UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 1-9263
DATAWORLD SOLUTIONS, INC.
-------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 11-2816128
------------------------ ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
275K Marcus Blvd.
Hauppauge, NY 11788
--------------------------
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (631) 951-4000
Check 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 ____ No __X__
The number of shares outstanding of each of the issuer's classes of common
stock, as of the last practicable date:
Common stock, $.001 par value 32,465,450
--------------------------------------------------------------------------------
Class Number of shares outstanding at April 28, 2004
Transitional Small Business Disclosure Format: Yes ____ No __X__
Page 1
DATAWORLD SOLUTIONS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2003
and June 30, 2003............................................. 1
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2003 and 2002............... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended September, 2003 and 2002................... 3
Notes to Condensed Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations............................. 12
Item 3. Controls and Procedures....................................... 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 15
Item 2. Changes in Securities and Use of Proceeds..................... 15
Item 3. Defaults Upon Senior Securities............................... 15
Item 4. Submission of Matters to a Vote of Security Holders.......... 15
Item 5. Other Information............................................. 16
Item 6. Exhibits and Reports on Form 8-K.............................. 16
SIGNATURES ................................................................ 16
Exhibit 31 Section 302 Certification
Exhibit 32 Section 906 Certification
Page 2
ITEM 1 FINANCIAL STATEMENTS
DATAWORLD SOLUTIONS, INC.
Condensed Consolidated Balance Sheet
September 30, 2003
September 30, 2003 June 30, 2003*
(Unaudited)
------------------ --------------
ASSETS
CURRENT ASSETS:
Cash $ 4,859 $ 11,888
Accounts receivable, net of allowance
for doubtful accounts of $20,000 113,753 173,309
------------ ------------
TOTAL CURRENT ASSETS 118,612 185,197
------------ ------------
TOTAL ASSETS $ 118,612 $ 185,197
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Payable to factor $ 1,785,999 $ 1,838,655
Accounts payable 3,172,966 3,200,009
Accrued expenses and other 1,207,862 1,137,009
Current portion of notes payable 15,500 15,500
Bankruptcy distributions payable 275,859 270,332
Secured subordinated debentures, net 90,833 90,473
------------ ------------
TOTAL CURRENT LIABILITIES 6,549,019 6,551,978
Notes payable - related parties 579,000 536,000
Accrued dividends on preferred stock 416,035 393,436
Subscriptions received 35,000 35,000
------------ ------------
TOTAL LIABILITIES 7,579,054 7,516,414
------------ ------------
Page 1
COMMITMENTS AND CONTINGENCIES
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; 1,559 and 1,595
shares issued and outstanding at
September 30, 2003 and June 30, 2003,
respectively 1,559,000 1,595,000
Common stock, $.001 par value; 40,000,000
shares authorized, 36,913,664 and 34,240,313
issued and outstanding at September 30, 2003
and June 30, 2003 respectively 36,914 34,240
Additional paid-in capital 3,227,762 3,144,931
Accumulated deficit (12,284,118) (12,105,388)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (7,460,442) (7,331,217)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 118,612 $ 185,197
============ =============
* Condensed from audited financial statements.
See accompanying notes to condensed consolidated financial statements.
DATAWORLD SOLUTIONS, INC.
Unaudited Condensed Consolidated Statements of Operations
Three Months ended September 30,
2003 2002
----------- -----------
Net sales $ 145,483 $ 178,982
Cost of goods sold 84,714 104,899
----------- -----------
Gross profit 60,769 74,083
----------- -----------
Selling, general and administrative expenses 127,644 187,201
Interest expense 134,911 119,469
----------- -----------
262,555 306,670
----------- -----------
(201,786) (232,587)
Page 2
Commission income 55,160 --
----------- -----------
Net loss $(146,626) $ (232,587)
Accrued dividends on preferred stock 32,104 41,650
----------- -----------
Net loss attributable to common shareholders $ (178,730) $ (274,237)
=========== ===========
Basic and diluted loss per share $ (0.01) $ (0.01)
=========== ===========
Weighted average common shares outstanding
- basic and diluted 34,754,646 33,740,316
=========== ===========
See accompanying notes to condensed consolidated financial statements.
DATAWORLD SOLUTIONS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30,
2003 2002
Cash flows from operating activities:
Net loss $ (146,626) $ (232,587)
Adjustments to reconcile net loss to net cash
provided (used) in operating activities:
Depreciation - 500
Amortization of bond discount 360 360
Accrued interest on bankruptcy liabilities 5,527 1,180
Interest component of beneficial conversion
feature of convertible loans 40,000 -
Page 3
Changes in current assets and liabilities:
Accounts receivable 59,556 17,361
Other assets - -
Accounts payable and accrued liabilities 43,810 96,185
------------ ------------
Net cash provided (used ) by
operating activities 2,627 (117,001)
------------ ------------
Cash flows from financing activities:
Proceeds from loans 46,000 -
Principal repayments on loans (3,000) -
Borrowings from asset-based lender 152,382 241,468
Repayments of amounts due to asset-based
lender (205,038) (186,709)
------------ ------------
Net cash provided (used) by
financing activities (9,656) 54,759
------------ ------------
Net change in cash (7,029) (62,242)
Cash, beginning of period 11,888 4,872
------------ ------------
Cash, end of period $ 4,859 $ (57,370)
============ ============
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ - $ -
============ ============
Cash paid for interest $ - $ -
============ ============
Non-Cash Investing and Financing Activities:
Conversion of preferred stock and accrued
dividends to common stock $ 45,505 $ -
============ ============
Dividends accrued on preferred stock $ 32,104 $ 41,650
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 4
DATAWORLD SOLUTIONS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Summary of Significant Accounting Policies
(A) - Unaudited Interim Financial Information
The unaudited consolidated interim financial statements, and accompanying notes
included herein, have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and reflect all
adjustments which are of a normal recurring nature and which, in the opinion of
management, are necessary for the fair statement of the results of the three
months ended September 30, 2003 and 2002. Certain information and footnote
disclosures have been condensed or omitted pursuant to such rules and
regulations. The results for the current interim period are not necessarily
indicative of the results for the full year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto in the Company's latest annual report filed
with the SEC on Form 10-KSB for the year ended June 30, 2003.
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiary on a consolidated basis. All significant
intercompany accounts and transactions have been eliminated. The preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies as of the date of the consolidated
financial statements and the reported amount of revenues and expenses during the
period. Actual results could differ from those estimates.
(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.
Subsequent to September 30, 2003, the Company established a new division, DWS
Defense Systems to address the demand for security and safety products.
(C) - Net Loss Per Basic and Diluted Common Share
Page 5
Net loss per basic and diluted common share is computed on the basis of the
weighted average number of basic and diluted common shares outstanding during
the period. Only the weighted average number of shares of common stock
outstanding was used to compute basic and diluted loss per common share for the
three months ended September 30, 2003 and 2002. Warrants to purchase 160,000
shares of common stock have been excluded from the calculation of diluted loss
per share, as their effect would have been anti-dilutive.
(D) - Income Taxes
The Company records its income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the recognition of different tax
assets and liabilities for the future tax consequences of temporary differences
between the financial statement and tax basis carrying amounts of assets and
liabilities. There were no differing methods of reporting income for tax
purposes as compared to financial reporting purposes.
(E) - 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.
(F) - Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 150, "Accounting of Certain Financial
Instruments with Characteristics of both Liabilities and Equity," (SFAS 150).
Under SFAS 150, certain financial instruments, which under previous guidance
were accounted for as equity, should be accounted for as liabilities. The
financial instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003. Adoption of SFAS 150
did not have an impact on the Company's financial position.
In April 2003, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies
the accounting for derivative instruments, including derivative instruments
imbedded in other contracts, and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designed after June 30, 2003. Adoption of SFAS 149
did not have an impact on the Company's financial position.
Page 6
In December 2002, the FASB issued Statement of Financial Accounting Standard
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS
148). SFAS 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
Statement of Financial Accounting Standard 123, "Accounting for Stock-Based
Compensation" (SFAS 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.
Note 2: Going Concern
The Company has current assets of $118,612 (including $4,859 in cash) compared
with current liabilities of $6,549,019, resulting in a working capital deficit
of $6,430,407 as of September 30, 2003. In addition, the Company incurred a net
loss of $146,626 for the three months ended September 30, 2003 and has incurred
significant net losses in each of the three preceding fiscal years and has a
stockholder's equity deficit of $7,460,442 at September 30, 2003. Such deficits
and recurring losses raise questions about the Company's ability to continue as
a going concern.
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. Subsequent to September 30, 2003 the Company formed
a new subsidiary, DWS Defense Systems ("DWS"), 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 its current product offerings and greatly expand its customer base.
Additionally, the Company has formed an advisory board to assist DWS 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 DWS's products and services. The Company may also pursue strategic
acquisitions that provide it with growth and vertical integration within this
new area. There is no assurance that the Company will be successful in
accomplishing its objectives. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Page 7
Note 3: Notes Payable-related parties
Notes payable - related parties, as of September 30, 2003, consists of
the following:
TW Cable, LLC $ 249,900
Edward Goodstein 163,600
Augustine Capital 120,000
Former employee 36,000
J&B Associates 25,000
----------
594,500
(Less) current maturities (15,500)
----------
$ 579,000
==========
For the three months ended September 30, 2003, the Company's borrowings from
Augustine Capital required the recognition of $40,000 of additional interest
expense related to the lender's right to convert the outstanding balance of
their note payable into shares of common stock at a 25% discount from market.
Any future borrowings under this agreement will result in the recognition of
additional interest expense related to this beneficial conversion feature.
Note 4: Income Taxes
No income taxes were provided since the Company incurred losses from its
operations. As of September 30, 2003, the Company has net operating loss
carry-forwards totaling approximately $18,700,000, expiring at various dates
through fiscal 2023.
Note 5: Capital Stock Transactions
In August 2003, as per the terms of the 8% Convertible Preferred Stock
agreement, Augustine Capital Management ("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.
Following is a schedule of changes in shareholders' deficit for the three months
ended September 30, 2003:
8% Retained
Preferred Common Additional Earnings Stock-
Stock Common Stock Paid in (accumulated holder's
Amount Shares Amount Capital deficit) Deficit
----------- ----------- -------- ----------- ------------- ------------
Balance July 1, 2003 $1,595,000 34,240,313 $34,240 $3,144,931 $(12,105,388) ($7,331,217)
Conversion of preferred
stock to common stock (3,000) 1,078,571 1,079 2,696 775
Conversion of preferred
stock
to common stock (33,000) 1,594,780 1,595 40,135 8,730
Value of beneficial
conversion
feature of convertible
loans 40,000 40,000
Accrued dividends on 8%
preferred stock (32,104) (32,104)
Net loss - - - - (146,626) (146,626)
----------- ----------- -------- ----------- ------------- ------------
Balance September 30,
2003 $1,559,000 36,913,664 $36,914 $3,227,762 $(12,284,118) $(7,460,442)
=========== =========== ======== =========== ============= ============
Accrued and unpaid dividends on preferred stock amounted to approximately
$416,000 at September 30, 2003.
Page 8
Note 6: Contingencies
a. 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 September 30, 2003, the Company had outstanding
judgments amounting to $1,225,899. This balance is included in accounts payable
and accrued expenses 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. The Company has filed a counter suit
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 written complaint from a purported
shareholder alleging certain wrongdoings by the CEO of the Company with regard
to his management of the Company's affairs. The Company believes that the
allegations are totally without merit. The complaint was not filed in court and
in April 2004, the Company received written notice that the complaint was
withdrawn.
b. Default on debt obligations
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").
The Company has been in default on this agreement since fiscal 2001. 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.
The Company is currently in default on payments owed on its bankruptcy
distributions payable. 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. This obligation
is secured by all of the Company's assets, but is subordinate to all current and
future loan facilities.
c. Sales and payroll tax deliquencies
As of August 2001, the Company failed to remit sales taxes that it
collected from customers in four states. As of September 30, 2003, approximately
$320,000 was due these states (inclusive of estimated penalties and interest).
The Company is presently negotiating a settlement of it's approximately $258,000
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.
As of March 2002, the Company failed to remit federal payroll taxes that it
had collected. As of September 30, 2003, approximately $50,000 was due,
inclusive of estimated penalties and interest.
Page 9
Note 7: Subsequent events
a. 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 April 15, 2004, the outstanding balance was $62,500. As
this debt is non-interest bearing, the Company will impute interest.
b. Consulting and commission agreement
In October 2003, the Company entered into an agreement with a consultant/advisor
in consideration of his acceptance 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. 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.
Page 10
In addition, as a result of the aforementioned consulting agreement being
executed, the Company paid 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.
c. 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.
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 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.
Page 11
d. Stock issuances
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.
In February 2004, the Company issued 500,000 shares of common stock to the
Company's Chief Operating Officer upon his acceptance of the position.
e. 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. The Company
will recognize a gain on this debt extinguishment of $34,990.
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.
f. Stock issuance under subscription agreement
In February 2004, the Company issued 500,000 shares of common stock to four
unaffiliated individuals, pursuant to four Subscription Agreements for total
proceeds of $100,000 or $0.20 per share.
g. Contribution of treasury shares
In April 2004, the Company's President and Chief Executive Officer contributed
six million shares of common stock that he had previously held, to the Company's
treasury.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis covers material changes in the financial
condition of Data World Solutions, Inc., (the "Company") since June 30, 2003 and
material changes in the Company's results of operations for the three months
ended September 30, 2003, as compared to the same period in 2002.
Page 12
Special note regarding forward-looking statements
This report contains forward-looking statements within the meaning of federal
securities laws. These statements plan for or anticipate the future.
Forward-looking statements include statements about our future business plans
and strategies, statements about our need for working capital, future revenues,
results of operations and most other statements that are not historical in
nature. In this Report, forward-looking statements are generally identified by
the words "intend", "plan", "believe", "expect", "estimate", and the like.
Investors are cautioned not to put undue reliance on forward-looking statements.
Except as otherwise required by applicable securities statutes or regulations,
the Company disclaims any intent or obligation to update publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise. Because forward-looking statements involve future risks and
uncertainties, these are factors that could cause actual results to differ
materially from those expressed or implied.
Results of Operations
Three Months Ended September 30, 2003 versus Three Months Ended September 30,
2002
Sales revenue decreased approximately 18.7 percent, from $178,982 for the three
months ended September 30, 2002, to $145,483 for the comparative period in the
current year primarily due to decreased demand for the Company's data products
and a reduction in sales staff.
Costs of revenue decreased approximately 19.2 percent, from $104,899 for the
three months ended September 30, 2002, to $84,714 for the three months ended
September 30, 2003 primarily due to the decrease in product sales.
Gross profit decreased approximately 18.0 percent, from $74,083 for the three
months ended September 30, 2002, to $60,769 for the three months ended September
30, 2003, primarily due to the decrease in product sales. Gross profit margin
was substantially unchanged at 41.4% for the three months ended September 30,
2002, compared to 41.8% for the three months ended September 30, 2003.
General and administrative expenses decreased approximately 31.8 percent, from
$187,201 for the three months ended September 30, 2002, to $127,644 for the
three months ended September 30, 2003. The decrease is related to a reduction in
staff and associated overhead costs.
Interest expense increased 12.9 percent, from $119,469 for the three months
ended September 30, 2002, to $134,911 for the three months ended September 30,
2003. This was primarily related to a $1.2 million reduction in notes payable
between September 30, 2003 and 2002, respectively, offset by interest expense
incurred as a result of the beneficial conversion feature of a note payable.
Page 13
The Company incurred a net loss of $146,626 for the three months ended September
30, 2003, as compared to a net loss of $232,587 for the three months ended
September 30, 2002, a decrease of 37.0 percent, due to decreased general and
administrative expenses, as well as $55,160 of commission income received for
the three months ended September 30, 2003.
After accrued dividends payable to convertible preferred shareholders of $32,104
and $41,650 for the three months ended September 30, 2003 and 2002,
respectively, the net loss applicable to common shareholders for the three
months ended September 30, 2003 and 2002 was $178,730 and $274,237,
respectively.
Liquidity and Capital Resources
The Company has current assets of $118,612 (including $4,859 in cash) compared
with current liabilities of $6,549,019, resulting in a working capital deficit
of $6,430,407 as of September 30, 2003. In addition, the Company incurred a net
loss of $146,626 for the three months ended September 30, 2003 and has incurred
significant net losses in each of the three preceding fiscal years and has a
stockholder's equity deficit of $7,460,442 at September 30, 2003. Such deficits
and recurring losses raise questions about the Company's ability to continue as
a going concern.
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. Subsequent to September 30, 2003 the Company formed
a new subsidiary, DWS Defense Systems ("DWS"), 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 its current product offerings and greatly expand its customer base.
Additionally, the Company has formed an advisory board to assist DWS 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 DWS's products and services. The Company may also pursue strategic
acquisitions that provide it with growth and vertical integration within this
new area. There is no assurance that the Company will be successful in
accomplishing its objectives. If the Company is not successful in these
initiatives, it may be forced to severely curtail operations or seek protection
under the bankruptcy laws.
Page 14
The Company's cash balance at June 30, 2003 decreased $7,029, from $11,888 to
$4,859 as of September 30, 2003. The decrease was the result of a combination of
cash proceeds from shareholder loans and advances from the Company's asset-based
lender totaling $198,382, and cash flows from operations totaling $2,627, offset
by cash used for the repayment of loans totaling $208,038. Cash flows from
operations consisted primarily of our $146,626 net loss, offset by a decrease in
accounts receivable of $59,556 and an increase in accounts payable and accrued
liabilities of $43,810.
During the three month period ended September 30, 2003, the Company borrowed an
additional $45,000 under the terms of its convertible loan agreement with
Augustine. During the subsequent three month period, the Company borrowed an
additional $54,000 under this agreement, bringing the total indebtedness to
$174,000, all of which was subsequently converted into shares of common stock.
The agreement provides for maximum loans of $500,000, all of which may be
converted to common stock.
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 unaffiliated
private investors totaling $100,000.
ITEM 3. CONTROLS AND PROCEDURES
Daniel McPhee, Chief Executive and Financial Officer of Data World Solutions,
Inc. has established and is currently maintaining disclosure controls and
procedures for the Company. The disclosure controls and procedures have been
designed to ensure that material information relating to the Company is made
known to them as soon as it is known by others within the Company.
The Company's Chief Executive and Financial Officer conducts an update and a
review and evaluation of the effectiveness of the Company's disclosure controls
and procedures and has concluded, based on his evaluation within 90 days of the
filing of this Report, that such disclosure controls and procedures are
effective for gathering, analyzing and disclosing the information the Company is
required to disclose in its reports filed under the Securities Exchange Act of
1934. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the previously mentioned evaluation.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings:
There were no new legal proceeding or significant developments in existing
proceedings that occurred during the three months ended September 30, 2003.
Item 2 - Changes in Securities:
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.
Page 15
Item 3 - Defaults Upon Senior Securities:
As of September 30, 2003, the Company is in default on the following
obligations, as disclosed in Note 6b to the Condensed Consolidated Financial
Statements: The R&R Financing Agreement, the Secured Subordinated Debentures,
and the Class 7 Bankruptcy Distributions. Additionally, as disclosed in Notes 6a
and 6c, the Company has approximately $1.2 million in judgments entered against
it for unpaid trade payables and is delinquent on payment of certain sales and
payroll tax obligations.
Item 4 - Submission of Matters to a Vote of Security Holders:
None.
Item 5 - Other information:
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
31 Section 302 Certification
32 Section 906 Certification
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities and 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.
Date: April 28, 2004 By: /s/ Daniel McPhee
-------------- ------------------------------------
Daniel McPhee Chief Executive
Officer and Chief Financial Officer
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