SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
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Commission file number 1-9263
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DATAWORLD SOLUTIONS, INC.
(Name of small business issuer in its charter)
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Delaware 11-2816128
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
275 Marcus Boulevard, Hauppauge, New York 11788
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (631) 951-4000
Registrant's Former Address and Telephone Number:
920 Conklin Street, Farmingdale, New York 11735 (631) 293-1610
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __ No X
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes X No __
State issuer's revenues for its most recent fiscal year: $ 950,656
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 1, 2004 was approximately $4,302,068, based on the
closing price on that date.
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes __ No X
On April 1, 2004, 37,965,450 shares of common stock, $.001 par value were
outstanding.
EXPLANATORY NOTE:
The accompanying Form 10-KSB is the first annual report filed by the registrant
since June, 2000. Accordingly, it reports the annual financial statements for
each of the years in the three-year period ended June 30, 2003, in addition
to summary quarterly financial information for which quarterly reports for those
periods were not filed.
DATAWORLD SOLUTIONS, INC.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7. Financial Statements
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial
Disclosure
Item 8A. Controls and Procedures
PART III
Item 9. Directors and Executive Officers of the Company
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
Item 14 Principal Accountant Fees and Services
PART I
ITEM ONE - BUSINESS
Certain statements contained in this Annual Report on Form 10-KSB, including,
without limitation, statements using words such as "believe", "expect",
"anticipate", "intend", "estimate", "plan", and words and expressions of similar
import, constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements involve risks and uncertainties, and
the Company's actual results could differ from those anticipated in such
statements as a result of these risks and uncertainties. In addition to the
uncertainties stated elsewhere in this report, the factors which could affect
these forward-looking statements include, but are not limited to, adverse
changes in general economic conditions, including adverse changes in the
specific markets for our products, adverse business conditions, increased
competition, pricing pressures, lack of success in marketing our products and
services, and other factors. These forward-looking statements speak only as of
the date of this report and readers are cautioned not to place undue reliance
upon such statements.
THE COMPANY
DATAWORLD SOLUTIONS, INC. (the "Company") was incorporated in Delaware on
January 7, 1998 and commenced operations on March 7, 1998. The Company became
publicly traded as a result of a reverse acquisition of Vertex Computer Cable &
Products, Inc. ("Vertex") in December 1998. Previously in January 1998, Vertex
secured certain financing that made effective Vertex's second amended plan of
organization under Chapter 11 of the U.S. Bankruptcy Act. The Company is a
specialty distributor of electronic cable assemblies used in data systems. The
Company provides value added cables to link standardized or proprietary
electronic devices and peripheral components from different vendors to provide
solutions for various customer requirements.
The Company seeks to add value to its products by providing connectivity
solutions which may include distributed sales of passive components (electronic
connectors, electronic wire and cable, cabinets and racks, and patch panels),
and active components (hubs, bridges, routers, gateways and modems). The Company
provides quality products at competitive prices for interconnection requirements
including Fiber Optics, CAT 5, Telco, V.35, Wire Harnesses, Ethernet, Fast
Ethernet, Token Ring, Flat Ribbon and Coax cables. The Company is one of only
five exclusive domestic distributors of Corning Cable Systems Premise Wiring.
Management believes that the Company's technical ability for providing
connectivity solutions between the data system capabilities of many
manufacturers and the specific connectivity needs of its customers, along with
its reputation for providing manufactured, custom-made electronic cable
assemblies that are subject to quality control testing, will be the principal
factors on which the Company will plan its future growth. The Company expects
internal growth to be enhanced by what the Company perceives to be two
continuing trends: (i) the increasing demand for data communications to provide
timely information in the office environment and factory floor that requires
connectivity solutions; and (ii) the growing number of alternatives available to
organizations of all sizes in all types of industries to increase productivity
through improved or upgraded computer data communications.
The Company's executive offices are located at 275 Marcus Boulevard, Hauppauge,
New York 11788 and its telephone number is (631) 951-4000. The Company's address
on the World Wide Web is www.DataWorldDirect.com. Unless the context requires
otherwise, all references herein to the Company and DataWorld mean DataWorld
Solutions, Inc.
SIGNIFICANT DEVELOPMENTS
In April 2001, the Company executed a binding merger agreement with American
Access Technologies, Inc. ("AAT"). In July 2001, AAT failed to proceed with the
merger agreement, sued the Company, and the Company has counter-sued AAT to
protect its rights thereunder. See "ITEM 3. LEGAL PROCEEDINGS."
In contemplation of the pending merger with AAT, the Company changed its
business strategy to become a manufacturing rather than a manufacturing and
distribution company. As a result, in May 2001, the Company consolidated its
distribution operation in Long Island City, New York and San Jose, California
with its corporate facility in Farmingdale, New York. Thereafter, Christopher
Frances, the Company's COO, resigned as an officer and director in June 2001.
In August 2001, the Company entered into an agreement (the "Boundless
Agreement") with Boundless Manufacturing Services, Inc. of Hauppauge, New York
("Boundless") which provided that Boundless would assume the manufacturing of
the Company's cable assembly products. As a result of the Boundless Agreement,
the Company terminated all of its remaining manufacturing personnel at its
Farmingdale, New York facility and withdrew from its agreement with its union,
the International Brotherhood of Electrical Workers ("IBEW") Local #3. In
January 2003, the Company discontinued its arrangement with Boundless and began
using other manufacturing sources. Effective May 2003, a single manufacturer is
manufacturing substantially all of the Company's cable assembly products.
In September 2001, the Company's liquidity problems forced it to discontinue its
general business risk insurance.
In October 2001, the Company closed its Farmingdale facility and consolidated
all of its operations in Hauppauge where it leased space on a month-to-month
basis from Boundless, through February, 2004. See "ITEM 2. PROPERTIES."
In connection with the June 1998 refinancing of the Company's revolving credit
facility, TW Cable, LLC ("TW"), an entity owned by the former principal
stockholder of Vertex, made available as collateral, assets with a value of
$1,268,000 to support the Company's factor-financing agreement. In October 2001,
the Company's factor, Rosenthal & Rosenthal ("R&R"), seized this collateral. In
December 2002, the Company reached an agreement with TW and Edward Goodstein
("Goodstein"), its principal, to restructure the Company's indebtedness and
preferred stock with TW and Goodstein. Debt of $1,543,749 (including accrued
interest and dividends), and 6,500 shares of preferred stock were exchanged for
500,000 shares of common stock and two notes payable for $252,000 and $168,000,
respectively. The notes bear interest at 5% per annum, mature in 2017, and are
personally guaranteed up to $133,000 by the Company's Chief Executive Officer.
The result of the debt/equity restructuring was a credit of $1,286,134 to
capital. If at such time either TW or Goodstein should sell any of the
aforementioned shares, the Company's debt obligation would be reduced by 67% of
the proceeds of such a sale.
In November 2001, the Company entered into a commission agreement with Benfield
Electronic Corporation to represent their voice and data products. Through June
30, 2003, the Company realized commission income of approximately $127,000 from
this agreement.
In December 2001, a judgment in the amount of $52,200 was entered by Lake
Electronics, a vendor, against the Company. Pursuant to this judgment, in
November 2002, the Company was forced to sell at auction certain equipment in
full settlement of this obligation.
In fiscal 2001 and 2002, Augustine Capital Management ("Augustine"), a
stockholder, made certain advances to the Company totaling $75,000. In August
2003, the Company entered into a convertible note agreement with Augustine which
included this balance. Additionally, in June 2002, the principal shareholders of
Augustine advanced the Company $25,000 pursuant to a convertible note agreement
with J&B Associates, an entity controlled by Augustine's principals.
In August 2003, the Company entered into an 8% convertible note agreement with
Augustine (the "Augustine Agreement"). Under the terms of the agreement, the
Company may borrow up to $500,000, with interest paid quarterly in arrears at
the rate of 8% per annum. Individual advances are evidenced by separate
sub-notes. All outstanding notes are due May 28, 2005. The agreement provides
that the Company's indebtedness to Augustine (inclusive of accrued interest)
may, with the Company's consent, be converted into the Company's common stock at
a price equal to 75% of the lowest bid price for the five trading days
immediately preceding the conversion. The Company is required to reserve shares
of common stock sufficient to satisfy the conversion of any outstanding
advances.
As of August 2003, the Company received subsequent advances totaling $99,000,
for a total indebtedness to Augustine of $174,000. These advances were converted
into a sub-note in accordance with the terms of the Augustine Agreement, and
subsequently converted to common stock.
BUSINESS STRATEGY
As described in Part II - Item 6, the Company has suffered losses from
operations and has net working capital and stockholders' equity deficiencies.
Management's plan to address this issue is discussed therein and includes
restructuring its liabilities and raising additional capital. The execution of
the Company's overall business strategy as described below has been hampered by
its financial condition.
The Company's business strategy is to develop a value-added distribution network
through internal growth with a focus on connectivity solutions for data and
telecommunications. Management believes it will continue to (i) introduce new
connectivity solutions, (ii) improve operating efficiencies through a more
efficient organizational structure, (iii) derive the benefits of critical mass
through the opportunity to develop stronger relationships with, and obtain
improved terms from key suppliers, and (iv) derive the benefits of critical mass
through the ability to distribute to and service large national and
international customers. In its relationship with its customers, the Company
focuses on providing connectivity solutions. Such solutions include advising
customers on the options available to meet their specific needs, and
manufacturing custom-made electronic cable assemblies for the customers. In
addition, the Company continues to service the customers with components and
assemblies as the customer's system grows. Management believes that
manufacturers of products generally choose to build relationships with
distributorships capable of offering advisory services, technical support, and
other services such as manufacturing custom-made electronic cable assemblies.
The Company believes it is perceived as a value-added manufacturer by both
suppliers and customers as a result of its technical skills and knowledge of the
marketplace, access to and understanding of the product capabilities, and
technical design and manufacturing capabilities for custom-made electronic cable
assemblies. The Company also plans to focus its efforts on the marketing of its
franchised distributorship with Corning Cable Systems, one of the premier fiber
optic cable manufacturers in the Unites States.
The Company has formed a new wholly owned subsidiary, DWS Defense Systems, Inc.
This subsidiary was created to address the growing safety and security concerns
expressed by clients of DataWorld. The new venture will focus on the design,
development, production and installation of quality safety and security products
and systems. The Company believes that this new venture will complement and
enhance their current product offerings and greatly expand their customer base.
PRODUCTS AND SERVICES
The Company's products and services consist principally of the design and sales
of custom-made electronic cable assemblies and harnesses used as solutions for
connectivity requirements in data communications.
PRINCIPAL SUPPLIERS
A single manufacturer is manufacturing substantially all of the Company's cable
assembly products, on a purchase order basis.
SALES AND MARKETING
The Company offers a broad range of custom-made cable assemblies and harnesses
used as connectivity solutions to end-users, professionals who install and
service data communications, and original equipment manufacturers (OEM's). The
Company operates through its location in the Northeast region of the United
States. This location operates as a sales office in addition to supporting the
design and manufacture of custom-made and standard cable assembly requirements
for the entire Company. In order to effectively meet each customer's needs, the
sales force first gains an understanding of the customer's system connectivity
requirements before recommending one or more possible solutions. The Company
generally does not participate in the design of computer applications but rather
participates in the design and implementation of the connectivity solutions
required for data communications.
The field sales force is supported by inside sales personnel, who handle
incoming customer calls, perform sales estimates, provide responses to customer
questions and assist in sales prospecting. Sales leads are typically generated
by ongoing interaction with existing customers, sales calls to companies not
currently customers, and referrals from suppliers.
MAJOR CUSTOMERS
The Company's net sales are currently concentrated among four major customers
who accounted for 19%, 14%, 14%, and 13% of net sales, respectively, in fiscal
2003.
COMPETITION
All aspects of the Company's business are highly competitive. The Company
competes with several national distributors, which have greater financial and
other resources than the Company. The Company also competes with numerous
distributors on a local or regional basis. The Company believes that its ability
to design and manufacture custom cable assemblies as well as make available
technical support, differentiates the Company's from its primary competitors and
gives the Company a competitive advantage. There can be no assurance the Company
will be able to successfully exploit such advantage.
INSURANCE
Due to liquidity restrictions, the Company ceased carrying insurance in
September 2001. The Company then relied on the pass-through warranties provided
by its manufacturers. The Company can not assess the significance of its not
maintaining product liability insurance, but to date no claims have been made
and the Company is unaware of any potential product liability claims against it.
In February 2004, the Company purchased general liability and property
insurance.
EMPLOYEES
The Company currently has six full-time employees. Of these, three are sales and
marketing personnel, one is an estimator/project manager, and two are
executives. None of the Company's present employees are covered by a collective
bargaining agreement. The Company considers its employee relations to be
generally satisfactory. The Company retains consultants and sub-contractors on a
continuing and as-needed basis to handle additional workflow.
ITEM 2 - PROPERTIES
The Company's only facility is located at 275 Marcus Boulevard, Hauppauge, New
York, where it moved at the end of February 2004. This location consists of
1,400 square feet of office space, and 1,400 square feet of warehousing space.
The Company recently signed a four-year lease for this facility, and considers
this space to be adequate for its present needs. The lease is for a period of
four years with an annual rent of $30,800 and a 3% annual increase in each of
the three subsequent years. This charge is inclusive of real-estate taxes and
common area charges, but does not include utilities. Previously the Company
leased space on a month-to-month basis from Boundless.
ITEM 3 - LEGAL PROCEEDINGS
The Company is a party to legal matters arising in the general conduct of
business. The ultimate outcome of such matters is not expected to have a
material adverse effect on the Company's results of operations or financial
position. During fiscal 2001 and subsequently, the Company decided not to
dispute litigation with suppliers and other creditors for collection of amounts
owed to them. As a result, through January 2004, the Company had outstanding
judgments amounting to $1,090,194. The Company is presently negotiating with its
judgement holders and hopes to reduce and/or eliminated the amounts outstanding.
In September 2000, the Company began to negotiate a potential merger with
American Access Technologies ("AAT") which resulted in a Merger Agreement being
signed in April 2001. In June 2001, the Company was notified by AAT that they
were unilaterally terminating the agreement claiming that the Company had
suffered material and adverse changes and that such changes entitled AAT to
terminate the agreement. AAT then filed suit against the Company seeking
reimbursement of various incurred costs and damages of $500,000. The Company has
filed a countersuit against AAT alleging wrongful termination. The matter is
currently set for trial in June 2004. The ultimate outcome of this matter is not
expected to have a material adverse effect on the Company's results of
operations or financial position.
In March 2004, the Company received a complaint from a purported shareholder
alleging wrongdoings by the CEO the Company with regard to his management of the
Company's affairs. The Company believes that the allegations are without merit
and denies any wrongdoing on the part of this officer.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in fiscal 2001, 2002 and 2003.
PART II
ITEM 5 - MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Current symbol - DWLD.PK
The Company's common stock traded on the Nasdaq Over-The-Counter Electronic
Bulletin Board through November 2001, and on the National Quotation Bureau's
Pink Sheets since that date. The following table shows the quarterly range of
the high and low closing bid prices for the Common Stock on the Over-The-
Counter Electronic Bulletin Board and the Pink Sheets since July 1, 2000, for
the periods indicated.
Common Stock
Period High Low
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FISCAL 2003
First Quarter ended September 30, 2002 .02 .01
Second Quarter ended December 31, 2002 .02 .01
Third Quarter ended March 31, 2003 .02 .01
Fourth Quarter ended June 30, 2003 .02 .01
FISCAL 2002
First Quarter ended September 30, 2001 .13 .01
Second Quarter ended December 31, 2001 .05 .01
Third Quarter ended March 31, 2002 .07 .01
Fourth Quarter ended June 30, 2002 .02 .01
FISCAL 2001
First Quarter ended September 30, 2000 1.16 .56
Second Quarter ended December 31, 2000 .84 .22
Third Quarter ended March 31, 2001 .45 .16
Fourth Quarter ended June 30, 2001 .36 .11
Recordholders
As of April 1, 2004, there were approximately 158 holders of record of the
Company's common stock.
Dividends
The Company has never paid a cash dividend on its common stock and the Company
does not anticipate paying any dividends on the common stock in the foreseeable
future. The Company anticipates retaining future earnings, if any, to fund
capital development.
Recent Sales of Unregistered Securities
At July 1, 2000 the Company had subscriptions received of $217,000 representing
687,905 shares of Common Stock. During fiscal 2001 the Company received an
additional $85,000 in subscription proceeds representing 340,000 shares of the
Company's common stock.
Further, in connection with one of these subscriptions, the Company agreed to
issue warrants to the subscriber to purchase 12,500 shares of the Company's
common stock at $1.25 per share, expiring on May 17, 2003. The warrants were
never exercised and thus expired.
Effective July 1, 2000, 652,905 shares of common stock were deemed issued in
consideration of previously received stock subscriptions. Additionally, in
February 2001, 340,000 shares of common stock were deemed issued in
consideration of $85,000 received.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003 AND 2002
Net sales decreased from $1,196,642 in fiscal year 2002 to $950,656 in 2003. The
decline in sales was due to a variety of economic factors. During the year the
Company closed a commission arrangement with a distributor to handle sales of
products other than its cable assembly products while at the same time
completing a manufacturing agreement with a local company to produce its cable
assembly products.
Gross profit amounted to $544,768 in fiscal 2003 versus $445,115 in 2002. Gross
profit margin increased to 57% in 2003 from 37% in 2002. The year 2003 gross
profit was positively impacted by a major contract completed during the fiscal
year that called for the Company to provide labor only, which resulted in a
higher gross profit.
Selling, general and administrative expenses were approximately $801,127 or 84%
of sales in 2003. For the year 2002, selling, general and administrative
expenses amounted to $1,172,518 or 98% of sales. Fiscal 2003 expenses as a
percentage of sales was lower than 2002 mainly because the Company was operating
as a sales company and not a manufacturing company during fiscal 2003, resulting
in lower operating expenses. The Company began to self-insure its insurance
exposures during the fiscal year reducing insurance expense by approximately
$12,000. Production payroll was eliminated in 2003 which saved the company
$97,800 during the year. In addition, the Company reduced administrative payroll
by $23,600 offset by the use of outside consultants that cost approximately
$70,000.
Depreciation and amortization included in selling, general and administrative
expenses, was $2,440 in 2003 and$3,440 in 2002.
Interest expense amounted to $363,643 in 2003 versus $481,436 in 2002. Interest
expensed declined in 2003 due to a combination of lower outstanding revolving
loan balances and lower interest rates.
The Company had a net loss of $492,495 in 2003 compared to a net loss of
$1,208,839 in 2002.
The net loss applicable to common shareholders was $636,627 in 2003 and
$1,375,811 in 2002 primarily due to the dividends declared on convertible
preferred stock.
QUARTERS ENDED SEPTEMBER 30, 2002, DECEMBER 31 2002, MARCH 31, 2003 AND
SEPTEMBER 30, 2001, DECEMBER 31 2001, MARCH 31, 2002
Net sales for the first quarter of fiscal 2003 decreased to $178,982 from
$499,785 for the same quarter the prior year. Gross profit for the first quarter
of fiscal 2003 also decreased to $74,083 from $199,904 for the same quarter the
prior year. The Company's gross profit margin was 41% for the first quarter of
fiscal 2003, which is essentially unchanged from the same quarter the prior
year. The decline in sales was due to a variety of economic factors. Selling,
general and administrative expenses totaled $224,929 for the first quarter of
fiscal 2003, down from $360,912 for the same quarter the prior year, as a result
of the Company sub-contracting its manufacturing. Interest expense amounted to
$81,743 for the first quarter of fiscal 2003, an increase from $50,305 for the
same quarter the prior year, due to interest on a note payable to a former
officer of the Company. The Company had a net loss of $232,587 in the first
quarter of fiscal 2003, compared to a net loss of $211,314 for the same quarter
the prior year.
Net sales for the second quarter of fiscal 2003 increased to $224,105 from
$190,184 for the same quarter the prior year. Gross profit for the second
quarter of fiscal 2003 decreased to $106,402 from $139,221 for the same quarter
the prior year. The Company's gross profit margin was 47% for the second quarter
of fiscal 2003, compared to 73% for the same quarter the prior year. The
increase in sales was due to the effect of the 9/11 tragedy on prior year sales.
Selling, general and administrative expenses totaled $190,106 for the second
quarter of fiscal 2003, down from $382,310 for the same quarter the prior year,
as a result of the Company sub-contracting its manufacturing. Interest expense
amounted to $72,596 for the second quarter of fiscal 2003, which is essentially
unchanged from the same quarter the prior year. The Company had a net loss of
$99,482 in the second quarter of fiscal 2003, compared to a net loss of $315,535
for the same quarter the prior year. The reduction in losses is a result of the
effect of the 9/11 tragedy on results for the same quarter the prior year.
Net sales for the third quarter of fiscal 2003 decreased to $286,834 from
$332,658 for the same quarter the prior year. Gross profit for the third quarter
of fiscal 2003 increased to $204,273 from $97,766 for the same quarter the prior
year. The Company's gross profit margin was 71% for the third quarter of fiscal
2003, compared to 29% for the same quarter the prior year. The decline in sales
was due to a variety of economic factors. Selling, general and administrative
expenses totaled $257,645 for the third quarter of fiscal 2003, down from
$268,084 for the same quarter the prior year. Interest expense amounted to
$55,942 for the third quarter of fiscal 2003, a decrease from $79,278 for the
same quarter the prior year. The Company was no longer making interest payments
on a note payable to a former officer of the Company. The Company had a net loss
of $77,336 in the third quarter of fiscal 2003, compared to a net loss of
$249,596 for the same quarter the prior year. The reduction in losses is a
result of the effect of the 9/11 tragedy on results for the same quarter the
prior year.
YEARS ENDED JUNE 30, 2002 AND 2001
Net sales decreased from $9,774,153 in fiscal year 2001 to $1,196,642 in 2002.
The decline in sales was largely due to a change in mode of operation from a
distribution company to a manufacturing company and the impact of September 11
on the entire communications and data industries. In the aftermath of the
September 11th tragedy, several large customers were lost, which represented 25%
of sales in fiscal 2001.
Gross profit amounted to $445,115 in fiscal 2002 versus a loss of $764,128 in
2001. Gross profit margin increased to 37% in 2002 from a negative 8% in 2001.
The year 2001 gross profit was adversely impacted as a result of winding down of
our distribution facilities in San Jose, CA and the loss of certain key
personnel.
Selling, general and administrative expenses for fiscal 2002 were $1,172,518 or
98% of sales. For fiscal 2001, selling, general and administrative expenses
amounted to $3,085,543 or 31% of sales. Fiscal 2002 expenses as a percentage of
sales was much higher than 2001 mainly because sales volume declined at a much
faster rate than selling, general and administrative expenses as the company
changed corporate strategies and began laying off production workers and
administrative staff.
Depreciation and amortization decreased from $152,782 in 2001 to $3,440 in 2002.
The decrease was due to the Company taking a $3,643,000 loss on impairment of
assets in 2001 that included $3,391,000 write-off of goodwill and $252,000
reduction of machinery and equipment to net realizable value.
Interest expense amounted to $481,436 in 2002 versus $666,957 in 2001. Interest
expense declined in 2002 due to a combination of lower outstanding revolving
loan balances (beginning in October 2001) and lower interest rates. Offsetting
the lower interest rates in fiscal 2002 was additional interest expense on
outstanding indebtedness due investors, subordinated debenture holders and
former employees.
The company sustained a net loss of $1,208,839 in 2002 compared to a net loss of
$8,164,446 in 2001. The year 2001 loss included a loss on impairment of assets
of $3,643,000.
The net loss applicable to common shareholders was $1,375,811 in 2002 and
$8,331,438 in 2001 primarily due to the dividends declared on convertible
preferred stock.
QUARTERS ENDED SEPTEMBER 30, 2001, DECEMBER 31 2001, MARCH 31, 2002 AND
SEPTEMBER 30, 2000, DECEMBER 31 2000, MARCH 31, 2001
Net sales for the first quarter of fiscal 2002 decreased to $499,785 from
$3,240,492 for the same quarter the prior year. Gross profit for the first
quarter of fiscal 2002 also decreased to $199,904 from $514,312 for the same
quarter the prior year. The Company's gross profit margin was 40% for the first
quarter of fiscal 2002, compared to 16% for the same quarter the prior year. The
decline in sales was due the Company scaling back on its distribution business.
Selling, general and administrative expenses totaled $360,912 for the first
quarter of fiscal 2002, down from $817,506 for the same quarter the prior year,
due to the Company closing down several of its facilities. Interest expense
amounted to $50,305 for the first quarter of fiscal 2002, a decrease from
$129,543 for the same quarter the prior year, due to the Company having a lower
balance with its asset-based lender. The Company had a net loss of $211,314 in
the first quarter of fiscal 2002, compared to a net loss of $511,994 for the
same quarter the prior year.
Net sales for the second quarter of fiscal 2002 decreased to $190,184 from
$3,407,586 for the same quarter the prior year. Gross profit for the second
quarter of fiscal 2002 decreased to $139,221 from $453,161 for the same quarter
the prior year. The Company's gross profit margin was 73% for the second quarter
of fiscal 2002, compared to 13% for the same quarter the prior year. The decline
in sales was due the effect of the 9/11 tragedy and the Company scaling back on
its distribution business. The increase in gross profit margin was the result of
the Company scaling back on the lower margin distribution business. Selling,
general and administrative expenses totaled $382,310 for the second quarter of
fiscal 2002, down from $772,165 for the same quarter the prior year, due to the
Company closing down several of its facilities. Interest expense amounted to
$72,447 for the second quarter of fiscal 2002, a decrease from $139,224 for the
same quarter the prior year, due to the Company having a lower balance with its
asset-based lender. The Company had a net loss of $315,535 in the second quarter
of fiscal 2002, compared to a net loss of $537,841 for the same quarter the
prior year.
Net sales for the third quarter of fiscal 2002 decreased to $332,658 from
$2,126,180 for the same quarter the prior year. Gross profit for the third
quarter of fiscal 2002 decreased to $97,766 from $243,932 for the same quarter
the prior year. The Company's gross profit margin was 29% for the third quarter
of fiscal 2002, compared to 11% for the same quarter the prior year. The decline
in sales was due the effect of the 9/11 tragedy and the Company scaling back on
its distribution business. Selling, general and administrative expenses totaled
$268,084 for the third quarter of fiscal 2002, down from $615,018 for the same
quarter the prior year, due to the Company closing down several of its
facilities. Interest expense amounted to $79,278 for the third quarter of fiscal
2002, a decrease from $143,937 for the same quarter the prior year, due to the
Company having a lower balance with its asset-based lender. The Company had a
net loss of $249,596 in the third quarter of fiscal 2002, compared to a net loss
of $594,409 for the same quarter the prior year.
YEARS ENDED JUNE 30, 2001 AND 2000
Net sales decreased from $13,368,206 in fiscal year 2000 to $9,774,153 in 2001.
The decline in sales was largely due to an overall economic decline,
particularly in the communications and data industries.
Gross loss amounted to $764,128 in fiscal 2001 versus a profit of $3,091,079 in
2000. Gross profit margin decreased to a negative 8% in 2001 from 23% in 2000.
The year 2001 gross profit was adversely impacted as a result of winding down of
our distribution facilities in San Jose, CA and the loss of certain key
personnel.
Selling, general and administrative expenses for fiscal 2001 were $3,085,543 or
31% of sales. For fiscal 2000, selling, general and administrative expenses
amounted to $2,881,715 or 22% of sales. Fiscal 2001 expenses as a percentage of
sales was higher than 2000 mainly because sales volume declined at a faster rate
than selling, general and administrative expenses as the company reacted to the
decline in sales.
Interest expense amounted to $666,957 in 2001 versus $513,061 in 2000. Interest
expense increased in 2001 due to a combination of an increase in facility fees
and a slower rate of collection on accounts receivable.
Depreciation and amortization decreased from $323,810 in 2000 to $152,782 in
2001. The decrease was due to the company taking a $3,643,000 loss on impairment
of assets in 2001 that included $3,391,000 write-off of goodwill and $252,000
reduction of machinery and equipment to net realizable value.
The company sustained a net loss of $8,164,446 in 2001 compared to a net loss of
$627,507 in 2000. The year 2001 loss included a loss on impairment of assets of
$3,643,000.
The net loss applicable to common shareholders was $8,331,438 in 2001 and
$1,276,953 in 2000, primarily due to the dividends declared on convertible
preferred stock.
LIQUIDITY AND FINANCIAL CONDITION AS OF JUNE 30, 2003
Current assets at June 30, 2003 amounted to $185,197. The Company had a net
working capital deficit of $6,366,781. This compares with current assets of
$149,378 in 2002 and a working capital deficit of $6,084,271. Current
liabilities increased mainly due to recording of additional interest on Company
indebtedness. The Company's working capital is clearly not sufficient to meet
the Company's current liquidity needs. The Company has relied upon cash flow
generated from operations and loans from third party lenders to sustain itself
during the year. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
During the fiscal year ended June 30, 2002, the Company decided to self-insure
against its liability risks. There have been no claims against the Company with
respect to any insurable risks.
The Company is currently implementing a business plan that it believes will
strengthen the balance sheet, increase revenue and return them to profitability.
The plan involves a series of initiatives. The Company is seeking to restructure
its liabilities by negotiating with secured and unsecured creditors and vendors
for forgiveness of certain outstanding debt, or to exchange debt for equity. The
Company is actively engaged in raising capital through private investors. This
will provide additional working capital and allow it to pursue more profitable
projects. The Company is working aggressively to complete all outstanding public
filings and remain current on a going-forward basis. This will allow it to apply
for re-listing on the OTC Bulletin Board, thereby increasing shareholder
liquidity and gaining easier access to capital through equity transactions.
Additionally, in October 2003, the Company formed an Advisory Board to assist
management in the development and execution of the business plan. The board
consists of several recognized business and industry leaders. These individuals
will provide guidance and experience, access to prospective customers, and build
industry awareness for the Company's products and services. The Company has
formed a new subsidiary, DWS Defense Systems, to address the demand for security
and safety products in the domestic and international business community. The
Company believes that this new venture will complement and enhance their current
product offerings and greatly expand their customer base. The Company has
already signed a contract, which represents their initial expansion into this
new line of business. The Company may also pursue strategic acquisitions that
provide it with growth and vertical integration within this new area.
In November 2003, the Company raised additional capital through the sale of
common stock to private investors totaling $150,000. In January 2004, the
Company raised additional capital through the sale of common stock to another
private investor totaling $100,000. In February 2004, the Company raised
additional capital through the sale of common stock to a group of private
investors totaling $100,000.
INFLATION
For the last three years, we have not been significantly affection by inflation.
ITEM 7 - FINANCIAL STATEMENTS
The financial statements listed in the accompanying index to the Financial
Statements are attached as part of this report, commencing on page F-1.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In May 2002, the Company dismissed Grant Thornton LLP as its independent
accountants. The Company's board approved the decision to change independent
accountants. In May 2002, the Company engaged BP Professionals LLP, the
predecessor firm to BP Audit Group PLLC, the Company's present independent
accountants, as its new independent accountants commencing with the fiscal year
ended June 30, 2001.
ITEM 8-A - CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer, of the
effectiveness of the design and operation of our "disclosure controls and
procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer concluded that the disclosure
controls and procedures are effective in timely alerting him to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the periodic SEC filings.
There has been no change in The Company's internal controls over financial
reporting during the most recent fiscal year that materially affected or is
reasonably likely to materially affect the internal controls.
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Director and Executive Officers of the Company and certain information
concerning them as of March 31, 2004, are set forth below:
Name Position With The Company Age
---------------- -------------------------- ---
Daniel McPhee Chairman of the Board, 40
President, Chief Executive and
Financial Officer and Sole Director
Philip J. Rauch Chief Operating Officer 43
Mr. Daniel McPhee has been Chairman of the Board of Directors, President, Chief
Executive and Financial Officer and Director since December 17, 1998. Prior
thereto Mr. McPhee served as a Director and Chief Executive Officer of DataWorld
since its inception in 1998. Prior thereto, and since 1992, Mr. McPhee was
associated with Elcan Technologies Corp. ("ETC") as senior sales representative
and was promoted to Executive Vice President in early 1997. From 1988 to 1992,
Mr. McPhee was employed by United Datacom & Cable, Inc. as a salesman and Vice
President. From 1985 to 1988, Mr. McPhee was a project manager with Forest
Electric Corp. In 1985, Mr. McPhee received a bachelor's degree in Business
Administration from Adelphi University. Mr. McPhee is a member of the
Communication Managers Association.
Mr. Philip J. Rauch has been the Chief Operating Officer since February 1, 2004.
Prior thereto, and since 1997, Mr. Rauch was associated with AboveNet, Inc.
(formerly Metromedia Fiber Network, Inc.) as Vice President, Carrier Business
Operations, and since 2001 as Controller. From 1993 to1997, Mr. Rauch was Vice
President, Controller of Columbus Construction, a heavy construction company
with several plant facilities. From 1989 to 1993 he was Vice President and Chief
Financial Officer of F. Garofalo Electric Co., a Local #3 IBEW engineering and
construction company. Mr. Rauch earned a Bachelor of Science in Economics degree
from the University of Pennsylvania Wharton School of Business, with a
concentration in finance and accounting. He also earned a certificate in
Construction Management from the Institute of Design and Construction in New
York. Mr. Rauch is a member of the American Management Association and the
Construction Financial Management Association.
ITEM 10 - EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year indicated, all compensation
awarded to, earned by or paid to all individuals serving as the Company's Chief
Executive Officer ("CEO") or acting in a similar capacity and all executive
officers of the Company who earned more than $100,000 annually.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
Other
Annual All Other
Compen- Number Compen-
Name and Fiscal Salary Bonus sation of sation
Principal Position Year ($) ($) ($) Options ($)
--------------------- ----- -------- ------ ------- ------- --------
Daniel McPhee 2003 $150,000 $ - $18,500 - $ -
Chief Executive 2002 $150,000 $ - $27,900 - $ -
Officer 2001 $150,000 $ - $9,000 - $ -
Christopher Francis 2001 $136,973 $ - $8,250 - $ -
Chief Operating
Officer
The Company currently has no pension plan for employees.
No options were granted to the Executive Officers during the fiscal years ended
June 30, 2001, 2002 and 2003. The Executives exercised no options during the
fiscal years ended June 30, 2001, 2002 and 2003.
DIRECTORS' COMPENSATION
The Company did not pay any director's fees during the 2001, 2002 or 2003 fiscal
years.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth as of April 1, 2004, certain information
regarding beneficial ownership of the Common Stock held by each person known by
the Company to own beneficially more than 5% of the Common Stock, each of the
Company's directors, each of the executive officers named in the Summary
Compensation Table, and all of the Company's executive officers and directors as
a group.
Beneficial Ownership
Name and Address Shares %
-------------------- -------------- ------
Daniel McPhee 9,285,000 24.5%
275 Marcus Blvd.,
Hauppauge, NY 11788
Augustine Fund, LLP 3,331,500 8.8%
141 W. Jackson Blvd.
Chicago, IL
Edward McPhee 1,872,500 5.0%
2424 N. Federal Highway
Boca Raton, FL 33431
All directors and 9,285,000 24.5%
officers as a group
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with a June 1998 refinancing of the Company's revolving credit
facility, TW Cable, LLC ("TW"), a related party, made available as collateral,
assets with a value of $1,268,000 to support the revolving credit facility. In
October 2001, the Company's creditor, R&R, seized this collateral and the
Company became obligated to TW therefore. In December 2002, the Company reached
an agreement with TW and Edward Goodstein ("Goodstein"), its principal, to
reduce the Company's indebtedness to TW and Goodstein from $1,543,749 (including
accrued interest and dividends) to $420,000 and to redeem the 6,500 shares of
preferred stock that had been issued to Goodstein, in exchange for 500,000
shares of common stock. The result of the debt//equity restructuring was a gain
of $1,286,134, which was credited directly to equity. At June 30, 2003, the
balance on the note was $416,500.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of June 30, 2003, 2002 and 2001 F-3
Consolidated Statements of Operations for the years ended
June 30, 2003, 2002, and 2001 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 2003, 2002 and 2001 F-5-6
Consolidated Statements of Cash Flows for the years ended
June 30, 2003, 2002 and 2001 F-7-7a
Notes to Consolidated Financial Statements F8-F33
(b) EXHIBITS:
The following documents are included or incorporated by reference as exhibits to
this report:
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation, or
Succession.
2.1 Second Amended Joint Plan of Reorganization dated September 24, 1997
(incorporated by reference to Exhibit 2.1 to the registrant's current
report on Form 8-K dated February 5, 1998)
2.2 Second Amended Joint Disclosure Statement dated September 24, 1997
(incorporated by reference to Exhibit 2.2 to the registrant's current
report on Form 8-K dated February 5, 1998)
2.3 Order of United States Bankruptcy Court, Eastern District of New York
dated October 30, 1997(incorporated by reference to Exhibit 2.3 to the
registrant's current report on Form 8-K dated February 5, 1998)
2.4 Certificate of Ownership and Merger dated November 20, 1997
(incorporated by reference to Exhibit 3.1(d) to the registrant's
current report on Form 8-K dated February 5,1998)
2.5 Certificate of Ownership and Merger and change of name dated April 30,
1999 (incorporated by reference to Exhibit 2.5 to the registrant's
annual report on Form 10K-SB for the year ended June 30, 2000)
2.6 Certificate of Correction dated February 18, 2000 to the Certificate
of Ownership and Merger dated April 30, 1999 (incorporated by
reference to Exhibit 2.6 to the registrant's annual report on Form
10K-SB for the year ended June 30, 2000)
2.7 Restated Certificate of Incorporation dated May 24, 2000 (incorporated
by reference to Exhibit 3.1 to the registrant's annual report on Form
10K-SB for the year ended June 30, 2000)
(3) Articles of Incorporation & By-laws
3.1 Restated Certificate of Incorporation dated May 24, 2000 (incorporated
by reference to Exhibit 3.1 to the registrant's annual report on Form
10K-SB for the year ended June 30, 2000)
3.2 By-Laws (incorporated by reference to Exhibit 3(b) of Form S-18
Registration Statement No. 33-7693-NY)
(4) Instruments Defining the Rights of Security Holders
4.1 Certificate of Designation, Preferences and Rights of Senior
Cumulative Convertible Preferred Stock (incorporated by reference to
Exhibit 1.2 to the registrant's report on Form 8- K/A dated December
18, 1998)
4.2 Subordinated Debenture Agreement dated December 16, 1999 between the
Company and a non-affiliate (incorporated by reference to Exhibit 4.2
to the registrant's report on Form 10-KSB for the year ended June 30,
1999)
4.3 Securities Purchase Agreement between the Company and Augustine Fund
LP dated May 26, 2000 (incorporated by reference to Exhibit 4.4 to the
registrant's annual report on Form 10K-SB for the year ended June 30,
2000)
4.4 Certificate of Designation of Series B 8% Convertible Preferred Stock
(incorporated by reference to Exhibit 4.5 to the registrant's annual
report on Form 10K-SB for the year ended June 30, 2000)
4.5 Eight-Percent (8%) Convertible Note Agreement between the Company and
Augustine Fund, LP, dated August 28, 2003
(10) Material Contracts
10.1 Agreement by and among Vertex Computer Cable & Products, Inc. and
Daniel McPhee and Christopher Francis and TW Cable LLC and Edward
Goodstein and DataWorld Solutions, Inc. Dated December 18, 1998
(incorporated by reference to Exhibit 1.1 to the registrant's report
on Form 8-K dated December 18, 1998)
10.2 Agreement by and among DataWorld Solutions, Inc. and Daniel McPhee and
TW Cable LLC and Edward Goodstein, dated December 4, 2002
10.3 Consulting Agreement - SMG Marketing Group, Inc. dated September 10,
2001
10.4 Consulting Agreement - Lawrence Dobroff dated June 30, 2001
10.5 Consulting Agreement - Bernard Kerik dated October 29, 2003
10.6 Consulting Agreement - Donald DiRenzo dated November 10, 2003
10.7 Consulting Agreement - Scott Vining dated November 10, 2003
10.8 Consulting Agreement - Robert T. Schanz dated November 10, 2003
(99) Additional Exhibits
(i) Certification of Chief Executive and Financial Officer pursuant to 18
U.S.C. Section 1850, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(ii) Certification of the Chief Executive and Financial Officer Pursuant to Rule
13a-14(b) of the Exchange Act and 18 U.S.C. Section 1850, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(c) REPORTS ON FORM 8-K
The Company's report on Form 8-K/A dated May 16, 2002
On May 16, 2002, the Registrant filed a Current Report on Form 8-K/A, announcing
the dismissal of Grant Thornton LLP as its independent accountants, and
announcing the engagement of BP Professionals, LLP as its new independent
accountants for the fiscal year ended June 30, 2001.
The Company's report on Form 8-K/A dated April 10, 2001.
On April 10, 2001, the Registrant filed a Current Report on Form 8-K/A,
announcing that it had entered into an Agreement and Plan of Merger with
American Access Technologies, Inc. ("AAT") in which AAT's subsidiary, Dolphin
Acquisition Corp. will be merged into the Registrant, with the Registrant
becoming a wholly-owned subsidiary of AAT.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to the Company by its independent
accountants, BP Audit Group PLLC, applicable to the fiscal years ended June 30,
2003, 2002 and 2001:
Fee category 2003 2002 2001
------------ ---- ---- ----
Audit fees $ 124,380 - -
Audit-related fees - - -
Tax fees $6,243 - -
All other fees - - -
----------
Total fees $130,623 - -
Audit fees: Consists of fees for professional services rendered by our principal
accountants for the contemporaneous audit of the Company's three annual
financial statements and the review of quarterly financial statements or
services that are normally provided by our principal accountants in connection
with statutory and regulatory filings or engagements.
Audit-related fees: Consists of fees for assurance and related services by our
principal accountants that are reasonably related to the performance of the
audit or review of the Company's financial statements and are not reported under
"Audit fees."
Tax fees: Consists of fees for professional services rendered by our principal
accountants for tax advice prior to September, 2003.
All other fees: Consists of fees for products and services provided by our
principal accountants, other than the services reported under "Audit fees,"
"Audit-related fees" and "Tax fees" above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATAWORLD SOLUTIONS, INC.
By: /s/ Daniel McPhee
---------------------------
Daniel McPhee,
President, Chief Executive
Officer and Chairman of the Board
Date: April 1, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the registrant in the
capacities and dates indicated:
/s/ Daniel McPhee Date
------------------- ----------------------
Name: Daniel McPhee April 1, 2004
Title: President, Director and
Chairman of the Board
(Principal Executive, Financial and
Accounting Officer)
DataWorld Solutions, Inc.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2003, 2002 and 2001 F-3
Consolidated Statements of Operations for the years ended
June 30, 2003, 2002, and 2001 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 2003, 2002 and 2001 F-5-6
Consolidated Statements of Cash Flows for the years ended
June 30, 2003, 2002 and 2001 F-7-7a
Notes to Consolidated Financial Statements F8-F33
Report of Independent Registered Public Accounting Firm
Board of Directors
DataWorld Solutions, Inc.
We have audited the accompanying consolidated balance sheets of DataWorld
Solutions, Inc. and Subsidiary as of June 30, 2003, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
DataWorld Solutions, Inc. and Subsidiary as of June 30, 2003, 2002 and 2001 and
the consolidated results of its operations and its cash flows for each of the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2 to the
consolidated financial statements, the Company has suffered losses from
operations and has net working capital and stockholders' equity deficits that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 2-F. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ BP Audit Group, PLLC
Farmingdale, NY
March 31, 2004
2
DATAWORLD SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, June 30, June 30,
2003 2002 2001
----------------- --------------- -----------------
ASSETS (Notes 2 and 6)
----------------------
CURRENT ASSETS:
Cash $ 11,888 $ 4,872 $ -
Accounts receivable, net of allowance for doubtful
accounts of $20,000 in 2003 and 2002 and $130,182 in
2001 173,309 144,506 785,850
Inventories 147,377
---------------------------------------------------
TOTAL CURRENT ASSETS 185,197 149,378 933,227
PROPERTY, PLANT AND EQUIPMENT, net - 7,500 149,432
---------------------------------------------------
TOTAL ASSETS $ 185,197 $ 156,878 $1,082,659
================= =============== =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Cash overdraft $ - $ - $ 55,980
Payable to factor 1,838,655 1,702,822 3,350,565
Current portion of notes payable 15,500 - -
Accounts payable 3,200,009 3,196,695 3,052,501
Accrued expenses and other 1,137,009 987,080 505,021
Bankruptcy distributions payable 270,332 258,019 246,144
Secured subordinated debentures, net of discount 90,473 89,033 87,593
----------------- --------------- -----------------
TOTAL CURRENT LIABILITIES 6,551,978 6,233,649 7,297,804
Notes payable 536,000 1,502,376 243,333
Accrued dividends on preferred stock 393,436 366,577 200,408
Subscriptions received 35,000 35,000 35,000
----------------- --------------- -----------------
TOTAL LIABILITIES 7,516,414 8,137,602 7,776,545
----------------- --------------- -----------------
COMMITMENTS AND CONTINGENCIES (Notes
2,6,7,8,9,10,11, 12 and 13)
STOCKHOLDERS' DEFICIT:
8% Series B Convertible Preferred Stock, $.01 par value,
stated value $1,000 per share; Redeemable at $1,250 per
share; authorized, 3,000 shares; 1,595 shares issued and
outstanding at June 30, 2003 and 2002 and
1,600 at June 30, 2001 1,595,000 1,595,000 1,600,000
$6 Senior Cumulative Convertible Preferred Stock, stated
value $100 per share; authorized 5,000,000 shares;
6,500 issued and outstanding at June 30, 2002 and 2001 - 650,000 650,000
Common stock, par value $.001 per share; 40,000,000 shares
authorized, 34,240,313, 33,740,313, and 33,036,905 issued
and outstanding at June 30, 2003, 2002, and 2001,
respectively 34,240 33,740 30,037
Additional paid-in capital 3,144,931 1,209,297 1,119,027
Accumulated deficit (12,105,388) (11,468,761) (10,092,950)
----------------- --------------- -----------------
TOTAL STOCKHOLDERS' DEFICIT (7,331,217) (7,980,724) (6,693,886)
----------------- --------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT: $185,197 $156,878 $1,082,659
================= =============== =================
The accompanying notes are an integral part of these financial statements.
3
DATAWORLD SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
June 30,
2003 2002 2001
------------------ ------------------- ------------------
Net sales $950,656 $1,196,642 $9,774,153
Cost of goods sold exclusive of depreciation in 2001 405,888 751,527 10,538,281
------------------ ------------------- ------------------
Gross profit/(loss) 544,768 445,115 (764,128)
------------------ ------------------- ------------------
Selling, general and administrative expenses 801,127 1,172,518 3,085,543
Impairment of assets - - 3,649,777
Interest expense 363,643 481,436 666,957
------------------ ------------------- ------------------
1,164,770 1,653,954 7,402,277
------------------ ------------------- ------------------
(620,002) (1,208,839) (8,166,405)
------------------ ------------------- ------------------
Commission Income 127,507 - -
Interest Income - - 1,959
------------------ ------------------- ------------------
127,507 - 1,959
------------------ ------------------- ------------------
Net loss (492,495) (1,208,839) (8,164,446)
Accrued dividends on preferred stock (144,132) (166,972) (166,992)
------------------ ------------------- ------------------
Net loss attributable to common stockholders $ (636,627) $ (1,375,811) $ (8,331,438)
------------------ ------------------- ------------------
Basic and diluted loss per share $ (0.02) $ (0.04) $ (0.28)
================== =================== ==================
Weighted average common shares outstanding -
basic and diluted 34,028,357 31,719,472 29,655,252
================== =================== ==================
The accompanying notes are an integral part of these financial statements.
4
DATAWORLD SOLUTIONS, INC.
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
8% $6.00 Retained
Preferred Preferred Common Additional Earnings Stockholder's
Stock Stock Common Stock Paid in (accumulated Equity
Amount Amount Shares Amount Capital deficit) (Deficit)
----------- --------- ----------- --------- ----------- ------------- ------------
Balance July 1, 2000 $1,600,000 $672,750 29,044,000 $29,044 $773,020 $(1,761,512) $1,313,302
Reclassification of
accrued dividends (22,750) (22,750)
Adjustment to equity
resulting from
rescission of stock
issuable for website
development 66,000 66,000
Subscribed common stock
deemed issued 225,000 225 22,275 22,500
Subscribed common stock
deemed issued 175,000 175 17,325 17,500
Subscribed common stock
deemed issued 20,000 20 1,980 2,000
Subscribed common stock
deemed issued 80,000 80 14,920 15,000
Subscribed common stock
deemed issued 152,905 153 124,847 125,000
Subscribed common stock
deemed issued 200,000 200 49,800 50,000
Subscribed common stock
deemed issued 140,000 140 34,860 35,000
Discount attributable
to stock issued to
employee 14,000 14,000
Accrued dividends on 8%
preferred stock (127,992) (127,992)
Accrued dividends on $6
preferred stock (39,000) (39,000)
Net loss (8,164,446) (8,164,446)
----------- --------- ----------- --------- ----------- ------------- ------------
Balance June 30, 2001 $1,600,000 $650,000 30,036,905 $30,037 $1,119,027 $(10,092,950) $(6,693,886)
5
Balance July 1, 2001 $1,600,000 $650,000 30,036,905 $30,037 $1,119,027 $(10,092,950) $(6,693,886)
Issuance of common
stock to
officer/employees for
services 900,000 900 27,000 27,900
Stock issued to
consultants for
services rendered 750,000 750 22,500 23,250
Issuance of common
stock for services 600,000 600 36,420 37,020
Conversion of preferred
to common stock (5,000) 1,453,408 1,453 4,350 803
Accrued dividends on 8%
preferred stock (127,972) (127,972)
Accrued dividends on
$6 preferred stock (39,000) (39,000)
Net loss (1,208,839) (1,208,839)
----------- --------- ----------- --------- ----------- ------------- -------------
Balance June 30, 2002 $1,595,000 $650,000 33,740,313 $33,740 $1,209,297 $(11,468,761) $(7,980,724)
Conversion of preferred
stock into
common stock (650,000) 500,000 500 766,773 117,273
Exchange of debt and
preferred stock for
equity 1,168,861 1,168,861
Accrued dividends on 8%
preferred stock (127,600) (127,600)
Accrued dividends on $6
preferred stock (16,532) (16,532)
Net loss (492,495) (492,495)
----------- ---------- ----------- -------- ----------- ------------- -------------
Balance June 30, 2003 $1,595,000 $0 34,240,313 $34,240 $3,144,931 $(12,105,388) $(7,331,217)
=========== ========== =========== ======== =========== ============= =============
The accompanying notes are an integral part of these financial statements.
6
DATAWORLD SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
June 30,
2003 2002 2001
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(492,495) $(1,208,839) $(8,164,446)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities
Depreciation and amortization - 2,000 151,342
Amortized bond discount 1,440 1,440 1,440
Provision for doubtful accounts - (110,182) 74,182
Amortization of website development costs - - 66,000
Stock issued for services 62,941 197,124 100,940
Impairment of goodwill 3,391,020
Impairment of fixed assets 252,054
Change in operating assets and liabilities:
Decrease/(increase) in accounts receivable (28,803) 751,526 2,198,540
Decrease in inventories - 147,377 1,533,200
Decrease in prepaid expenses and other assets - - 30,221
Increase in accounts payable and other
accrued expenses 324,100 504,174 539,491
----------------- ----------------- -----------------
Net cash provided (used) by operating activities (132,817) 284,620 173,984
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment (capital expenditures) 7,500 139,932 (40,237)
Decrease in security deposits - - 88,350
----------------- ----------------- -----------------
Net cash provided by investing activities 7,500 139,932 48,113
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under factoring/
and loan agreements 1,067,305 1,406,568 869,317
Repayments of amounts due factor (934,972) (1,770,268) (1,238,691)
Issuance of common stock - - 85,000
Payment of bankruptcy distributions - - (44,856)
Cash overdraft - (55,980) 55,980
----------------- ----------------- -----------------
Net cash provided (used) by financing activities: 132,333 (419,680) (273,250)
----------------- ----------------- -----------------
NET INCREASE/(DECREASE) IN CASH 7,016 4,872 (51,153)
Cash beginning of year 4,872 - 51,153
----------------- ----------------- -----------------
Cash at end of year $11,888 $4,872 $0
================= ================= =================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest 0 0 $124,183
================= ================= =================
Taxes 0 0 0
================= ================= =================
The accompanying notes are an integral part of these Financial Statements.
7
DATAWORLD SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTARY STATEMENT OF NON-CASH INVESTING AND FINANCING ACTIVITIES
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
YEAR-ENDED
JUNE 30,
2003 2002 2001
-----------------------------------------
ISSUANCES OF COMMON STOCK
--------------------------------------
ISSUANCE OF COMMON STOCK PREVIOUSLY SUBSCRIBED $ $ $ $182,000
==========
REDUCTION OF SUBSCRIPTIONS RECEIVED (182,000)
==========
CONVERSION OF NOTES PAYABLE FOR COMMON STOCK (50,000)
CONVERSION OF ACCRUED INTEREST AND DIVIDENDS
ATTIBUTABLE TO PREFERRED STOCK FOR COMMON STOCK (266,506)
CONVERSION OF PREFERRED STOCK TO COMMON STOCK (650,000)
CONVERSION OF AMOUNTS DUE TO AFFILIATES (1,317,376)
CONVERSION OF JUDGMENTS PAYABLE UPON CONVERSION
OF DEBT AND PREFERRED STOCK TO COMMON STOCK (49,502)
---------------
TOTALS (2,333,384)
===============
ISSUANCE OF NOTES PAYABLE IN CONNECTION WITH
CONVERSION OF PREFERRED TO COMMON STOCK 168,000
ISSUANCE OF NOTES PAYABLE IN CONNECTION WITH
CONVERSION OF PREFERRED TO COMMON STOCK 252,000
INCREASE IN PAID-IN CAPITAL RESULTING FROM CONVERSION
OF DEBT AND PREFERRED STOCK TO COMMON STOCK 1,912,884
INCREASE IN COMMON STOCK 500
---------------
TOTALS 2,333,384
===============
7a
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
A) ORGANIZATION
DataWorld Solutions, Inc. (the "Company") was incorporated in Delaware
in January 1998. The Company became publicly traded as a result of a
reverse acquisition of Vertex Computer Cable & Products, Inc.
("Vertex") in December 1998. (See Note 7-A). Previously in January
1998, Vertex secured certain financing that made effective Vertex's
second amended plan of organization under Chapter 11 of the U.S.
Bankruptcy Act. (See Note 3-A).
B) NATURE OF BUSINESS
The Company distributes electronic wire, cable and related products
used primarily for data communication and distribution. The principle
market for the Company's products is the United States with a
concentration in the New York metropolitan area.
Prior to fiscal 2002, the Company assembled its products in-house.
Subsequent to June 2001, the Company outsourced all assembly
operations to a single contract manufacturer. In 2003, the Company
switched to another contract manufacturer. As the Company's operations
comprised a single business segment in fiscal 2003 and 2002,
presentation of segment information for fiscal 2001 is not contained
herein as it is not deemed to be useful.
Subsequent to June 30, 2003, the Company established a new division,
DWS Defense Systems to address the demand for security and safety
products. (See Note 2-F).
NOTE 2 - GOING CONCERN
A) GENERAL
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As of June 30, 2003 the
Company's liabilities exceeded its assets by $7,331,217. It has a
working capital deficit of $6,366,781 and has incurred cumulative net
losses of $9,865,780 for the three years then ended. These factors
raise substantial doubt about the Company's ability to continue as a
going concern. Management's plan, in regard to these matters is
described below. (See Note 2-F). The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
8
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
B) FINANCING
All of the company's assets have been pledged as collateral under the
term of its financing agreement with Rosenthal & Rosenthal, Inc
(hereinafter "R&R"). (See Note 6-B). During each of the fiscal years
2003, 2002, and 2001, the Company was in default of this agreement.
R&R stopped advancing on collateral in October 2003. As a consequence
of the default, R&R has the right to seize the Company's assets. The
Company has negotiated a settlement of this obligation which is
currently being reduced to writing and which if completed, will settle
all claims and eliminate R&R's ability to seize the Company's assets.
Should negotiations not be successful, the Company could be forced to
cease operations.
C) SALES AND PAYROLL TAX OBLIGATIONS
As of August 2001, the Company failed to remit sales taxes that it
collected from customers in four states. As of June 30, 2003,
approximately $305,000 was due these states (inclusive of estimated
penalties and interest). The Company is presently negotiating a
settlement of it's approximately $244,000 liability with the State of
New York. Should negotiations not be successful, the Company could be
forced by the State of New York to cease operations. (See Note 13-I).
As of March 2002, the Company failed to remit federal payroll taxes
that it had collected. As of June 30, 2003, approximately $50,000 was
due, inclusive of estimated penalties and interest. (see Note 13-I).
D) SINGLE MANUFACTURER
Effective May 2003, a single manufacturer is manufacturing
substantially all of the Company's cable assembly products. The
Company is dependent on the continued supply arrangement with this
manufacturer. There are several other manufacturers; however a change
in manufacturer may result in less favorable terms being offered by
other manufacturers. (See Note 1-B).
E) DEFAULT ON DEBT OBLIGATIONS
The Company is currently in default on payments owed on its bankruptcy
distributions payable. (See Note 6-D). This could result in the
Company's creditors requesting that the Company's Chapter 11
bankruptcy proceedings be re-opened.
Additionally, the Company has not made payments on its Secured
Subordinated Debentures since January, 2001, and may be declared in
default. (See Note 6-C). This obligation is secured by all of the
Company's assets, but is subordinate to all current and future loan
facilities.
9
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
F) MANAGEMENT'S PLAN
The Company is currently implementing a business plan that it believes
will increase revenue and generate profits. The plan involves a series
of initiatives. The Company is seeking to restructure its liabilities
by negotiating with secured and unsecured creditors and vendors to
settle or restructure the outstanding debt, or exchange debt for
equity. The Company is also actively engaged in raising capital
through private investors. If successful, this will provide additional
working capital and allow the Company to pursue more profitable
projects and lines of business. The Company is working to complete all
outstanding SEC filings and remain current on a going-forward basis.
This will allow it to apply for re-listing on the OTC Bulletin Board,
thereby increasing shareholder liquidity and gaining easier access to
capital through equity transactions. Additionally, the Company formed
an advisory board to assist management in the development and
execution of its business plan. The board consists of several
recognized business and industry leaders. These individuals will
provide guidance and experience, access to prospective customers, and
build industry awareness for the Company's products and services.
Subsequent to June 30, 2003 the Company formed a new subsidiary, DWS
Defense Systems, to address the demand for security and safety
products in the domestic and international business community. (See
Note 1-B). The Company believes that this new venture will complement
and enhance its current product offerings and greatly expand its
customer base. The Company has already signed a contract that
represents the initial expansion into this new line of business. The
Company may also pursue strategic acquisitions that provide it with
growth and vertical integration within this new area.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company's wholly-owned subsidiary, DWS Manufacturing, Inc. All
inter-company accounts and transactions have been eliminated.
B) CASH and CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and highly liquid
investments with an original maturity, when purchased, of three months
or less. The Company places any temporary cash investments with major
financial institutions. Such investments may be in excess of the FDIC
insurance limit of $100,000.
10
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
C) CONCENTRATION OF CREDIT RISK
The Company sells its services and products to original equipment
manufacturers and end users in various industries such as
manufacturing and finance, concentrated in the Northern and Eastern
United States. The customer base is comprised of several Fortune 500
companies and other large financial institutions which the Company
believes represent little or no credit risk.
D) INVENTORIES
Inventories at June 30, 2001, consisting principally of goods, which
are purchased as components to be used in the assembly of manufactured
goods, are stated at the lower of cost (first-in, first-out method) or
market.
E) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2002 and 2001, are stated at cost
less accumulated depreciation and amortization computed on a
straight-line basis over the estimated useful lives of the respective
assets, which range from five to ten years. Leasehold improvements are
amortized over the useful life of the improvement, or the lease term,
whichever is less. Expenditures for maintenance, repairs and
betterments, which do not materially extend the useful lives of the
assets, are charged to operations as incurred. The cost and related
accumulated depreciation of assets retired or sold are removed from
the respective accounts and any gain or loss is recognized in
operations.
F) GOODWILL
Goodwill is recorded at cost, less accumulated amortization. The
excess of purchase price over the fair value of identifiable tangible
assets acquired was being amortized on a straight-line basis over 20
years. The Company periodically evaluates the recoverability of the
carrying value of its intangible assets and the related amortization
periods. The Company assessed the recoverability of unamortized
goodwill based on the undiscounted projected cash flows.
As a result of the restructuring of operations, the Company determined
that the goodwill recognized in the reverse acquisition of Vertex had
no continuing value. Accordingly, the unamortized balance of
$3,391,020 was charged to operations in fiscal 2001.
11
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
G) SUBSCRIPTIONS RECEIVED ON COMMON STOCK
The Company has accepted cash subscriptions for common stock and
during the period covered in the accompanying financial statements,
there was a delay in the delivery of certificates for shares of common
stock. This delay no longer exists. When there was a delay, the
Company's policy was to record such issuances at the time the shares
were authorized to be issued, even though delivery of the certificates
had not yet taken place.
H) REVENUE RECOGNITION
The Company recognizes revenue on the date the product is shipped and
title passes to the customer. The Company recognizes commissions
earned on distribution of certain products when those products are
shipped.
I) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation pursuant to
Statement of Financial Accounting Standards No. 123. This
pronouncement allows companies to either expense the estimated fair
value of all stock options or, with respect to options granted to
employees and directors, to continue to follow the intrinsic value
method previously set forth in Accounting Principles Board Opinion No.
25, but disclose the pro forma effects on net income (loss) had the
fair value of those options been expensed. The Company has elected to
continue to apply the previous standard in accounting for stock
options granted to employees and directors.
J) ADVERTISING COSTS
Advertising costs are charged to operations when the advertising first
takes place. During the three years ended June 2003, 2002, and 2001,
the Company incurred minimal advertising expense.
K) INCOME TAXES
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and
loss carryforwards for which income tax benefits are expected to be
realized in future years. A valuation allowance is established to
reduce the deferred tax assets to estimated realizable amounts.
L) NET LOSS PER COMMON SHARE
Basic and diluted income and loss per share is calculated by dividing
the net loss, after consideration of the deemed and accrued dividends
on preferred stock, by the weighted average number of shares of common
stock outstanding during each period. In years where the Company
incurs a loss, anti-dilutive options and warrants are excluded.
12
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
M) USE OF ESTIMATES
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements, as well as
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
N) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value of financial instruments
using available market information and other valuation methodologies
in accordance with Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments." Management of
the Company believes that the fair value of financial instruments,
consisting of cash, accounts receivable, accounts payable, notes
payable, long-term debt and subordinated debentures approximate
carrying value for assets and is undeterminable for liabilities.
O) PREFERRED STOCK
Preferred stock issuances are presented as net proceeds received on
issuance. Par and stated values are disclosed parenthetically on the
face of the accompanying consolidated balance sheet.
P) ACCRUED DIVIDENDS ON PREFERRED STOCK
Accrued dividends on preferred stock are presented as non-current
liabilities when it is unlikely that they will be paid in cash or
other current assets.
Q) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board (FASB)
issued SFAS No. 132 (revised 2003), Employers' Disclosures about
Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88 and 106, and a revision of FASB Statement No.
132. This standard revises employers' disclosures about pension plans
and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. The new rules require
additional disclosures about the assets, obligations, cash flows and
net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. The new disclosures are generally
effective for 2003 calendar year-end financial statements of public
companies. Adoption of this statement will not have a material impact
on the Company's financial statement disclosures.
13
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
On December 17, 2003, the Staff of the Securities and Exchange
Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition, which amends SAB 101, Revenue
Recognition in Financial Statements. SAB 104's primary purpose is to
rescind accounting guidance contained in SAB 101 related to multiple
element revenue arrangements, superseded as a result of the issuance
of EITF 00-21. Additionally, SAB 104 rescinds the SEC's Revenue
Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SEC
Topic 13, Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. While the wording of SAB 104 has changed to
reflect the issuance of EITF 00-21, the revenue recognition principles
of SAB 101 remain largely unchanged by the issuance of SAB 104.
Adoption of this standard is not expected to have an impact on the
Company's financial position, results of operations or cash flows.
Effective July 1, 2003, the Company will adopt SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities,
which rescinds Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred,
rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by this statement include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing or other exit or
disposal activity. Adoption of this statement is not expected to have
a material impact on the Company's financial position, results of
operations or cash flows.
As of July 1, 2003, the Company will adopt the disclosure requirement
of SFAS No. 148, Accounting for Stock-Based Compensation--Transition
and Disclosure. This statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based-method of accounting
for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company
does not expect to change to the fair value-based method of accounting
for stock-based employee compensation. The Company continues to
account for employee stock options under APB No. 25, Accounting for
Stock Issued to Employees, under which the Company did not recognize
any compensation expense for 2003, 2002 or 2001.
14
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity, which requires certain financial instruments that were
previously presented on the consolidated balance sheets as equity to
be presented as liabilities. Such instruments include mandatorily
redeemable financial instruments and certain options and warrants.
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for the
Company as of July 1, 2003. The Company is analyzing the pronouncement
to determine what effect it may have on its reported financial
position.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149 was
issued in order to address some of the implementation issues about
interpreting and applying the definition of a derivative. This
statement is effective for contracts entered into or modified after
June 30, 2003, and is effective for hedging relationships designated
after June 30, 2003. Adoption of this standard is not expected to have
any impact on the Company's financial position, results of operations
or cash flows.
Effective July 1, 2003, the Company will adopt Emerging Issues Task
Force (EITF) Issue No. 00-21, Accounting For Revenue Arrangements with
Multiple Deliverables, which establishes criteria for whether revenue
on a deliverable can be recognized separately from other deliverables
in a multiple deliverable arrangement. The criteria considers whether
the delivered item has stand-alone value to the customer, whether the
fair value of the delivered item can be reliably determined and the
customer's right of return for the delivered item. Adoption of this
standard is not expected to have an impact on the Company's financial
position, results of operations or cash flows.
In January 2003 and December 2003, the FASB issued Interpretation No.
46, Consolidation of Variable Interest Entities (FIN 46), and its
revision, FIN 46-R, respectively. FIN 46 and FIN 46-R address the
consolidation of entities whose equity holders have either not
provided sufficient equity at risk to allow the entity to finance its
own activities or do not possess certain characteristics of a
controlling financial interest. FIN 46 and FIN 46-R require the
consolidation of these entities, known as variable interest entities
(VIEs), by the primary beneficiary of the entity. The primary
beneficiary is the entity, if any, that is subject to a majority of
the risk of loss from the VIE's activities, entitled to receive a
majority of the VIE's residual returns, or both. FIN 46 and FIN 46-R
are applicable for financial statements of public entities that have
interests in VIEs or potential VIEs referred to as special-purpose
entities for periods ending after December 15, 2003. Application by
public entities for all other types of entities is required in
financial statements for periods ending after March 15, 2004. Adoption
of both of these standards is not expected to have an impact on the
Company's financial position, results of operations or cash flows.
15
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
NOTE 4 - INVENTORIES
At June 30, 2001, inventories consist primarily of goods purchased as
components, which are used in the assembly of manufactured goods. The
Company regularly reviews its inventory for obsolete and slow-moving
items, which includes reviews of inventory levels of certain product
lines and an evaluation of the inventory based on changes in
technology and markets.
Raw Materials $138,934
Work in process 8,443
-----
Total Inventories $147,377
========
During the year ended June 30, 2002, the Company sold virtually all
its remaining inventories to its then sole supplier under its supply
chain agreement. As a result there was no inventory at either June 30,
2003 or 2002.
NOTE 5 - PROPERTY AND EQUIPMENT, NET
Property and equipment, consist of the following:
June 30,
2003 2002 2001
------------ ------------ -------------
Machinery and equipment $ - $ - $ 139,932
Computer equipment - 5,000 5,000
Furniture and fixtures - 5,000 5,000
------------ ------------ -------------
- 10,000 149,932
Less accumulated depreciation and
amortization - (2,500) (500)
------------ ------------ -------------
$ - $ 7,500 $ 149,432
============ ============ =============
16
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
Depreciation and amortization of property, plant and equipment was
$1,000, $2,000, and $104,390 for the years ended June 30, 2003, 2002
and 2001, respectively. In April 2001, all assets were written down to
their estimated future value. (See Note 11-B).
During the fiscal year ended June 2002, the Company sold all of its
manufacturing machinery and equipment for net book value ($139,932) to
its then sole supplier with whom it had a supply chain agreement.
In December 2001, a judgment in the amount of $52,200 was entered by a
vendor against the Company. Pursuant to this judgment, in November
2002, the Company was forced to sell at auction, all of its remaining
furniture and equipment, in full settlement of this obligation. A
consultant to the Company purchased these assets at auction for
approximately $1,100 and is currently leasing these assets to the
company on a month-to-month basis for $100 per month.
NOTE 6 - DEBT OBLIGATIONS
A) NOTES PAYABLE
Notes Payable consists of the following:
2003 2002 2001
---- ---- ----
TW Cable, LLC $ 249,900 $ 50,000 $ 50,000
Edward Goodstein 166,600 1,317,376 133,333
Augustine Capital 75,000 75,000 25,000
Former employee 35,000 35,000 35,000
J&B Associates 25,000 25,000 -
---------- --------- ---------
551,500 1,502,376 243,333
Less current
maturities 15,500 - -
---------- --------- ---------
$ 536,000 $1,502,376 $ 243,333
=========== ========== =========
These obligations mature as follows:
June 30,
2004 $ 15,500
2005 111,500
2006 27,500
2007 33,500
2008 36,000
Thereafter 327,500
---------
$551,500
=========
As described below, certain of these obligations have been satisfied
through the issuance of common stock and accordingly, are classified
as non-current obligations in the accompanying consolidated financial
statements.
17
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
TW Cable, LLC/Edward Goodstein:
In June 1998, the Company refinanced its revolving credit facility. TW
Cable, LLC ("TW"), an entity owned by the former principal stockholder
of Vertex, made available as collateral, assets with a value of
$1,268,000 to support the Company's factor-financing agreement. (See
Note 2-B). In October 2001, the Company's factor, R&R, seized this
collateral. In December 2002, the Company reached an agreement with TW
and Edward Goodstein ("Goodstein"), its principal, to restructure the
Company's indebtedness and preferred stock with TW and Goodstein. Debt
of $1,543,749 (including accrued interest and dividends), and 6,500
shares of preferred stock, were exchanged for 500,000 shares of common
stock and two notes payable for $252,000 and $168,000 respectively.
The notes bear interest at 5% per annum, mature in 2017, and are
personally guaranteed up to $133,000 by the Company's Chief Executive
Officer. The result of the debt/equity restructuring was a credit of
$1,286,134 to capital. If at such time either TW or Goodstein should
sell any of the aforementioned shares, the Company's debt obligation
and the guarantee would be reduced by 67% of the proceeds of such a
sale. At June 30, 2003, the balance remaining on the notes was
$249,900 and $166,600 respectively.
Augustine Capital:
In fiscal 2001 and 2002, Augustine Capital Management ("Augustine"), a
stockholder, made certain advances to the Company totaling $75,000. In
August 2003, the Company entered into a convertible note agreement
with Augustine which included this balance. (See Notes 13-A and 13-G).
Former Employee:
In February 2001, a former DataWorld employee lent the Company $35,000
in exchange for a $35,000, six-month note, payable at 10% interest per
annum. The balance on this note was $35,000 at June 30, 2003, 2002 and
2001, and accrued interest of $8,478, $4,929, and $1,380 is included
as accrued expenses in the accompanying consolidated financial
statements. In December 2003, this note, inclusive of accrued
interest, was exchanged for 14,000 shares of common stock. (See Note
13-G).
J&B Associates
In June 2002, the principal shareholders of Augustine advanced the
Company $25,000 pursuant to a convertible note agreement with J&B
Associates ("J&B"). Under the terms of the agreement, the Company
borrowed $25,000, with interest paid quarterly in arrears at the rate
of 8% per annum. The note matures in June, 2004. The agreement
provides that the Company's indebtedness to J&B (inclusive of accrued
interest) may, with the Company's consent, be converted into the
Company's common stock at a conversion price equal to $0.10 per share.
The Company is required to reserve shares of common stock sufficient
to satisfy the conversion of any outstanding balance.
18
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
B) FINANCING AGREEMENT
Until October 2003, the Company had a financing agreement ("the
Agreement") with R&R that, as amended, provided for revolving loans
and letters of credit subject to maximum borrowings of $5,000,000.
(See Note 2-B). Total borrowings were limited to 85% of eligible
accounts receivable (constituting those amounts outstanding 90 days or
less), 50% of eligible accounts receivable outstanding between 91 and
120 days, 40% of regular inventories, 10% of slow moving inventories
and the amount of collateral deposited by TW. The Company was required
to pay interest at prime plus 2 1/2%, with a minimum interest rate of
8%, and a commitment fee of 1% per annum. At June 30, 2003, 2002 and
2001, $1,838,655, $1,702,822 and $3,350,565, respectively, was
outstanding and there were no outstanding letters of credit issued for
inventory purchases. Borrowings under the Agreement are collateralized
by all of the assets of the Company. In connection with the Agreement,
TW agreed to deposit approximately $1,268,000 as additional collateral
for borrowings under the Agreement. Under the terms of the Agreement,
R&R had the right to draw down on such collateral beginning January
2000 and began to do so on June 15, 2000. In October 2001, pursuant to
the agreement, R&R seized the collateral pledged by TW and applied the
collateral to the outstanding loan balance. (See Note 6-A).
C) SECURED SUBORDINATED DEBENTURES
The subordinated debentures of approximately $90,473, $89,043 and
$87,593 at June 30, 2003, 2002 and 2001, respectively, net of
unamortized discount, held by several unaffiliated private investors,
remain secured by all of the Company's assets and are subordinated to
all current and future institutional loan facilities. These debentures
accrue interest at 8% are payable semi-annually and have a maturity
date of January 2004. The amount of amortized bond discount was $1,440
for each of the years ended June 2003, 2002, and 2001. The Company
discontinued interest payments in January, 2001. Accrued and unpaid
interest was $18,000, $10,500, and $3,090 at June 2003, 2002, and
2001, respectively. As the Company has discontinued such payments, the
entire amount has been reclassified as a current liability. (See Note
2-E).
D) BANKRUPTCY DISTRIBUTIONS PAYABLE
On March 24, 2000, the Company agreed with the Official Committee of
Unsecured Creditors ("the Committee") as to the modification of the
treatment of the Class 7 Unsecured Creditors ("the Class 7 Creditors")
under the Company's confirmed Chapter 11 Plan of Reorganization, as
previously modified ("the Plan"). Pursuant to such agreement, in
satisfaction of the claims of the Class 7 Creditors, the Company paid
the Class 7 Creditors, $400,000 from an escrow account and $100,000
from the Company on or about April 24, 2000. The balance of the amount
due to the Class 7 Creditors was $291,000. This amount was payable in
30 monthly installments of approximately $11,000 including interest at
8%, beginning on June 15, 2000. In addition, the Company had the
option, until March 31, 2001, to pay the then balance due plus an
additional $25,000 to the Class 7 creditors. In the event the Company
did not exercise this option, the Company was obligated to pay the
Class 7 Creditors a percentage of the Company's cumulative cash flow,
as defined, through September 2002 as originally specified in the
Plan. As the Company did not prepay the obligation, the option
expired. The Company discontinued making payments on this obligation
in March 2001. The balance owed to the Class 7 Creditors as of June
30, 2003, 2002, and 2001 was $270,332, $258,019, and $246,144
respectively, including accrued interest.
19
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
NOTE 7 - PREFERRED STOCK
A) $6 SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK
In connection with the reverse acquisition of Vertex, the Company
issued to TW 6,000 shares of $6 Senior Cumulative Convertible
Preferred Stock ("$6 Preferred Stock") having a stated value of $100
per share. In March 1999, TW purchased an additional 500 shares of
Preferred Stock. Beginning December 1, 1999, the dividends accrued at
the rate of $6 per share, and as declared by the Board of Directors,
were payable quarterly beginning March 1, 2000. The holders of the $6
Preferred Stock had the right to convert the $6 Preferred Stock into
the Company's common stock anytime after December 31, 1999 provided
that the market price of the Company's common stock is greater than
$1.50. In the event the holders of the $6 Preferred Stock elected to
convert, the amount of shares received in conversion would be
determined by dividing the stated value, including accrued but unpaid
dividends, by 75% of the market price of the Company's common stock,
as defined. Further, the $6 Preferred Stock was redeemable at the
option of the holder anytime after December 1, 2003 at the stated
value plus any accrued but unpaid dividends. In the event the holders
sought redemption, the Company could either redeem such shares for
cash or issue shares of common stock with a market value equaling the
redemption amount. As of June 30, 2002 and 2001, accrued dividends
were $77,991 and $38,991 respectively.
Pursuant to an agreement entered into by the Company and the holder of
the preferred stock dated December 4, 2002, the Company redeemed all
$650,000 of the $6 Senior Cumulative Convertible Preferred Stock,
extinguished $126,870 of accrued dividends and interest and $1,416,879
of principal indebtedness due the shareholders in exchange for 500,000
shares of Common Stock valued at $.01 per share and the issuance of
notes payable to the shareholder totaling $420,000. (See Notes 6-A and
8-B). As a result of this transaction the Company recorded additional
capital of $1,286,134.
20
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
B) 8% SERIES B CONVERTIBLE PREFERRED STOCK
On May 31, 2000, the Company issued 1,600 shares of a newly authorized
3,000 shares of 8% Series B Convertible Preferred Stock ("8% Preferred
Stock"), $.01 par value, with a stated value of $1,000 per share,
redemption value at 125% of the stated value, to accredited investors
pursuant to Regulation D under the Securities Act of 1933 for net cash
proceeds of approximately $1,435,000. (See Note 10-C). The 8%
Preferred Stock has no voting rights and is presently convertible into
common stock of the Company at an effective conversion price of the
lower of (i) 50% of the market price or (ii) $1.13, which represents
110% of the lowest closing bid of the Company's common stock for the
five trading days immediately preceding the closing date, May 31,
2000, as defined in the Certificate of Designation of the 8% Preferred
Stock. As the Company's Registration Statement on Form SB-2 has not
been declared effective, the conversion percentage has decreased from
75% of market to 50% of market as defined.
Additionally, the Stock agreement called for a mandatory conversion of
all outstanding shares (plus accrued dividends) of the 8% Preferred
Stock on May 31, 2003, subject to the investors total holdings not
exceeding 5% of the then outstanding shares of the Company's common
stock. On September 2003, this provision was amended to 9.9% of the
outstanding shares of common stock, and the mandatory conversion date
was amended to May 31, 2006.
In June, 2002, as per the terms of the preferred stock agreement, the
holders of the 8% Preferred Stock converted 5 shares of preferred
stock with a stated value of $5,000 into 1,453,408 shares of Common
Stock. (See Note 8-B). Holders of the 8% Preferred Stock are entitled
to receive dividends at the stated dividend rate of 8% on the stated
value of $1,000 on each 8% Preferred Stock share. Dividends are
cumulative from the date of issue, whether or not declared, for any
reason. As of June 30, 2003, 2002, and 2001, accrued dividends were
$393,436, $366,577, and $200,408, respectively.
NOTE 8 - COMMON STOCK
A) SUBSCRIPTIONS RECEIVED
At July 1, 2000 the Company had subscriptions received of $217,000
representing 652,905 shares of Common Stock. During fiscal 2001 the
Company received an additional $85,000 in subscription proceeds
representing 340,000 shares of the Company's common stock. (See Note
3-G).
Further, in connection with one of these subscriptions, the Company
agreed to issue warrants to the subscriber to purchase 12,500 shares
of the Company's common stock at $1.25 per share, expiring on May 17,
2003. The warrants were never exercised and thus expired.
21
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
B) COMMON STOCK ISSUANCES
Effective July 1, 2000, 687,905 shares of common stock were deemed
issued in consideration of previously received stock subscriptions.
(See Notes 3-G and 8-A). Additionally, in February 2001, 340,000
shares of common stock were deemed issued in consideration of $85,000
received.
In September 2001, the Company issued 600,000 shares of common stock
to a marketing and consulting company pursuant to a long-term
consulting agreement. (See Note 10-C).
In November 2001, the Company issued 750,000 shares of common stock to
an individual pursuant to a long-term consulting agreement. (See Note
10-C).
In November 2001, the Company issued 900,000 shares of common stock to
two employees for reimbursement of various expenses. The shares were
valued at $27,900, or $0.03 per share, which represents the
weighted-average closing price for the two days preceding the
transaction.
In June 2002, the Company issued 1,453,408 shares of common stock
pursuant to the conversion of five shares of 8% Preferred Stock by
Augustine. (See Note 7-B).
In December 2002, the Company issued 500,000 shares of common stock to
TW and Goodstein. (See Note 7-A).
NOTE 9 - OTHER EQUITY TRANSACTIONS
A) STOCK OPTIONS
There are no stock options outstanding as of June 30, 2003.
B) WARRANTS
The holders of the Company's 8% Series B Convertible Preferred Stock
were granted five-year warrants to purchase 160,000 shares of common
stock at a purchase price of $1.2376 per share, which represents 120%
of the lowest of the closing bid prices for the Company's common stock
for the five trading days prior to May 31, 2000.
22
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
The Company granted to a consultant three-year warrants to purchase
500,000 shares of common stock at a purchase price of $1.2376 per
share, which represents 120% of the lowest of the closing bid prices
for the Company's common stock for the five trading days prior to May
31, 2000, in conjunction with issuance of the Company's 8% Series B
Convertible Preferred Stock. The warrants were never exercised and
thus expired.
Additionally, in May 2000, the Company agreed to issue three-year
warrants to purchase 12,500 shares of the Company's common stock at
$1.25 per share, to a common stock subscriber. The warrants were never
exercised and thus expired.
C) OTHER CHARGES
In February 2001, an employee of the Company was deemed to be issued
common stock pursuant to a subscription agreement, at a $14,000
discount to the market price of the stock in effect at the time.
Accordingly, the Company recorded a compensation expense and
additional paid-in-capital of $14,000.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
A) LEASES
As of June 30, 2003, the Company had no operating lease obligations.
Since fiscal 2001, the Company had been renting office space on a
month-to-month basis. In February 2004, the Company entered into an
agreement to lease approximately 2,800 square feet of office space in
Hauppauge, NY, to serve as the Company's headquarters. The lease is
for a period of four years with an annual rent of $30,800 and a 3%
annual increase in each of the three subsequent years. This charge is
inclusive of real-estate taxes and common area charges, but does not
include utilities. Outlined below is the Company's minimum annual
rental commitment under the terms of this lease:
23
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
Years ending June 30 Total:
------
2004 $ 10,267
2005 31,108
2006 32,041
2007 33,003
2008 22,437
----------
$ 128,856
==========
Rent expense, including related real estate taxes and other operating
charges, was approximately $32,185, $41,230 and $324,895 for the years
ended June 30, 2003, 2002 and 2001, respectively.
B) LITIGATION MATTERS
The Company is a party to legal matters arising in the general course
of business. During fiscal 2001 and subsequently, the Company decided
not to dispute litigation with suppliers and other creditors for
collection of amounts owed to them. As a result, as of June 30, 2003,
the Company had outstanding judgments amounting to $1,001,115. This
balance is included in accounts payable in the accompanying
consolidated financial statements.
In September 2000, the Company began to negotiate a potential merger
with American Access Technologies ("AAT") which resulted in a Merger
Agreement being signed in April 2001. In June 2001, the Company was
notified by AAT that they were unilaterally terminating the agreement
claiming that the Company had suffered material and adverse changes
and that such change entitled AAT to terminate the agreement. AAT then
filed suit against the Company seeking reimbursement of various
incurred costs and $500,000 in damages. The Company has filed a
countersuit against AAT alleging wrongful termination. The matter is
currently set for trial in June 2004. The ultimate outcome of this
matter is not expected to have a material adverse effect on the
Company's results of operations or financial position.
In March 2004, the Company received a complaint from a purported
shareholder alleging wrongdoings by the CEOs of the Company with
regard to his management of the Company's affairs. The Company
believes that the allegations are without merit and denies any
wrongdoing on the part of the officer.
24
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
C) CONSULTING AGREEMENTS
In June 2001, the Company entered into an agreement with a business
consultant to consult on general business matters including but not
limited to accounting, human resources and operational issues. The
agreement has a one-year term with an automatic one-year renewal
unless either party gives written notice to the other prior to the
expiration of the term, and states that the consultant shall be paid
at the rate of $65.00 per hour plus reimbursement of expenses. In
November 2001, the Company issued 750,000 shares of common stock to
the consultant. (See Note 8-B). The shares were valued at $23,250, or
$0.03 per share, which represents the weighted-average closing price
for the two days preceding the agreement. This agreement was
terminated subsequently.
In September 2001, the Company entered into an agreement with a
consulting firm whereby the firm would provide sales and marketing
services as defined by the agreement. Pursuant to this agreement, the
Company granted and issued 600,000 shares of common stock to the
consulting firm. (See Note 8-B). The shares were valued at $37,020, or
$0.06 per share, which represents the weighted-average closing price
for the two days preceding the agreement.
D) EMPLOYEE PENSION PLAN
Prior to September 2001, the Company participated in a multi-employer,
union-sponsored pension plan covering its union employees pursuant to
a negotiated labor contract. In addition, during fiscal 2001, the
Company participated in a defined contribution plan.
E) MAJOR CUSTOMERS
During the fiscal year ended June 30, 2003, four customers accounted
for 19%, 14%, 14% and 13% of net sales, respectively.
F) INSURANCE
Due to liquidity restrictions, the Company ceased carrying insurance
in September 2001 and relied on the pass-through warranties provided
by its manufacturers. The Company cannot assess the significance of
not maintaining product liability insurance, but to date no claims
have been made and the Company is unaware of any potential product
liability claims against it. In February 2004, the Company purchased
general liability and property insurance.
25
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
NOTE 11 - IMPAIRMENT OF ASSETS
A) GOODWILL
In September 2001, as a result of the restructuring of operations, the
Company determined that the goodwill recognized in the reverse
acquisition of Vertex had no continuing value. Accordingly, the
unamortized balance of $3,391,020 of goodwill was charged to
operations in fiscal 2001. (See Note 1-B).
B) FIXED ASSETS
Effective April 2001, it became apparent to the Company that due to
its decision to restructure and discontinue assembly operations, the
Company's building improvements, machinery and equipment, computer
equipment and furniture and fixtures would be disposed of and
accordingly, their carrying value was impaired as of June 30, 2001.
(See Note 5). The Company determined the fair value of these assets to
be what was subsequently realized on their sale to its then sole
supplier in fiscal 2002. (See Note 5). Accordingly, a loss of $252,054
was charged to operations in fiscal 2002 as impairment of assets.
C) WEB SITE DEVELOPMENT COSTS
In January 2000, the Company issued 1,800,000 shares of its common
stock, in exchange for services valued at $360,000 to be provided in
connection with the development of the Company's web site. In fiscal
2000 the Company recognized $54,000 of expense relating to the initial
design of the web site. In 2001, as a result of substantial
non-performance by the service provider, the Company abandoned the
project and, accordingly, reversed the $306,000 un-amortized balance
against paid-in capital as it had been able to recover and cancel
1,200,000 shares of common stock issued under this arrangement. The
difference of $66,000 was written off in fiscal 2001.
NOTE 12 - INCOME TAXES
As a result of the Company's fiscal 2003, 2002 and 2001 losses and
inability to realize tax benefits, the Company recorded no tax benefit
for the years ended June 30, 2003, 2002 and 2001.
The Company anticipates that for the foreseeable future it will
continue to be required to provide a 100% valuation allowance for the
tax benefit of its net operating loss carry-forwards and temporary
differences. At June 30, 2003, such allowance was approximately
$6,300,000.
26
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
As a result of the above, the Company has an effective tax rate of
zero. As of June 30, 2003, the Company's net operating loss
carry-forwards aggregate approximately $18,526,817, which expire
during fiscal 2006 through 2023.
NOTE 13 - SUBSEQUENT EVENTS - (UNAUDITED)
A) 8% CONVERTIBLE NOTE PAYABLE
In August 2003, the Company entered into an 8% convertible note
agreement with Augustine, an existing stockholder (the "Augustine
Agreement"). Under the terms of the agreement, the Company may borrow
up to $500,000, with interest paid quarterly in arrears at the rate of
8% per annum. Individual advances are evidenced by separate sub-notes.
All outstanding notes are due May 28, 2005. The agreement provides
that the Company's indebtedness to Augustine (inclusive of accrued
interest) may, with the Company's consent, be converted into the
Company's common stock at a price equal to 75% of the lowest bid price
for the five trading days immediately preceding the conversion. The
Company is required to reserve shares of common stock sufficient to
satisfy the conversion of any outstanding advances.
As of June 30, 2003, the Company had received advances from Augustine
totaling $75,000 and as of August 2003, subsequent advances totaling
$99,000, for a total indebtedness of $174,000. These advances, plus
accrued interest of $11,550, were converted into a sub-note in
accordance with the terms of the Augustine Agreement, and subsequently
converted to common stock. (See Note 13-G).
B) STOCKHOLDER LOAN
In January 2004, the Company entered into an agreement with a
stockholder whereby the stockholder agreed to advance up to $200,000
to the Company on a short-term basis for purposes of settling
outstanding judgments and financing ongoing projects. As of January
15th 2004, the outstanding balance was $62,500. As this debt is
non-interest bearing, the Company will impute interest.
C) PREFERRED STOCK CONVERSIONS
In August 2003, as per the terms of the 8% Convertible Preferred Stock
agreement, Augustine, converted three shares of preferred stock with a
stated value of $3,000 plus accrued dividends of $775 into 1,078,571
shares of Common Stock based on a conversion price of $0.0035 per
share.
Additionally, in September 2003, Augustine, converted 33 shares of
preferred stock with a stated value of $33,000 plus accrued dividends
of $8,730, into 1,594,780 shares of Common Stock based on a conversion
price of $0.026 per share.
27
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
D) CONSULTING AND COMMISSION AGREEMENT
In October 2003, the Company entered into an agreement with a
consultant/advisor in consideration of his acceptance to be on the
Advisory Board of the Company's subsidiary, DWS Defense Systems, Inc.
The agreement calls for the consultant to devote such time and
attention to his duties, as he deems appropriate in order to expand
the Company's of business. The agreement has four components: a
commission component, a loan component, a grant component and a stock
option component.
The commission component calls for the consultant/advisor to receive
2% of gross receipts from all contracts or other sales of the Company
or affiliates that result from his efforts.
The grant component calls for the consultant to receive 400,000 shares
of the Company's Common Stock upon signing of the agreement.
The stock option component calls for the consultant/advisor to be
awarded 1,200,000 options that are exercisable immediately and expire
October 29, 2013. The options have exercise prices as follows: $.50
per share for the first 200,000 shares, $1.00 per share for the next
200,000 shares, $2.00 per share for the next 200,000 shares, $3.00 per
share for the next 200,000 shares, $4.00 per share for the next
200,000 shares and $5.00 per share for the last 200,000 shares.
The loan component calls for the Company to loan the consultant
$150,000 without interest which is required to be repaid with profits
earned by the consultant out of the sale of shares acquired by him
pursuant to the stock grant or stock options provided for in this
agreement, by 2013.
Pursuant to this agreement the Company is obligated to issue 400,000
shares of common stock.
In addition, as a result of the aforementioned consulting agreement
being executed, the Company paid to another individual a finder's fee
of $50,000, and issued warrants to purchase 900,000 shares of common
stock at prices ranging from $0.50 to $5.00 per share, such warrants
to expire in five years.
E) OTHER CONSULTING AGREEMENTS
In November 2003, the Company entered into an agreement with a
consultant in consideration of his acceptance to serve as Chairman of
the Advisory Board of the Company's subsidiary, DWS Defense Systems,
Inc. The agreement calls for the consultant to devote such time and
attention to his duties, as he deems appropriate in order to expand
the Company's business. In consideration, the Company awarded 300,000
options to purchase common stock that are exercisable immediately and
expire in October 2013. The options have exercise prices as follows:
$.75 per share for the first 50,000 shares, $1.00 per share for the
next 100,000 shares, $1.50 per share for the next 50,000 shares, $2.00
per share for the next 50,000 shares, and $2.50 per share for the last
50,000 shares.
28
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
In November 2003, the Company entered into an agreement with a
consultant in consideration of his acceptance to serve on the Advisory
Board of the Company's subsidiary, DWS Defense Systems, Inc. The
agreement calls for the consultant to devote such time and attention
to his duties, as he deems appropriate in order to expand the
Company's business. In consideration, the Company awarded 100,000
shares of common stock, and 300,000 options to purchase common stock
that are exercisable immediately and expire in November 2008. The
options have exercise prices as follows: $.75 per share for the first
50,000 shares, $1.00 per share for the next 100,000 shares, $2.00 per
share for the next 50,000 shares, $3.00 per share for the next 50,000
shares, and $5.00 per share for the last 50,000 shares. Pursuant to
this agreement the 100,000 shares were issued in November, 2003 and
were valued at $20,000, or $.20 per share, the weighted average
closing market price for the two days before and after the date of the
agreement.
In November 2003, the Company entered into an agreement with a
consultant in consideration of his acceptance to serve on to the
Advisory Board of the Company's subsidiary DWS, Defense Systems, Inc.
The agreement calls for the consultant to devote such time and
attention to his duties, as he deems appropriate in order to expand
the Company's business. In consideration, the Company awarded 300,000
options to purchase common stock that are exercisable immediately and
expire in November 2008. The options have exercise prices as follows:
$.75 per share for the first 50,000 shares, $1.00 per share for the
next 100,000 shares, $2.00 per share for the next 50,000 shares, $3.00
per share for the next 50,000 shares, and $5.00 per share for the last
50,000 shares.
In January, 2004, the Company entered into a consulting agreement with
a relative of the Company's President and Chief Executive Officer. The
agreement calls for the consultant to provide business planning and
consulting services. In consideration, the Company awarded him 200,000
shares of Common Stock valued at $80,000, or $0.40 per share, the
weighted average closing market price for the two days before and
after the date of the agreement.
29
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
F) STOCK ISSUANCES - OTHER
In November 2003, an existing stockholder entered into an agreement
with the Company to purchase an additional 100,000 shares of common
stock for $50,000, or $0.50 per share.
In November 2003, an existing stockholder entered into an agreement
with the Company to purchase an additional 200,000 shares of common
stock for $100,000, or $0.50 per share.
In December 2003, the Company settled a $97,000 liability with the
issuance of 60,000 shares of common stock.
In January 2004, a stockholder/consultant purchased 400,000 shares of
common stock for $100,000, or $0.25 per share.
G) PREFERRED STOCK AND DEBT CONVERSIONS
In November 2003, a former employee entered into an agreement to
convert the outstanding balance of $44,790 of principal and interest
on a note payable into 14,000 share of common stock, valued at $9,800
or $0.70 a share. (See Note 6-A).
In December 2003, Augustine converted the outstanding balance of
$185,550 of principal and interest on the Augustine Agreement,
together with $457,236 of outstanding dividends on their 8% Preferred
Stock, into 642,786 shares of common stock based on a conversion price
of $1.00 per share.
H) STOCK ISSUANCE UNDER SUBSCRIPTION AGREEMENT
In February 2004, the Company issued 500,000 shares of common stock to
four individuals, pursuant to four Subscription Agreements for total
proceeds of $100,000 or $0.20 per share.
I) SALES AND PAYROLL TAX OBLIGATIONS
In March 2004, the Company settled its sales tax obligation with the
State of Massachusetts which resulted in an installment plan whereby
the Company will make three monthly payments of $1,000 in full
settlement of this liability,
In March 2004, the Company settled its federal payroll tax liability
which resulted in an installment plan whereby the Company will make
eighteen monthly payments of $3,000 in full settlement of this
liability.
30
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
NOTE 14 - FOURTH QUARTER ADJUSTMENTS- FISCAL 2001
During the fourth quarter of the year ended June 30, 2001, the Company
recorded the following:
Over -accrual of sales taxes ($41,748)
Impairment of fixed assets $252,054
Write-off of goodwill $3,391,020
NOTE 15 - UNAUDITED QUARTERLY RESULTS- FISCAL 2003, 2002 AND 2001
The following tables contain selected unaudited statement of operations
information for each quarter of 2003, 2002 and 2001. The Company believes that
the following information reflects all normal recurring adjustments necessary
for a fair presentation of the information for the periods presented. Unaudited
quarterly results were as follows:
Year ended June 30, 2003
Fourth Third Second First
Quarter Quarter Quarter Quarter
Net sales $260,735 $286,834 $224,105 $178,982
Gross profit 160,010 204,273 106,402 74,083
Net loss (83,089) (77,336) (99,483) (232,587)
Basic and diluted loss
per share $ (.00) $ (.00) $ (.00) $ (.01)
Shares used in computation
of loss per share 34,240,313 34,240,313 33,892,487 33,740,316
Year ended June 30, 2002
Fourth Third Second First
Quarter Quarter Quarter Quarter
Net sales $174,015 332,658 $190,184 $499,785
Gross profit 8,224 97,766 139,221 199,904
Net loss ($432,394) ($249,596) ($315,535) ($211,314)
Basic and diluted loss
per share $ (.01) $ (.01) $ (.01) $ (.00)
Shares used in computation
of loss per share 32,686,193 32,286,905 31,730,927 30,173,862
DATAWORLD SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003, 2002 AND 2001
Year ended June 30, 2001
Fourth Third Second First
Quarter Quarter Quarter Quarter
Net sales 999,895 2,126,180 3,407,586 3,240,492
Gross profit (1,975,533) 243,932 453,161 514,312
Net loss (a) (6,520,202) (594,409) (537,841) (511,994)
Basis loss per share $ (.21) $ (.02) $ (.02) $ (.02)
Shares used in computation
of loss per share 30,036,905 29,878,683 29,661,421 29,044,000
(a) After fourth quarter adjustments. (See Note 14).