UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 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 August 31, 2001
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _________ to
---------
Commission File Number: 033-05384
World Internetworks, Inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0443026
-------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Cochran St., Simi Valley, California 93065
-----------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (805) 582-3600
------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve 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 [ ]
The number of shares outstanding of Registrant's common stock as of July 19,
2001 was: 16,029,956
1
WORLD INTERNETWORKS, INC.
TABLE OF CONTENTS
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of August 31, 2001
(Unaudited) F-1
Condensed Consolidated Statements of Operations for the three
and eight months ended August 31, 2001 and 2000
(Unaudited) F-2 - F-3
Condensed Consolidated Statements of Cash Flows for the
eight months ended August 31, 2001 and 2000
(Unaudited) F-4
Notes to Condensed Consolidated Financial Statements F-5 - F-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 3 - 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 2. Changes in Securities 7
Item 3. Defaults upon Senior Securities 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 5. Other Information 7
Item 6. Exhibits and Reports on Form 8-K 7 - 8
Signatures 8
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
World Internetworks, Inc. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
August 31, 2001
ASSETS
Current assets:
Cash$ 32,205
Accounts receivable, net 920,517
Inventory 1,196,407
Notes receivable 150,000
Prepaid expenses and other assets 22,850
-----------
Total current assets 2,321,979
Property, plant and equipment, net 171,173
Goodwill, net 475,258
Royalty agreement 75,000
Other assets 37,146
-----------
$ 3,080,556
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Convertible notes payable $ 375,000
Accounts payable and accrued liabilities 2,299,058
Accounts payable to related parties 32,770
Notes payable to related parties 568,000
Notes payable 216,593
Current installments due under capital leases 10,189
-----------
Total current liabilities 3,501,610
-----------
Shareholders' deficit:
Series A Preferred stock, $0.001 par value; 1 share authorized;
no shares issued and outstanding --
Series B Preferred stock, $0.001 par value; 10,000,000 shares authorized;
no shares issued and outstanding --
Common stock, $0.001 par value; 40,000,000 shares authorized;
16,062,517 shares issued and outstanding 16,061
Additional paid-in capital 1,298,740
Subscriptions receivable (340,987)
Accumulated deficit (1,394,868)
-----------
Total shareholders' deficit (421,054)
-----------
$ 3,080,556
===========
The accompanying notes are an integral part of
these consolidated financial statements
F-1
World Internetworks, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For The Three and Eight Months Ended August 31, 2001
Three Months Ended Eight Months
August 31, 2001 Ended
August 31, 2001
------------ ------------
Net sales $ 2,127,999 $ 5,827,000
Cost of sales 1,517,120 3,836,206
------------ ------------
Gross profit 610,879 1,990,794
------------ ------------
Employee compensation 394,170 1,518,616
Selling, general and administrative 460,464 1,015,591
------------ ------------
Total operating expenses 854,634 2,534,207
------------ ------------
Operating loss (243,755) (543,413)
------------ ------------
Other income (expense):
Interest, net (30,545) (75,083)
Other 6,306 16,890
------------ ------------
Net loss $ (267,994) $ (601,606)
============ ============
Basic and diluted loss per share $ (0.02) $ (0.04)
============ ============
Basic and diluted weighted average common
shares outstanding 16,062,517 15,250,213
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-2
World Internetworks, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For The Three and Eight Months Ended August 31, 2000
Three Months Ended Eight Months
August 31, 2000 Ended
August 31, 2000
------------ ------------
Net sales $ 3,057,592 $ 4,637,397
Cost of sales (2,390,961) (3,352,189)
------------ ------------
Gross profit 666,631 1,285,208
------------ ------------
Employee compensation 549,405 1,154,984
Selling, general and administrative 129,079 309,755
------------ ------------
Total operating expenses 678,484 1,464,739
------------ ------------
Operating loss (11,853) (179,531)
Other income (expense):
Interest, net (29,822) (57,870)
------------ ------------
Net loss $ (41,675) $ (237,401)
============ ============
Basic and diluted loss per share $ (0.00) $ (0.02)
============ ============
Basic and diluted weighted average common
shares outstanding 13,375,334 13,154,579
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-3
World Internetworks, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For The Eight Months Ended August 31, 2001 and 2000
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss $(601,606) $(237,401)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 148,354 162,404
Interest earned on subscriptions receivable (15,204) --
Changes in operating assets and liabilities:
Accounts receivable (40,210) 124,717
Inventories (341,873) (148,559)
Prepaid expenses and other (5,643) (6,036)
Accounts payable and accrued liabilities 666,187 (273,284)
Accounts payable to related party (341) --
--------- ---------
Net cash used in operating activities (190,336) (378,159)
--------- ---------
Cash flows from investing activities:
Loan to third party (150,000) --
Cash obtained in acquisition -- 75,666
Purchases of property and equipment (13,684) (19,175)
--------- ---------
Net cash (used in) provided by investing activities (163,684) 56,491
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock 112,680 --
Proceeds from sale of Preferred B stock 4,907 368,500
Proceeds from the issuance of convertible debentures 375,000 --
Principal repayments under line of credit (365,180) --
Fees related to financing activities -- (57,831)
Increase in subscriptions receivable -- (14,000)
Principal payments on notes payable (64,821) --
Principal borrowings on notes payable -- 176,166
Principal payments on capital lease obligations (8,260) (7,175)
--------- ---------
Net cash provided by financing activities 54,326 465,660
--------- ---------
Net change in cash (299,694) 143,992
Cash, beginning of period 331,899 4,839
--------- ---------
Cash, end of period $ 32,205 $ 148,831
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 58,200 $ 57,900
========= =========
Income taxes $ -- $ --
========= =========
The accompanying notes are an integral part of
these consolidated financial statements
F-4
World Internetworks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For The Three and Eight Months Ended August 31, 2001
Note 1 - Organization and Summary of Significant Accounting Principals
----------------------------------------------------------------------
Basis of Presentation
---------------------
The financial statements of World Internetworks, Inc. ("WINS" or the "Company")
for the three and eight months ended August 31, 2001 and 2000 are unaudited. Due
to the merger with GT Data Corporation (see Note 4) the reporting amounts of
WINS are those of the surviving corporation. The results of operations of WINS
previously filed in prior years are not included herein. Certain information and
note disclosures normally included in the financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted. These financial statements should be read in
conjunction with the audited financial statements and notes thereto, which are
included in WINS Form 8-K filed June 5, 2001. In the opinion of management, the
financial statements contain all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position of WINS for the
period presented. The interim operating results may not be indicative of
operating results for the full year or for any other interim periods. Due to the
merger with GT Data (see Note 4) and the fiscal year end of GT Data being
December 31, the accompanying consolidated financial statements present both the
three and eight months period ended of GT Data and TSLi.
Going Concern
-------------
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company has negative working capital of $1,179,631, a
stockholders' deficit of $421,054, losses from operations through August 31,
2001 and a lack of operational history, among others, that raise substantial
doubt about its ability to continue as a going concern. The Company hopes to
increase revenues from additional revenue services and other cost-cutting
measures. In the absence of significant revenues and profits, the Company
intends to fund operations through additional debt and equity financing
arrangements which management believes may be insufficient to fund its capital
expenditures, working capital, and other cash requirements for the fiscal year
ending February 28, 2002. Therefore, the Company may be required to seek
additional funds to finance its long-term operations. The successful outcome of
future activities cannot be determined at this time and there are no assurances
that if achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive results.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Risks and Uncertainties
-----------------------
The Company operates in a highly competitive industry that is subject to intense
competition, government regulation, and rapid technological change. The
Company's operations are subject to significant risk and uncertainties including
financial, operational, technological, regulatory and other risks associated
with an emerging business, including the potential risk of business failure.
Concentration Risk
------------------
The Company grants credit to customers within the United States of America and
does not require collateral. The Company's ability to collect receivables is
affected by economic fluctuations in the geographic areas served by the Company.
Reserves for uncollectable amounts are provided, based on past experience and a
specific analysis of the accounts, which management believes are sufficient.
Although the Company expects to collect amounts due, actual collections may
differ from the estimated amounts.
F-5
World Internetworks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For The Three and Eight Months Ended August 31, 2001
Note 1 - Organization and Summary of Significant Accounting Principals,continued
--------------------------------------------------------------------------------
Three customers accounted for approximately 57% of total product sales for the
eight months ending August 31, 2001, compared to 60% for the same period in
2000. The loss of any of these customers may have a material impact on the
Company's financial statements and results of operations.
Revenue Recognition
-------------------
The Company records sales when goods are shipped to the customer or upon the
completion of the services.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. The effective date of this pronouncement was the fourth quarter of
the fiscal year beginning after December 15, 1999. The adoption of SAB 101 did
not have a material impact on the Company's financial position and results of
operations.
Warranty
--------
The Company provides warranties ranging from ninety days to six months on
certain products sold. Estimated future warranty obligations related to certain
products and services are provided by charges to operations in the period in
which the related revenue is recognized. The Company has a warranty reserve of
approximately $40,000 at August 31, 2001.
Earnings Per Share
------------------
The Company has adopted Statement of Financial Accounting Standards No.
128("SFAS 128"), "Earnings Per Share." Under SFAS 128, basic earnings per share
is computed by dividing income available to common shareholders by the weighted
average number of shares assumed to be outstanding during the period of
computation. Diluted earnings per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive
(1,686,338 and zero (0) shares as of August 31, 2001 and 2000, respectively).
Because the Company has incurred net losses, basic and diluted loss per share
are the same as additional potential common shares would be anti-dilutive.
Segments of Business
--------------------
The Company has adopted Statement of Financial Accounting Standards No.
131("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports issued to
shareholders. It also requires entity wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues, and its major customers. The Company currently operates in one
segment, as disclosed in the accompanying consolidated statements of operations.
F-6
World Internetworks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For The Three and Eight Months Ended August 31, 2001
Note 1 - Organization and Summary of Significant Accounting Principals,continued
--------------------------------------------------------------------------------
Derivative Instruments
----------------------
The Company adopted Statement of Financial Accounting Standards No. 133
("SFAS133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities on the balance sheet at their fair
value. This statement, as amended by SFAS 137 and 138, is effective for
financial statements for all fiscal quarters of fiscal years beginning after
June 15, 2000. The adoption of this standard did not have a material impact on
the Company's results of operations, financial position or cash flows as it
currently does not engage in any derivative or hedging activities.
New Accounting Pronouncements
-----------------------------
In July 2001, FASB issued SFAS No. 141, "Business Combinations," which is
effective for business combinations initiated after June 30, 2001. SFAS No. 141
eliminates the pooling of interest method of accounting for business
combinations and requires that all business combinations occurring on or after
July 1, 2001 are accounted for under the purchase method. The Company does not
expect SFAS No. 141 to have a material impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for fiscal years beginning after December 15, 2001.
Early adoption is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not been
previously issued. SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted for in
the financial statements upon their acquisition and after they have been
initially recognized in the financial statements. SFAS No. 142 requires that
goodwill and intangible assets that have indefinite useful lives not be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives. SFAS
No. 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. In addition, SFAS No. 142 expands the
disclosure requirements about goodwill and other intangible assets in the years
subsequent to their acquisition. Impairment losses for goodwill and
indefinite-life intangible assets that arise due to the initial application of
SFAS No. 142 are to be reported as resulting from a change in accounting
principle. However, goodwill and intangible assets acquired after June 30, 2001
will be subject immediately to the provisions of SFAS No. 142. The Company has
not yet determined the impact, if any, that SFAS No. 142 may have on its
financial statements and results of operations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of intangible long-lived assets and
the associated asset retirement costs and is effective for fiscal years
beginning after June 15, 2002. the Company does not expect SFAS No. 143 to have
a material impact on its financial statements.
Note 2 - Principles of Consolidation
------------------------------------
The consolidated financial statements include the accounts of the Company, GT
Data Corporation ("GT Data"), and Technical Services & Logistics, Inc. ("TSLi"),
which are both wholly owned subsidiaries of WINS. All significant intercompany
balances and transactions have been eliminated in consolidation.
F-7
World Internetworks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For The Three and Eight Months Ended August 31, 2001
Note 3 - Business Combination
-----------------------------
Effective February 28, 2000, GT Data acquired TSLi in a business combination
accounted for as a purchase. Prior to the business combination, one of the
majority stockholders of GT Data was a stockholder of TSLi. GT Data issued
975,334 shares of its common stock in exchange for all the outstanding common
shares of TSLi. The shares issued for TSLi were valued at $73,150, which
represents the estimated fair market value.
The purchase price was allocated to the business acquired based on the relative
fair values of the assets acquired and liabilities assumed as follows:
Assets $ 2,458,514
Goodwill 528,067
Liabilities (2,913,431)
----------------
$ 73,150
================
The results of operations of TSLi are included in the accompanying consolidated
financial statements from March 1, 2000. The following pro forma summary
presents consolidated results of operations for the eight months ended August
31, 2000 as if TSLi had been acquired as of January 1, 2001.
Net sales $ 5,796,802
Net loss $ (166,162)
Loss per common share $ (0.01)
Note 4 - Merger with GT Data Corporation
----------------------------------------
On March 20, 2001, and pursuant to a Certificate filed with the Nevada Secretary
of State, the Company effected a 1 for 2 reverse split of all the outstanding
shares of its common stock, options and warrants. Immediately following the
reverse split the Company had 250,000,000 shares authorized and 7,104,114 shares
issued and outstanding. Outstanding options and warrants were 224,500 and
815,000 respectively, after the reverse split. On February 27, 2001, the Company
entered into an Agreement and Plan of Reorganization and Merger (the "Plan of
Merger") with GTD Acquisition, Inc. ("Newco") and GT Data Corporation. On March
22, 2001, the Plan of Merger became effective (the "Merger"). Under the Merger,
Newco merged with and into GT Data, with GT Data as the surviving subsidiary of
the Company. Pursuant to the Plan of Merger, all of the 7,688,403 outstanding
preferred and common shares of GT Data were exchanged for shares of the Company
1 for 1 on a post-split basis and 750,000 shares were issued to Fairway Capital
Partners, LLC, a finder, in connection with the transaction. All of the
outstanding shares of Newco were converted into shares of GT Data as the
surviving corporation with the Company as the sole holder of those shares. The
transaction was regarded as a "reverse merger" whereby GT Data was considered to
be the accounting acquirer as it retained control of WINS after the Merger.
Pursuant to the Plan of Merger, certain shareholders of GT Data agreed to
surrender 7,165,931 shares of common stock prior to the consummation of the
Merger. The number of shares issued in exchange for Newco and GT Data shares
under the Plan of Merger is as follows:
Newco common shareholders 100 shares of the surviving corporation
GTD:
Common shares 6,209,403 shares of the Company
Series A Preferred 1 share of the Company
Series B Preferred 1,479,000 shares of the Company
---------------
Total shares issued 7,688,503
===============
Since WINS' continuing operations and balance sheet are insignificant, pro forma
financial statements are not presented.
F-8
World Internetworks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For The Three and Eight Months Ended August 31, 2001
Note 4 - Merger with GT Data Corporation, continued
---------------------------------------------------
The Plan of Merger also provides for a Registration Rights Agreement for certain
shareholders of the Company's common stock that hold shares restricted under
Section 144 whereby their shares will be registered as part of any registration
filing undertaken by the Company after the effective date of the Plan of Merger.
Note 5 - Eight Month Period
---------------------------
As a result of the Company's merger with GT Data, the financial data in this
report covers eight (8) months of operations for the Company's two operating
subsidiaries, GT Data and TSLi. Both GT Data and TSLi use the calendar year as
their fiscal year, while World Internetworks' fiscal year is March 1 through
February 28. As a result of this inconsistency in fiscal years, the financial
data in this report represents the operating results of both GT Data and TSLi
for January 2001 through August 2001 and January 2000 through August 2000 and
World Internetworks for March 22, 2001 through August 2001.
Note 6 - Note Receivable
------------------------
On July 10, 2001 the company loaned Trace Affex (See Note 10), an unrelated
third party, $150,000 (the "Loan"), for working capital purposes. The Loan bears
interest at the rate of 10% per annum, is due in full on May 31, 2002, and is
secured by substantially all of the assets of Trace Affex.
Note 7 - Notes Payable and Line of Credit
-----------------------------------------
On May 2, 2001 TSLi paid the remaining balance of both its Asset Based Credit
line and Term Note that were payable to a financial institution totaling
$422,661. TSLi had been in default on the Asset Based Credit line since January
2000 and had been operating under a Forbearance Agreement with a financial
institution that required TSLi to remit 10% of its daily cash collections to the
financial institution. TSLi is current on its Small Business Administration
(SBA) loan payable to the financial institution and is not in default on its
remaining notes payable.
Note 8 - Convertible Notes Payable
----------------------------------
On July 3, 2001 the Company sold $375,000 of convertible subordinated debentures
in a Reg. S offering. The debentures carry a 10% stated rate of interest and
mature on May 31, 2002. The debenture holder has the right, at its option, at
any time on or before the close of business on May 31, 2002, to convert the
principal and accrued, but unpaid, interest of this debenture into 1,249,875
shares of the Company's common stock. Accrued interest is to be paid on the 30th
day of March, June, September, and December of each year beginning on September
30, 2001, until the subordinated debentures due May 31, 2002 has been paid or
converted into common stock. As of August 31, 2001, total interest incurred on
this note was $6,066, of which, the full amount is accrued under interest
payable, which is recorded in accounts payable and accrued liabilities in the
accompanying balance sheet. As of the date of this report, management has not
been informed that the holder of this note is going to convert such note into
Common Stock of the Company.
In addition, the Company issued the investor a warrant for the right to purchase
an additional 1,249,875 shares of the Company's common stock at a price of $0.40
per share. Due to the fact that the warrant does not vest until the debenture is
converted, the Company has not expensed the fair market value of the warrant.
The warrant has an estimated fair market value based on SFAS 123, using the
Black-Scholes pricing model, of $137,500. If the debentures are converted, the
fair market value of the warrant will be recorded to interest expense in the
accompanying statement of operations at the time of conversion.
F-9
World Internetworks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For The Three and Eight Months Ended August 31, 2001
Note 9 - Stockholders' Equity
-----------------------------
In January 2001, the Company sold 22,000 shares of Series B Preferred stock for
$4,907 in cash.
In connection with the reverse merger (see Note 4) the Company issued 9,333,114
(including 1,479,000 for the conversion of Series B Preferred stock on a one to
one basis and 750,000 shares to a finder). In addition, certain GT Data
shareholders agreed to surrender 7,165,931 shares of common stock.
On May 21, 2001, the Company sold 520,000 shares of common stock to an unrelated
investor for $112,680 (net of commissions paid of $17,320). In addition, the
investor was granted warrants to purchase 520,000 shares of common stock at an
exercise price of $0.25 per share.
On May 18, 2001, the Company granted to a third party service provider warrants
to purchase 300,000 shares of common stock at an exercise price of $0.25 valued
at $75,000 (pursuant to SFAS 123 based on the Black-Scholes option pricing model
and recorded the amount under License Agreement in the accompanying balance
sheet). The warrants vested on the date of grant.
Note 10 - Letter of Intent with Trace Affex, Inc.
-------------------------------------------------
On May 3, 2001, the Company had entered into a proprietary non-binding Letter of
Intent with Trace Affex, Inc., whereby Trace Affex was to be merged with or
would have become a subsidiary of World Internetworks, Inc. Trace Affex is a
private company located in San Jose, California and is a leading provider of
high-end optical data storage solutions and CD-ROM duplication and printing
system solutions. World Internetworks and Trace Affex had agreed to enter into
good faith negotiations towards reaching a definitive merger agreement, subject
to the terms and conditions set forth in the non-binding Letter of Intent. The
transaction was also subject to due diligence and shareholder approval.
The non-binding Letter of Intent that was signed on May 3, 2001 expired on June
2, 2001. World Internetworks and Trace Affex entered into an agreement to extend
the non-binding Letter of Intent through July 20, 2001. On October 2, 2001 the
Company announced that its Letter of Intent with Trace Affex had expired and
that it will not be renewed.
Note 11 - License Agreement
---------------------------
Effective May 18, 2001, the Company entered into a license agreement with a
third party. The agreement provides the Company with an exclusive worldwide
license to manufacture and sell the Starlite tape drive, an IBM 3590 compatible
tape drive, as defined. The agreement requires the Company to make an initial
payment of $300,000 on or before October 31, 2001, which the Company has not yet
made. In addition, the Company is required to make two additional payments of
$150,000 each no later than 60 and 120 days after delivery of the actual initial
payment. The Company will capitalize these costs as a license agreement when
paid.If the Company does not make the subsequent payments, the license will
continue on a non-exclusive basis. The Company is required to pay a royalty to
the third party for all sales ranging from $250 to $950 for each unit sold. In
connection with this agreement, the Company granted the third party warrants to
purchase 300,000 shares of common stock of an exercise price of $0.25 per share
valued at $75,000, (pursuant to SFAS 123 based on the Black-Scholes option
pricing model) which the Company has capitalized under License Agreement in the
accompanying Balance Sheet.
Note 12 - Commitments and Contingencies
---------------------------------------
The Company may from time to time, be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations or discrimination, or
breach of contract actions incidental to the normal operations of its business.
The Company is currently not involved in any such litigation which management
believes could have a material adverse effect on its financial position or
results of operations.
F-10
Item. 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following information should be read in conjunction with the financial
statements and the notes thereto. The analysis set forth below is provided
pursuant to applicable Securities and Exchange Commission regulations and is not
intended to serve as a basis for projections of future events.
Except for historical information contained herein, the matters discussed in
this Form 10-QSB are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in such forward looking statements. Such forward-looking
statements may be identified by the use of certain forward-looking terminology,
such as "may," "will," "expect," "anticipate," "intend," "estimate," "believe"
or comparable terminology that involves risks or uncertainties. Actual future
results and trends may differ materially from historical and anticipated
results, which may occur as a result of a variety of factors. Such risks and
uncertainties include, without limitation, World Internetworks' limited
operating history, the unpredictability of its future revenues, the
unpredictable and evolving nature of its key markets, competition, dependence on
key personnel, creation and licensing, the management of growth, and
WorldInternetworks' need for additional capital. Except as required by law,
World Internetworks undertakes no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
Readers should carefully review the factors set forth in other reports or
documents that World Internetworks files from time-to-time with the SEC.
Overview
On March 22, 2001, World Internetworks acquired all of the outstanding stock of
GT Data Corporation and it's wholly owned subsidiary, Technical Services &
Logistics, Inc. (TSLi), thereby making GT Data a wholly owned subsidiary of
World Internetworks. The transaction was recorded as a reverse merger where GT
Data was considered the acquirer because it maintained control after the
transaction was completed. Additionally, as part of the GT Data merger, the
current management and directors of World Internetworks resigned, and a new
management team and board of directors was put in place to run the new
operations of the Company. Going forward, the Company will focus its efforts on
its newly acquired data storage business. Subsequent to the merger, on April
30,2001, World Internetworks sold all of the assets of its pre-existing Internet
business.
In regard to the following discussion and analysis of the results of operations,
comparisons made to the same period last year will only apply to the operations
of GT Data and TSLi because they are the surviving operations of the Company.
As a result of the Company's merger with GT Data, the year-to-date financial
data in this report covers eight (8) months of operations for the Company's two
operating subsidiaries, GT Data and TSLi. Both GT Data and TSLi use the calendar
year as their fiscal year, while World Internetworks' fiscal year is March 1
through February 28. As a result of this inconsistency in fiscal years, the
financial data in this report represents the operating results of both GT Data
and TSLi for January 2001 through August 2001 and January 2000 through August
2000 and World Internetworks for March 22, 2001 through August 2001.
3
Results of Operations for the Quarter Ending and Year to Date August 31, 2001
Overview
The significant operational activities in the second quarter of 2001 focus
primarily on the operations of TSLi. While GT Data operates as a holding
company, TSLi is actively engaged in business activities that are the core of
the Company's data storage business. For the purposes of this overview, we will
concentrate on TSLi's operations.
TSLi, and the mass storage industry in general, annually face a historic down
cycle in revenue performance for the May through August period. TSLi's revenue
results for the quarter ended August 31, 2001 reflect this annual trend. In
addition, the weakened global economy, particularly in the tech sector, further
impacted TSLi's revenue opportunities as large OEMs flooded the market with
excess inventory. The flood of excess inventory made buyers scarce, and TSLi's
resale business declined drastically, particularly in July and August.
Another factor that impacted TSLi's resale business was the annual summer
slowdown of the European economy. TSLi sells to the Eastern bloc countries, and
this revenue stream decreased dramatically during the summer months as our
European customers shutdown. For reasons unknown to TSLi management, the drop in
our European business was more severe this year than in prior years.
Revenue
Net revenue for the quarter ended August 31, 2001 was $2,127,999, down 30.5%
from the $3,057,592 generated in the same period in 2000. The revenue for the
second quarter of 2000 includes $691,000 generated from two resale transactions
that netted the company gross profits of approximately $41,000, or 6% of the
$691,000 selling price. Excluding these two transactions, net revenue in the
second quarter of 2000 was $2,366,592, 10% more than the revenue in the second
quarter of 2001. Repair revenue for the quarter ended August 31, 2001 was
$1,488,015 (69.2% of total revenue) with revenue from resale activities making
up the remaining $639,984 (30.8%). In the same period last year, repair revenue
was $1,420,192 (46.4%) while resale revenue totaled $1,637,400 (53.6%).
For the eight months ended August 31, 2001, revenue was $5,827,000 compared to
revenue of $4,637,397 for the same period last year. Revenue for the period
ending August 31, 2000 includes only six months of revenue from TSLi because GT
Data did not acquire TSLi until month-end February 2000. On a pro forma basis
revenue for the first eight months of 2000 was $5,796,802. Revenue increased
primarily due to increased repair work from two of our biggest customers, one of
which experienced a three (3) month period where its unit volume tripled.
Gross Profit
Gross profit for the quarter ended August 31, 2001 was $610,879, or 28.7% of net
revenue, compared to gross profit of $666,631, or 21.8% of net revenue for the
same period in fiscal 2000. Gross profit increased due to the increased ratio of
repair revenue, which provides a higher gross margin than revenue generated
through resale activities.
For the eight months ended August 31, 2001, gross profit was $1,990,794 compared
to gross profit of $1,285,208 for the same period last year. For the same period
in 2000, only six months of gross profit from TSLi is included because GT Data
did not acquire TSLi until month-end February 2000. On a pro forma basis gross
profit for the first eight months of 2000 was $1,756,164. The increase in gross
profit was attributable to the higher ratio of repair revenue, which provides a
higher gross margin then the revenue generated through resale activities.
Gross profit in the recent quarter was adversely affected by the write-off of
approximately $92,715 worth of inventory and tighter margins in the resale
business. In addition, fewer revenue dollars meant a smaller base to spread
fixed overhead costs.
Operating Expenses
Operating expenses in the quarter ended August 31, 2001 were $854,634, up 26%
from the $678,484 incurred in the same period last year. Legal and professional
fees associated with the reverse merger with World Internetworks and
4
negotiations to merge with Trace Affex were $109,519 in the recent quarter,
compared to legal and professional fees of $32,182 in the same period in fiscal
2000. Other factors contributing to the increase in operating expenses were the
addition of two full-time sales people at TSLi, an executive compensation plan,
increased travel expenses, and higher labor costs at TSLi.
For the eight months ended August 31, 2001, operating expenses were $2,534,207
compared to operating expenses of $1,464,739 for the same period in fiscal 2000.
On a pro forma basis, operating expenses were $1,846,150 for the same period
last year. Legal and professional fees for the eight months ending August 31,
2001 were $378,922 compared to $62,330 for the same period last year. The
Company also incurred expenses of approximately $100,000 of World Internetworks
earlier this year. Other factors contributing to the increase in operating
expenses were the addition of two full-time salespeople at TSLi, an executive
compensation plan at TSLi, increased travel expenses, and higher labor costs at
TSLi.
Interest Expense
Net interest expense for the second quarter of 2001 was $20,239 versus $29,822
in the same period last year. Total interest expense for the recent quarter was
$30,545, with interest income of $6,306 reducing the net interest expense to the
$24,239 shown above. Such interest decreased due to the pay-off of the line of
credit and term note in the current quarter.
For the eight-month period, total interest expense was $75,083 compared to
$72,211 for the same period last year. On a pro forma basis, total interest
expense for the same period in fiscal 2000 was $90,714. Overall, interest
expense at TSLi has decreased due to the payoff of the Asset Based Credit line
and Term note, while interest expense has increased at GT Data due to the
issuance of $375,000 in debentures, finance charges on accounts payable, and the
compounding effect of interest on the $470,000 note payable.
As a result of the discussions above, net loss for the three months ended August
31, 2001 was $267,994 compared to a net loss of $41,675 as of August 31, 2000.
In addition, the net loss for the eight months ended August 31, 2001 was
$601,606 compared to a net loss of $237,401 as of August 31, 2000.
Assets and Liabilities
At August 31, 2001, the Company had total assets of $3,080,556 compared to total
assets of $2,902,194 at December 31, 2000. Cash was $32,205 as of August 31,
2001, down $299,694 from the $331,899 cash on hand as of December 31, 2000. The
decrease in cash was caused primarily by the Company's cash purchase of
approximately $150,000 of inventory, terms cash in advance, from a large OEM
during the last week of the quarter and the remittance of approximately $422,661
earlier this year to payoff TSLi's Asset Based Credit line and Term note. As of
August 31, 2001 the above mentioned inventory was still in transit and will
eventually be refurbished and sold as part of the Company's resale operations.
The Company also used cash to pay down various accounts payable and accrued
liabilities.
Accounts receivable were $920,517, up $40,210 from the $880,307 on December 31,
2000. Inventories rose $341,873, from $854,534 on December 31, 2000 to
$1,196,407 as of August 31, 2001. The majority of the increase in inventories is
attributable to the above mentioned inventory purchases and inventory purchased
for several new Vendor Managed Inventory (VMI) programs awarded to TSLi
Fixed assets were $171,173, down $111,198 from the $282,371 on December 31,
2000. Fixed asset purchases of $13,684 were offset by $124,882 in depreciation
expense. The purchases consisted primarily of computer hardware and software.
Total liabilities on August 31, 2001 were $3,501,605, an increase of $602,580
from the $2,899,025 as of December 31, 2000. Accounts payable and accrued
liabilities increased $661,187 to $2,299,058, primarily due to legal and
professional fees relating to the World Internetworks merger and the
negotiations to merge with Trace Affex and accrued wages for Robert Genesi, the
Company's CEO. Notes payable and lease obligations at August 31, 2001 totaled
$1,169,782, a decrease of $63,261 from the $1,233,043 on December 31, 2000. The
payoff of the Asset Based Credit line and Term note of approximately $430,000
and payments on capital leases of $8,260 were offset by the issuance of $375,000
of convertible subordinated debentures on July 3, 2001
5
Stockholder's Deficit
Stockholder's deficit was ($421,054) on August 31, 2001, a decrease of $424,223
from the $3,169 as of December 31, 2000. The changes in stockholder's equity
were as follows:
Balance as of December 31, 2000 $ 3,169
Net Loss (601,606)
Interest on subscriptions receivable (15,204)
Issuance of Common Stock and Preferred stock 117,587
Estimated fair market value of warrants 75,000
----------------
$ (421,054)
================
Liquidity and Capital Resources
As of August 31, 2001, the Company had $3,080,556 in total assets, including
$32,205 in cash, $920,517 in accounts receivable, $1,196,407 in inventories, and
net fixed assets of $171,173. The accounts receivable are considered by
management to have a high probability of collection, as a majority of the
receivables are to large OEMs. Inventories consist primarily of hard drives and
tapes drives and are very marketable, although by nature their value tends to
decrease over time as newer, more advanced products are brought to market. Fixed
assets consist primarily of computers, office furniture and equipment, software,
and test equipment. Due to the age and proprietary nature of most of the fixed
assets, these assets probably have limited value to those outside the Company.
Also at August 31, 2001, total liabilities were $3,501,606, including accounts
payable and accrued liabilities of $2,299,058 notes payable and capital lease
obligations of $1,169,782. The accrued liabilities include $372,358 of accrued
salary for Robert Genesi, the Company's Chief Executive Officer. Notes payable
include $470,000 to Robert Genesi and Anthony Giraudo, a director of the
company. As of August 31, 2001, the Company had no available credit lines for
short-term financing needs.
During the period ended August 31, 2001, the Company's cash flow used in
operations was ($190,336), while net cash used in the period was $299,694. The
Company's negative cash flow from operations resulted primarily from the
Company's operating loss (601,606) and its inventory purchases ($341,873), which
were partially offset by the $666,187 increase in accounts payable and accrued
liabilities. Accounts payable and accrued liabilities increased primarily due to
the Company delayed payment of legal and professional fees and the salary of
Robert Genesi, the Company's CEO.
The Company had negative working capital of $1,179,631 as of August 31, 2001.
The Company expects its operations to continue using net cash through at least
the third quarter of this year as it continues to invest in its data storage
business. Thus, the Company's success, including its ability to fund future
operations, depends largely on its ability to secure additional funding. There
can be no assurance that the Company will be able to consummate debt or equity
financings in a timely manner, on a basis favorable to the Company, or at all.
Inflation
Management believes that inflation has not had a material effect on the
Company's results of operations.
Going Concern
The Company's independent certified public accountants have stated in their
reports included in the Company's Form 8-K dated June 5, 2001 that the Company
has negative working capital, borrowings in default, lack of operations history
and an accumulated deficit. These conditions, among others, raise substantial
doubt about the Company's ability to continue as a going concern.
6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not currently a party to any legal proceedings, the adverse
Outcome of which, individually or in the aggregate would have a material adverse
Effect on our financial position or results of operations.
Item 2. Changes in Securities.
In January 2001 the Company issued 22,000 shares of Series B preferred at a
price of $0.50 per share, or $11,000 in the aggregate, less commissions paid of
$6,093.
On March 22, 2001, the Company issued 7,854,114 shares of common stock
(including 750,000 shares issued to a finder) in exchange for all the
outstanding shares of GT Data Corporation in a transaction commonly referred to
as a "reverse merger." In addition, the Company issued 1,479,000 shares of
common stock in exchange for the conversion of the GT Data preferred stock on a
one to one basis.
In May 2001, the Company issued 520,000 shares of common at a price of $0.25 per
share, or $130,000 in the aggregate, less a commission paid of $17,320. Such
funds were used for working capital purposes.
On July 3, 2001 the Company issued $375,000 of 10% convertible subordinated
debentures that mature on May 31, 2002. The holder may, at any time on or before
the close of business on May 31, 2002, convert the principal and accrued, but
unpaid, interest into 1,249,875 shares of the Company's common stock and a
warrant for the right to purchase an additional 1,249,875 shares of the
Company's common stock at a price of $0.40 per share that vests when the related
debenture is converted into Common Stock of the Company.
Item 3. Defaults upon Senior Securities.
None.
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
3.1 Articles of Incorporation filed March 17, 1986, which is incorporated
herein by reference to Exhibit 3.1 to the Registrant's Statement on
Form SB-2, Registration No. 333-35766, as amended (Registrant's Form
SB-2).
3.2 Articles of Amendment filed September 5, 1996, which is incorporated
herein by reference to Exhibit 3.1 to the Registrant's Statement on
Form SB-2.
3.3 Certificate Pursuant to section 78.207(4) of the Nevada Revised Statues
filed October 11, 1996, which is incorporated herein by reference to
Exhibit 3.1 to the Registrant's Statement on Form SB-2.
3.4 Certificate Pursuant to section 78.207(4) of the Nevada Revised Statues
filed October 24, 1996, which is incorporated herein by reference to
Exhibit 3.1 to the Registrant's Statement on Form SB-2.
3.5 Certificate of Amendment filed March 30, 1998, which is incorporated
herein by reference to Exhibit 3.1 to the Registrant's Statement on
Form SB-2.
3.6 Certificate of Amendment filed August 31, 1998, which is incorporated
herein by reference to Exhibit 3.1 to the Registrant's Statement on
Form SB-2.
3.7 Certificate Pursuant to Section 78.207(4) of the Nevada Revised
Statutes filed March 16, 2001, which is incorporated herein by
reference to Exhibit 3.7 to the Registrant's Annual Report on Form
10-KSB for the year ended February 28, 2001.
3.8 Amended Bylaws of World Internetworks, Inc., which is incorporated
herein by reference to Exhibit 3.8 to the Registrant's Annual Report on
Form 10-KSB for the year ended February 28, 2001.
7
10.1 Agreement and Plan of Reorganization and Merger dated February 27, 2001
between World Internetworks, Inc., GTD Acquisition, Inc. and GT Data
Corporation, which is incorporated herein by reference to Exhibit 2.1
to the Registrant's Statement on Form 8-K dated March 22, 2001.
10.2 Starlite Licensing Option Agreement, which is incorporated herein by
reference to Exhibit 10.2 to the Registrant's Form 10-QSB for the
quarter ended May 31, 2001.
(b) Forms 8-K filed during the fiscal quarter ended August 31, 2001 and to
date.
(i) Form 8-K/A Current Report dated June 5, 2001 amending the Form
8-K Current Report dated March 22, 2001
(ii) Form 8-K Current Report dated July 2, 2001
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
World Internetworks, Inc.
Date: October 19, 2001, /s/ Robert Genesi
------------------
Robert Genesi, President
8