SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
Commission File Number 33-7693
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DATAWORLD SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 11-2816128
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
920 Conklin Street, Farmingdale, New York 11735
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (631) 293-1610
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _______
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Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes X No _______
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On May 15, 2001, 29,044,000 shares of common stock, $.001 par value were
outstanding.
Note: This is Page 1 of a document consisting of 18 pages.
DATAWORLD SOLUTIONS, INC.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
-----------------------------
ITEM 1: UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets - March 31, 2001 and June 30, 2000........................ 3
Statement of Operations - Three Months Ended
March 31, 2001 and 2000................................................ 5
Statement of Operations - Nine Months Ended
March 31, 2001 and 2000................................................ 6
Statement of Changes in Stockholders' (Deficiency)
For the Nine Months Ended March 31, 2001............................... 7
Statement of Cash Flows for the Nine Months Ended
March 31, 2001 and 2000................................................ 8
Notes to Condensed Consolidated Financial Statements..................... 9-13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................14-16
PART II- OTHER INFORMATION................................................. 17
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SIGNATURES................................................................. 18
2
DATAWORLD SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
2001 2000
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ASSETS
------
CURRENT ASSETS:
Cash $ - $ 51,153
Accounts receivable, net of allowance for doubtful
accounts of $90,000 and $67,000 as of March 31,
2001 and June 30, 2000, respectively 2,859,863 3,058,572
Inventories, net 1,386,704 1,680,577
Prepaid expenses and other current assets 20,826 30,221
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TOTAL CURRENT ASSETS 4,267,393 4,820,523
PROPERTY, PLANT AND EQUIPMENT, net 408,992 466,139
GOODWILL 3,298,116 3,437,472
DEFERRED ACQUISITION COSTS 200,395 -
OTHER ASSETS 88,090 88,350
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TOTAL ASSETS $ 8,262,986 $ 8,812,484
============ ============
The accompanying notes are an integral part of these financial statements
3
DATAWORLD SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
MARCH 31, JUNE 30,
2001 2000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 3,707,221 $ 22,972
Current portion notes payable - Affiliates 115,210 66,666
Cash overdraft 84,034 -
Notes payable 35,000 -
Accounts payable and accrued expenses 2,702,355 3,026,757
Bankruptcy distributions payable 228,006 291,000
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TOTAL CURRENT LIABILITIES 6,871,826 3,407,395
SUBSCRIPTIONS RECEIVED 302,000 217,000
LONG-TERM DEBT, NET OF CURRENT PORTION 47,612 3,721,967
NOTES PAYABLE - AFFILIATE, NET 55,556 66,667
SECURED SUBORDINATED DEBENTURES, NET 86,153 86,153
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
8% Series B Convertible Preferred Stock, $.01 par value;
stated value $1,000 per share; Redemption value
$2,000,000 authorized, 3,000 shares; 1,600
shares issued and outstanding, net
1,696,000 1,600,000
$6 Senior Cumulative Convertible Preferred stock, stated
value $100 per share, authorized 5,000,000 shares, 6,500
issued and outstanding, net
702,000 672,750
Common stock, par value $.001 per share; authorized 40,000,000 shares;
issued and outstanding 29,044,000 29,044 29,044
Deferred web site costs (306,000) (306,000)
Additional paid in capital 1,195,230 1,079,020
Accumulated deficit (2,416,435) (1,761,512)
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TOTAL STOCKHOLDERS' EQUITY 899,839 1,313,302
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,262,986 $ 8,812,484
============ ============
The accompanying notes are an integral part of these financial statements.
4
DATAWORLD SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2000 2001
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Net sales $ 2,402,321 $ 3,616,823
Cost of goods sold 1,882,248 2,815,525
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Gross profit 520,073 801,298
Selling, general and administrative expenses 614,528 585,472
Depreciation and amortization 79,876 82,370
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(Loss) earnings before interest (174,331) 133,456
Interest expense 143,937 115,280
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Net (loss) earnings (318,268) 18,176
Accrued dividends on preferred stock 41,750 -
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Net (loss) income applicable to common stockholders $ (360,018) $ 18,176
============= =============
SHARE INFORMATION
Basic and diluted (loss) income per share $ (.01) $ -
============= =============
Weighted average number of common shares outstanding 29,044,000 28,494,540
============= =============
The accompanying notes are an integral part of these financial statements
5
DATAWORLD SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED MARCH 31,
2001 2000
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Net sales $ 9,913,829 $ 9,953,195
Cost of goods sold 7,610,853 7,674,045
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Gross profit 2,302,976 2,279,150
Selling, general and administrative expenses 2,155,219 1,810,564
Depreciation and amortization 239,727 241,761
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(Loss) earnings before interest (91,970) 226,825
Interest expense 437,703 333,810
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Net (loss) (529,673) (106,985)
Accrued dividends on preferred stock 125,250 -
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Net loss applicable to common shareholders $ (654,923) $ (106,985)
============= =============
SHARE INFORMATION
Basic and diluted loss per share $ (.02) $ -
============= =============
Weighted average number of common shares outstanding 29,044,000 27,676,000
============= =============
The accompanying notes are an integral part of these financial statements.
6
DATAWORLD SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
RETAINED
8% $6.00 DEFERRED ADDITIONAL EARNINGS TOTAL
PREFERRED PREFERRED COMMON WEB SITE PAID-IN ACCUMULATED STOCKHOLDERS
STOCK STOCK STOCK COSTS CAPITAL (DEFICIT) EQUITY
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance July 1, 2000 $ 1,600,000 $ 672,750 $ 29,044 $ (306,000) $ 1,079,020 $(1,761,512) $ 1,313,302
Accrued dividends
on 8% preferred
stock 96,000 (96,000)
Accrued dividends
on $6 Preferred
stock 29,250 (29,250)
Agreements to issue 116,210 116,210
warrants
Net loss (529,673) (529,673)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance March 31, 2001
$ 1,696,000 $ 702,000 $ 29,044 $ (306.000) $ 1,195,230 $(2,416,435) $ 899,839
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of this financial statement
7
DATAWORLD SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED MARCH 31,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (529,673) $ (106,985)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 239,727 242,841
Interest expense 19,754 -
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 198,709 (922,305)
Decrease (increase) in inventories 293,873 (408,024)
Decrease (increase) in prepaid expenses and other current assets 9,395 (25,664)
Decrease (increase) in other assets 260 (2,223)
(Decrease) increase in accounts payable and accrued expenses (324,402) 183,034
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Net cash used in operating activities (92,357) (1,039,326)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred acquisition costs (105,395) -
Capital expenditures (43,224) (184,620)
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Net cash used in investing activities (148,619) (184,620)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under loan agreement 9,894 644,926
Issuance of subordinated debenture subsequently converted
to common stock - 250,000
Borrowings from affiliates, net 38,889 73,000
Proceeds form issuance on notes payable 35,000 280,000
Cash overdraft 84,034 -
Payment of bankruptcy distributions (62,994) -
Proceeds from subscriptions received 85,000 -
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Net cash provided by financing activities 189,823 1,247,927
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NET (DECREASE) INCREASE IN CASH (51,153) 23,980
Cash at beginning of period 51,153 -
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Cash at end of period $ - $ 23,980
============ ============
Supplemental disclosure of cash flow information:
Cash paid for Interest: $ 380,449 $ 332,730
============ ============
Non cash financing transactions:
Warrants issued in connection with Subordinated debenture $ - $ 51,000
============ ============
Warrants issued in connection with proposed merger transaction $ 95,000 $ -
============ ============
Warrants issued in connection with issuance of notes payable $ 21,210 $ -
============ ============
The accompanying notes are an integral part of these financial statements
8
DATAWORLD SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
DATAWORLD SOLUTIONS, INC., (the "Company") operates primarily in one
business segment - assembly and distribution of electronic wire, cable
and related products used primarily for data communication and
distribution. The principal market for the Company's products is in the
United States.
The condensed consolidated balance sheet as of March 31, 2001, the
related consolidated statements of operations, changes in stockholders'
deficiency and cash flows for the three and nine months ended March 31,
2001 and the condensed consolidated statement of stockholders' equity
for the nine months ended March 31, 2001 have been prepared by the
Company without audit. In the opinion of management, all adjustments
(which include only normal recurring accrual adjustments) necessary to
present fairly the consolidated financial position at March 31, 2001,
and the results of operations and cash flows for all periods presented
have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principals
generally accepted in the United States have been condensed or omitted.
It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto included in the Annual
Report on Form 10-KSB for the year ended June 30, 2000 filed by the
Company. The results of operations for the nine months ended March 31,
2001 are not necessarily indicative of the operating results expected
for the full fiscal year.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which assumes the realization
of assets and settlement of liabilities in the normal course of
business. For the nine months ended March 31, 2001, the Company
incurred a net loss of approximately $530,000 and has a deficit in
working capital of $2,604,000, which is not sufficient to fund the
Company's operations. Borrowings under the Company's line of credit are
due January 31, 2002 and as a result have been classified a current
liability in the accompanying condensed consolidated balance sheet as
of March 31, 2001. The Company has requested that the line be extended,
however such extension has not been granted. The Company is continuing
to negotiate with its lender, but there can be no assurance that the
Company will be successful in obtaining an extension of the line of
credit. The Company is continuing to pursue the merger with American
Access Technologies, Inc., which if consummated, is expected to
increase the Company's sources of capital on a consolidated basis. In
addition, management is continuing to seek other sources of capital. As
a result of the Company refocusing its business model on assembly
operations and away from traditional distribution, the Company has
initiated various streamlining strategies. During May 2001, we
consolidated our Long Island City operation into our Farmingdale
location. During June 2001, we have also consolidated our San Jose
assembly operation into our Farmingdale location in order to both
reduce costs and better manage our operations. As the result of these
consolidations, along with staff reductions in the Farmingdale
location, the Company has reduced its workforce from 82 on March 31,
2001 to 53 on June 12, 2001. The reduction in workforce was realized by
lowering employment levels in all departments. There is no assurance
that any or all of these actions taken will by themselves be sufficient
for the Company to continue as a going concern.
Certain reclassifications have been made to the prior periods amounts
to conform to the current period presentation.
9
DATAWORLD SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. INVENTORIES
Inventory consists principally of components used in the manufacture of
cable assemblies. The Company regularly reviews its inventory for
obsolete and slow-moving items which includes reviews of inventory
levels of certain product lines and an evaluation of the inventory
based on changes in technology and markets. As of March 31, 2001 and
June 30, 2000, the allowance for obsolete and slow-moving inventory was
approximately $519,000 and $532,000, respectively.
March 31, June 30,
2001 2000
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Raw Materials $ 1,120,758 $ 1,590,577
Work in Process 265,946 90,000
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Inventories, net $ 1,386,704 $ 1,680,577
============ ============
3. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, June 30,
2001 2000
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Revolving asset-based loan (a) $ 3,655,107 $ 3,657,677
Capitalized lease obligations (b) 64,726 87,262
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3,719,833 3,744,939
Less current portion of long-term debt 17,114 22,972
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$ 3,702,719 $ 3,721,967
============ ============
a. The Company has a financing agreement ("Agreement") with a financial
institution that, as amended, provides for revolving loans and letters
of credit subject to maximum borrowings of $5,000,000 through October
31, 2002. Total borrowings are limited to 85% of eligible accounts
receivable (constituting those amounts outstanding 90 days or less) and
50% of eligible accounts receivable outstanding between 91 and 120
days, 40% of regular inventories, 10% of slow moving inventory and the
amount of collateral deposited by TW Cable LLC, a related entity
("TW"). The Company is required to pay interest at prime plus 2 1/2%
and a commitment fee of 1% per annum. At March 31, 2001, there was a $
75,000 outstanding letter of credit issued for inventory purchases.
Borrowings under the agreement are collateralized by substantially all
of the assets of the Company. In connection with the Agreement, TW
agreed to deposit approximately $1,268,000 as additional collateral for
borrowings under the Agreement. Under the terms of the Agreement, TW
has the right to draw down on such collateral beginning January 2000
and began to do so on June 15, 2000. The Agreement, as amended,
requires, among other things, the Company to maintain a deficiency in
tangible net worth of not more than $3,500,000 and a deficiency in
working capital of not more than $3,800,000, as defined. In January
2001, the Company agreed to issue a warrant to the financial
institution, expiring January 19, 2003, to purchase 50,000 shares of
the Company's common stock at $.26 per share as consideration for
advancing funds to the Company in excess of its borrowing limit. The
estimated fair value of the warrant, $19,000, has been recorded as
additional interest expense for the three and nine month period ended
March 31, 2001.
10
DATAWORLD SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. LONG-TERM DEBT (CONTINUED)
b. The Company leases certain computer equipment, which is accounted for
as a capital lease. The obligation for the computer equipment requires
the Company to make monthly payments of $1,426 through March 2005.
4. NET LOSS PER COMMON SHARE
Stock options and warrants to purchase 1,429,334 shares have been
excluded from the calculation of diluted loss per share, as their
effect would have been antidilutive.
5. DEFERRED ACQUISITION COSTS
Effective December 7, 2000, the Company agreed to issue a warrant,
expiring December 7, 2005, to purchase 500,000 shares of the Company's
common stock at $.2625 to Delano Group Securities LLC ("Delano") as
partial consideration for advisory services rendered in connection with
the Company's proposed merger transaction with American Access
Technologies, Inc. ("AATK"). Additionally, the Company agreed to pay
Delano a $10,000 retainer and a monthly fee of $5,000 until either the
closing of the transaction with AATK or the proposed transaction with
AATK is terminated. Delano is affiliated with Augustine Fund L.P. who
is the holder of the Company's 8% Series B convertible preferred stock.
The estimated fair value of the above warrant had been classified as
deferred acquisition costs in the accompanying consolidated balance
sheet at March 31, 2001, together with other related costs. Further,
the Company had agreed to pay Delano a success fee equal to 2.5% of
consideration paid, as defined in the agreement, in the ATTK
transaction payable in shares of the Company's common stock. In
addition, the Company has agreed to register the common shares issuable
pursuant to this agreement.
6. SUBSCRIPTIONS RECEIVED
During the three months ended March 31, 2001 the Company received an
aggregate of $85,000 in exchange for agreeing to issue 340,000 shares
of the Company's common stock. During fiscal 2000 and 1999, the Company
received an aggregate of $227,000 in exchange for agreeing to issue
1,172,905 shares of the Company's common stock. Further, in connection
with one of these subscriptions, the Company agreed to issue warrants
to the subscriber to purchase 12,500 shares of the Company's common
stock at $1.25 per share, expiring on May 17, 2003.
7. NOTES PAYABLE
During the three month period ended March 31, 2001 the Company issued
(i) a note payable aggregating $50,000 to TW Cable, LLC, an affiliate,
and (ii) a note payable aggregating $35,000 to a former employee. The
notes bear interest at 10% and mature on August 9, 2001. In connection
with the issuance of such notes, the Company issued the holders
warrants to purchase an aggregate of 8,500 shares of the Company's
common stock at $.22 per share, expiring February 10, 2003. The
estimated relative fair value, $2,210, has been recorded as a discount
on such notes and is amortized as additional interest expense over the
life of the notes.
11
DATAWORLD SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. WEB SITE DEVELOPMENT COSTS
In January 2000, the Company issued 1,800,000 non-forfeitable shares of
its common stock, in exchange for services valued at $360,000 to be
provided in connection with the development of the Company's Web site.
Through March 31, 2001, the Company recognized $54,000 of expense
relating to the initial design of the Web site. Unamortized Web site
development costs have been classified as a component of stockholders'
equity in the accompanying consolidated financial statements and will
be recognized as services are provided.
9. CONTINGENCIES
a. LITIGATION MATTERS
The Company is a defendant in a federal lawsuit brought by a former
employee seeking approximately $900,000 in damages. The Company is
vigorously defending the suit and has answered the complaint, denying
all such claims and has filed a counter suit. The Company believes the
suit is without merit.
The Company is a party to other legal matters arising in the general
conduct of business. Management believes the ultimate outcome of such
other matters is not expected to have a materially adverse effect on
the Company's results of operations or financial position.
b. BANKRUPTCY DISTRIBUTION
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. As of March 31, 2001 the
balance due to the Class 7 Creditors is approximately 228,000. This
amount is payable in monthly installments of approximately $11,000 at
8% interest. 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. As the Company did not exercise this option, the
Company is obligated to pay the Class 7 Creditors a percentage of the
Company's cumulative cash flow, as defined, through September 2002, as
originally specified in the Plan.
12
DATAWORLD SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
10. SUBSEQUENT EVENTS
The Company terminated its lease at its Long Island City facility on
May 1, 2001 and consolidated that operation with its facility in
Farmingdale, New York. In June 2001, the Company consolidated its San
Jose manufacturing operations with its Farmingdale operations, while
maintaining a sales presence in San Jose, along with engineering
support. The Company is considering exploring opportunities, if any, to
terminate or sublet its lease at the San Jose location.
As a result of the Company's decision to refocus its business direction
away from distribution, the Company's Chief Operating Officer and a
Vice President left the employ of the Company and have resigned as
officers and directors.
The Company entered into a merger agreement dated as of April 9, 2001
with American Access Technologies, Inc., a Florida corporation, and
Dolphin Acquisition Corp., a Delaware corporation and newly formed
subsidiary of American Access Technologies, Inc. The merger agreement
provides for the merger of Dolphin Acquisition Corp. with and into us,
with us becoming a wholly-owned subsidiary of American Access
Technologies, Inc.
The merger agreement provides for the issuance of 0.25 shares of common
stock of American Access Technologies, Inc. in exchange for each share
of our common stock outstanding immediately prior to the consummation
of the merger. In addition, American Access Technologies, Inc. will
assume our outstanding options and warrants, which will represent the
right to purchase that number of shares of common stock of American
Access Technologies, Inc. equal to the product of the number of shares
of our common stock that were issuable upon the exercise of such option
or warrant immediately prior to the effective time of the merger
multiplied by 0.25, at weighted per share exercise prices equal to the
quotient determined by dividing the exercise price per share at which
such option or warrant was exercisable immediately prior to the
effective time of the merger by 0.25. Completion of the merger is
subject to the satisfaction of various conditions, including approval
of our stockholders and the stockholders of American Access
Technologies, Inc. We cannot assure you that the proposed merger will
be consummated.
Concurrently with the execution of the merger agreement, certain
directors and officers of ours entered into separate voting agreements
with American Access Technologies, Inc. These directors and officers
beneficially hold outstanding shares of our common stock representing
approximately 70% of our outstanding common stock, including options
and warrants exercisable for our common stock. In the voting
agreements, such directors and officers have agreed to vote their
shares of our common stock in favor of approval and adoption of the
merger agreement and approval of the merger and against any competing
transactions that may arise.
American Access Technologies, Inc. manufactures zone cabling units that
mount in ceilings, raised floors and custom furniture. American Access
Technologies, Inc.'s manufacturing subsidiary, Omega Metals, located in
Keystone Heights, Florida, offers precision metal fabrication and
finishing.
13
DATAWORLD SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
When used herein, the words "believe", "anticipate", "think", "intend",
"will be", "expect", and similar expressions identify forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements are not guarantees of future performance, and
actual results may differ materially from those in the forward-looking
statements. Readers are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date hereof. Readers
are also urged to carefully review and consider the various disclosures made
by the Company which attempt to advise interested parties of the factors
which affect the Company's business, including, without limitation, the
disclosures made hereunder.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2001
----------------------------
Net sales for the quarter ended March 31, 2001 were approximately
$2,402,000. Net sales for the quarter ended March 31, 2000 were
approximately $3,617,000. This decrease of approximately $1,215,000 or
33.6% in sales was primarily the result of both a slowdown in the
technology industry and purchases of technology related equipment in the
non technology sector of the economy.
Gross profit for the quarter ended March 31, 2001 was approximately
$520,000. Gross profit as a percentage of sales was 21.6% for the quarter
ended March 31, 2001. Gross profit for the period ended March 31, 2000 was
approximately $801,000. Gross profit as a percentage of sales was
approximately 22.2%. This decrease in gross profit is primarily the result
of the decreased sales volume in the current period.
Selling, general and administrative expenses were approximately $615,000 or
25.6% for the quarter ended March 31, 2001. For the period ended March 31,
2000 selling, general and administrative expenses were approximately
$585,000. The increase is primarily the result of additional executive
personnel.
Interest expense for the quarter ended March 31, 2001 was approximately
$144,000. For the quarter ended March 31, 2000, interest expense was
approximately $115,000. This increase of $29,000 was primarily due to
additional borrowings and debt discount costs.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2001
--------------------------------
Net sales for the nine months ended March 31, 2001 were approximately
$9,914,000. Net sales for the nine months ended March 31, 2000 were
approximately $9,953,000. This decrease of approximately $39,000 or .4% in
net sales was primarily due to the slowdown in both the technology industry
and purchases of technology related equipment in the non technology sector
of the economy due the third fiscal quarter. This reduction offset the
increase in sales realized by the Company during the first two quarters of
the fiscal year.
Gross profit for the nine months ended March 31, 2001 was approximately
$2,303,000. Gross profit as a percentage of sales was 23.2% for the nine
months ended March 31, 2001. Gross profit for the period ended March 31,
2000 was approximately $2,279,000. Gross profit as a percentage of sales
was 22.9% for the nine months ended March 31, 2000. Gross profit remained
consistent with the prior years' nine months primarily due to the decline
in the three months ended March 31, 2001.
14
DATAWORLD SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Selling, general and administrative expenses were approximately $2,155,000
or 21.7% for the nine months ended March 31, 2001. For the period ended
March 31, 2000 selling, general and administrative expenses were
approximately $1,811,000 or 18.2% of sales for the nine months ended March
31, 2000. This increase was primarily due to an increase in office salaries
and other office expenses.
Interest expense for the nine months ended March 31, 2001 was approximately
$438,000. For the nine months ended March 31, 2000 interest expense was
approximately $334,000. The increase of approximately $104,000 is a result
of an increase in borrowings and debt discounts costs, which was partially
offset by a decrease in interest rates in the third fiscal quarter.
LIQUIDITY AND FINANCIAL CONDITION
AS OF MARCH 31, 2001
--------------------
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which assumes the realization of
assets and settlement of liabilities in the normal course of business. For
the nine months ended March 31, 2001, the Company incurred a net loss of
approximately $530,000 and has a deficit in working capital of $2,604,000,
which is not sufficient to fund the Company's operations. Borrowings under
the Company's line of credit are due January 31, 2002 and as a result have
been classified a current liability in the accompanying condensed
consolidated balance sheet as of March 31, 2001. The Company has requested
that the line be extended, however such extension has not been granted. The
Company is continuing to negotiate with its lender, but there can be no
assurance that the Company will be successful in obtaining an extension of
the line of credit. The Company is continuing to pursue the merger with
American Access Technologies, Inc. which, if consummated, is expected to
increase the Company's sources of capital on a consolidated basis. In
addition, management is continuing to seek other sources of capital. As a
result of the Company refocusing its business model on assembly operations
and away from traditional distribution, the Company has initiated various
streamlining strategies. During May 2001, we consolidated our Long Island
City operation into our Farmingdale location. During June 2001, we have
also consolidated our San Jose assembly operation into our Farmingdale
location in order to both reduce costs and better manage our operations. As
the result of these consolidations, along with staff reductions in the
Farmingdale location, the Company has reduced its workforce from 82 on
March 31, 2001 to 53 on June 12, 2001. The reduction in workforce was
realized by lowering employment levels in all departments. There is no
assurance that any or all of these actions taken will by themselves be
sufficient for the Company to continue as a going concern.
During the nine months ended March 31, 2001, the Company used approximately
$92,000 in cash from operating activities. Net cash used during the nine
months was primarily due to the decrease in accounts receivable of
approximately $199,000 and a decrease in inventory of $294,000, offset
partially by a decrease in accounts payable of $324,000. This decrease in
receivables helped reduce the Company's borrowings under its revolving
credit facility.
Investing activities used net cash of approximately $149,000 during the
nine months ended March 31, 2001. The principal use was for purchases of
additional computer equipment needed for the Company's new system
implemented in January 2000 and costs incurred as the result of the
proposed merger.
15
DATAWORLD SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Financing activities provided cash of approximately $190,000. The cash
provided by financing activities was funded primarily by the subscription
received for the sale of 340,000 shares of our common stock, which yielded
the company $85,000, a $50,000 loan made to the Company by an affiliate and
a $35,000 loan made by a former employee of the Company.
On May 31, 2000, the Company issued 1,600 shares of newly created 8% Series
B Convertible Preferred Stock ("8% Preferred Stock"), $.01 par value, with
a stated value of $1,000 per share, 3,000 shares authorized, to accredited
investors pursuant to Regulation D under the Securities Act of 1933 for net
cash proceeds of approximately $1,435,000. The 8% Preferred Stock has no
voting rights and is convertible into common stock of the Company at an
effective conversion price of 63% of the market price, subject to further
reduction for each month or partial month subsequent to the date hereof
that the related SEC registration statement is not declared effective and
subject to reduction to 50% if such registration statement is not effective
by May 31, 2001. In addition, the investors were granted five-year warrants
to purchase 160,000 shares of common stock at a purchase price equal to
120% of the lowest of the closing bid prices for the Company's common stock
for the five trading days prior to May 31, 2000. The Company recorded a
deemed dividend of $638,780 for the year ended June 30, 2000, representing
the discount resulting from the allocation of the proceeds to the
beneficial conversion feature and the fair value of the underlying
warrants. Such deemed dividend was recognized on the date of issuance since
the 8% Preferred Stock was immediately convertible. In connection with this
transaction, the Company issued five-year warrants to the broker/finder to
purchase an aggregate of 100,000 shares of the Company's common stock at
120% of the lowest of the closing bid prices for the Company's common stock
for the five trading days preceding the closing date, May 31, 2000. These
warrants were fair valued at $105,000. In addition the Company issued
500,000 warrants to a consultant.
Management plans to continue to pursue revenue growth, which may provide
additional borrowings under its revolving credit facility. In light of the
recent economic downturn in the United States (including delays in spending
by some of the Company's telecom customers), the Company plans to focus in
the near-term on expanding its relationships with its OEM customer base.
The Company has been repaying cash collateral under the credit facility on
a monthly basis beginning June 15, 2000 of approximately $15,000 per month.
In an effort to continue to grow the Company, management intends to seek
additional sources of equity and debt financing.
As required by the terms of the Company's 8% Series B Convertible Preferred
Stock, the Company filed a registration statement in December 2000. The
Registration Statement covers shares of the Company's common stock issuable
(i) upon conversion of such Preferred Stock, (ii) in lieu of cash dividends
on such Preferred Stock and pursuant to (iii) upon exercise of certain
options and warrants issued, in connection with such financing.
The Company's continuing existence as a going concern is dependent on its
ability to obtain profitable operations, generate sufficient cash flow to
meet its obligations on a timely basis, comply with the terms and covenants
of its financing agreement and to obtain additional financing as may be
required.
16
PART II- OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in a federal lawsuit brought by a former
employee seeking approximately $900,000 in damages. The Company is
vigorously defending the suit and has answered the complaint, denying
all such claims and has filed a counter suit. The Company believes the
suit is without merit.
The Company is a party to other legal matters arising in the general
conduct of business. Management believes the ultimate outcome of such
other matters is not expected to have a materially adverse effect on
the Company's results of operations or financial position.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K /A filed April 25, 2001 in connection with the
proposed transaction with American Access Technologies, Inc.
Form 8-K filed April 24, 2001 in connection with the proposed
transaction with American Access Technologies, Inc.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATAWORLD SOLUTIONS, INC.
By: /s/ Daniel McPhee
--------------------------
Chief Executive Officer
By: /s/ Lawrence Dobroff
--------------------------
V.P. of Finance
Dated: June 22, 2001
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