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, 1996
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
Common Stock, $.001 Par Value American Stock Exchange
Securities Registered Under Section 12(g) of the Exchange Act:
None
(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: $ 7,056,626 (NET)
------------------
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).
$10,788,305 based on closing bid of $2.50 for the common stock on January 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: 9,045,035 at January 31, 1997
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one):
Yes: No: X .
<PAGE>
WIZ TECHNOLOGY, INC.
Index to Form 10-KSB
July 31, 1996
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
<PAGE>
PART I
Item 1 - Description of Business
(a) Business Development: WIZ Technology, Inc., a Nevada corporation (the
"Company") began operations in January, 1991 and 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 in the transaction which provides worldwide, exclusive
rights to sell an intranet sofware systems-application to retailers, wholesalers
and original equipment manufacturers (Management wishes to point out that the
terms "internet" and "intranet" are not exclusive to the Company in that no one
owns nor controls the internet). DSR retains the rights to sell the software
technology to the US government and its agencies and has made sales to the US
Navy. Although management is very enthusiastic about the possibilities of the
software acquired, at the present there can be no assurance it will develop into
revenues for the Company. The Company formed a wholly owned subsidiary called
"Capotec Business Solutions, Inc." to market the intranet software.
(b) Business of Issuer: The Company has historically marketed its products
directly and through distributors. The Company's product line of over 200
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. These software programs are developed by independent
programmers who sell the marketing rights to the Company in exchange for royalty
payments. The royalty payments are typically equal to 10% of the net sales of
the software and are written for a duration of two years. However, in the
immediate future the Company will be re-directing its primary emphasis from its
core business of software development and sales to selling intranet applications
as discussed above.
The Company intends to focus its business in two broad directions: 1) Continuing
its business of developing and selling inexpensive computer software, and, 2)
develop a marketing strategy of the intranet software acquired during the Q&A
acquisition. With the acquisition of Q&A, the Company's customer base changed
radically from previous years. Prior to the acquisition the Company dealt with
many small companies for its inexpensive software and remained diversified.
However, with the Q&A purchase, 86% of the Company's sales are vested with eight
major customers/distributors. This was because the sales force of Q&A dealt with
larger companies resulting in fewer, though larger, sales invoices. Management
intends to work toward better diversification of the customer base during fiscal
1997 and does not consider the concentration of sales a material risk. In the
fiscal year ended July 31, 1996, the following customers accounted for 10% or
more of the Company's net revenues: CompUSA, 31%, Ingram-Micro, 31%, Slash, 15%
and ADTI, 13%.
Research and Development
The Company incurred no research and development expense for fiscal 1996
compared to R&D expense of $29,342 in fiscal 1995.
Competition
The market for the Company's products, although fragmented, is very competitive
and subject to rapid change and the Company currently competes with 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
<PAGE>
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.
Employees
As of July 31, 1996, the Company had 48 employees, 42 of whom were full time.
The Company considers its employee relations to be good. None of the Company's
employees are subject to any collective bargaining agreement. Certain employees
of Q&A were hired by the Company on closing of the acquisition. At July 31,
1996, five of these employees remained, however, subsequent to that date two of
these employees left the Company. All remaining are involved in sales and
operations. Two of these will be directly involved in the marketing of the
rights to the licensing agreement which was acquired from DSR during the
purchase of Q&A.
Trademarks
The Company believes that the trade names and trademarks used by it in the
aggregate and specifically "$5 Computer Software Store", "White Wolf", "Silver
Coyote", "Publishers Diamond", and "World of Multimedia" are important to its
business. Applications are pending with the U.S. Office of Patents and
Trademarks for the tradename "Wiz Technology" and various other trademarks and
trademarks including "$5 Computer Software Store," "Cyberquest" and "Rainbow
Avenue Educational Software." The Company has been notified that an opposition
has been filed on the trademark application for "Wiz Technology," but believes
that the failure to obtain proprietary protection on "Wiz Technology" will not
materially adversely affect its business. There can be no assurance that any
federal trademarks will be granted, in which case the Company intends to rely on
common law trademark protections, to the extent available. 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 believes that this space will be adequate for its needs
for the foreseeable future. Additionally, the Company is liable for certain
leased office space as a result of the Q&A acquisition which extends to
February, 1997. The space is currently subleased to other tenants and presents
no material effect on the Company.
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.
The Company has filed, on March 23, 1994, 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
alleges that the Defendants continue to use the Company's trademarks and
represent themselves as the owners of such trademarks without the consent of the
Company. Furthermore, the Company alleges the breach of an agreement with the
Defendants, pursuant to which the Company agreed to extend credit to the
Defendants. The Company seeks 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 alleges 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 seeks also 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), but collection of the
judgment has been stayed pending appeal and resolution of the countersuit
described below.
On March 21, 1994, $5.99 Computer Software Store (Canada), Inc.(the "Plaintiff")
filed a lawsuit in the
Supreme Court of British Columbia, Canada, against the Company in which it
alleges a breach of the
<PAGE>
distribution agreement by the Company. The Plaintiff seeks unspecified damages
and an injunction restraining the Company from distributing its products in
Canada. A trial date has been tentatively scheduled for September, 1998 to
resolve outstanding issues with respect to this matter.
Although the Company believes it has successfully challenged Plaintiff's claims,
in the event the Plaintiff was successful, the Company believes that the impact
would neither be material nor have a material adverse impact on the Company.
There can be no assurance that the Plaintiff and others will not bring claims
against the Company nor that the Company can successfully challenge each such
claim.
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 without merit and has filed an answer denying all allegations.
The Company has filed a motion to disqualify the Underwriter's legal counsel on
the basis of a conflict of interest.
The Company has been named in a respondent action for breach of contract and
other business-related torts brought by Daisy Software, Inc. The Company filed a
counter-claim alleging numerous business-related torts and seeking punitive
damages. In October, 1996 an arbitrator with the American Arbitration
Association who presided over the hearing awarded $140,000 to Daisy Software.
This amount has been accrued as a liability in the July 31, 1996 financial
statements. The Company intends to appeal this judgment.
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.
See Note #13 in Notes to Consolidated Financial Statements.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
<PAGE>
Part II
Item 5 - Market for Common Equity and Related Stockholder Matters The Company's
Common Stock has been listed on the American Stock Exchange Emerging Company
Marketplace ("ECM") under the symbol "WIZ" since February 3, 1994. It is now
published with the "Full American" listing with the symbol "EC". From August 28,
1992 to February 2, 1994 the Company's Common Stock was quoted on the Electronic
Bulletin Board sponsored by the National Association of Securities Dealers, Inc.
The following table sets forth the high and low sales for each quarter during
the last two fiscal years:
<TABLE>
<CAPTION>
Oct-94 Jan-95 Apr-95 Jul-95 Oct-95 Jan-96 Apr-96 Jul-96
------
<S> <C> <C> <C> <C> <C> <C> <C>
3 5/16 4 3/16 3 1/4 5 1/2 5 3/8 4 5/16 6 9 1/8
2 5/8 2 3/8 2 2 9/16 3 3/4 3 1/4 3 3/4 5
</TABLE>
At January 31, 1997 there were approximately 443 shareholders of record. No
dividends have been declared and management does not foresee dividends being
paid in the near future.
On November 13, 1996, trading of common stock on the American Stock Exchange
(the Exchange) was halted due to the Company's failure to file SEC Form 10-KSB
for the year ended July 31, 1996 in a timely manner. The Exchange informed the
Company it has fallen below the Exchange's listing requirements and is at risk
of being de-listed. Management believes that with the filing of the Form 10- KSB
for the year ended July 31, 1996 the Company will be in full compliance with all
Exchange rules and will be operating within the Exchange guidelines. Management
expects the Company will remain on the American Stock Exchange and trading
should resume in early February, 1997.
Item 6 - Management's Discussion and Analysis or Plan of Operation Management's
Discussion and Analysis of Financial Condition and Results of Operation
Financial Condition:
Despite reporting a loss in excess of $3.1 million for the year ended July 31,
1996 the Company's general financial condition remains good. Total stockholders'
equity is $6.3 million and total liabilities of $3.2 million which results in a
ratio of stockholders' equity to total debt of 2:1. Working capital of $1.2
million includes a cash position at July 31, 1996 of approximately $451,000. Net
sales for the year ended July 31, 1996 increased to over $7 million from $3.7
million for the year ended July 31, 1995. This increase in sales is primarily
attributed to the customer base acquired with the Q&A acquisition discussed
earlier as well as increased sales to three existing customers. This increase in
sales also changed the customer-mix of the Company from its past operations.
Sales and accounts receivable at July 31, 1996 are concentrated with 86%
attributed to fewer than eight customers (see Footnote #2 in the Notes to
Consolidated Financial Statements). Management, however, does not consider this
an inordinate risk due to the strength of the customers involved which are all
credit-worthy national accounts and because the Company is re-directing its
emphasis toward the sale of intranet software applications. Accounts receivable
of $1.9 million are shown net of allowances of $608,000 which management
believes is adequate. Inventories of $1.0 million are disclosed net of
allowances for slow moving/obsolescence of $478,000 which management believes is
also adequate.
Changes in Financial Condition
The two largest changes in balance sheet accounts at July 31, 1996 from July 31,
1995 are the additions of the "Covenant not to Compete" and "License Agreement"
related to the Q&A purchase which are carried at a book value of $557,000 and
$3,368,753 respectively. These amounts were recorded primarily as a result of
the Q&A purchase, are disclosed net of allowance for amortization of $43,000 and
$131,247 respectively, and both are amortized over five and ten year lives,
respectively. The valuations of both of these items were established by the
Company based upon the valuation report prepared by an independent financial
advisor. The License Agreement involves the rights of the Company to market an
intranet software application which was developed by DSR. The Company has the
worldwide exclusive rights to market applications of the product to retail
customers and the public at large. Exclusive rights to sell to government
entities remains with DSR only. It is the marketing of this software application
which the Company believes will become its core business in the future.
Subsequent to July 31, 1996 the Company entered into three contracts to develop
intranet applications for customers. It is management's intention to either
develop these projects directly, or, sell the contracts to third party
developers for an up-front fee with participation in future revenues generated
from the contracts. Management believes revenues derived from this concept will
be realized in fiscal 1997, though no assurances can be given at this time nor
is the Company relying on this source of revenues for its operations in the near
future.
<PAGE>
Management believes that capital and liquidity are sufficient to meet the
on-going operations of the Company for the foreseeable future. Currently, the
Company is seeking an accounts receivable credit line with a local bank.
Management considers this credit line one of convenience and for contingencies
rather than one of necessity and whether or not it is approved, management
believes liquidity is sufficient for the foreseeable future. Also, in October,
1996 the Company was successful in completing an offering under Regulation D
whereby it sold $1,250,000 of 7% convertible debentures due October, 1999.
The Company has no plans for any major capital expenditures 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.
Results of Operations
Because management believes the Company's future will be focused more on
developing the intranet software acquired with Q&A, management chose to revise
its strategic direction. As a result, management evaluated its product lines in
the fourth quarter of fiscal 1996 and determined that the marketing of certain
lines would be discontinued. This resulted in the write-off of significant
software development costs. In addition, management evaluated a number of its
assets for continuing significance following the strategic direction change.
Write-offs included charges to inventory, accounts receivable and fixed assets
(See Footnote #15 of the Notes to Consolidated Financial Statements). Management
also chose to increase the allowance for obsolescence in inventory, and increase
the allowance for doubtful accounts receivable to cover the exposure created
with the bankruptcy of Neostar- Babbages later in October, 1996. This customer
accounted for approximately $300,000 in accounts receivable for the Company at
July 31, 1996. Management believes these allowances applied to sales, inventory
and accounts receivable are now adequate for the near future. Additionally,
pre-paid advertising of approximately $700,000 which was to have been amortized
over fiscal 1997 was completely expensed at July 31, 1996 due to a dispute which
arose subsequent to July 31, 1996.
Company sales for the year ended July 31, 1996 almost doubled compared to the
year ended July31, 1995 from $3.7 million to $7.1 million partially as a result
of a change in software sold from 3 1/2 inch floppy disks to CD-Roms, and
because the Company's customer base expanded into larger retail operatons which
typically place larger orders. Cost of revenues increased from 53% of revenues
in fiscal 1995 to 78% in fiscal 1996 primarily due to increased development and
packaging costs as it related to the change to CD-Roms, and because previously
capitalized software development costs were expensed in the fourth quarter as a
result of discontinued items. Selling, general and administrative expenses
increased by 84% primarily as a result of the added expenses related to the Q&A
acquisition.
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 Accountant's Report of Cacciamatta Accountancy Corporation
Independent Accountant's Report of Coopers & Lybrand L.L.P.
Consolidated Balance Sheet as of July 31, 1996
Consolidated Statements of Operations for the Years Ended July 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended July 31,
1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended July 31,
1996 and 1995 Notes to Consolidated Financial Statements Item 8 - Changes In and
Disagreements with Accountants on Accounting and Financial
Disclosure.
On June 26, 1995, Corbin & Wertz, the Company's former independent accountants
resigned. The Company's Board of Directors approved such action. Except as set
forth hereinbelow, there have been
<PAGE>
no disagreements between the Company and Corbin & Wertz on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure. A disagreement between the Company and Corbin & Wertz
occurred in connection with the preparation of the Company's third quarter 1995
Form 10Q-SB (the "Form 10Q-SB"). The Company prepared a draft of Form 10Q-SB
which was sent for a limited review to Corbin & Wertz. Included in those
financial statements were costs incurred which the Company believed to be
capitalizable under Statement of Financial Accounting Standard No. 86
"Accounting for the Costs of Computer Software to be Sold, Licensed or Otherwise
Marketed" (SFAS 86) with respect to its new product line. Those costs were
included under the caption Other Assets in the draft document. After reading the
Form 10Q-SB and discussing its contents with management, Corbin & Wertz informed
the Company that the costs, in their opinion, did not qualify as capitalizable
costs under SFAS 86. Upon further discussion, Corbin & Wertz indicated that a
portion of these costs might be inventoriable costs and that executive salaries
could not be capitalized. The Company reclassified an amount, which together
with associated overhead, constituted all of such costs in question, including
executive salaries, to be included under the caption Inventory and filed the
Form 10Q-SB without further review or advice from Corbin & Wertz. Based on
discussion with Company management and its previous knowledge of the Company's
business from prior audits, Corbin & Wertz informed the Company that it did not
agree that all of these costs are capitalizable.
On June 29, 1995, the Company engaged Coopers & Lybrand L.L.P. as its
independent accountants to audit the Registrant's financial statements for the
fiscal year ended July 31, 1995. Prior to the engagement of Coopers & Lybrand
L.L.P. the Company did not consult with Coopers & Lybrand L.L.P. regarding (i)
the application of accounting procedures to a specified transaction or the type
of audit opinion that might be rendered on the Company's financial statements,
or (ii) any matter that was the subject of a disagreement with or a reportable
event regarding the Company's former independent public accountants.
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.
<PAGE>
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.
<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.
Name Age Title
Mar-Jeanne Tendler * 48 Chairman, Chief Executive
Officer and Director
Arthur S. Tendler * 49 President and Director
Bruce Allen Gilgen 49 Executive Vice President, Chief
Operating Officer and Director
Gary Wolfe 40 Executive Vice President-Sales
Richard H. Nance 48 Chief Financial Officer
(*)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.
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.
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.
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.
Compliance with Section 16(a) of the Exchange Act
Based solely on a review of Forms 3 and 4 and amendments thereto, furnished to
the Company during its most recent fiscal year, and Forms 3 and amendments
thereto, furnished to the Company with respect to its most recent fiscal year
and certain written representations, each of Mar-Jeanne and Arthur Tendler and
Bruce Gilgen failed to file one Form 4 in June 1996.
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 aone 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 is subject to annual increase by the Board of
Directors and bonus based on profitability of the Company.
<PAGE>
The Company also entered into an employment contract in March, 1996 with Gary
Wolfe which continues through July, 1999. This contract provides for annual
compensation of $180,000 which is base salary and commission advances. The
contract also provides for commissions to be paid on sales relating to internet
revenues generated pursuant to the Company's intranet application license
agreement with DSR.
<TABLE>
<CAPTION>
Summary Compensation Table
- --------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------------------------
-------------------------------------------------
AWARDS PAYOUTS All
Other
- ------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus Other Restricted Options Payouts
$ Stock
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mar-Jeanne Tendler 1996 140,000 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
1995 140,000 0 0 0 100,000 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
1994 140,000 0 0 0 100,000 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
Arthur S. Tendler 1996 140,000 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
1995 140,000 0 0 0 100,000 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
1994 140,000 0 0 0 100,000 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Bruce Allen Gilgen 1996 100,000 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
1995 100,000 0 0 0 100,000 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
1994 100,000 0 0 0 100,000 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
Gary Wolfe (1) 1996 100,000 0 80,000 0 100,000 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------------------
Gary Wolfe's contract also provides for commissions on sales of software
and revenues derived from the licensing arrangement with DSR with minimum
annual payments of $80,000.
Directors receive no compensation to perform duties as directors.
<TABLE>
<CAPTION>
Options Granted in Fiscal 1996:
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Percentage of Total Options
Name Options Granted Granted to Employees in 1996 Exercise Price Expiration Date
- ----------------------------------------------------------------------------------------------------------------------------------
Gary Wolfe, EVP 100,000 83% 5.4375 March, 2006
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregated Option Exercises and Fiscal Year-End Option Value Table:
- ----------------------------------------------------------------------------------------------------------------------------------
Value of
Unexercised In-
the-Money
Number of Unexercised Options and Options at July
Warrants 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Acquired on
Name Exercise Value Realized Exercisable Non-Exercisable Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Mar-Jeanne Tendler -0- -0- 300,000 -0- $1,138,000
- ------------------------------------------------------------------------------------------------------------------------------------
Arthur S. Tendler -0- -0- 300,000 -0- $1,138,000
- ------------------------------------------------------------------------------------------------------------------------------------
Bruce Allen Gilgen 25,000 37,500 275,000 -0- $1,025,500
- ------------------------------------------------------------------------------------------------------------------------------------
Gary Wolfe -0- -0- 100,000 -0- $56,000
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
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
<PAGE>
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.
Item 11- Security Ownership of Certain Beneficial Owners and Management
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Title of Amount and Nature of Percent
Class Name/Address of Beneficial Owner(1)(2) Beneficial Owner of Class
- -------------------------------------------------------------------------------------------------------------------------------
Common Mar-Jeanne Tendler, 32951 Calle Perfecto, San Juan Capistrano, CA 92675 1,788,000(3)(4) 18.8
- -------------------------------------------------------------------------------------------------------------------------------
Common Arthur S.Tendler, 32951 Calle Perfecto, San Juan Capistrano, CA 92675 1,682,800(3) 17.6
- -------------------------------------------------------------------------------------------------------------------------------
Common Bruce Allen Gilgen, 32951 Calle Perfecto, San Juan Capistrano, CA 92675 1,375,000(3) 14.5
- -------------------------------------------------------------------------------------------------------------------------------
Common Willie Woods, 4301 N. Fairfax Dr., Ste 725, Arlington, VA 22203(6) 1,099,201(5) 12.7
- -------------------------------------------------------------------------------------------------------------------------------
Common Gary Wolfe, 32951 Calle Perfecto, San Juan Capistrano, CA 92675 446,623 (5) 4.8
- -------------------------------------------------------------------------------------------------------------------------------
Common Gerson Lacoff, Trustee, The Red Net Trust, 32951 Calle Perfecto, SJC(7) 1,000,000(6) 11.6
- -------------------------------------------------------------------------------------------------------------------------------
Common All executive officers as a group 5,292,423 (2)(3)(4) 48.8
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The address of each individual is 32951 Calle Perfecto, San Juan
Capistrano, California 92675,
unless otherwise noted.
(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 and Mr. Gilgen,
but not an additional 400,000 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.
1 Includes 13,000 shares held by Mar-Jeanne Tendler as trustee for minor
relatives.
1 Includes 281,194 shares issuable upon conversion of 281,194 shares of
Series B preferred
stock, and options to purchase 100,000 shares of common stock (6)
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.
(7) Includes 1,000,000 shares held by a family trust of which Gerson
Lacoff is trustee.
<PAGE>
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 Lacoff's received 10,000 shares of Company common stock, and
have the option of converting the entire debt, principal and outstanding
interest, to common stock computed at a stock price of $1.50 per share. To date
they have not exercised this option and the principal outstanding debt to the
Lacoff's at July 31, 1996 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, under the 1992 Stock Option Plan 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.
On August 8, 1994, the Company loaned to James M. Duarte, former legal counsel
to the Company, $150,000 (the "Loan"), payable at a rate of $25,000 per month,
with no interest, commencing 30 days from the date of registration with the
Securities and Exchange Commission of Mr. Duarte's 186,364 shares of Common
Stock, provided such registration occurred not later than October 31, 1994. As
consideration for the Loan and subsequent loans in the amount of $175,000 for a
total of $325,000, Mr. Duarte agreed to sell not more than 50,000 shares per
month unless otherwise consented by the Company. Said limitation on the number
of shares sold by Mr. Duarte was not to apply, however, if the price of the
Company's Common Stock increased to $5.00 per share or decreased to $1.50 per
share or if the stock was not registered and freely tradeable by October 31,
1994. The shares were not registered by October 31, 1994. The Loan was
collateralized by Mr. Duarte's pledge of 100,000 shares of the Company's common
stock and was repaid by December 1995 by an unrelated third party who acquired
the shares from Mr. Duarte.
The Company has a $100,000 certificate of deposit at El Dorado Bank (formerly
Mariners Bank) which collateralizes a personal obligation of Mar-Jeanne and
Arthur S. Tendler in the amount of $100,000. The outstanding balance of the loan
at July 31, 1996 was approximately $97,000.
Management believes the terms of the foregoing transactions were no less
favorable to the Company than would have been obtained from independent third
parties for similar transactions.
Item 13 - Exhibits and Reports on Form 8-K
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as a part of this
Report:
(1) Financial Statements. The consolidated
financial statements of the Company are included in
Part II, Item 8, herein.
Exhibit
Number Description
2. Plan of acquisition, reorganization, arrangement, liquidation
or succession.
2.1 Agreement and Plan of Reorganization, dated February 14,1996,
between the Company, Q&A Sales Marketing, Inc. and Q&A
Acquisition Company(5)
3. Certificate of Incorporation and Bylaws
3.1 Articles of Incorporation(2)
3.2 Bylaws(2)
3.3 Certificate of Amendment to Articles of Incorporation for
change in name of registrant to "WIZ Technology, Inc."(1)
3.4 Certificate of Designation for Series A Convertible
Preferred Stock(8)
3.5 Certificate of Designation for Series B Convertible
Preferred Stock(8)
4. Instruments defining rights of holders, including indentures.
4.1 Warrant Agreement between the Company and Strasbourger
Pearson Tulcin Wolff(1)
4.2 Form of the Company's 7% Convertible Debenture(8)
4.3 Form of Warrant granted to Cameron Capital Management as to
62,500 shares and DJ Ltd. as to 78,750 shares(8)
4.4 Form of Warrant granted to First Bermuda Securities, Ltd.
with Schedule of Details(8)
<PAGE>
10. Material Contracts
10.1 1992 Stock Option Plan, as amended(2)
10.2 Form of Stock Option Agreement with Mar-Jeanne Tendler,
Arthur S. Tendler and Bruce Allen "Gil" Gilgen(2)
10.3 Demand Promissory Note in favor of Elaine & Gerson
Lacoff(2)
10.5 Consulting Agreement with Dale Kostman (1) 10.7 Employment Agreement
between the Company and Arthur S.
Tendler(1)
10.8 Employment Agreement between the Company and Mar-Jeanne
Tendler(1)
10.9 Employment Agreement between the Company and Bruce Allen
Gilgen(1)
10.10 Registration rights agreements and schedule of
beneficiaries(1)
10.12 Consulting Agreement between the Company and Strasbourger
Pearson Tulcin Wolff(1)
10.13 Promissory Note from Company in favor of Mar-Jeanne and
Arthur Tendler(1)
10.14 Extension and amendment of Promissory Note from Company
in favor of Mar-Jeanne and Arthur Tendler(1)
10.15 Lease for the Company's executive offices(3)
10.16 Consulting Agreement between the Company and Stuart
Wertzberger(3)
10.17 Trust Agreement between Stuart Wertzberger and the
Company(3)
10.19 Consulting Agreement between the Company and Jensen
Consultants, Inc.(4)
10.20 Promissory note from Arthur Tendler dated July 31, 1995(4)
10.21 Form of Convertible Promissory Notes and schedule of
details(4)
10.22 Software Development and License Agreement between the
Company and Digital Systems Research, Inc. dated March 8,
1996(6)(P)
10.23 Employment Agreement with Gary Wolfe(6)(P)
10.24 Covenant Not-to-Compete(6)
16. Letter on change in certifying accountant
16.1 Letter from Corbin & Wertz(4)
16.2 Letter from Coopers & Lybrand L.L.P.(7)
16.3 Letter from Grant Thornton LLP (8)
21. Subsidiaries of the small business issuer(6)
(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2, filed on November 1, 1993
(2) Incorporated by reference to the Company's Registration
Statement on Form 10-SB, File No. 0-20910 (the "Form 10")
(3) Incorporated by reference to the Company's Annual Report on
Form 10K-SB for the year ended July 31. 1994.
<PAGE>
(4) Incorporated by reference to the Company's Annual Report on Form 10K-SB
for the year ended July 31, 1995.
(5) Incorporated by reference to the Company's Current Report on
Form 8-K dated March 12, 1996.
(6) Incorporated by reference to the Company's Registration
Statement on Form S-3, file no. 333-6423, filed on June 20,
1996.
(7) Incorporated by reference to the Company's Current Report on
Form 8-K dated August 21, 1996.
(8) Incorporated by reference to the Company's Current Report on
Form 8-K dated December 12, 1996.
All other Exhibits called for by Rule 601 of Regulation S-B are not
applicable to this filing.
(b). Reports on Form 8-K
A report on Form 8-K dated June 26, 1995 was filed as
disclosed in Item 8, to report a change in auditors. See Item
8.
<PAGE>
<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
Mar-Jeanne Tendler, Chairman of the Board and Chief Executive Officer
Date
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
Arthur S. Tendler, President
Date:
By
Bruce Allen Gilgen, Executive Vice President, Chief Operating Officer
Date:
By:
Richard H. Nance, Chief Financial Officer
Date:
WIZ TECHNOLOGY, INC. AND SUBSIDIARY
----------
REPORT ON AUDITED CONSOLIDATED FINANCIAL STATEMENTS
As Of July 31, 1996 And
For The Years Ended July 31, 1996 And 1995
----------
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
----------
To the Stockholders and
Board of Directors of
WIZ Technology, Inc.
We have audited the accompanying consolidated balance sheet of WIZ Technology,
Inc. and Subsidiaries as of July 31, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WIZ Technology,
Inc. and Subsidiaries as of July 31, 1996, and the results of their consolidated
operations and their consolidated cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Cacciamatta Accountancy Corporation
Irvine, California
January 28, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
WIZ Technology, Inc. and Subsidiary
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year ended July 31, 1995 of WIZ
Technology, Inc. and Subsidiary. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
WIZ Technology, Inc. and Subsidiary for the year ended July 31, 1995 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
November 8, 1995
<PAGE>
<TABLE>
<CAPTION>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As Of July 31, 1996
----------
- ----------------------------------------------------------------------------------------------------------------------------
A S S E T S
<S> <C>
Current assets:
Cash and cash equivalents $ 450,971
Accounts receivable, net of allowance for doubtful accounts of $ 607,653 1,903,999
Notes receivable 127,415
Notes receivable from stockholders 103,596
Prepaid expenses and other current assets 505,681
Inventories 998,814
Employee advances 48,909
Total current assets 4,139,385
Property and equipment, net 874,701
License agreement, net of accumulated amortization of $ 131,247 3,368,753
Software development costs 199,181
Certificate of deposit 100,000
Covenants not to compete, net of accumulated amortization of $ 352,161 637,214
Other assets 204,969
Total assets $9,524,203
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Obligations under capital leases, current $101,109
Accounts payable 1,443,558
Accrued expenses 463,084
Accrued salaries and wages 257,770
Notes payable 500,000
Accrued settlement expense 140,000
Convertible debt to related party 80,000
Total current liabilities 2,985,521
Obligations under capital leases, noncurrent 216,719
Total liabilities 3,202,240
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares authorized
Series A, 1,050 shares issued and outstanding 1
Series B, 1,200,000 shares issued and outstanding 1,200
Common stock, $.001 par value, 50,000,000 shares authorized, 8,935,581 shares
issued and outstanding 8,936
Additional paid-in capital-preferred 3,762,799
Additional paid-in capital-common 8,671,553
Services receivable for common stock issued (28,350)
Note receivable from stockholder (157,500)
Accumulated deficit (5,936,676)
Total stockholders' equity
6,321,963
Total liabilities and stockholders' equity $9,524,203
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended July 31, 1996 And 1995
----------
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Net revenues $7,056,626 $ $3,680,634
Costs and expenses:
Cost of revenues 5,539,431 1,932,746
Selling, general and administrative expenses 4,381,249 2,387,436
Research and development --- 29,342
Total costs and expenses 9,920,680 4,349,524
Loss from operations
(2,864,054) (668,890)
- -
Nonoperating expenses (income):
Interest income (68,970) (74,792)
Interest expense 129,553 41,160
Other 202,100 (73,347)
Total nonoperating expenses (income) 262,683 (106,979)
Loss before provision for income taxes (3,126,737) (561,911)
Provision for income taxes 800 800
Net loss ($3,127,537) ($562,711)
Net loss per share
($0.37) ($0.07)
Weighted average number of common shares outstanding 8,352,183 7,944,034
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<TABLE>
<CAPTION>
WIZ TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended July 31, 1996 and 1995
Note
Addi- Receiv- Note
tional Addi- able Receiv-
Paid-in tional For able Total
Series A Series B Capital Paid-in Common From Accum- Stock-
Preferred Stock Preferred Stock Common Stock Pre- Capital Stock Stock- ulated holders'
Shares Amount Shares Amount Shares Amount ferred Common Issued holder Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
July 31,1994 7,851,768 $ 7,852 $5,359,715 $ (73,962)$(150,000)$(2,246,428)$2,897,177
Stock issued
for services
rendered 30,034 30 94,240 94,270
Stock issued
for services
to be rendered 109,432 109 233,641 (233,750)
Stock issued
for covenant
not to compete 25,000 25 39,350 39,375
Stock issued
for exercise
of options 2,555 3 4,606 4,609
Stock issued
to employees
for bonuses 1,740 2 5,129 5,131
Services rendered
for stock
previously
issued 106,716 106,716
Reclassification
of services and
notes receivables
from stockholders 69,596 150,000 219,596
Net loss (562,711)(562,711)
Balances 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 88,199 88 415,124 415,212
Services
rendered for
stock previously
issued 103,050 103,050
Note receivable
from stockholder 45,000 45 157,455 (157,500)
Stock issued
in private
offering -less
issuance cost 2,000 $ 2 $1,799,998 1,800,000
Conversion of
preferred stock
to common stock (950) (1) 299,564 300 (854,999) 854,700
Record charge
on cheap options 169,081 169,081
Exercise of
stock options 99,018 99 244,906 245,005
<PAGE>
Stock issued
for purchase
of Q&A 1,200,000 1,200 299,994 300 2,817,800 779,700 3,599,000
Stock issued
for legal
settlement 10,000 10 41,240 41,250
Stock issued
to employees
for bonuses 4,602 4 29,042 29,046
Exercise of
warrants 68,675 69 243,624 243,693
Net loss (3,127,537)(3,127,537)
Balances at
July 31, 1996 1,050 $ 1 1,200,000 $ 1,200 8,935,581 $ 8,936 $3,762,799 $8,671,553$(28,350)$(157,500)(5,936,676)6,321,963
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended July 31, 1996 And 1995
----------
- -----------------------------------------------------------------------------------------------------------------------------
1995
1996
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,127,537) ($562,711)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 513,061 278,522
Amortization of capitalized software development costs 260,909 19,727
Write off of software development costs 558,808 -----
Provision for allowance for doubtful accounts, sales returns and discounts 526,700 125,652
Provision for allowance for slow-moving inventory 418,021 50,000
Loss on disposal of property and equipment 89,954 -----
Stock issued for services rendered 415,212 94,270
Stock issued for bonuses 29,046
5,131
Charge to adjust for stock options issued below market value 169,081 -----
Stock issued in settlement of a lawsuit 41,250 -----
Services rendered for stock previously issued 103,050 106,716
Changes in operating assets and liabilities:
Accounts receivable (1,001,299) (1,076,203)
Inventories (19,131) (566,770)
Prepaid expenses and other assets (436,088) (21,135)
Accounts payable (462,680) 380,537
Accrued expenses 371,132 (42,453)
Accrued salaries and wages 54,983 (2,839)
Accrued interest to stockholders ----- 6,447
--------------- --------------
Net cash used by operating activities (1,495,528) (1,205,109)
----------- ---------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities ----- 908,183
Purchases of property and equipment, net (260,715) (305,546)
Proceeds from settlement of stockholder notes, net ----- 28,189
Increase in notes receivable (127,415) -----
Collections on notes receivable from stockholders, net 325,135 (325,000)
Collections on note receivable 26,129
2,640
Increase in employee advances (41,294)
(7,615)
Increase in other assets (171,477) 4,289
Capitalized software development costs (621,143) (417,482)
--------- ---------
Net cash used by investing activities (870,780) (112,342)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Series A Convertible Preferred stock, net 1,800,000 -----
Proceeds from exercise of common stock options and warrants 488,698 4,609
Principal payments on obligations under capital leases (73,413) (29,499)
Proceeds from notes payable 500,000 -----
---------- ----------
Net cash provided (used) by financing activities 2,715,285 (24,890)
--------- --------
Net increase (decrease) in cash and cash equivalents 348,977 (1,342,341)
Cash and cash equivalents at beginning of year 101,994 1,444,335
-------- ---------
Cash and cash equivalents at end of year $450,971 $101,994
========= ========
</TABLE>
Continued
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS,
Continued For The Years Ended July 31,
1996 And 1995
----------
Supplemental disclosure of cash flow information:
<S> <C> <C>
Cash paid during the year for:
Interest $ 55,388 $40,493
Income taxes $ ----- $1,600
</TABLE>
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 45,000 shares of Common Stock with a value of $157,500
in exchange for a note receivable.
+ Issuance of 92,801 shares of Common Stock with a value of
$444,258 in exchange for services.
+ Automobiles valued at $141,535 received in exchange
for capital lease obligations.
+ Issuance of 10,000 shares of Common Stock with a value of
$41,250 in settlement of a legal matter.
The accompanying notes are an integral part of these financial statements.
<PAGE>
A charge of $169,081 to adjust for stock options issued
below market value.
During 1995, the Company completed the following
transactions:
+ Issued 109,432 shares of common stock with a value of $233,750 for services
to be rendered.
+ Issued 25,000 shares of common stock with a value of $39,375 for a covenant
not to compete.
+ Exchanged $69,596 of services receivable for common stock for a
note receivable from an officer.
+ Acquired property and equipment with a value of $141,335 through
the issuance of long-term debt.
The accompanying notes are an integral part of these financial statements.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
1. Summary Of Significant Accounting Policies:
Principles Of Consolidation:
The consolidated financial statements include the accounts of WIZ
Technology, Inc. and its wholly-owned subsidiaries, Wiz Technology,
Inc. (a California corporation), Q & A Software Company and CAPOTEC
Intranet Business Solutions ("CAPOTEC"). (collectively, the "Company").
Intercompany balances and transactions have been eliminated in
consolidation. The Company develops and markets low cost computer
software, including licensed commercial software and "shareware." In
April 1996, CAPOTEC was established to conduct intranet system
marketing and sales.
Effective March 8, 1996, the Company acquired all of 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 of the net assets of Q & A. The
acquisition was accounted for as a purchase.
The purchase price related to the Q & A acquisition is as follows:
Issuance of stock $3,599,000
Liabilities assumed 1,402,627
$5,001,627
The purchase price was allocated to the assets approximately as
follows:
F-8
<PAGE>
Cash $ ---
Trade accounts receivable 350,000
Inventory 450,000
Property and equipment 100,000
License agreement 3,500,000
Covenant not to compete 600,000
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
1. Summary Of Significant Accounting Policies, Continued
Principles Of Consolidation, Continued
The Company has consolidated the results of Q & A since the effective
date of the merger.
F-9
<PAGE>
The license agreement acquired in this transaction 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 covenant not to compete acquired in this transaction restricts the
former parent of Q & A and two of its officers from competing with the
business of 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.
This covenant became effective on the date of the merger and continues
for a period of five years.
The following unaudited pro forma consolidated results of operations of
the Company for the years ended July 31, 1996 and 1995 assume that the
acquisition of Q & A occurred on August 1, 1994. 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 1995
(unaudited) (unaudited)
Revenues $7,705,495 $6,893,000
Net loss (3,291,262) (1,105,000)
Net loss per common share (.37) (.13)
<PAGE>
WIZ TECHNOLOGY , INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
1. Summary Of Significant Accounting Policies, Continued
Revenue Recognition:
Revenues and costs of revenues for computer software products are
recognized at the time of product shipment. Revenues for intranet
system sales are recognized when all obligations under the related
contracts have been performed by the Company and collections of related
receivable are reasonably assured. Provisions are recorded for
estimated future product returns and for advertising and other
allowances.
Cash And Cash Equivalents:
The Company considers all highly liquid investments with a maturity at
acquisition of 90 days or less to be cash equivalents.
Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined under the first-in, first-out method. Periodically, the
Company analyzes its inventories, based on historical and projected
usage, and provides reserves for obsolete, slow-moving or otherwise
nonsalable inventories.
Property And Equipment:
Property and 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.
<PAGE>
The estimated useful lives are:
Equipment 5 years
Automobiles 3-5 years
Furniture and fixtures 5-7 years
Leasehold improvements
Lesser of useful life or lease term
Displays 1-3 years
Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized. Upon the sale or retirement of property and
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.
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
1. Summary Of Significant Accounting Policies, Continued
License Agreement:
License agreement is stated at a value independently determined by a
third party evaluator and is amortized using the straight-line method
over a ten year period. Amortization expense for the year ended July
31, 1996 was $131,247. The Company will periodically evaluate the
recoverability of this license agreement by comparing the carrying
value to estimated cash flows from the license agreement.
Covenants Not To Compete:
<PAGE>
Covenants not to compete are stated at cost and are amortized using the
straight-line method over the terms of the related agreements.
Amortization expense for the years ended July 31, 1996 and 1995 was
$172,789 and $121,039, respectively.
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 $260,909 and $19,727 for the years ended July 31, 1996 and 1995,
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.
Research And Development Costs:
Research and development costs are charged to operations as incurred.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
1. Summary Of Significant Accounting Policies, Continued
Income Taxes:
The Company follows the Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes ("SFAS No. 109"). 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 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.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
About Fair Value of Financial Instruments, requires management to
disclose the estimated fair value of certain assets and liabilities
defined by SFAS No. 107 as financial instruments. Financial instruments
are generally defined by SFAS No. 107 as cash, evidence of ownership
interest in equity, or a contractual obligation that both conveys to
one entity a right to receive cash or other financial instruments from
another entity and imposes on the other entity the obligation to
deliver cash or other financial instruments to the first entity. At
July 31, 1996 management believes that the carrying amounts of cash,
certificate of deposits, notes and accounts receivable, accounts
payable and other current liabilities, approximate fair value because
of the short maturity of these financial instruments.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of
F-14
<PAGE>
revenues and expenses during the reporting period. Actual results
could differ from those
estimates.
New Accounting Pronouncement:
The Financial Accounting Standards Board has recently issued Statement
of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation, which requires the determination and disclosure of
compensation costs implicit in stock option grants or other stock
rights. The Company was required to adopt certain provisions of this
standard for nonemployee transactions entered into after December 15,
1995.
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
1. Summary Of Significant Accounting Policies, Continued
New Accounting Pronouncement: continued
The Company has adopted the required provisions during fiscal 1996 for
all nonemployee transactions occurring after December 15, 1995. The
remaining provisions must be adopted in fiscal 1997. Under the employee
transaction provisions, companies are encouraged, but not required, to
adopt the fair value of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for
such transactions under Accounting Principles Board Opinion No. 25 (APB
25), Accounting for Stock Issued to Employees, but would be required to
disclose, in a note to the financial statements, pro forma net earnings
and, if presented, earnings per share as if the Company had adopted
SFAS No. 123. The Company will continue to account for employee
stock-based compensation under APB No. 25.
2. Concentration Of Credit Risk And Significant Customers:
The Company 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
F-15
<PAGE>
is limited due to the quality of the 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, 1996 and 1995 are as
follows:
1996 1995
United States 74% 72%
Canada 9% 15%
Australia 10%
Other 7% 13%
100% 100%
Net accounts receivable by geographic markets as of July 31, 1996 are
as follows:
United States 68%
Canada 17%
Australia 14%
Others 1%
------
100%
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
2. Concentration Of Credit Risk And Significant Customers: continued
As of July 31, 1996, four customers had balances each representing 10%
or more of total net accounts receivable, with the sum of these four
customers representing approximately 80% of total net accounts
receivable.
During the year ended July 31, 1995, six of the Company's customers
accounted for 47.2% of total net revenues. One customer represented 14%
of total net revenues for the year ended July 31, 1996. No other
customers represented 10% or more of total net revenues for the years
ended July 31, 1996 and 1995.
3. Notes Receivable:
At July 31, 1996, the Company had 6 notes receivable totaling $127,415
from an individual. The notes are non interest bearing, and are due and payable
within 30 days of the issuance of the Company's stock as payment for software
design services.
4. Prepaid Expenses And Other Assets:
Prepaid expenses and other assets consists of the following at July 31,
1996:
- -------------------------------------------------------------------------------
Advance royalties $110,831
- ------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prepaid advertising 75,000
Prepaid shelfspace 144,000
Advanced commissions 40,000
Legal retainers 40,000
Other 95,850
$505,681
5. Inventories:
Inventories consist of the following at July 31, 1996:
Raw materials $566,510
Finished goods 910,325
1,476,835
Allowance for obsolescence (478,021)
$998,814
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
6. Property And Equipment:
Property and equipment consists of the following at July 31, 1996:
Equipment $571,663
Automobiles 329,220
Furniture and fixtures 66,236
Leasehold improvements 37,267
Displays 342,599
1,346,985
Less, Accumulated depreciation and (472,284)
amortization
$874,701
Certain equipment and automobiles under capital leases totaling
$441,120 with related amortization of $116,413 are included in property
and equipment as of July 31, 1996.
Depreciation and amortization for the years ended July 31, 1996 and
1995 was $243,348 and $157,483, respectively.
7. Certificate Of Deposit:
The Company maintains a $100,000 certificate of deposit which is
collateral for a personal obligation of two officers which is due in
February 1997.
8. Notes Payable:
At July 31, 1996, the Company had four convertible notes payable 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% (10.25% at July 31,1996). These notes, due and
payable on August 22, 1996, are in default and are in the process of
being renegotiated. With each note, 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.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
9. Stockholders' Equity:
Preferred Stock:
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 for an aggregate of $1,800,000. During 1996, 950 shares of Series A
Preferred
were converted into 299,564 shares of common stock. In the event of any
liquidation, dissolution, or winding up of 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
year
ended July 31,1996. In conjunction with the issuance of Series A Preferred,
warrants to purchase 100,000 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.
<PAGE>
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 or 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 year ended July 31, 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.
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
9. Stockholders' Equity: Continued
Common Stock:
During the year ended July 31, 1995, the Company issued 30,034 shares
of common stock for professional services provided to the Company. The
stock was issued at prices ranging from $2.50 to $3.50 per share, which
approximated fair market value on the dates of issuance.
During the year ended July 31, 1995, the Company issued 109,432 shares
of its common stock, 100,000 of which were unregistered shares, for
professional services to be
<PAGE>
rendered under various consulting agreements (see Note 13). The
registered shares were issued at their approximate fair market value on
the dates of issuance. The unregistered shares were discounted 30% due
to the shares being subject to future registration. Total services
rendered under all stock-for-services agreements during the year ended
July 31, 1995 was $106,716 and was charged to operations. The remaining
amount of services not yet rendered under these agreements as of July
31, 1995 was $131,400 and was recorded as services receivable for
common stock issued in the accompanying consolidated financial
statements as of that date.
On April 7, 1995, the Company issued 25,000 shares of unregistered
common stock to a consultant under a covenant not to compete. The
Company discounted the value of the shares by 30% due to the shares
being subject to future registration.
During the year ended July 31, 1996, the Company issued 88,199
shares of common stock in
exchange for services provided to the Company. The stock was issued at prices
ranging from $3.82 to $8.06 per share, which approximated fair market value
on the
dates of issuance.
On December 15, 1995, the Company issued 45,000 shares in exchange for
a note receivable from a stockholder of the Company in the amount of $157,500.
The note carries interest, payable quarterly, at the rate of 8% per annum.
Various individuals exercised options to purchase 99,018 shares of
common stock at a value of $245,005. Exercise prices ranged from $1.50
to $3.67 per share.
In February 1996, 10,000 shares of common stock valued at $41,250 were
issued in settlement of a legal dispute.
In May 1996, warrants to purchase 68,675 shares of common stock
originally granted in conjunction with the issuance of Series A
Preferred were exercised in exchange for $243,693.
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
9. Stockholders' Equity: Continued
<PAGE>
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 and to employees of companies who do
business with the Company.
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.
Stock 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, 1996 or 1995.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
9. Stockholders' Equity: Continued
Stock Options: continued
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 options to a former officer, and 400,000 options to current
officer/stockholders, which options do not come under the provisions of
the Plan.
The following table summarizes shares under option, including options
both under the Plan and outside the Plan, for the years ended July 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
Number Of Price Number Of Price
Shares Per Share Shares Per Share
<S> <C> <C> <C> <C>
Beginning of year 936,772 $1.50-$3.50 627,843 $1.50-$2.50
Granted 292,373 $2.50-$4.69 311,484 $3.00-$3.50
Exercised (99,018) $1.50-$3.67 (2,555) $1.50-$2.25
Canceled (1,191) $3.50 --- ---
------------- ------------
End of year 1,128,936 $1.50-$4.69 936,772 $1.50-$3.50
========================== ======= ===========
Exercisable 1,075,508 927,022
========= =======
</TABLE>
<PAGE>
Warrants:
See Notes 8, 14 and 16 for a description of outstanding warrants to
purchase common stock.
10. 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.
Primary and fully-diluted loss per share amounts do not differ.
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
11. Income Taxes:
The income tax provision for the years ended July 31 consists of:
1996 1995
Current:
Federal $ - $ -
State 800 800
---------------
800 800
Deferred:
Federal - -
State - -
---------------
Provision for income taxes $800 $800
=== ===
Deferred income taxes are recorded based upon the differences between
the financial statement and tax bases of assets and liabilities.
Temporary differences which give rise to deferred income tax assets and
liabilities are as follows:
1996
Deferred tax assets:
Allowance for doubtful accounts $ 215,274
Inventory obsolescence reserve 191,209
Net operating loss carryforwards 1,969,505
Covenants not to compete 47,866
Accrued vacation 25,356
-------------
Total gross deferred tax assets 2,449,210
Deferred tax liabilities:
Software development (75,754)
Property and equipment (93,743)
Total gross deferred tax liabilities (169,497)
Subtotal 2,279,713
Valuation allowance (2,279,713)
Net deferred taxes $ 0
===========
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
11. Income Taxes: continued
The net change during the year ended July 31, 1996 in the total
valuation allowance was an increase of $1,135,683.
The provision (benefit) for income taxes differs from the amount that
would result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------
<S> <C> <C>
Tax provision at the federal statutory rate (34.00%) (34.00%)
- ---------
State income taxes, net of federal income tax benefit .03% 0.17%
Accounting losses for which deferred federal income
tax benefits could not be recognized 35.90% 39.31%
Miscellaneous (1.90%) (1.27%)
Federal tax refund 0 (4.04%)
------------ -------
0.03% 0.17%
</TABLE>
At July 31, 1996, the Company has net operating loss carryforwards for
federal and state income tax purposes in the amounts of approximately
$5,071,000 and $2,638,000, respectively. These carryforwards begin to
expire in 2009 and 1999, respectively.
The utilization of net operating loss carryforwards may be limited
under the provisions of Internal Revenue Code Section 382.
12. Other 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 expense to the related party during the years
ended July 31, 1996 and 1995 amounted to $8,004 and $8,667,
respectively.
<PAGE>
On July 31, 1994, the Company loaned $32,988 to an officer/stockholder
of the Company. The note bears interest at a rate of 5% per annum and
is due on demand. As of July 31, 1996, the balance due from such
stockholder, under a promissory note, was $34,000, plus accrued
interest of $708.
<PAGE>
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
12. Other Related Party Transactions: continued
During fiscal 1995, the Company loaned an aggregate of $325,000 under a
promissory note to its outside legal counsel pending the registration
of 100,000 shares of common stock held by such individual. The loan was
collateralized by a pledge of such shares. On July 31, 1995, the shares
were transferred from the individual to an unrelated third party, who
assumed the note obligation. The balance of $325,000 was collected in
full during fiscal 1996.
Also, in connection with this transaction, as of July 31, 1995, such
legal counsel owed the Company $69,596 in services prepaid by the
Company with stock during the year ended July 31, 1994. On July 31,
1995, the rights to such services to be rendered were transferred to an
officer/stockholder in exchange for a promissory note from such
officer/stockholder due on or before July 31, 1997 and bearing no
interest. The balance of the note as of July 31, 1996 of $69,596 was
included in notes receivable from stockholders in the accompanying
consolidated balance sheet.
13. Commitments And Contingencies:
Leases:
The Company leases certain office equipment and automobiles under
capital leases which expire at various dates through July 2001. The
Company leases its office and warehouse space and certain equipment and
automobiles under operating leases expiring through July 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.
Future minimum lease payments under capital and operating leases for
each of the years ending July 31 are as follows:
Capital Operating
Leases Leases
1997 $ 128,379 $ 279,681
1998 116,051 197,381
1999 69,783 58,276
2000 18,273 4,607
2001 51,076 ---
---------- ---------
383,562 $539,945
Less, amount representing interest 65,734
$317,828
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
13. Commitments And Contingencies: continued
Leases: continued
In 1997 the Company is expected to receive sublease income of $102,375
against operating lease expense.
Rent expense for the years ended July 31, 1996 and 1995 amounted to
$279,506 and $140,021, respectively.
Employment Agreements:
As of July 31, 1996, the Company has employment agreements with four
officers. Three of the contracts originated at the time of the initial
public offering, expired in August 1996 and have been extended for a
one year term. The fourth agreement was entered into in March 1996 and
expires in July 1999. The agreements require aggregate annual base
<PAGE>
salaries of approximately $560,000, with annual increases at the
discretion of the Board of Directors for three of the agreements and a
five percent annual increase for the fourth. 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, 1996
and 1995.
Consulting Agreements:
Effective April 1, 1994, the Company entered into a two-part agreement
with an unrelated third 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 portion 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 is being amortized using the straight-line method over
the three-year term of the agreement. Amortization expense related to
this covenant was $116,664 for the years ended July 31, 1996 and 1995.
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
----------
13. Commitments And Contingencies: continued
Consulting Agreements: continued
<PAGE>
Effective April 1, 1995, the Company entered into a two-part agreement
with an unrelated third 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. As of July 31, 1996, $28,350 of services not
yet rendered was included in services receivable for common stock
issued in the accompanying balance sheet.
Under the second part of the agreement, 25,000 shares represented
consideration under a covenant not to compete for the three-year period ending
March 31, 1997.
These shares will remain restricted until the end of the term. The
covenant not to compete is being amortized using the straight-line method over
the three-year term of the agreement. Amortization expense related to this
covenant for the years ended July 31, 1996 and 1995 was $13,125 and $4,375,
respectively.
Effective August 1, 1994, the Company entered into an agreement with an
unrelated party to provide marketing and promotional services to the
Company for the two-year period ended July 31, 1996. As compensation
under the agreement, the Company issued 50,000 shares of its
unregistered common stock. Due to the shares being subject to future
registration, the Company discounted the value of the stock by 30%. As
of July 31,1996, all services have been rendered under this agreement.
As described in Note 1, a covenant not to compete was entered into as a
result of the Q & A merger. Amortization expense related to this
covenant was $43,000 for the year ended July 31, 1996.
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.
Collection of the judgment was stayed and the Company's counsel has
prepared an application to remove the stay. However, the Company has
not recognized any gain with respect to this judgment. A trial date has
been tentatively scheduled for September 1998 to resolve outstanding
issues with respect to this matter.
<PAGE>
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 that the Company will be successful in its defense.
On October 3, 1996, an arbitrator with the American Arbitration
Association awarded Daisy Software, Inc., a former distributor of the
Company's product, compensatory damages of approximately $140,000 for
breach of contract. An accrual has been recorded in the financial
statements as of July 31, 1996 in the amount of $140,000.
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 is
preparing its response as well as a counter claim. The Company intends
to vigorously defend the allegations stated in the complaint, as it
believes such allegations to be without merit.
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.
14. Public Offering:
<PAGE>
On February 9, 1994, the Company issued 2,000,000 shares of its common
stock for $4,146,269, net of offering costs of $853,731 through a
public offering. As part of such offering, the Company agreed to the
following:
(Diamond) The Company granted the Underwriter warrants to purchase
182,000 shares of the Company's common stock at a price of
$3.00 per share. The warrants are outstanding as of July 31,
1996 and are exercisable for a period of three years from the
date of closing.
(Diamond) The Company entered into employment contracts with
its principal executive officers for a period of
three years from the date of closing (see Note 13).
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
14. Public Offering: Continued
(Diamond) For a period of three years from the closing, the
Underwriter shall have the right to designate one
nominee for election to the Board of Directors of the
Company.
(Diamond) The Company will not, without the consent of the
Underwriter, sell any shares of the Company's common
stock or warrants or options to purchase shares of
the Company's stock for a period of two years from
the closing.
15. Fourth Fiscal Quarter Adjustments:
<PAGE>
During the fourth quarter of the fiscal year ended July 31, 1996, the
Company recorded adjustments, aggregating approximately $3.4 million,
that increased the net loss for such quarter were as follows:
(Diamond)The write off of advertising credits of approximately
$700,000, which have been disputed.
(Diamond)An increase to the allowance for doubtful accounts of
approximately $527,000 to reserve for significant
customers' balances. One of the customers filed for
bankruptcy protection in August 1996.
(Diamond)An accrual to provide for the settlement of an arbitration
matter in the amount of $140,000.
(Diamond)A write off of software development costs in the amount of
$560,000 as a result of a decision to discontinue certain
product lines in fiscal 1997.
(Diamond)An increase to the allowance for obsolete inventory to reserve
for slow-moving inventory items of $330,000.
(Diamond) A reversal of fourth quarter sales due to product
returns subsequent to year end of approximately $350,000.
(Diamond)A charge for returned inventory deemed to be unsaleable in the
amount of approximately $300,000.
(Diamond) Write off of certain property and equipment of $52,000.
(Diamond)An increase to accrued expenses for fourth quarter legal fees
of approximately $85,000.
(Diamond) Other write downs aggregating approximately $380,000.
WIZ TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended July 31, 1996 And 1995
<PAGE>
16. Subsequent Events (Unaudited):
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:
1) lesser of 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.
On November 13,1996, trading of common stock on the American Stock
Exchange was halted due to the Company's failure to file SEC Form
10-KSB for the year ended July 31, 1996 in a timely manner. The
Exchange informed the Company it has fallen below the Exchanges listing
requirements and is at risk of being de-listed. Management believes
that with the filing of the Form 10-KSB for the year ended July 31,
1996 the Company will be in full compliance with all Exchange rules and
will be operating within the Exchange quidelines.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE STATEMENTS FOR THE YEAR ENDED JULY 31, 1996
AND AS OF
JULY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000914282
<NAME> WIZ TECHNOLOGY, INC.
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<CURRENCY> US dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jul-31-1996
<PERIOD-START> Aug-01-1995
<PERIOD-END> Jul-31-1996
<EXCHANGE-RATE> 1
<CASH> 450,971
<SECURITIES> 0
<RECEIVABLES> 1,903,999
<ALLOWANCES> 607,653
<INVENTORY> 998,814
<CURRENT-ASSETS> 4,139,385
<PP&E> 874,701
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,524,203
<CURRENT-LIABILITIES> 2,985,521
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0
1201
<COMMON> 8,936
<OTHER-SE> 6,311,826
<TOTAL-LIABILITY-AND-EQUITY> 9,524,203
<SALES> 7,056,626
<TOTAL-REVENUES> 7,056,626
<CGS> 5,539,431
<TOTAL-COSTS> 9,920,680
<OTHER-EXPENSES> 262,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,553
<INCOME-PRETAX> (3,126,737)
<INCOME-TAX> 800
<INCOME-CONTINUING> (3,127,537)
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<EXTRAORDINARY> 0
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<NET-INCOME> (3,127,537)
<EPS-PRIMARY> (.37)
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