of a press release
by the Registrant on the results of operations for the year ended July 31, 1996
which required substantial revisions due to significant accounting adjustments,
and the Registrant's lack of understanding of the significance of certain
matters to the preparation of financial statements and the audit thereof and
timeliness of both internal and external communication of those matters. Grant
Thornton also advised the Registrant that for the period Grant Thornton was
engaged to audit (the year ended July 31,1996) the Registrant did not have the
appropriate level of management or board oversight over the Company's accounting
policies, practices or other procedures.
Prior to the engagement of Cacciamatta Accountancy Corporation the Company did
not consult Cacciamatta Accountancy Corporation on the application of accounting
principles to a specific completed or contemplated transaction or type of audit
opinion that might be expressed on the Company's financial statements.
8
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
The members of the Board of Directors serve until the next annual meeting of
stockholders, or until their successors have been elected. The officers serve at
the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Mar-Jeanne Tendler * 49 Chairman, Chief Executive Officer and Director
Arthur S. Tendler * 50 President and Director
Bruce Allen Gilgen 50 Executive Vice President, Chief Operating Officer and
Director
Gary Wolfe 41 Executive Vice President-Sales
Richard H. Nance 49 Chief Financial Officer
</TABLE>
(*)ARTHUR S. AND MAR-JEANNE TENDLER ARE HUSBAND AND WIFE.
NO DIRECTORS ARE DIRECTORS OF ANY OTHER REPORTING COMPANIES.
MAR-JEANNE TENDLER has been Chairman, Chief Executive Officer and a Director of
the Company's California subsidiary since its incorporation in September 1991.
She has been Chairman, Chief Executive Officer and a Director of the Company
since August 1992.
ARTHUR S. TENDLER has been President and a Director of the Company since its
incorporation in September 1991. He was Acting Chief Financial Officer of the
Company's California subsidiary from August 1994 to July 1995. He has been
President, Chief Operating Officer and a Director of the Company since August
1992 and was Chief Financial Officer from September 1991 to October 1993 and
from September 1997 to the present.
BRUCE ALLEN GILGEN has been Executive Vice President, Chief Operating Officer
and a Director of the Company's California subsidiary since September 1991, and
has held the same position in the Company since August 1992. Mr. Gilgen resigned
in September 1997.
GARY WOLFE joined the Company in March 1996 as Executive Vice President of Sales
from Q&A Sales and Marketing. Prior to joining the Company he was CEO of Q&A
from April 1993 until the acquisition by the Company. As CEO of Q&A he was
responsible for over 15 national and international software company
product-lines, involved in sales, distribution and product development. Prior to
Q&A he was Executive Vice President of Cosmi Software from May, 1987 to April,
1993. In his role he established one of the top software lines in the "budget
category" of software. Mr. Wolfe resigned in January 1997.
RICHARD H. NANCE joined the Company as Chief Financial Officer in September,
1996. He has been involved in accounting, finance and banking for over twenty
years. He has been senior vice president and executive vice president in state
and nationally chartered banks and worked as a National Bank Examiner with the
Comptroller of the Currency. For the three years prior to joining the Company he
worked as a principal in Calspectre Management Consulting. From July, 1989 to
October 1993 he was chief financial officer of Mortgage BancFund Inc., a
mortgage banking operation in Irvine, CA. He holds a Bachelor of Business
Administration in Banking and Finance from North Texas State University, and a
Bachelor of Science in Accounting from Central State University of Oklahoma. He
is a Certified Public Accountant and a member of the AICPA and the California
Society of CPA's. Mr. Nance resigned in September 1997.
ITEM 10- EXECUTIVE COMPENSATION
EMPLOYMENT AGREEMENTS
The Company entered into three-year employment contracts with each of Messrs.
Gilgen and Tendler and Ms. Tendler commencing on August 1,1993 and were renewed
for a one year term. The contracts provide for annual compensation of $140,000
each to Mr. Tendler and Ms. Tendler and $100,000 to Mr. Gilgen. The annual
compensation was subject to annual increase by the Board of Directors and bonus
based on profitability of the Company. Mar-Jeanne Tendler and Arthur Tendler are
currently not covered by employment contracts and their annual salary effective
August 1, 1997 has been reduced to $70,000 per annum.
9
<PAGE>
The Company also entered into an employment contract in March 1996 with Gary
Wolfe, which was to continue through July 1999. This contract provided for
annual compensation of $180,000, which was a base salary and commission advance.
The contract also provided for commissions to be paid on sales relating to
internet revenues generated pursuant to the Company's intranet application
license agreement with DSR. Mr. Wolfe resigned from the Company in January 1997.
The termination of Mr. Wolfe's employment contract had no material effect on the
Company.
The Company at this time has no Executive employment agreements.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------- -------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------
AWARDS PAYOUTS All
Other
- ----------------------- ----- ---------- --------- ------- ------------------- ----------
Name and Principal Year Salary Bonus Other Restricted Options Payouts
Position $ Stock
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mar-Jeanne Tendler * 1997 140,000 0 0 0 0 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
1996 140,000 0 0 0 100,000 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
1995 140,000 0 0 0 100,000 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
Arthur S. Tendler * 1997 140,000 0 0 0 0 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
1996 140,000 0 0 0 100,000 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
1995 140,000 0 0 0 100,000 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
Bruce Allen Gilgen(2) 1997 100,000 0 0 0 0 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
1996 100,000 0 0 0 100,000 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
1995 100,000 0 0 0 100,000 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
Gary Wolfe (1) 1997 110,385 0 0 0 0 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
1996 100,000 0 80,000 0 0 0 0
- ----------------------- ----- ---------- --------- ------- ---------- -------- ---------- ------
</TABLE>
*Beginning in January 1997, Arthur and Mar-Jeanne Tendler cashed their paychecks
as cash flow allowed. Their uncashed payroll checks aggregate $86,000 through
July 31, 1997 and $125,000 through November 14, 1997.
(1) Mr. Wolfe left employment with the Company in January 1997. (2) Mr. Gilgen
left employment with the Company in September 1997. Directors receive no
compensation to perform duties as directors.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE:
- ------------------ ------------------ ------------- ------------------------------ -------------
Value of
Unexercised
In-the-Money
Number of Unexercised Options at
Options and Warrants July 31,
1997
- ------------------ ------------------ ------------- ------------------------------ -------------
Shares Acquired
Name on Exercise Value Exercisable Non-ExercisablExercisable
Realized
- ------------------ ------------------ ------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Mar-Jeanne -0- -0- 300,000 -0- 0
Tendler
- ------------------ ------------------ ------------- ---------------- ------------- -------------
Arthur S. Tendler -0- -0- 300,000 -0- 0
- ------------------ ------------------ ------------- ---------------- ------------- -------------
Bruce Allen 25,000 37,500 275,000 -0- 0
Gilgen
- ------------------ ------------------ ------------- ---------------- ------------- -------------
- ------------------ ------------------ ------------- ---------------- ------------- -------------
</TABLE>
STOCK OPTION PLAN
The Company adopted the 1992 Stock Option Plan (the "Plan") in August, 1992, and
amended and restated the Plan to increase the number of authorized shares
issuable thereunder from 500,000 shares to 800,000 shares in January, 1993 and
again in May, 1996 to 2,000,000 shares. The Plan enables the Company to offer an
incentive based compensation system to employees, officers and directors and to
the principal employees of companies who perform consulting services to the
Company provided such companies have a very limited number of employees.
10
<PAGE>
Any shares which are subject to an award but are not used because the terms and
conditions of the award are not met, or any shares which are used by
participants to pay all or part of the purchase price of any option may again be
used for awards under the Plan. However, shares with respect to which a stock
appreciation right has been exercised may not again be made subject to an award.
In the discretion of a committee comprised of non-employee directors (the
"Committee"), directors, officers, and key employees of the Company and its
subsidiaries or employees of companies with which the Company does business
become participants in the Plan upon receiving grants in the form of stock
options or restricted stock. The Board of Directors is currently acting as the
Committee.
Stock options may be granted as non-qualified stock options or incentive stock
options, but incentive stock options may not be granted at a price less than
100% of the fair market value of the stock as of the date of grant (110% as to
any 10% shareholder at the time of grant); non-qualified stock options may not
be granted at a price less than 85% of fair market value of the stock as of the
date of grant. Restricted stock may not be granted under the Plan in connection
with incentive stock options.
Stock options may be exercised during a period of time fixed by the Committee
except that no stock option may be exercised more than ten years after the date
of grant or three years after death or disability, whichever is later. In the
discretion of the Committee, payment of the purchase price for the shares of
stock acquired through the exercise of a stock option may be made in cash,
shares of the Company's Common Stock or by delivery or recourse promissory notes
or a combination of notes, cash and shares of the Company's Common Stock or a
combination thereof. Incentive stock options may only be issued to directors,
officers and employees of the Company.
Stock options granted under the Plan might include the right to acquire an
Accelerated Ownership on-Qualified Stock Option ("AO"). All options granted to
date have included the "AO" feature. If an option grant contains the AO feature
and if a participant pays all or part of the purchase price of the option with
shares of the Company's Common Stock, then upon exercise of the option the
participant is granted an AO to purchase, at the fair market value as of the
date of the AO grant, the number of shares of Common Stock of the Company equal
to the sum of the number of whole shares used by the participant in payment of
the purchase price and the number of whole shares, if any, withheld by the
Company as payment for withholding taxes. An AO may be exercised between the
date of grant and the date of expiration, which will be the same as the date of
expiration of the option to which the AO is related. Under the Plan,
"fair-market value" for purposes of replacement AO options will be the average
of the closing bid and ask prices of the Common stock if it is then publicly
traded, or if not traded, the fair market value determined by the Board of
Directors.
Stock appreciation rights and/or restricted stock may be granted in conjunction
with, or may be unrelated to stock options. A stock appreciation right entitles
a participant to receive a payment, in cash or Common Stock or a combination
thereof, in an amount equal to the excess of the fair market value of the stock
at the time of exercise over the fair market value as of the date of grant.
Stock appreciation rights may be exercised during a period of time which may be
fixed by the Committee not to exceed ten years after the date of grant or three
years after death or disability, whichever is later. Restricted stock requires
the recipient to continue in service as an officer, director, employee or
consultant for a fixed period of time, as may be determined by the Board of
Directors, for ownership of the shares to vest. If restricted shares or stock
appreciation rights are issued in tandem with options, the restricted stock or
stock appreciation right is canceled upon exercise of the option and the option
will likewise terminate upon vesting of the restricted shares.
<TABLE>
<CAPTION>
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ---------- ------------------------------------------------------ --------------------- --------
Title of Amount and Nature Percent
Class Name/Address of Beneficial Owner(1)(2) of Beneficial Owner of Class
<S> <C> <C> <C>
- ---------- ------------------------------------------------------ --------------------- --------
Common Mar-Jeanne Tendler, 32951 Calle Perfecto, San Juan 1,788,000(3)(4) 13.0
Capistrano, CA 92675
- ---------- ------------------------------------------------------ --------------------- --------
Common Arthur S.Tendler, 32951 Calle Perfecto, San Juan 1,682,800(3) 12.29
Capistrano, CA 92675
- ---------- ------------------------------------------------------ --------------------- --------
Common Bruce Allen Gilgen, 32951 Calle Perfecto, San Juan 1,375,000(2) 10.0
Capistrano, CA 92675
- ---------- ------------------------------------------------------ --------------------- --------
Common Willie Woods, 4301 N. Fairfax Dr., Ste. 725, 1,099,201(5) 8.30
Arlington, VA 22203(6)
- ---------- ------------------------------------------------------ --------------------- --------
Common Gerson Lacoff, Trustee, The Red Net Trust, 32951 1,000,000(6) 7.50
Calle Perfecto, SJC(7)
- ---------- ------------------------------------------------------ --------------------- --------
- ---------- ------------------------------------------------------ --------------------- --------
Common All executive officers as a group 3,470,800 (3)(4) 25.29
- ---------- ------------------------------------------------------ --------------------- --------
</TABLE>
(1) The address of each individual is 32951 Calle Perfecto, San Juan
Capistrano, California 92675, unless otherwise noted.
11
<PAGE>
(2) Unless otherwise indicated, the persons named in the table have sole
voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
(3) Included 500,000 shares of Common Stock issuable upon exercise of
options held by each of Mar-Jeanne and Arthur Tendler, but not an
additional 300,000 shares of Common Stock issuable upon exercise of
options which are not yet vested. Mar-Jeanne and Arthur Tendler, husband
and wife, disclaim beneficial ownership of the shares held by the other.
(4) Includes 13,000 shares held by Mar-Jeanne Tendler as trustee for minor
relatives.
(5) Includes 891,717 shares issuable upon conversion of 891,717 shares of
Series B preferred Stock owned by DSR. Mr. Woods is the controlling
shareholder of DSR and is deemed to beneficially own all of the shares
of common stock owned by DSR.
(6) Includes 1,000,000 shares held by a family trust of which Gerson
Lacoff is trustee.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1991 and 1992, the parents of Mar-Jeanne Tendler, Gerson and Elaine
Lacoff, entered into a series of transactions whereby they loaned the Company an
aggregate amount of $80,000. For this they are paid interest quarterly.
Additionally, the Lacoffs received 10,000 shares of Company common stock, and
have the option of converting the entire debt, principal and outstanding
interest, to common stock at $1.50 per share. To date they have not exercised
this option and the principal outstanding debt to the Lacoffs at July 31, 1997
is $80,000.
In August 1992, the Company adopted the 1992 Stock Option Plan, under which plan
three year non-qualified options to purchase 100,000 shares at $1.50 per share
were granted to each of Mar-Jeanne Tendler, Arthur Tendler, and Bruce Gilgen.
These options were extended until August 1997. In fiscal 1994, the Company
granted options to purchase 100,000 shares at a price of $2.125 per share to
each of Mar-Jeanne Tendler, Art Tendler, and Bruce Allen Gilgen. In fiscal 1995,
the Company granted, outside the 1992 Stock Option Plan, three-year options to
each of these persons to purchase 100,000 shares at a price of $3.00 per share.
Mr. Gilgen exercised 25,000 options at $1.50 per share during fiscal 1996. No
other options have been exercised to date.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
NONE
12
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WIZ TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
By /s/ Mar-Jeanne Tendler
- --------------------------------------------------------------------------------
Mar-Jeanne Tendler, Chairman of the Board and Chief Executive Officer
Date December 15, 1997
- --------------------------------------------------------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Arthur S. Tendler
- --------------------------------------------------------------------------------
Arthur S. Tendler, President and Chief Financial Officer
Date: December 15, 1997
- --------------------------------------------------------------------------------
Supplemental information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Exchange Act by Non-reporting Issuers
(a) Except to the extent that the material enumerated in (1) and/or (2) below
are specifically incorporated into this Form by reference (in which case, see
rule 12b-23(b)), every issuer which files an annual report on this Form under
Section 15(d) of the Exchange Act shall furnish the Commission for its
information, at the time of filing its report on this Form, four copies of the
following:
(1) Any annual report to security holders covering the registrant's last
fiscal year; and
(2) Every proxy statement, form of proxy or other proxy soliciting material
sent to more than ten of the registrant's security holders with respect
to any annual or other meeting of security holders.
(b) The Commission will not consider the material to be "filed" or subject to
the liabilities of Section 18 of the Exchange Act, except if the issuer
specifically incorporates it in its annual report on this Form by reference.
(c) If no such annual report or proxy material has been sent to security
holders, a statement to that effect shall be included under this caption. If
such report or proxy material is to be furnished to security holders subsequent
to the filing of the annual report on this Form, the registrant shall so state
under this caption and shall furnish copies of such material to the Commission
when it is sent to security holders.
13
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Financial Statements
July 31, 1997
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The Board of Directors and Stockholders
WIZ Technology, Inc.
We have audited the accompanying consolidated balance sheet of WIZ Technology,
Inc., and Subsidiaries (the "Company") as of July 31, 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the two years in the period ended July 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WIZ Technology, Inc.
and Subsidiaries as of July 31, 1997 and the results of their consolidated
operations and cash flows for each of the two years in the period ended July 31,
1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company has incurred a net loss of $12,500,000 during the two
years ended July 31, 1997, and, as of that date, had a working capital
deficiency of over $3,000,000. As more fully described in Note 8 of the
financial statements, the Company is in default on substantially all its loan
agreements which, among other things, causes the balances to become due on
demand. The Company is not aware of any alternate sources of capital to meet
such demands, if made. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are discussed in Note 2. The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
November 13, 1997
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
July 31, 1997
---------------
ASSETS
Current assets:
Cash $ 99,310
Accounts receivable, less allowance of $344,899 269,834
Inventories, less allowance of $312,000 338,655
Prepaid expenses 98,311
---------------
Total current assets 806,110
Note receivable from officer 69,596
Certificate of deposit 100,000
Equipment 455,843
---------------
$ 1,431,549
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Convertible debt $ 1,250,000
Obligations under capital lease 234,476
Notes payable 500,000
Convertible debt to related party 80,000
Accounts payable 1,152,545
Accrued settlement expense 129,000
Accrued salaries and wages 159,998
Other accrued expenses 342,528
---------------
Total current liabilities 3,848,547
---------------
Commitments and contingencies -
Stockholders' deficit:
Preferred stock, $.001 par value, 10,000,000 shares authorized Series A, 650
shares issued and outstanding 1 Series B, 1,000,000 shares issued and
outstanding 1,000
Additional paid-in capital, preferred 2,932,999
Common stock, $.001 par value, 50,000,000 shares authorized,
10,794,901 shares issued and outstanding 10,795
Additional paid-in capital, common 9,947,738
Accumulated deficit (15,309,531)
---------------
Net stockholders' deficit (2,416,998)
---------------
$ 1,431,549
===============
The accompanying notes are an integral part of these financial statements
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Revenue:
Computer software $ 2,512,760 $ 7,056,626
Intranet systems 216,285 -
--------------- ---------------
Total revenue 2,729,045 7,056,626
--------------- ---------------
Costs and expenses:
Cost of revenues - computer software 1,884,295 5,450,301
Selling, general and administrative 6,639,574 4,673,278
Impairment of intangible long-lived assets 3,455,757 -
--------------- ---------------
Total costs and expenses 11,979,626 10,123,579
--------------- ---------------
Loss from operations (9,250,581) (3,066,953)
--------------- ---------------
Nonoperating (expenses) income:
Interest income 25,994 68,970
Interest expense (148,268) (129,553)
--------------- ---------------
Total nonoperating expenses (122,274) (60,583)
--------------- ---------------
Net loss $ (9,372,855) $ (3,127,536)
=============== ===============
Net loss per common share $ (0.99) $ (0.37)
=============== ===============
Weighted average number of common shares outstanding 9,434,597 8,352,183
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
<TABLE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended July 31, 1997 and 1996
<CAPTION>
Preferred stock
-------------------------------------------------------------
Additional
Per Series A Series B Paid-in
Share Shares Amount Shares Amount Capital
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 - $ - - $ - $ -
Stock issued for services rendered $ 4.79 - - - - -
Services rendered for stock
previously issued - - - - -
Services receivable from stockholder $ 3.50 - - - - -
Stock issued in private offering -
less issuance cost $ 1,000 2,000 2 - - 1,799,998
Conversion of preferred stock to
common stock $ 2.85 (950) (1) - - (854,999)
Cheap options charge - - - - -
Exercise of stock options $ 2.47 - - - - -
Stock issued for purchase of Q&A - - 1,200,000 1,200 2,817,800
Stock issued for legal settlement $ 4.12 - - - - -
Exercise of warrants $ 3.55 - - - - -
Net loss for 1996 - - - - -
---------------------------------------------------------------
Balance at July 31, 1996 1,050 1 1,200,000 1,200 3,762,799
Conversions of preferred stock to
common stock $.12-$3.43 (400) - - - (360,000)
Exercise of options $ 1.50 - - - - -
Conversions of preferred stock to
common stock $ 2.35 - - (200,000) (200) (469,800)
Stock issued for services rendered $ 0.58 - - - - -
Services rendered for stock
previously issued - - - -
Net loss for 1997 - - - -
---------------------------------------------------------------
Balance at July 31, 1997 650 $ 1 1,000,000 $1,000 $ 2,932,999
===============================================================
<CAPTION>
WIZ TECHNOLOGY, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended July 31, 1997 and 1996
Common Stock
------------------------------------------------------------------ Total
Additional Stockholders'
Paid-in For Accumulated Equity
Shares Amount Capital Services Deficit (Deficit)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1995 8,020,529 $ 8,021 $ 5,736,681 $ (131,400) $ (2,809,139) $ 2,804,163
Stock issued for services
rendered 92,801 92 444,166 - - 444,258
Services rendered for stock
previously issued - - - 103,050 - 103,050
Services receivable from
stockholder 45,000 45 157,455 (157,500) - -
Stock issued in private offering -
less issuance cost - - - - - 1,800,000
Conversion of preferred stock to
common stock 299,564 300 854,700 - - -
Cheap options charge - - 169,081 - - 169,081
Exercise of stock options 99,018 99 244,906 - - 245,005
Stock issued for purchase
of Q&A 299,994 300 779,700 - - 3,599,000
Stock issued for legal
settlement 10,000 10 41,240 - - 41,250
Exercise of warrants 68,675 69 243,624 - - 243,693
Net loss for 1996 - - - - (3,127,537) (3,127,537)
-----------------------------------------------------------------------------------
Balance at July 31, 1996 8,935,581 8,936 8,671,553 (185,850) (5,936,676) 6,321,963
Conversions of preferred stock to
common stock 897,395 897 359,103 - - -
Exercise of options 3,500 4 5,246 - - 5,250
Conversions of preferred stock to
common stock 200,000 200 469,800 - - -
Stock issued for services
rendered 758,425 758 442,036 - - 442,794
Services rendered for stock
previously issued - - - 185,850 - 185,850
Net loss for 1997 - - - - (9,372,855) (9,372,855)
-----------------------------------------------------------------------------------
Balance at July 31, 1997 10,794,901 $ 10,795 $ 9,947,738 $ - $ (15,309,531) $ (2,416,998)
===================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended July 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,372,855) $ (3,127,536)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,146,024 773,970
Write off of note receivable from shareholder 171,415 -
Write off of license agreement 3,018,757 -
Write off of covenant not to compete 437,000 -
Write off of software development costs - 558,808
Provision for allowance for doubtful accounts receivable 825,478 621,637
Provision for allowance for slow moving inventories 298,307 952,508
Loss on disposal of property and equipment 133,854 89,954
Common stock issued for services rendered 502,874 444,258
Cheap options charge - 169,081
Stock issued in settlement of a lawsuit - 41,250
Services rendered for stock previously issued 185,850 103,050
(Increase) decrease in assets:
Accounts receivable 904,539 (1,096,236)
Inventories 361,852 (553,618)
Prepaid expenses 533,353 (648,860)
Increase (decrease) in liabilities:
Accounts payable (351,013) (462,680)
Accrued settlement (11,000) 140,000
Accrued salaries and wages (16,312) 50340
Other accrued expenses (247,016) 235,775
-------------- --------------
Net cash used by operating activities (1,478,893) (1,708,299)
-------------- --------------
Cash flows from investing activities:
Purchases of equipment (7,172) (260,715)
Increase in notes receivable - (127,415)
Collections on notes receivable - 351,264
Capitalized software development costs - (621,143)
-------------- --------------
Net cash used by investing activities (7,172) (658,009)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of Series A Convertible Preferred Stock - 1,800,000
Proceeds from exercise of common stock options and warrants 5,250 488,698
Principal payments on obligations under capital lease (83,346) (73,413)
Proceeds from notes payable 1,212,500 500,000
-------------- --------------
Net cash provided by financing activities 1,134,404 2,715,285
-------------- --------------
Net (decrease)increase in cash and equivalents (351,661) 348,977
Cash and equivalents, beginning of year 450,971 101,994
-------------- --------------
Cash, end of year $ 99,310 $ 450,971
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Supplemental disclosure of cash flow information:
Year ended July 31,
-------------------------------
1997 1996
------------- -------------
Cash paid during the year for:
Interest $ 58,427 $ 55,388
============= =============
Income taxes $ - $ -
============= =============
During 1997, the Company completed the following transactions:
- - Conversion of 400 shares of Series A Convertible Preferred Stock at a value
of $360,000 for 897,395 shares of Common Stock.
- - Issuance of 835,348 shares of Common Stock at a value of $442,874 in
exchange for services performed.
- - Conversion of 200 shares of Series B Convertible Preferred Stock at a value
of $470,000 for 200,000 shares of Common Stock.
- - Wrote off the net value of the license agreement resulting in a non-cash
charge of $3,018,757.
- - Wrote off the net value of the covenant not to compete resulting in a
non-cash charge of $437,000.
- - Received $1,212,500 net proceeds from the issuance of $1,250,000 of long
term convertible debt.
- - Options were exercised to purchase 3,500 shares of Common Stock at $1.50
per share.
During 1996, the Company completed the following transactions:
- - Issuance of 299,994 shares of Common Stock and 1,200,000 shares of Series B
Convertible Preferred Stock in exchange for the net assets of Q & A Sales &
Marketing, Inc.
- - Conversion of 950 shares of Series A Convertible Preferred Stock at a value
of $855,000 for 299,564 shares of Common Stock.
- - Issuance of 92,801 shares of Common Stock with a value of $444,258 in
exchange for services.
- - Automobiles valued at $141,535 were received for capital lease
transactions.
- - Issuance of 10,000 shares of Common Stock with a value of $41,250 in
settlement of a legal matter.
- - A charge of $169,081 for stock options issued below market value.
The accompanying notes are an integral part of these financial statements
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 31, 1997
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the business
- ----------------------
The Company develops and markets low cost computer software, including licensed
commercial software and "shareware." As a result of the merger with Q & A (see
below) for a portion of fiscal 1997 the Company was also engaged in the business
of selling intranet systems used to create internet home pages and other
applications. Also as described below, the Company does not expect intranet
revenues to continue in the future.
Principles of consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of WIZ
Technology, Inc. (a Nevada corporation) and its wholly-owned subsidiaries, Wiz
Technology, Inc., Q & A Software Company ("Q & A") and CAPOTEC Intranet Business
Solutions ("CAPOTEC") (collectively, the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation. At
July 31, 1997 Q & A and CAPOTEC are substantially inactive.
Purchase of Q & A
- -----------------
Effective March 8, 1996, the Company acquired all the net assets of Q & A Sales
& Marketing ("Q & A") by the merger of Q & A into a newly formed Nevada
subsidiary of the Company. In connection with the merger, Q & A's name was
changed to Q & A Software Company. The Company issued 1,200,000 shares of Series
B Convertible Stock and 299,994 shares of Common Stock in exchange for all the
net assets of Q & A. The acquisition was accounted for as a purchase. As part of
the merger agreement the Company was to register the shares issued to Q & A with
the SEC. To date the Company has not registered these shares.
The purchase price related to the Q & A acquisition is as follows:
Issuance of preferred stock $ 2,819,000
Issuance of common stock 780,000
Liabilities assumed 1,402,627
--------------
$ 5,001,627
==============
The purchase price was allocated to the acquired assets as follows:
Trade accounts receivable $ 350,000
Inventory 451,627
Equipment 100,000
License agreement 3,500,000
Covenant not to compete 600,000
--------------
$ 5,001,627
==============
The Company has consolidated the results of Q & A since the effective date of
the merger.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
- --------------------------------------------------------------------------
Purchase of Q & A (continued)
- -----------------------------
The following unaudited pro forma consolidated results of operations of the
Company for the year ended July 31, 1996 assume that the acquisition of Q & A
occurred on August 1, 1995. The pro forma results presented below are not
necessarily indicative of the actual results of operations had Q & A been
acquired as of the earlier date, nor are they necessarily indicative of future
results of operations.
1996
--------------
(unaudited)
Revenues $ 7,705,495
Net loss (3,291,262)
Net loss per common share (0.37)
License agreement, covenant not to compete and intranet sales
- -------------------------------------------------------------
The license agreement acquired in the Q & A merger provides the Company the
worldwide, exclusive rights to sell intranet systems to the public at large or
to retailers, wholesalers, distributors or original equipment manufacturers.
These systems are based on internet technology and use a relational database to
create dynamic and interactive home pages and numerous other applications. The
license agreement's value and useful life of 10 years were independently
determined by a reputable evaluator. Amortization expense for the years ended
July 31, 1997 and 1996 was $350,000 and $131,247.
The five year covenant not to compete entered into with the Q & A merger
restricts the former parent and two officers of Q & A from developing, marketing
and selling boxed software, CD-ROM software or budget consumer software to
consumers throughout the world at manufacturer's suggested retail prices of less
than $50 per unit. Amortization expense related to this covenant was $120,000
and $43,000 for the years ended July 31, 1997 and 1996.
Under the terms of the license agreement, on January 31, 1997 the Company sold
two of its existing intranet contracts to American Data Intranet Systems, Inc.
(ADIS), an affiliate of American Data Technology, Inc. (ADTI), for $2,000,000.
ADTI transacts other business with the Company relating to outside
software-fulfillment. The terms of the sale called for $450,000 in cash, which
was applied first to a $250,000 prior receivable, and the balance of $1,550,000
to be collected over 51 months beginning in October 1997.
As part of the merger with Q & A the Company acquired employees with the
technical expertise and contacts to enable the Company to enter the intranet
market. When the Company failed to register the shares issued in the Q & A
merger relationships with these employees deteriorated and they left the
Company's employ, leaving the Company unable to market the intranet business.
Consequently, on October 27, 1997 the holder of the license agreement notified
the Company that it was canceling the agreement based on its evaluation that the
Company was not aggressively marketing the intranet technology. Also subsequent
to year end, the Company became aware that
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
- ---------------------------------------------------------------------------
License agreement, covenant not to compete and intranet sales (continued)
- -------------------------------------------------------------------------
the remaining balance of $1,550,000 from sales of intranet contracts to ADIS was
unlikely to be collected.
Another of the original benefits to the merger with Q & A was the potential to
expand the Company's customer base and sell to large retailers. The Company
began to sell its products through these large retailers, but found that the
sales terms placed on the Company's products and the slowness of the retailers
to pay made it impossible for the Company to be profitable in this market.
Therefore, the Company decided to discontinue selling its products through these
large retailers.
Based on these facts, it was determined that the license agreement and covenant
not to compete had little or no future economic value to the Company and should
be written off according to the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for Long-Lived Assets". SFAS 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Since these intangible assets were determined to provide no future cash flows to
the Company their net values of $3,018,757 and $437,000, respectively, were
written off in a non-cash charge to operations, increasing the 1997 loss by $.37
per share.
Revenue recognition
- -------------------
The Company recognizes revenue from product sales upon shipment. Under specified
conditions, distributors and resellers may return products to the Company for
credit against additional purchases or, in the event the Company reduces its
selling prices, receive credits for the reduction in selling price. The amount
of potential product returns, including returns under the Company's warranty
program, and credits for selling price reductions are estimated and provided for
in the period of the sale.
Accounts receivable and sales returns
- -------------------------------------
The allowance for doubtful accounts and sales returns includes management's
estimate of the amount expected to be lost on specific accounts and for losses
on other as yet unidentified accounts included in accounts receivable. In
estimating the allowance component for unidentified losses and returns,
management relies on historical experience. The amounts the Company will
ultimately realize could differ materially in the near term from the amounts
assumed in arriving at the allowance for doubtful accounts and sales returns in
the accompanying financial statements.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
- ---------------------------------------------------------------------------
Inventories
- -----------
Inventories are reported at the lower of cost (determined on the
first-in-first-out method) or market. Allowances for slow moving and obsolete
inventory are based on management's estimate of the amount considered obsolete
based on specific review of inventory items. In estimating the allowance,
management relies on its knowledge of the industry as well as its current
inventory levels. The amounts the Company will ultimately realize could differ
materially in the near term from amounts estimated by management.
Equipment
- ---------
Equipment, including certain assets under capital lease, are stated at cost,
less accumulated depreciation and amortization. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets
or over the lesser of the term of the lease or the estimated useful life for
leasehold improvements and assets under capital leases.
Maintenance and repairs are expensed as incurred while renewals and betterments
are capitalized. Upon the sale or retirement of equipment, the accounts are
relieved of the cost and the related accumulated depreciation and amortization,
and any resulting gain or loss is included in operations.
Software development costs
- --------------------------
The Company capitalizes internal software development costs in accordance with
Statement of Financial Accounting Standards No. 86. The capitalization of these
costs begins when a product's technological feasibility has been established and
ends when the product is available for general release to customers. The Company
uses the working model approach to establish technological feasibility.
Amortization is computed on an individual product group basis and is the greater
of: (a) the ratio of current gross revenues for a product group to the total
current and anticipated future gross revenues for the product, or (b) the
straight-line method over the estimated economic life of the product. Currently,
the Company is using an estimated economic life of three years for all
capitalized software costs. Amortization expense was $199,181 and $260,909 for
the years ended July 31, 1997 and 1996, respectively. During the fourth quarter
of 1996 the Company chose to discontinue several products as a result of its
strategic redirection due to the merger with Q & A. As a result, software
development costs of $558,808 were written off through a charge to cost of
revenues.
Income taxes
- ------------
The Company follows the Statement of Financial Accounting Standards (SFAS) No.
109, ACCOUNTING FOR INCOME TAXES. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
- ---------------------------------------------------------------------------
Income taxes (continued)
- ------------------------
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
Net loss per common share
- -------------------------
Net loss per common share is computed by dividing reported net loss by the
weighted average number of shares of common stock outstanding during the
respective periods. Common stock equivalents were excluded from the computations
of net loss per share because the effect of including such equivalents in the
computation would have been anti-dilutive.
Fair value of financial instruments
- -----------------------------------
The fair value of financial instruments, consisting principally of notes
payable, convertible debt and obligations under capital leases, is based on
interest rates available to the Company and comparison to quoted prices. The
fair value of these financial instruments approximates carrying value.
Stock based compensation
- ------------------------
The Company accounts for compensation costs related to employee stock options
and other forms of employee stock-based compensation plans in accordance with
the requirements of Accounting Principles Board Opinion 25 ("APB 25"). APB 25
requires compensation costs for stock based compensation plans to be recognized
based on the difference, if any, between the fair market value of the stock on
the date of the grant and the option exercise price. In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123
established a fair value-based method of accounting for compensation costs
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to measure compensation costs
using the principles of APB 25 if certain pro forma disclosures are made. SFAS
123 is effective for fiscal years beginning after December 15, 1995. The Company
adopted the provisions of pro forma disclosure requirements of SFAS 123 in
fiscal 1997. Options granted to non-employees are recognized at their estimated
fair value at the date of grant.
Use of estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform with current year
presentation.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. GOING CONCERN
- ------------------
As shown in the financial statements, the Company has incurred a net loss of
$12,500,000 during the two years ended July 31, 1997, and, as of that date, had
a working capital deficiency of over $3,000,000. As more fully described in Note
8 of the financial statements, the Company is in default on substantially all
its loan agreements which, among other things, causes the balances to become due
on demand. The Company is not aware of any alternate sources of capital to meet
such demands, if made. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
Management has reoriented the Company back to the business of selling budget
software to smaller retailers. In addition, the Company has begun to develop a
marketing strategy to sell software to the fundraising industry through
non-profit organizations such as: schools, Churches and other non-profit and
fraternal groups. Management has also taken steps to reduce overhead costs and
improve the results of operations and is attempting to negotiate settlements
with debt holders and trade vendors. There can be no assurance that the Company
will be successful in its efforts to become profitable or negotiate settlements.
If the Company is unsuccessful in its efforts, it may be necessary to undertake
such other actions as may be appropriate to preserve asset value. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
3. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
- -----------------------------------------------------------
The Company, from time to time, has cash deposits at financial institutions in
amounts in excess of federally-insured limits. The Company believes that credit
risk related to its cash deposits is limited due to the quality of the financial
institutions and the Company's policy which limits credit exposure to any one
financial institution.
The Company's customers are located in several geographic markets, primarily in
the United States and Canada. Short-term unsecured credit is granted to its
customers, substantially all of whom are engaged in business activity within the
retail distribution industry. Net revenues by geographic markets for the years
ended July 31, 1997 and 1996 are as follows:
1997 1996
--------- ---------
United States 93% 74%
Canada 3% 9%
Australia 3% 10%
Other 1% 7%
--------- ---------
100% 100%
========= =========
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS (CONTINUED)
- -----------------------------------------------------------------------
Net accounts receivable by geographic markets as of July 31, 1997 are as
follows:
1997
----------
United States 90%
Canada 8%
Australia 2%
----------
100%
==========
As of July 31, 1997 two customers accounted for approximately 83% of total net
accounts receivable.
During the year ended July 31, 1996, one customer represented 14% of total net
revenues. In 1997, the largest customer represented 12% of computer software
sales.
4. ACCOUNTS RECEIVABLE
- ------------------------
Activity relating to the allowance for doubtful accounts and sales returns is as
follows:
1997 1996
------------ -----------
Balance at beginning of year $ 607,653 $ 65,346
Provision 825,478 621,637
Charges (1,088,232) (79,330)
------------- ----------
Balance at end of year $ 344,899 $ 607,653
============= ==========
5. INVENTORIES
- ----------------
1997
----------------
Raw materials $ 309,414
Finished goods 341,241
----------------
650,655
Allowance for slow moving and obsolete inventories (312,000)
----------------
$ 338,655
================
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. INVENTORIES (CONTINUED)
- ----------------------------
Activity relating to the allowance for slow moving and obsolete inventories is
as follows:
1997 1996
---------------- -----------------
Balance at beginning of year $ 478,022 $ 60,000
Provision 298,307 952,508
Charges (464,329) (534,487)
---------------- -----------------
Balance at end of year $ 312,000 $ 478,021
================ =================
6. PREPAID EXPENSES
- ---------------------
1997
--------------
Advanced royalties $ 52,755
Deposits 19,702
Other 25,854
--------------
$ 98,311
==============
<TABLE>
7. EQUIPMENT
- --------------
<CAPTION>
LIFE IN YEARS 1997
------------------------------ ---------------
<S> <C> <C>
Equipment 5 $ 467,976
Automobiles 3 to 5 304,519
Furniture and fixtures 5 to 7 65,455
Leasehold improvements Lesser of useful life or lease term 37,268
Displays 1 to 3 65,668
---------------
940,886
Less: accumulated depreciation and amortization (485,043)
---------------
$ 455,843
===============
</TABLE>
Certain equipment and automobiles under capital leases totaling $401,570 with
related accumulated depreciation of $188,360 are included in equipment as of
July 31, 1997.
Depreciation and amortization for 1997 and 1996 was $268,734 and $243,348,
respectively.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. DEBT
- ---------
Notes payable
- -------------
At July 31, 1997, the Company had four convertible notes of $125,000 each
payable to four individuals. The notes provide for interest payable on a
quarterly basis at Bank of America's prime lending rate plus 2% (9% at July 31,
1997). These notes, which were due and payable on August 22, 1996, are in
default and the note holders have initiated legal action against the Company. In
response, the Company acknowledges the obligation and is attempting to arrive at
a negotiated settlement of this obligation.
Warrants to purchase 30,000 shares of common stock were granted to each note
holder at an exercise price of $2.50 per share. These warrants expire in August
2000. The Company charged interest expense for the difference between the fair
value of its common stock (less a discount of 25%) on the date of grant and the
exercise price. The total of this charge for the year ended July 31, 1996 was
$67,081.
Convertible debentures
- ----------------------
On October 14, 1996, the Company issued 7% Convertible Debentures in the
principal sum of $1,250,000 which mature on October 14, 1999. The interest
compounds annually and is payable on a semi-annual basis commencing six months
after the date of the Debentures. The Debentures may be converted, at the
holder's option, up to 33 1/3% of the aggregate original principal amount
beginning after the 90th day following the date of the issuance; 66 2/3% after
the 125th day; and 100% after the 170th day. The conversion price shall be equal
to the lesser of: 1) 110% of the average closing bid price (as reported on the
American Stock Exchange) of the Company's common stock for the 5 consecutive
trading days ending on the trading day immediately preceding the date of the
agreement, or 2) 82% of the average closing bid price of the Company's common
stock for the 5 consecutive trading days ending on the trading day immediately
preceding a Conversion Date, as defined. In conjunction with the issuance of the
Debentures, the Company granted warrants to purchase 37,500 shares of common
stock at an exercise price of $5 per share. These warrants expire on October 14,
1999. As of July 31, 1997, none of the debt had been converted and no warrants
exercised. Subsequent to year end, $80,000 of debt was converted into 1,445,145
shares of the Company's common stock. The Company is in default with respect to
several covenants of this debenture agreement. At July 31, 1997 the entire
outstanding balance has been classified as a current liability. Since the
Company does not have the cash to repay these debentures, management is
negotiating with the holders a settlement of the outstanding obligation.
9. OTHER ACCRUED EXPENSES
- ---------------------------
1997
---------------
Payroll taxes $ 129,687
Royalties 94,878
Interest 83,838
Other 34,125
---------------
$ 342,528
===============
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. STOCKHOLDERS' EQUITY
- -------------------------
Series A Convertible Preferred Stock
- ------------------------------------
In November 1995, the Company issued 2,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred") for $2,000,000, net of $200,000 of
issuance costs. During 1996, 950 shares of Series A Preferred were converted
into 299,564 shares of common stock. In the event of liquidation, dissolution,
or winding up on the Company, whether voluntary or involuntary, the Series A
Preferred carries a preference of $1,000 per share. Each share of Series A
Preferred is convertible, at the option of its holder, into the number of common
shares at the initial conversion rate, subject to certain adjustments in the
event of reclassification, exchange or substitution of shares or reorganization,
merger, consolidation or sale of assets. The initial conversion rate is the
number of shares of common stock equal to $1,000 divided by the lower of 80% of
the market price or $3.4375. The Series A Preferred carries no voting rights and
is not redeemable. The holders are entitled to dividends when and as declared by
the Board of Directors at the rate of $80 per year, payable semi-annually. No
dividends were declared during the years ended July 31, 1997 and 1996. In
conjunction with the issuance of Series A Preferred, warrants to purchase
200,000 shares of the Company's Common Stock were issued at an exercise price of
$3.4375 per share and another 25,000 warrants were issued at an exercise price
of $4.00 per share. These warrants expire on November 1, 2000. During the year
ended July 31, 1997, 400 shares were converted into 897,395 shares of the
Company's common stock and no warrants were converted. In August 1997, 50 shares
were converted into 416,667 common shares.
Series B Convertible Preferred Stock
- ------------------------------------
In connection with the acquisition of Q & A, the Company issued 1,200,000 shares
of Series B Convertible Preferred Stock ("Series B Preferred"). In the event of
any liquidation, dissolution or winding up of the company, whether voluntary of
involuntary, the Series B Preferred carries a preference of $1.00 per share.
Each share of Series B Preferred is convertible, at the option of the holder,
into one share of common stock according to an established timetable until May
1998. Each holder of Series B Preferred is entitled to cast the number of votes
as if the Series B Preferred had been converted to common shares. The holders
are entitled to receive dividends, when and as declared by the Board of
Directors.
No dividends were declared during the years ended July 31, 1997 and 1996. As
long as at least 100,000 shares of Series B Preferred are outstanding or until
March 15, 1999, the holders of Series B Preferred have the right to purchase
antidilution shares of common stock in the event of a "trigger event", as
defined, at the same price as such shares are offered in the trigger event.
During the year ended July 31, 1997, 200,000 shares were converted into 200,000
shares of the Company's common stock.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. STOCKHOLDERS' EQUITY (CONTINUED)
- -------------------------------------
Stock options
- -------------
The Company's 1992 Stock Option Plan (the "Plan"), as amended, authorizes the
issuance of up to 2,000,000 shares of common stock to employees, officers and
directors of the Company.
Options may be granted as incentive stock options or nonqualified stock options.
Incentive stock options may not be granted at a price less than 100% of the fair
market value of the stock as of the date of grant (110% as to any 10%
stockholder at the time of grant) and nonqualified stock options may not be
granted at a price less than 85% of fair market value of the stock as of the
date of grant. Restricted stock may not be granted under the Plan in connection
with incentive stock options.
Stock options granted under the Plan may include the right to acquire an
Accelerated Ownership Nonqualified Stock Option ("AO"). All options granted to
date have included the AO feature. If an option grant contains the AO feature
and if a participant pays all or part of the purchase price of the option with
shares of the Company's common stock, then upon exercise of the option, the
participant is granted an AO to purchase, at the fair market value as of the
date of the AO grant, the number of shares of common stock of the company equal
to the sum of the number of whole shares used by the participant in payment of
the purchase price and the number of whole shares, if any, withheld by the
company as payment for withholding taxes. An AO may be exercised between the
date of grant and the date of expiration, which will be the same as the date of
expiration of the option to which the AO is related.
Stock appreciation rights and/or restricted stock may be granted in conjunction
with, or may be unrelated to, stock options. A stock appreciation right entitles
a participant to receive a payment, in cash or common stock or a combination
thereof, in an amount equal to the excess of fair market value of the stock at
the time of exercise over the fair market value of the date of grant. Stock
appreciation rights may be exercised during a period of time fixed by the
Committee not to exceed ten years after the date of grant or three years after
death or disability, whichever is later. There were no stock appreciation rights
outstanding at July 31, 1997 and 1996.
Restricted stock requires the recipient to continue in service as an officer,
director, employee or consultant for a fixed period of time for ownership of the
shares to vest. If restricted shares or stock appreciation rights are issued in
tandem with options, the restricted stock or stock appreciation right is
canceled upon exercise of the option and the option will likewise terminate upon
vesting of the restricted shares.
In addition to options granted under the Plan, the Company has granted 20,000
and 300,000 three-year options at a price of $1.50 per share to a former officer
and current officer/stockholders, respectively, which do not come under the
provisions of the Plan.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. STOCKHOLDERS' EQUITY (CONTINUED)
- ------------------------------------
Stock options (continued)
- -------------------------
The following table summarizes shares under option, including options both under
the Plan and outside the Plan, for the years ended July 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Number of Price Number of Price
Shares Per Share Shares Per Share
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Beginning of year 1,128,936 $1.50-$3.50 936,772 $1.50-$2.50
Granted 1,320,638 $.50-$4.06 292,373 $3.00-$3.50
Exercised (3,500) $1.50 (99,018) $1.50-$2.25
Canceled (278,000) $1.50 (1,191) $3.50
-------------- -------------- -------------- --------------
End of year 2,168,074 $.50-$4.06 1,128,936 $1.50-$3.50
============== ============== ============== ==============
Exercisable 847,436 1,075,508
============== ==============
</TABLE>
Combined transactions in employee options for fiscal 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ---------------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
---------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Beginning of year 1,039,436 $2.48 936,772 $2.23
Granted 1,320,638 $0.92 147,873 $4.06
Exercised (3,500) $1.50 (44,018) $2.09
Canceled (278,000) $1.50 (1,191) $3.50
---------------- -------------- ---------------- ---------------
End of year 2,078,574 $1.62 1,039,436 $2.48
================ ============== ================ ===============
</TABLE>
The following information applies to employee options outstanding at July 31,
1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------- -------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
exercise prices Shares Life (Years) Price Shares Price
- ------------------------------- ------------------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$0.50 1,045,638 3.5 $0.50 - -
$1.50 to $4.06 1,032,936 1.5 2.76 1,032,936 $2.76
------------- ------------------ ---------- ------------- ----------
2,078,574 2.5 $1.62 1,032,936 $2.76
============= ================== ========== ============= ==========
</TABLE>
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. STOCKHOLDERS' EQUITY (CONTINUED)
- -------------------------------------
Stock options (continued)
- ------------------------
Statement of Financial Accounting Standards 123, "Accounting for Stock-Based
Compensation", encourages but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees", and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock.
Had compensation cost for the plan been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS 123, the
Company's net loss and loss per share would have been:
1997 1996
---------------- ----------------
Net loss
As reported $ (9,373,855) $ (3,127,536)
Pro forma (10,350,069) (3,824,964)
Primary earnings per share
As reported $ (0.99) $ (0.37)
Pro forma (1.10) (0.46)
These pro forma amounts may not be representative of future disclosures because
they do not take into effect pro forma compensation expense related to grants
made before 1996. In addition, potential deferred tax benefits of approximately
$646,000 in 1997 and 1996 have not been reflected in the pro forma amounts due
to the uncertainty of realizing any benefit. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for 1997 and 1996:
Expected life (years) 3.5
Risk-free interest rate 6.00%
Volatility 200%
The weighted fair value of options granted during the year ended July 31, 1997
for which the exercise price approximated the market price on the grant date was
$.92.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
11. INCOME TAXES
- -----------------
Deferred income taxes are recorded based upon the differences between the
financial statement and tax basis of assets and liabilities. Temporary
differences which give rise to deferred income tax assets and liabilities are as
follows:
1997
--------------
Deferred tax assets:
Allowance for doubtful accounts $ 138,000
Allowance for slow moving and obsolete inventories 125,000
Net operating loss carryforwards 6,148,000
Accrued vacation 17,000
--------------
Total gross deferred tax assets 6,428,000
Valuation allowance (6,428,000)
--------------
$ -
==============
The net change during the year ended July 31, 1997 in the total valuation
allowance was an increase of $4,148,287.
At July 31, 1997 the Company has net operating loss carryforwards for Federal
and state income tax purposes in the amounts of approximately $14,662,000 and
$7,331,000, respectively. These carryforwards begin to expire in 2009 and 1999,
respectively.
12. RELATED PARTY TRANSACTIONS
- -------------------------------
Convertible debt to a related party bears interest at 10% per annum payable
quarterly, is due on demand, and may be converted at the option of the lender
into shares of the Company's common stock at the rate of $1.50 per share.
Interest for 1997 and 1996 was paid quarterly and amounted to $8,000 annually.
On July 31, 1994, the Company loaned $33,000 to an officer/stockholder at an
interest rate of 5% per annum, due on demand. As of July 31, 1997, the balance
was $34,000, plus accrued interest of $2,415. Subsequent to year end the officer
resigned from the Company and the note receivable was determined to be
uncollectible.
At July 31, 1997, the Company had a note receivable from its President of
$69,596. This note is due on demand.
The Company maintained a $100,000 certificate of deposit as collateral for a
personal obligation of the Company's president. Subsequent to year end, the
certificate matured and its proceeds were loaned to the president.
In 1997, a note receivable from a shareholder of $137,415 was determined to be
uncollectible and written off.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES
- ----------------------------------
Leases
- ------
The Company leases certain office equipment and automobiles under capital leases
which expire at various dates through 2003. The Company leases its office and
warehouse space and certain equipment and automobiles under operating leases
expiring through 2000. The office and warehouse space lease requires the Company
to pay maintenance, insurance, taxes and certain other expenses in addition to
the base rent and expires in March 1998. The Company anticipates renewing the
current lease under its renewal option clause or, if this space is larger than
necessary, leasing a smaller facility.
Future minimum annual lease payments under non-cancelable capital and operating
leases with remaining terms of one year or more consist of the following at July
31, 1997:
CAPITAL OPERATING
LEASES LEASES
-------------- --------------
1998 $ 140,968 $ 90,764
1999 69,938 5,394
2000 18,276 4,104
2001 47,884 -
-------------- --------------
277,066 $ 100,262
============== ==============
Less, amount representing interest (42,590)
--------------
$ 234,476
==============
Substantially all of the equipment and automobile leases are in default and
therefore classified as current obligations on the balance sheet.
Rent expense for the years ended July 31, 1997 and 1996 totaled $194,584 and
$279,506, respectively.
Employment agreements
- ---------------------
As of July 31, 1997, the Company has employment agreements with two officers.
These two contracts originated at the time of the initial public offering and
expired on July 31, 1997. Each agreement required annual base salaries of
approximately $140,000, with annual increases at the discretion of the Board of
Directors. The Board of Directors may also, at its discretion, award annual or
other bonuses based on profitability of the Company, performance, or other
criteria. No bonuses were paid to the officers during the years ended July 31,
1997 and 1996. Due to the cash flow shortages of the Company, both officers have
not received their full salary during fiscal 1997. These unpaid wages of
approximately $86,000 have been accrued at July 31, 1997. The officers are
currently not covered by an employment contract and their annual salary has been
reduced to $70,000 per annum.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
- ----------------------------------------------
Consulting agreements
- ---------------------
Effective April 1, 1994, the Company entered into a two-part agreement with an
unrelated party to provide financial and reporting advice to the Company. The
agreement required the Company to pay $100,000 at the inception of the agreement
for consulting services to be provided over a period of 24 months. The
consulting potion of the agreement can be terminated by either the consultant or
the Company with thirty days notice, and does not require the consultant to
repay the Company any amounts. Accordingly, the Company considered it
appropriate to expense the entire $100,000 during the year ended July 31, 1994.
Under the requirements of the second part of the agreement, the consultant
agreed not to provide similar services to current and prospective competitors of
the Company for a period of three years, effective April 1, 1994, in exchange
for 200,000 shares of the Company's common stock. The Company's stock has been
placed in a trust and cannot be accessed by the consultant until March 1997. Due
to the restrictions on the access and salability of the common stock, the
Company discounted the value of the common stock by 30%. The covenant not to
compete has been amortized using the straight-line method over the three-year
term of the agreement. Amortization expense related to this covenant was $58,339
and $116,667 for 1997 and 1996, respectively.
Effective April 1, 1995, the Company entered into a two-part agreement with
another unrelated party to provide financial and investor relations advice to
the Company in exchange for 75,000 shares of the company's unregistered common
stock. Due to the restrictions on the access and salability of the shares, the
Company discounted the value of the shares by 30%. Under the first part of the
agreement, 50,000 shares represented compensation for services to be rendered
from April 1, 1995 to April 30, 1997. Under the second part of the agreement,
25,000 shares represented consideration under a covenant not to compete for the
three-year period ended March 31, 1997; these shares to remain restricted until
the end of the term. The covenant not to compete has been amortized using the
straight-line method over the three-year term of the agreement. Amortization
expense related to this covenant for 1997 and 1996 was $21,875 and $13,125,
respectively.
Litigation
- ----------
The Company was awarded a judgment of approximately $364,000 (Canadian) with
respect to its claim against a former distributor. The former distributor
appealed the decision, but the appeal was abandoned. Subsequent to year end the
Company accepted a settlement of $62,500 (Canadian).
On April 1, 1996 and May 24, 1996, the underwriter of the company's initial
public offering, Strausbourger, Pearson Tulchin, Wolff, Inc., filed a lawsuit
against the Company alleging breach of contract and for failing to register
certain warrants. The Company's counsel is vigorously contesting these matters
and believes that the Company will be successful in its defense.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
- ----------------------------------------------
Litigation (continued)
- ----------------------
On October 29, 1996, a Nevada general partnership filed a complaint against the
Company asserting three causes of action based on an alleged breach of contract.
The complaint prays for damages to reimburse the plaintiff for the reasonable
value of services allegedly provided to the company plus interest and attorney
fees, or alternatively, 240,000 units of the company's product. The Company
intends to vigorously defend the allegations stated in the complaint, as it
believes such allegations to be without merit and has filed a cross complaint in
the amount of $700,000 alleging that the partnership failed to perform the
advertising for which it received $700,000 of the Company's products.
On March 4, 1997 a lawsuit was filed in the Orange County Superior Court of
California by shareholders alleging the "issuance of false financial statements
and other positive statements." The action seeks class action status for
purchasers of the Company stock between December 11, 1995 and November 11, 1996.
The complaint prays for relief as the court may deem just and proper. The
Company intends to vigorously defend the allegations stated in the complaint, as
it believes such allegations are without merit.
On April 16, 1997, the Company reached an agreement with Daisy Software, Inc., a
former distributor of the Company's product, whereby the Company agreed to pay
Daisy $185,000 over the next year for breach of contract. As of July 31, 1997,
$129,000 remains to be paid.
On May 8, 1997 the Company was notified that the Securities and Exchange
Commission is "conducting an informal inquiry concerning Wiz Technology, Inc. To
determine whether there have been violations of certain provisions of the
federal securities laws." The Company is cooperating fully with this process.
On May 28, 1997 ASR Recording Services of California, the Company's CD
duplicator, sued the Company for approximately $200,000 in accounts payable. The
Company and ASR have settled this litigation under an agreement by the Company
to continue the services of ASR and comply with a payment schedule on the past
due balance. As of October 1997 the unpaid balance was $150,000.
On September 10, 1997 the Company was sued in Orange County Superior Court by
four investors who provided bridge loans to the Company totaling $500,000 in
August 1996. The Company does not have the cash to repay the loan and is
attempting to negotiate a settlement of this litigation.
The Company is involved in various other legal matters resulting from the normal
course of business. Such legal matters, when ultimately determined, will not, in
the opinion of management, have a material effect on the financial position or
the results of operations of the Company.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
14. FOURTH FISCAL QUARTER ADJUSTMENTS
- --------------------------------------
The Company recorded fourth quarter 1997 adjustments of $3,018,757 and $437,000
to write off the net value of the license agreement and covenant not to compete,
respectively, as fully explained in Note 1. With the Q & A merger, discussed in
Note 1, the Company anticipated sales of its computer software products to
increase as it entered the larger retailer market in mid 1996. It became
apparent in the fourth quarter of fiscal 1997 that due to the larger retailers'
sales terms and payment policies the Company would not be able to be profitable
in this market. As a result, the Company sustained significant losses due to
sales returns, bad debts and write offs of inventory from sales which occurred
earlier in the year. This forced the Company to reorient itself back to selling
software to smaller retailers and begin selling software through fundraising
organizations. As a result of this decision sales levels were severely
depressed. Also as part of the Q & A merger, the Company planned to enter the
intranet business by obtaining a license agreement and several key contacts and
employees from Q & A. The Company was beginning to realize revenue from the
intranet business when the former Q & A employees decided to leave the Company.
This left the Company without the contacts or relationships to successfully
market the intranet business, forcing the Company to conclude that there was
little potential for future revenue from the intranet business.
The Company recorded fourth quarter 1996 adjustments aggregating approximately
$3.4 million that increased the net loss for the quarter as follows:
- - Wrote off $700,000 of disputed advertising credits.
- - Increased the allowance for doubtful accounts by $528,000.
- - Accrued $140,000 for an arbitration settlement.
- - Wrote off $560,000 in software development costs.
- - Increased the allowance for slow moving and obsolete inventory by $630,000.
- - Reversed $350,000 of sales booked in the fourth quarter that were returned
subsequent to July 31, 1996.
- - Recorded miscellaneous charges of $517,000.
<PAGE>
See accountants' review report.
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